It's Pity Party Time

Poor Ed Liddy... apparently by criticizing his statements, we little people hurt his feelings. Douglas A. McIntyre chastises us,

Liddy had committed one unpardonable sin, or at least that was the story that several members of Congress wanted to believe. He had agreed to previously planned bonuses for AIG employees who worked in the part of the company that had created many of the insurance firm's losses. Liddy was clear in making the point that AIG had a legal obligation to make the payments. He would have been better off to hold his tongue. The minute he gave an explanation for his actions, no matter how rational it was, his interrogators seized on it as another act of either bad faith or stupidity on his part.

Well, gosh... there you have it. So what can I really say, but this: "Mr. Liddy, I'm so sorry that when you, an insurance company executive and former CEO of Allstate, started lecturing the country on the sanctity and inviolability of contracts, I didn't thank you for telling me that it was raining."

Update: Jane Hamsher takes on the various "factual" assertions in McIntyre's editorial.

So Is It "Really" Salary?

With due respect to the defense of oversized financial industry bonuses, unrelated to profit or performance, can industry insiders please make up their minds? Addressing Edward Liddy, disgruntled employee Jake DeSantis, states,

As of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid.

But that was apparently contingent upon these special retention bonuses,

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised.

The bonuses are thus characterized as "earnings".

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes.

Now, I have no reason to doubt that Mr. DeSantis is a good guy who works really hard, made lots of money for his company, had no direct hand in the collapse of his division, and... well, I can't go so far as assuming that he didn't know "what the right hand was doing", down in the corner office, but let's leave that alone for now.

The editorial suggests that Mr. DeSantis agreed to work for $1/year in salary because he knew he was going to be paid about $3-4 million in bonuses for the year. (I'm guessing, based upon his description of the accelerated bonus schedule and the amount he received in this "balance of the payments".) If the bonus truly is a form of salary, Mr. DeSantis should have no complaint - he agreed to a $1 salary. If the bonus is not a form of salary, and was payable without regard to performance, let's stop pretending it was "earnings". Please - pick one door or the other, but not both. (Yes, it's okay to say something like, "The bonuses were really part of my salary, so I actually agreed to cut my salary by about 10-20% when I accepted the $1 deal." Granted, it doesn't sound as good.)

Democracy is... Flat?

Tom Friedman shares his insights....

If you want to guarantee that America becomes a mediocre nation, then just keep vilifying every public figure struggling to find a way out of this crisis who stumbles once - like Treasury Secretary Timothy Geithner or A.I.G.’s $1-a-year fill-in C.E.O., Ed Liddy - and you’ll ensure that no capable person enlists in government.

We could call this "meta-condescension". If I don't excuse Liddy for being condescending to me about contract rights and the importance of overcompensating people in the financial industry, I get a condescending lecture from Friedman about how unfair I was to react to the condescension.

Sure, I've had my moments of conscience about talking about the mistakes of both of these men, whose biggest sins appear to be that they are extraordinarily conventional thinkers for their respective industries, further hampered by tin ears. But that doesn't mean I'm not going to respond to a patronizing commentary about the "sanctity of contracts" from the former CEO of Allstate, or dismiss his notion that the people at AIG are doing taxpayers a great favor by unwinding contracts that should have landed the company in bankruptcy court, not made it the beneficiary of the largest taxpayer bailout in history. You know what? If the choice is between sitting silently while Liddy earns his $1, or being able to fully and fairly criticize the decisions of the CEO of AIG, I say pay him a market wage.

Geithner's department is far from fully staffed, and he's taken on a tough job - in normal times, probably only 1% of Americans even know who the Treasury Secretary is, and probably not many more than that know that we have one. As I said yesterday,

I'm still willing to assume that Geithner is a dedicated, hard-working public servant who means well, and who believes in this approach to the problem. But if he can't or won't explain himself, he deserves no deference.

We also shouldn't overlook the fact that public servants, first and foremost, are supposed to serve the public, and the public has the right to question them when their priorities appear to be the advancement of private commercial interests. Frank Rich captures the apparent attitude of the officials who are supposed to be addressing our concerns:

Bob Schieffer of CBS asked [Larry] Summers the simple question that has haunted the American public since the bailouts began last fall: “Do you know, Dr. Summers, what the banks have done with all of this money that has been funneled to them through these bailouts?” What followed was a monologue of evasion that, translated into English, amounted to: Not really, but you little folk needn’t worry about it.

Contrary to Friedman, I'm not content to be treated like a toddler just because Geithner is paid about $200K/year. I want to know what's in the bitter pill I'm being asked to swallow, and why other remedies aren't better.

