Thursday, March 19, 2009

Keeping the Rats on the Sinking Ship

Steven Davidoff takes a look at the AIG bonus contract, and finds a few surprises. Well, not really surprises if you're as cynical as I am, and inferred that these extraordinary bonus contracts were negotiated in anticipation of a government bailout.
These bonuses are payable regardless of performance and are calculated at 100 percent of 2007 compensation for all employees except senior management, who receive 75 percent of 2007 compensation. The amount is payable unless they are fired with good cause, resign without good reason or fail to meet performance standards. For those hoping that these employees could now be fired, “good cause” is defined in the agreement as a very high standard.
Payable without relation to performance. Payable based upon 2007 compensation. In other words, negotiated with full awareness that the Financial Products division was going down the tubes.
This was not a boilerplate contract. Rather, it was highly negotiated. And it was highly negotiated to pay retention fees at high levels without regard to performance. This is obviously shocking. But it makes me wonder: perhaps one area of direction here should be actually looking at who negotiated this and why?
That was a question I had hoped somebody would get around to asking Liddy during yesterday's Congressional hearing, rather than grandstanding. Dare I say, the hearing met my expectations, which means it fell far short of meeting my hopes?

Davidoff harrumphs that people focusing on the bonus scandal are missing the forest for the trees:
Yet, as I said in my post on Tuesday, “Seven Sad Truths About A.I.G.,” the real concern over the insurance giant should be about the $170 billion in government bailout money it received and and A.I.G.’s subsequent payments of tens of billions to a myriad of banks.

* * *

But of course, this is all merely a diversion for what should be the main focus: Where did the $170 billion go that taxpayers spent on A.I.G and why, and what we are going to do with A.I.G. going forward.
As should be obvious, the bonuses are an easily understood metaphor for everything that's wrong with this bailout. Most of the people in this country have suffered financially as a result of the financial crisis. It's absurd for taxpayer money to insulate those responsible for the crisis from feeling any pain - and even more absurd that it happens time, and time, and time again.

Pundits pontificate about bubbles, and the government's role in creating and sustaining bubbles, without giving heed to the fact that there's a huge bubble waiting to burst - a bubble that's sustained only through direct taxpayer subsidy: The financial sector's compensation bubble. If we would stop listening to people like Ruth Marcus and Andrew Ross Sorkin yammer about how seven figure bonuses - bonuses entirely divorced from profit and performance - are necessary to prevent people from fleeing the companies they've ruined for "better paying jobs" at some other financial institution, we might start seeing financial sector salaries come down to earth. One way or another, it's absurd for companies that are bankrupt but for multi-billion dollar infusions of taxpayer cash to be paying gargantuan bonuses completely divorced from anything that would justify their payment.

A lot of what's happened, including the payments Davidoff deems outrageous, has happened with straight-faced politicians assuring us that it's completely necessary, for the greater good, and will help keep things from getting worse. Sure, if you take the time to look under the hood, figure out what "counterparties" are, and really think about such atrocities as the manner in which AIG, with the full knowledge and participation of the likes of Geithner, Bernanke and Paulson, has tossed around taxpayer money rather than trying to cut deals that could help "save us" money, you have every right to be appalled.

If you hear somebody like Edward Liddy suggest that these bonuses help AIG "save" taxpayers money as it unravels the hideous mess it's Financial Products division made, you have every right to be outraged - AIG should be put through bankruptcy, but we're told that the magnitude of the harm that would cause necessitates our bailing it out, but its obscene to suggest that taxpayers had a choice here, or that they're being "saved" money when they shouldn't have been asked to contribute so much as a penny in the first place.

To say people shouldn't be angry about the AIG bonuses, or that they're overreacting, is a bit like asking, "That guy's been kicking you in the shin, hard, every day for the past six months, and the most you've done is grumble. Why did you get so angry today?" Does it really need to be explained?

1 comment:

  1. More Lies: The Washington Post has done a pretty lousy job of covering this story to date, but it had an intersting piece in today's paper that seems to refute the "we need to retain them, they are the only ones smart enough to fix the mess" argument.

    According to the Washington Post:

    The work of defusing the most dangerous bets placed by American International Group was largely concluded by December, according to documents and interviews, long before the company gave bonuses to employees it said it needed to retain to avoid a financial meltdown.

    . . .

    By the end of December, the outstanding volume of the riskiest kind of bet, on highly complex derivatives, had been reduced to roughly $13 billion from $78 billion, according to the company's financial filings. The Federal Reserve has since completed its planned purchases of assets from AIG's trading partners.

    Two Financial Products executives said the hardest work has been completed and their focus has shifted to the resolution of a vast but less risky portfolio of bets on more straightforward financial instruments. One said most of those trades are protected against loss and have caused few problems.

    That progress contrasted with the testimony before Congress yesterday of the company's chief executive, Edward M. Liddy, who said the payment of $165 million in retention bonuses last week was necessary because the departure of key employees could result in catastrophic losses.

    "The risk assessment was we've made great progress in winding down this business, but there is still $1.6 trillion of stuff in that portfolio. There's risk that that could blow up. And if it were to explode, it can cause irreparable damage to that progress that we've already made," Liddy said. "I know $165 million is a very large number. It's a very large number. In the context of $1.6 trillion and the money that's already been invested in us, we thought that was a good trade."

    (and just to make Aaron happy)

    The two executives, who spoke on the condition of anonymity, said they were particularly concerned that the loss of experienced employees would reduce the company's ability to secure the best prices in negotiations with other financial firms.

    "We're unwinding all of our businesses. We're going out of business, and all of our counterparties know that," one executive said.

    A former Financial Products executive, however, said the employees already are less inclined to haggle because they are playing with government money. He said that government officials, who are closely involved in the process, also have favored pricing that helps other financial firms by giving them more money.

    "It doesn't look like the government is trying to protect AIG," the former executive said, adding that paying full price on the amounts demanded by trading partners "is a way of lending them money."



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