It's Bonus Season at AIG Financial Products Again!
The pending payout to the AIG FP amounts to $ 235 million. This is apparently not a new deal, it's the same old story coming back to haunt us once again:
The pending $235 million in retention bonuses at AIG's financial products unit, whose woes were largely responsible for forcing AIG to the brink of bankruptcy court last year, are part of roughly $450 million in retention bonuses for that unit that AIG has previously disclosed. AIG agreed in early 2008 to make those payments, months before it received a government bailout. The first installment of those payments was made late last year, after the bailout.
The second installment came due in March, and it was the preparations to make those payments that set off the prior controversy. The next installment of payments to the financial products unit employees is not due to be paid for months. AIG has argued that it is obligated to make these payments, and that keeping employees in their jobs is crucial to avoiding additional losses on trades that the unit still has in place and is trying to wind down.
The justification for these retention bonuses is then two-fold: (1) we can't just rip up these contracts, and (2) these particular people are uniquely qualified to wind down the outstanding positions.
Now, this discussion has already been had, but just a couple of points. As regards (1), there is intrinsic value to respecting contracts in most situations, though the general principle of "respect a contract unless one of the parties has destroyed the world economy" seems a workable one without throwing all contractual commitments into doubt. As regards (2), it is a valid point if they are uniquely qualified. And that is not necessarily the case. Most of these trades are being unwound at par or close to par*, which requires no special knowledge or ability. A pug in an armchair could do that for you for, say, 100 bucks an hour...
And even if they are uniquely qualified to unwind this clusterfuck of their own making, have they no shame? Remember, the uniquely qualified Myron Scholes of LTCM fame took $250.000 a year to unwind his mess. He didn't ask for a bonus. These AIG people are true monsters.
* I should source this claim, but I can't find it (perhaps Naked Capitalism or Zero Hedge). If someone has a source or evidence to the contrary, it would be welcome.
"We're contractually obligated" I can buy. These people are shameless, possibly even to the point of being sociopaths, they won't have the slightest compunction about suing if they don't get their cash on time. If they sue and if the contract says they get their boodle, they'll get it without the case ever going to a jury. "But you're honor, they're complete assholes" isn't, unfortunately, a defense to a breach of contract claim. Thus, stiffing them means AIG will spend more of our money defending an indefensible suit then they'll have to pay it anyway, with interest.
But jeebus h. diced, AIG, please stop insulting our intelligence by telling us that that you have to pay them gobs of money because if you don't the competition will snap them up. Yeah, I totally believe that because "Instrumental in putting together borderline fraudulent scheme that almost brought down the economy of the entire world" isn't really a plus on your resume, you know?
July 10, 2009 2:32 PM | Reply | Permalink
Aren't contracts renegotiated all the time, like in labor unions? The contracts would not have been honored if AIG had just thrown in the towel and gone bust, so it seems like there would be some room for renegotiation, but maybe not if you're a "Master of the Universe" vs a pipe fitter or something.
July 10, 2009 6:31 PM | Reply | Permalink
As a general rule, contracts are renegotiated when a) they they have an expiration date in them and that date is approaching or has passed, or, b) because the possibility of bankruptcy or insolvency of one party gives the other party an incentive to make concessions and it fears it will get even less of what it is owed if it doesn't.
July 10, 2009 9:07 PM | Reply | Permalink
Point taken Steve. I remember the legal discussion on the status of these contracts and the possibility of revoking them. it seemed inconclusive, as far as I saw. But there was collusion by Dodd and Geithner on the administration's agreement to honor these contracts which was not based on arguments of legal liability, but on expediency. And that was/is less forgivable.
July 11, 2009 6:11 AM | Reply | Permalink
I'm tempted to say that anybody who suggests we need to give these people bonuses should be fired.
Part of me wants Obama or Biden to say: The answer is no, it's beyond unacceptable and the American people are being fair in questioning your sanity, and the next person who brings it up is asking us to fire him.
July 10, 2009 4:03 PM | Reply | Permalink
OT, it's all in the hands of Obama's 'pay czar'. It will be interesting to see how he handles this first high profile case. If he just lies down, it's a bad sign for what he will do with the much more significant amounts involved in BofA and Citi...
July 11, 2009 6:13 AM | Reply | Permalink
Interesting, thanks for the perspective.
You know, for many Americans the full brunt of the crisis is still unfolding and we may well not have reached the nadir. And these people played just a key role in making it such a mess, and yet...
So, uh, don't lay down, pay czar.
July 11, 2009 3:52 PM | Reply | Permalink
...though the general principle of "respect a contract unless one of the parties has destroyed the world economy" seems a workable one without throwing all contractual commitments into doubt.
