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Paying the AIG Bonuses - The Alternative Is Worse

I am personally far more disturbed about the original compensation scheme given to AIGFP execs which simply gave them 30% of profits. Is it just me, or does that seem like a ridiculous compensation scheme which focuses them completely on driving whatever profit they can get, regardless of the risk which is far more relevant to the problems we have? By the time the retention bonus scheme came along, I'm pretty sure it was obvious to everyone in the division, there would be no profits for a long time within the division and the only "profit performance" that anyone would be able to measure was associated with how little can we lose? That meant, there would be very little compensation for any future work under the previous plan. If I were CEO, I would be scared they would all leave.

Unfortunately AIG is far from the only practicioner of such compensation schemes, I think there are similarities throughout all of corporate America with the use of options, which are usually exercised and sold to cash quickly when they vest, instead of restricted stock which can force executives to keep more of their wealth in stock they can't sell. Didn't help Lehman or Bear, but at least there is a certain justice that executive wealth should get creamed if they lead their company to bankruptcy, instead of sold long ago and kept safely and diversified away. Anyone who thinks that it would be easy to simply replace the AIG team in the middle of the crisis I think is just angry and not really thinking clearly. I understand the anger, I just think it's the wrong compensation scheme to be angry about. It's the first one that helped impale the company. Those types of schemes are all over corporate america and still remain.

I also agree, MER was far more egretious. But really, part of the problem is this is the outlet for the financial mess we're in of which we should all be angry. Because for the most part, I think this is about as much as the general public and both houses really understand about the crisis. The dudes didn't deserve the money. Unfortunately, I am disturbed by what I see as the general level of understanding about the big things about where we go from here from our parties/houses/leaders. So instead everyone focuses on what they understand.

AIG and the Lunacy of GAAP Reporting

The only problem I have with this article is I wonder if there needs to be more analysis on what the actual CDOs have underlying them. The real problem with the CDOs is that they're collateralized not by straight mortgages or assets, but tranches and pools of asset backed securities in the first place. A CDO may be an overcollateralization of tranches of securities that are all about to get wiped out, because the securities that back the CDO are early in line for default. If you're collateralizing the CDO with tranches of junk, the overcollateralized super senior portion of the CDO get's wiped out too, because overcollateralization of zero is still zero, or close enough. It's the senior portions of the original AB security that will prove to be collateralized better, not the CDO and it's the double layerering of risk that is the biggest problem, IMO. Until you figure out piece by piece the loss severities on the securities underlying the CDO, it's really hard to know what's going on. That's very interesting a lot of it is vintage 2005. I have a feeling understanding AIG would take enormous amounts of time, which has been my biggest problem. Ultimately I think you're right, but it's a hard fish to fry.

I think the things I want to know regarding AIG are:
1) Is the guaranty business potentially walled off from the rest of the company if they were to just abandon it?
2) If they were to write off those securities to zero, what's their adjusted tangible book value?
3) Assuming 1, what's the value of the rest of the individual components of the company?
4) Not assuming 1, what's the rest of their exposure?

Personally, I think those questions are the root of figuring out the Margin of Safety. I'd say, assume the absolute worst and then get an idea of what's it's worth. Email me offline if you want to discuss more: gregharris_73 .. at .. yahoo dot com. I really don't have enough time to root through as much as I'd want to by myself, but I'm certainly willing to put in some work through it.

AIG and the Lunacy of GAAP Reporting

The only problem I have with this article is I wonder if there needs to be more analysis on what the actual CDOs have underlying them. The real problem with the CDOs is that they're collateralized not by straight mortgages or assets, but tranches and pools of asset backed securities in the first place. A CDO may be an overcollateralization of tranches of securities that are all about to get wiped out, because the securities that back the CDO are early in line for default. If you're collateralizing the CDO with tranches of junk, the overcollateralized super senior portion of the CDO get's wiped out too, because overcollateralization of zero is still zero, or close enough. It's the senior portions of the original AB security that will prove to be collateralized better, not the CDO and it's the double layerering of risk that is the biggest problem, IMO. Until you figure out piece by piece the loss severities on the securities underlying the CDO, it's really hard to know what's going on. That's very interesting a lot of it is vintage 2005. I have a feeling understanding AIG would take enormous amounts of time, which has been my biggest problem. Ultimately I think you're right, but it's a hard fish to fry.

I think the things I want to know regarding AIG are:
1) Is the guaranty business potentially walled off from the rest of the company if they were to just abandon it?
2) If they were to write off those securities to zero, what's their adjusted tangible book value?
3) Assuming 1, what's the value of the rest of the individual components of the company?
4) Not assuming 1, what's the rest of their exposure?

Personally, I think those questions are the root of figuring out the Margin of Safety. I'd say, assume the absolute worst and then get an idea of what's it's worth. Email me offline if you want to discuss more: gregharris_73 .. at .. yahoo dot com. I really don't have enough time to root through as much as I'd want to by myself, but I'm certainly willing to put in some work through it.