As difficult as it is to believe, I essentially accept Liddy's explanation
I hate to disagree with David Kurtz, but I really think that Liddy presented a very good explanation for the bonuses and for calling them Retention Bonuses even though some of the individuals have already moved on.
In fact, it is a better explanation (though much less satisfying) than my earlier conspiracy theory that a bunch of rogue left-over sales traders in AIGFP conducted a scam that suckered both Liddy and the government supervisors Summers and Geithner, then up to and including Obama.
The relevant facts are:
(1) These contracts are each a unique, highly complex, delicate, internally conherent bundle of individual derivative contracts. The set of contracts inside each bundle apparently are designed to protect each other from almost any change in the relevant markets. But each bundle has to be monitored daily, and the manager has to enter the markets to buy and sell derivatives and financial instruments to adjust the balance of the bundle. Miss one day and the entire bundle can fall apart, putting it into default. In the case of such a default, there are heavy penalties in addition to losing the total investment in the entire bundle. Successfully managing the bundle until its final expiration will result in a profit, probably substantial or they would not have built the bundle in the first place. Each bundle is uniquely designed and someone who understands it in detail has to monitor both the bundle and the markets.
(2) The managers who are managing those bundle are not salesmen. AIG decided to get out of the business about January 2008. The purpose of the bonuses was to keep the very specialized managers on the job managing those bundles until the bundle contract expired. But the job is ending. How do you keep the managers from finding new jobs that need their skills? Substantial "Retention." bonuses. The managers are <i>not</i> getting bonuses to sell these bundles because AIG stopped doing that. Once AIG stopped selling those bundles of contracts, it took about two months to negotiate a termination agreement with Joe Cassano, one which took effect March 31, 2008. The agreement kept him on retainer probably to advise how to deal with one of those bundles if it went bad and no one else could figure out how to keep it out of default. Notice that his consulting contract lasted only for the rest of 2008.
(3) The managers were working themselves out of a job. Without substantial incitement, they were going to immediately be looking for new employment someplace where their skills had a long term future. That was not AIG But someone who knew what was in the bundle had to be on hand <i>every trading day.</i>. Those managers had AIG over a barrel.
(4) Remember also that the contracts were created and signed in January 2008. Everyone, and I mean everyone, was expecting the economic downturn to last another six months and then turn around. Then the economy instead got continually worse into this year. The worsening of the economy has been a direct result of the failure of the government to act to protect the banking system, something none of the financial operators believed then was necessary. The market was supposedly self-correcting without government interference/management. The events in the Fall of 2008 were completely unforeseen, and to true free market believers (all of the top people on Wall Street), unforeseeable.
(I myself didn't start predicting Depression-level collapse until February 2008 and I was one of the early ones. I also didn't predict Obama's response, which MAY have staved off a real Depression IF the banking system has been saved. Jury's still out on that.)
(5) Were the employment contracts drawn badly? In hindsight, probably, and Liddy specifically stated that he would not have written them the way they were written. Considering how little was understood at that time about the overall systemic financial problems the top AIG people were pretty clearly muddling through as best they could. Overpaying a few people to avoid the massive losses defaults of those bundle contracts when the economy was oprobably going to be improving again when those contracts were completed and paid off would probably have cost a few extra dollars here and there to keep those managers doing their day to day work and staving off the immediate defaults. I don't doubt that it seemed a good bet and was probably considered worth it. Remember, Liddy did not come on the scene until September. By then a lot more was known and the risks were a lot more clear. The managers who wrote those contracts were already being replaced by September.
Generally I think I buy Liddy's explanation given Congress today. As I say, Liddy's explanation does explain the currently known facts, including why Treasury (including Geithner) and Larry Summers apparently signed off on paying those bonus payments some weeks ago before anyone realized the hash the media was going to make of the story.
Given the facts as I think I currently know them, and assuming good faith on the part of Liddy (I don't think he is a tobacco ececutive), I'd say that the AIG execs really did get rid of the bad apples (the Milken protoges) back in the first quarter of 2008 and are peddeling desperately to get AIG totally out of those contracts as rapidly as they can without destroying AIG and the banking system. Knowing what was learned by last Fall, the government bailout was needed, but if the bundles are well-managed, the taxpayers really are very likely to get their money back and maybe even make a profit.
There are, however, three groups who are not going to believe this explanation, no matter what. The reason is cynicism, ignorance of finance, and self-interest.
Those three groups are (1) the Republicans, (2) the right-leaning Bush-supporting media, and (3) the cynics who don't speak enough "Finance" to understand what Liddy told them today. That third group includes literally every reporter writing on the subject. Rush Limbaugh won't believe it for all three reasons.
The Republicans probably don't understand it, but even if they do, they don't want to. Darrly Issa? Give me a break. As a group they have here an issue they can ride to the next ballot box. As they have demonstrated with their absolute opposition to anything Obama does, they think they can win through tearing Obama down, and this issue is great for that. Limbaugh can't demagogue acceptance of what Liddy said, and besides the right-wing authoritarians he leads wouldn't accept such a story from him.
Then the public in general will not buy anything except a simplistic explanation, preferably one with clearly defined characters in white and black hats. They want heroes and villains,and they won't buy experts, technicians or bankers as heroes. This is too much inside baseball with technical language that takes a while to assimilate. Who trusts an expert or a banker today?
Finally there are the right-leaning media still pining for Bush/Cheney in office. First they don't understand what they are being told, and second they are looking for the new "Terry Shiavo - Dead White Girl - OJ Simpson" scandal that THEY can ride to the advertisement sales. Accepting Liddy's explanation takes all that away from them, adn no reporter is going to ride to Glory and a Pulitzer by accepting that Liddy knows what he is talking about, especially when there is so much opposition to accepting it already in the media.
