Daniel Moser

AIG: Why Pay Retention Bonuses to People Who Shouldn't Be Retained?

After watching most of the testimony by the CEO of AIG, it has become quite clear that pretty much everyone misunderstood what the retention bonuses were for. This particular article is no different and only spreads the confusion and wrong ideas to people interested.

The retention bonuses, as argued by the CEO, were designed to prevent portfolio managers/traders from walking out before unwinding their trading book (apprx. 2.5+ Trillion when the unwinding began and sits at apprx. 1.5 Trillion). These retention bonuses should be thought of as a simple final paycheck to a demolition crew that uses screw drivers and wrenches to deconstruct a very complicated building rather than dynamite and wrecking balls.

While I agree with much of the tone with respect to many upper level managers and their superb talent for fattening up their own wallets while shareholders suffer, the underlying facts are dead wrong.

During the testimony it seemed like the CEO of AIG kept having to repeat himself to congress (who collectively, apparently, had no better understanding of the purpose of these retention contracts than this author), on exactly why it was so important to carefully unwind the AIG FP portfolio rather than just literally fire sale everything at once to have it over with in a single week.

So, hopefully everyone will now have a better idea that the retention bonuses were paid for services rendered in the unwinding of the business in order to prevent a walk at during a dire time of need.

Perhaps an even better analogy would be paying a bonus for a bomb specialists to defuse a bomb, he/she at one point helped design to prevent, rather than have him/her walk off at 10 seconds to detenation.

If people believe mark to market is causing severe choas for financial institutions now, imagine what dumping 2.5+ Trillion worth of derivative securities onto the market at once. It might have easily purged the financial system entirely, thereby taking down every single financial institution at once. My guess is that most reasonable people would consider that scenario dire for everyone in the U.S. and very likely the rest of the developed nations.