You will ensure that every bank that has taken public money will try to get rid of it as fast it can, so as not to come under scrutiny, even though that would weaken their balance sheets and make them less able to lend money.

Oh no.... You mean, private banks that don't need government money wouldn't take it, and market forces would dictate their ultimate success or failure? What a horrible possibility! And again, you say, the solution is for us to "shut up and take it"? That seems like the least we can do....

And you will ensure that we’ll never get out of this banking crisis, because the solution depends on getting private money funds to team up with the government to buy up toxic assets - and fund managers are growing terrified of any collaboration with government.

Arguably the solution involves nationalizing the troubled banks, including those of the "big four" that can't make it on their own, cleaning up their balance sheets, and restoring them as quickly as possible to public ownership with new shareholders and new management.

Friedman has apparently embraced Geithner's solution - the government provides the money for private companies to buy up toxic debt, providing enough of a subsidy that they're willing to pay the valuation given to them by the banks that hold them, while "sharing" profit and protecting the private buyers from taking losses. It assumes that the assets at issue aren't grossly overvalued by the banks, or that the real estate bubble will quickly reinflate, or... well, we can't really be sure, because Tim Geithner won't tell us his assumptions. And Friedman implies, "We have no business asking; shut up and take it."

What's funny is, Friedman can't even follow his own advice:

Right now we have an absence of inspirational leadership. From business we hear about institutions too big to fail - no matter how reckless. From bankers we hear about contracts too sacred to break - no matter how inappropriate. And from our immature elected officials we hear about how it was all “the other guy’s fault.” I’ve never talked to more people in one week who told me, “You know, I listen to the news, and I get really depressed.”

The first words, put into the mouths of "business", could as easily be assigned to Geithner (or Ben Bernanke), who plainly believes that certain banks and financial institutions are "too big to fail". The "banker" could easily be AIG CEO Liddy, whose deference to compensation contracts goes way beyond what I can recall ever hearing from an employer, let alone from an insurance executive. And to attack public officials as immature and self-serving? As someone, oh yes, Thomas Friedman put it, "If you want to guarantee that America becomes a mediocre nation, then just keep vilifying every public figure struggling to find a way out of this crisis who stumbles once".

Yesterday, addressing bankers, Ben Bernanke commented,

Many of you likely are frustrated, and rightfully so, by the impact that the financial crisis and economic downturn has had on your banks, as well as on the reputation of bankers more generally. You may well have built your reputations and institutions through responsible lending and community-focused operations, but nonetheless, you now find yourselves facing higher deposit insurance assessments and increasing public skepticism about the behavior of bankers - outcomes that you perceive were largely caused by the actions of larger financial institutions. Many of you managed your businesses prudently and shunned more exotic instruments and activities. And many of your customers--households and businesses - avoided excesses and are able to meet their financial commitments on a timely basis.

No doubt this frustration has been heightened by the problems caused by financial firms that are too big or too interconnected to fail. Indeed, the too-big-to-fail issue has emerged as an enormous problem, both for policymakers and for financial institutions generally. Creditors of a firm perceived as too big to fail have less incentive to monitor and restrict the firm's risk-taking through adjustments to the price at which they lend money to the firm. If left unaddressed, this weakening of market discipline creates an unlevel playing field for smaller institutions, which may not be able to raise funds as cheaply, even if their individual risk profiles are better, or at least no worse, than those of their larger competitors. The erosion in market discipline distorts market behavior and can give firms an incentive to grow - either internally or through acquisitions - in order to be perceived as too big to fail.

Government rescues to prevent the failure of major financial institutions also have required large amounts of public resources. These actions have involved extremely unpleasant and difficult choices, but given the interconnected nature of our financial system and the potentially devastating effects on confidence, financial markets, and the broader economy that would likely arise from the disorderly failure of a major financial firm in the current environment, I do not think we have had a realistic alternative to preventing such failures.

Yet where Geithner and Bernanke appear content to (possibly) create a solution for these institutions to apply "next time", I think "There's no time like the present". I would be creating a Chapter 10 bankruptcy for companies like Chrysler and GM that are "too big to fail", and putting the weakest of those companies through it as a "test case". I would do the same thing with the "too big to fail" financial institutions. Why not? As Bernanke says,

Finally, an important element of addressing the too-big-to-fail problem is the development of an improved resolution regime in the United States that permits the orderly resolution of a systemically important nonbank financial firm. We have such a regime for insured depository institutions, but it is clear we need something similar for systemically important nonbank financial entities. Improved resolution procedures for these firms would help reduce the too-big-to-fail problem by giving the government the option of safely winding down a systemically important firm rather than keeping it operating.