In fact, it is a better explanation (though much less satisfying) than my earlier conspiracy theory that a bunch of rogue left-over sales traders in AIGFP conducted a scam that suckered both Liddy and the government supervisors Summers and Geithner, then up to and including Obama.
The relevant facts are:
(1) These contracts are each a unique, highly complex, delicate, internally conherent bundle of individual derivative contracts. The set of contracts inside each bundle apparently are designed to protect each other from almost any change in the relevant markets. But each bundle has to be monitored daily, and the manager has to enter the markets to buy and sell derivatives and financial instruments to adjust the balance of the bundle. Miss one day and the entire bundle can fall apart, putting it into default. In the case of such a default, there are heavy penalties in addition to losing the total investment in the entire bundle. Successfully managing the bundle until its final expiration will result in a profit, probably substantial or they would not have built the bundle in the first place. Each bundle is uniquely designed and someone who understands it in detail has to monitor both the bundle and the markets.
(2) The managers who are managing those bundle are not salesmen. AIG decided to get out of the business about January 2008. The purpose of the bonuses was to keep the very specialized managers on the job managing those bundles until the bundle contract expired. But the job is ending. How do you keep the managers from finding new jobs that need their skills? Substantial "Retention." bonuses. The managers are <i>not</i> getting bonuses to sell these bundles because AIG stopped doing that. Once AIG stopped selling those bundles of contracts, it took about two months to negotiate a termination agreement with Joe Cassano, one which took effect March 31, 2008. The agreement kept him on retainer probably to advise how to deal with one of those bundles if it went bad and no one else could figure out how to keep it out of default. Notice that his consulting contract lasted only for the rest of 2008.
(3) The managers were working themselves out of a job. Without substantial incitement, they were going to immediately be looking for new employment someplace where their skills had a long term future. That was not AIG But someone who knew what was in the bundle had to be on hand <i>every trading day.</i>. Those managers had AIG over a barrel.
(4) Remember also that the contracts were created and signed in January 2008. Everyone, and I mean everyone, was expecting the economic downturn to last another six months and then turn around. Then the economy instead got continually worse into this year. The worsening of the economy has been a direct result of the failure of the government to act to protect the banking system, something none of the financial operators believed then was necessary. The market was supposedly self-correcting without government interference/management. The events in the Fall of 2008 were completely unforeseen, and to true free market believers (all of the top people on Wall Street), unforeseeable.
(I myself didn't start predicting Depression-level collapse until February 2008 and I was one of the early ones. I also didn't predict Obama's response, which MAY have staved off a real Depression IF the banking system has been saved. Jury's still out on that.)
(5) Were the employment contracts drawn badly? In hindsight, probably, and Liddy specifically stated that he would not have written them the way they were written. Considering how little was understood at that time about the overall systemic financial problems the top AIG people were pretty clearly muddling through as best they could. Overpaying a few people to avoid the massive losses defaults of those bundle contracts when the economy was oprobably going to be improving again when those contracts were completed and paid off would probably have cost a few extra dollars here and there to keep those managers doing their day to day work and staving off the immediate defaults. I don't doubt that it seemed a good bet and was probably considered worth it. Remember, Liddy did not come on the scene until September. By then a lot more was known and the risks were a lot more clear. The managers who wrote those contracts were already being replaced by September.
Generally I think I buy Liddy's explanation given Congress today. As I say, Liddy's explanation does explain the currently known facts, including why Treasury (including Geithner) and Larry Summers apparently signed off on paying those bonus payments some weeks ago before anyone realized the hash the media was going to make of the story.
Given the facts as I think I currently know them, and assuming good faith on the part of Liddy (I don't think he is a tobacco ececutive), I'd say that the AIG execs really did get rid of the bad apples (the Milken protoges) back in the first quarter of 2008 and are peddeling desperately to get AIG totally out of those contracts as rapidly as they can without destroying AIG and the banking system. Knowing what was learned by last Fall, the government bailout was needed, but if the bundles are well-managed, the taxpayers really are very likely to get their money back and maybe even make a profit.
There are, however, three groups who are not going to believe this explanation, no matter what. The reason is cynicism, ignorance of finance, and self-interest.
Those three groups are (1) the Republicans, (2) the right-leaning Bush-supporting media, and (3) the cynics who don't speak enough "Finance" to understand what Liddy told them today. That third group includes literally every reporter writing on the subject. Rush Limbaugh won't believe it for all three reasons.
The Republicans probably don't understand it, but even if they do, they don't want to. Darrly Issa? Give me a break. As a group they have here an issue they can ride to the next ballot box. As they have demonstrated with their absolute opposition to anything Obama does, they think they can win through tearing Obama down, and this issue is great for that. Limbaugh can't demagogue acceptance of what Liddy said, and besides the right-wing authoritarians he leads wouldn't accept such a story from him.
Then the public in general will not buy anything except a simplistic explanation, preferably one with clearly defined characters in white and black hats. They want heroes and villains,and they won't buy experts, technicians or bankers as heroes. This is too much inside baseball with technical language that takes a while to assimilate. Who trusts an expert or a banker today?
Finally there are the right-leaning media still pining for Bush/Cheney in office. First they don't understand what they are being told, and second they are looking for the new "Terry Shiavo - Dead White Girl - OJ Simpson" scandal that THEY can ride to the advertisement sales. Accepting Liddy's explanation takes all that away from them, adn no reporter is going to ride to Glory and a Pulitzer by accepting that Liddy knows what he is talking about, especially when there is so much opposition to accepting it already in the media.