The driving puppy had to detour to a fire hydrant over that line.
The DP would like to join the Pug in unwinding those trades for the stated amount. We could share a hydrant.
July 10, 2009 6:34 PM | Reply | Permalink
kewl! The new and improved PPIP: Pug & Puppy investment Partners...
;0)
July 11, 2009 6:24 AM | Reply | Permalink
Seashell: OffThread, but within your sphere of interests - Ping-Up. cheers.
July 11, 2009 10:28 AM | Reply | Permalink
I want a 90% tax. RIGHT NOW. Mandatory withholding on all bonues. period. end of discussion.
Then we can go onto the audit. ha
July 10, 2009 8:09 PM | Reply | Permalink
It pisses me off how the government makes lots of noise and pretend to do something only to do a 180 once the media outrage dies down. Hope something tangible happens this time...
July 11, 2009 6:28 AM | Reply | Permalink
I understand people's anger, but you must balance the bonuses with the taxpayer's desire that AIG's future profits are maximized (since we own it). Therefore you want AIG to employ talented people. The people who are now running AIG have been brought in after the company had its meltdown. I would imagine it's guys like Gerry Pascuccio that are receiving the vast majority of the bonuses that are being paid out. Most of the people that "caused" the problem with their CDS trades are gone.
July 10, 2009 9:18 PM | Reply | Permalink
Bill, I was focusing on the AIG FP bonuses in particular, and 'holding on to the best people in order to maximize shareholder value' simply does not apply to that unit and its activities - there's no sign that they are aggressively pushing down the cost of the unwinding positions.
July 11, 2009 6:32 AM | Reply | Permalink
I'm not sure what you mean by "pushing down the cost". Some of those positions could end up being profitable if managed properly.
And I was speaking about the FP group too. How do you know what portion of the bonuses are going to people who caused the problem versus people that were brought in fresh to fix the problem?
July 11, 2009 6:18 PM | Reply | Permalink
Oh jebuz. Are we going to go through this again in three months? Last time everyone hyperventilated over this crap, Goldman Sachs managed to grab counterparty payments of like $50 billion - covering their CDS holdings at 100% on the dollar (on top of the $10 bn they got outright), without so much as a whimper of complaint while everyone grabbed pitchforks and torches and camped out at some mansion in Connecticut and threatened traders' children!
So what happened this week while the financial papers whack their favorite straw-villain ... Goldman, flush with our tax dollars, has announced they are doing so well they are going back to a Pre-Lehman Risk Mean. While Stanley Morgan had the innovative idea to bundle a couple hundred million worth of junk debt to make that magic AAA gold ... with Moody's playing right along again.
Forgive me if I question everyone's ability to keep their eye on the prize. No wonder we're so fucked.
July 11, 2009 1:56 AM | Reply | Permalink
In my defence kgb, I've posted on the Goldman scams before and on the latest Morgan Stanley fraud just yesterday. In my mind, there are a lot of prizes to keep our eyes on.
July 11, 2009 6:03 AM | Reply | Permalink
Fair enough. I missed the Morgan Stanley post - mega props. I'm so fucking pissed over the whole thing! This was more a rant in general than directed at you ... it could have just as easily ended up on SFCurt's thread.
I think the AIG bonus deal is a petty distraction that seems to get trotted out by the media when they want to divert attention from bigger fish. And I also think it's silly to pretend it's a new scandal every time we hit the next agreed on point. It's fair for the employees who stuck it out to expect what was promised to them - post crash - in exchange for continuing to work there. If we want to crucify someone, it should be Paulson, Geithner and Cuomo for putting the deal together in the first place. I also think the concept that any slurpee jockey could step in and do what they are doing, while cathartic for the plebes, is bullshit.
Ha, speaking of AIG and the last round of bonuses ... did you see the latest Vanity Fair article? It doesn't really give much technical insight beyond what was already known, but it's a delightful bit of well-deserved Cassano bashing.
July 11, 2009 1:05 PM | Reply | Permalink
Thanks for the link, KGB. As for the slurpey-jockey issue, my point is hard to defend as long as I can't find the source for the claim that FP isn't managing these positions in any particularly capable manner. The idea is that they are merely buying up the underlying securities at par and ripping up the CDS contract. My point was you don't need to be particularly knowledgable or capable to do that.
July 12, 2009 6:07 AM | Reply | Permalink
Obey -- your post and San Francisco's Curt's post in a similar vein focus our attention where it may not have been entirely focused before... though not for your lack of effort to provide that lens.
Thanks.
July 11, 2009 4:19 PM | Reply | Permalink