There's no time like the present.

AIG's Long History of Responsible Conduct

In 1987, AIG made a huge mistake in launching a credit-default-swaps portfolio, the source of the company's eventual collapse. Don't take my word for that - hear it from current CEO, Edward Liddy:

Mistakes were made at AIG, and on a scale that few could have imagined possible. The most egregious of those began in 1987, when the company strayed from its core insurance competencies to launch a credit-default-swaps portfolio, which eventually became subject to massive collateral calls that created a liquidity crisis for AIG. Its missteps have exacted a high price, not only for the company and its employees but for the American taxpayer, the federal government's finances and the global economy. These missteps brought AIG to the brink of collapse and to the government for help.

So, how that that happen? As a former CEO is quick to tell you, as long as you make profits on paper nothing should be deemed a mistake:

From 1987 to 2004, the company's financial products unit contributed more than $5 billion to AIG's pretax income.

As you might imagine, in former CEO Greenberg's eyes, there was no cause for concern until after he left the company:

In spring 2005, after I left the company, AIG's credit rating was downgraded. It would have been logical for AIG's new management to end or reduce its business of writing credit default swaps because of the risk it faced of having to post billions of dollars in additional collateral in connection with certain credit default protection. Yet AIG ramped up its credit default swaps business; significantly, the quality of the securities AIG wrote credit protection for deteriorated, and the company plunged into subprime mortgages. The results were disastrous.

There's no reason to doubt Greenberg's word that everything was peachy until the day he left.... except for the fact that he was ousted from AIG over dubious accounting practices, and the financial products division was his baby:

But in 2005, amid an investigation by then New York Attorney General Eliot Spitzer, Greenberg was forced out by AIG's board. He had refused to cooperate with the company's own probe.

He is still fighting civil charges being pursued by New York state, as well as a string of other lawsuits outstanding between him and AIG.

But detractors say he could face a tough time saving face given the latest loss revelations since the former chieftain was sole architect of AIG Financial Products - the business that poured itself into the CDS market, and ultimately cost AIG so much.

Under Greenberg and Joe Cassano, the former Michael Milken associate who headed the financial products group, there was trouble. In 2001 the financial products division engaged in illegal conduct, resulting in a $80 million fine and its return of close to $40 million in fees, back in 2004:

To make the transactions look legitimate, Financial Products had set up a company to "invest" in the entities, while receiving an equivalent amount in fees, investigators said. The structure of the deal violated securities laws, FBI agent Randy Tice asserted in an affidavit filed in federal court as part of the simultaneous settlement of a criminal case and an SEC civil complaint.

AIG and two Financial Products subsidiaries agreed to pay an $80-million fine and give back $39.8 million in fees it had earned, plus $6.5 million in interest. PNC paid a $115-million fine.

The settlement also required AIG "to implement a series of reforms addressing the integrity of client and third-party transactions." A group of senior AIG executives would review complex transactions from the previous few years, working with an independent monitor chosen by the Justice Department, the SEC and the company.

Unsurprisingly, the company's auditors wanted to take a close look at its operations - and was apparently told that they had to take "no" for an answer:

Both PricewaterhouseCoopers, the company’s auditor, and an independent accountant complained of a lack of access to the London unit and its leader, Joseph Cassano. The accountant, Joseph St. Denis, said in a statement to the committee that he had been deliberately blocked from questioning Mr. Cassano because he might ”pollute the process.” Mr. St. Denis later resigned in protest.

(There were a lot of red flags.) When things reached the breaking point, Cassano was allowed to retire with a sweetheart consulting deal, until negative publicity brought it to an early end.

He was forcibly retired in March of 2008, but kept on a $1 million per month retainer and allowed to keep living in the AIG-paid for apartment in London. It was only in September 2008 that Rep. Henry Waxman flipped out when he heard that the guy who blew up AIG and put taxpayers on the line for tens or hundreds of billions of dollars was still getting a $1 million a month retainer. That's when they killed the retainer too.

As things crumbled around them, those within the financial products division "negotiated" an incredibly one-sided "bonus" package based upon their division's illusory 2007 profits.

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.

Although the recent payments are supposedly necessary to keep on board the people needed to unravel AIG's mess, as it turns out the hardest work in wrapping up the mess was completed months ago.

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.

The remaining people at the financial products division could be replaced - unless they all quit at once.

But what about the argument made by top AIG officials that the people receiving retention bonuses have unique skills and knowledge that make them indispensable?

"They are replaceable," Pasciucco acknowledges. "If we were running a long-term business, we could probably replace them over time, not all at the same time."

So the sole remaining justification for the bonuses is that a bunch of replaceable employees might walk off the job at the same time, into the loving arms of the current financial industry job market, rather than "settling for" their salaries or a renegotiated bonus package based upon such absurd measures as their job performance.
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Update: Here's a more comprehensive summary of AIGFP's history. It provides a bit more context to some of the bad decisions made along the way.

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?

Edward Liddy Was CEO of Allstate?

That's rich. The former CEO of Allstate lecturing people on contract rights as inviolable?

Allstate ranks as the worst insurer for consumers, according to a comprehensive investigation of thousands of legal documents and financial filings.

The rankings show a distinct pattern of insurance industry greed amongst 10 companies that refuse to pay just claims, employ hardball tactics against policyholders, reward executives with extravagant salaries, and raise premiums while hoarding excessive profits.

"While Allstate publicly touts its 'good hands' approach, it has instead privately instructed its agents to employ a 'boxing gloves' strategy against its policyholders," said American Association for Justice CEO Jon Haber. "Allstate ducks, bobs and weaves to avoid paying claims to increase its profits."

Allstate set the standard for insurance company greed and placing profits over policyholders. Allstate contracted with consulting giant McKinsey & Co. in the mid-1990s to systematically force consumers to accept lowball claims or face its "boxing gloves," an aggressive strategy designed to deny claims at any cost. One Allstate employee reported that supervisors told agents to lie and blame fires on arson, and in turn, were rewarded with portable fridges.

Thousands of court documents, materials uncovered from litigation and discovery, testimony, complaints filed with state insurance departments, SEC and FBI records, and news accounts were reviewed to compile the rankings and statistics.

Hey - I know. Liddy wouldn't have approved the portable fridges as bonuses had he known about them beforehand, but a contract's a contract.

Edward Liddy's Tin Ear

I feel a bit sorry for the man, actually. As he points out, "My annual salary is $1. My only stake is my reputation." But without going too deeply into his superficial analysis of why we must pay bonuses that he concedes aren't merited by the employees receiving them, and that he would not have approved had he been CEO at the time, this conclusion is astonishing:

In America, when you owe people money, you pay them.

Sure, but you pay them with your own money.

If I send Liddy my mortgage bill and say, "Dude, pay this for me," at best he'll ignore me and at worst he'll make an alternate suggestion of where I should put the bill. But there's no chance - zero, zilch, nada - that he won't recognize that I'm asking him to pay my bill with his money.

It's not a difficult concept to grasp.

It's CYA Time?

So really, who knew what, and when?

One minute we're told,

Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments.

The next, it's,

U.S. Treasury Secretary Timothy Geithner found out about the impending bonuses to executives at insurer AIG last Tuesday and alerted the White House on Thursday, an administration official said.

If I were to interpret the second article uncharitably toward Geithner, I would say that Geithner found out Tuesday that the bonuses were going forward (that's the literal claim), not that he first learned about them on Tuesday. If in fact he didn't learn of them at all until Tuesday, who kept him in the dark and have they been fired yet?

Let's not forget - Timothy Geithner's job before he became Secretary of the Treasury was president of the Federal Reserve Bank of New York. Was he kept in the dark by all of his employees at both jobs? Even as he engineered the takeover and bailout of AIG?

(And enough with the anonymous sources - start naming names.)
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And it keeps coming:

Geithner waited 2 days to tell Obama about AIG bonuses

A new timeline released by White House officials late Tuesday evening reveals the president first learned about the $165 million in AIG bonuses last Thursday, days before the story leaked to the media over the weekend.

Thanks for the (lack of a) link, guys. Now I gotta go find that timeline....

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Well, Tim Geithner's sticking with his "I didn't know until Tuesday" story - he put it in writing. If only the Washington Post had named its sources, we might be able to figure out how so many other people knew of it for months, including lawyers who worked for Geithner at the Fed, while he was in the dark. Even though Geithner claims Liddy sprung this on him at the last second, he has nothing but praise for the man. It's enough to make me think that Liddy could blow the lid off of Geithner's cover story. But I guess I"m just suspicious by nature.

There's also this doublespeak from Press Secretary Robert Gibbs:

Q. Robert, we understand from your answers here that you don't have knowledge of the exact timeline, but would it be accurate to say that you were blind-sided, that the President was blind-sided by this?

MR. GIBBS: No. And I will certainly seek better timeline answers to enumerate the negative answer I just gave you.

Q. Why wouldn't it be accurate to say that?

MR. GIBBS: Because the Secretary obviously took steps last week to lessen the blow of what was both contractually obligated and what had been promised but was not part of a contract that lessened the amount of money that was paid out.

Again, the Secretary of Treasury did good work in changing what was potentially out there, and I think obviously he did so in order to protect the American taxpayers. And that's why I think - that's the basis for me answering that question.

Geithner protected the American people by taking steps to lesson the blow, even though those steps proved ineffectual, and that meant that two days later when he finally got around to telling Obama, nobody was blindsided? What part of that makes sense.

Julie Hirshfeld Davis does some actual reporting, pointing out that this was on the radar screen (and by implication should have been very much within the awareness of Geither in his former position, as long ago as November:

AIG's plans to pay hundreds of millions of dollars were publicized last fall, when Congress started asking questions about expensive junkets the company had sponsored. A November SEC filing by the company details more than $469 million in "retention payments" to keep prized employees.

Back then, Rep. Elijah E. Cummings, D-Md., began pumping Liddy for information on the bonuses and pressing him to scale them back. "There was outrage brewing already," Cummings said. "I'm saying (to Liddy), 'Be a good citizen. ... Do something about this.' "

Around the same time, outside lawyers hired by the Federal Reserve started reviewing the bonuses as part of a broader look at retention and compensation plans, according to government officials who spoke on condition of anonymity. The outside attorneys examined the possibility of making changes to the company plans — scaling them back, delaying them or rescinding them. They ultimately concluded that even if AIG's bonuses were withheld, the company would probably be sued successfully by its employees and be forced to pay them, the officials said.

In January, Reps. Joseph E. Crowley of New York and Paul E. Kanjorski of Pennsylvania wrote to the Federal Reserve and the Treasury Department pressing the administration to scrutinize AIG's bonus plans and take steps against excessive payments.

"I at that point realized that we were going to have a backlash with regard to these bonuses," Kanjorski said in an AP interview. In a meeting with Liddy later that month, he said he told the AIG chief that "all hell would break loose if we didn't find a way to inform the public ... and that we should take every step to put that information out there so we wouldn't have the shock."

All of this eluded Geithner, engineer of the AIG takeover?
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In an unsigned editorial, Fred Hiatt's crew is suggesting that Tim Geither is either incompetent or a liar (the bonus plan, apparently, was public information for the past year, and everybody knew about it), and is telling everybody else to get over it:

Thus, the attorney general of New York, Andrew M. Cuomo, among other Democrats, floated the argument that the AIG employees should get stiffed because "it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money." True. But the bonuses were set in motion well before the U.S. takeover of AIG, which was done to avoid a Lehman Brothers-like meltdown that would have cost taxpayers a lot more than $165 million, and the compensation plan has been public information for a year.

Hiatt's crew also suggests that AIG "is hemorrhaging knowledgeable employees" and not paying bonuses, with no exception indicated for bonuses paid to people who have already quit, "would probably accelerate the exodus, with the likely effect that the country would lose much more money on AIG than it would otherwise." If the situation at AIG is so bad despite these bonuses, perhaps it's time to think of solutions that don't depend upon the work of people who can't be replaced (even as other Washington Post editorials suggest that they've already been replaced).

Andrew Ross Sorkin, Contrarian

Addressing the AIG bonuses, Andrew Ross Sorkin argues that the American taxpayer should bend over and... I'll leave out the middle part, but at least it ends with "get over it" as opposed to "pretend to like it." It's an essay apparently designed to provoke; unfortunately it doesn't do much to persuade. Quoting President Obama, Sorkin states,

“This isn’t just a matter of dollars and cents,” he said. “It’s about our fundamental values.”

On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the “fundamental value” in question here is the sanctity of contracts.

The sanctity of contracts? I assume at this point that Sorkin's never had to negotiate with his insurance company over a claim or wrongful denial of benefits. It goes without saying that he's never gone to law school, let alone practiced contract law. I wonder if he takes a similar absolutist position on divorce - marriage is a contract, after all, yet here's the government letting people off the hook, all the time.

The world of AIG revolves around contracts - building contracts that are tightly binding on the other side, but loosely binding on AIG. They have platoons of lawyers that they can turn loose on their contracts to determine ways to deny claims, reinterpret provisions in their favor, revise contracts to take advantage of the latest changes in case law and statute, and otherwise to put the people on the other end of a transaction at contractual disadvantage. When there's a dispute over a contract, those lawyers don't hesitate to argue that the contract should be voided on any number of grounds, including fraud, mutual mistake, and violation of public policy. The only time they talk about the "sanctity of contracts" is when they're on the other side of the argument, and probably then only for the benefit of a jury - I can hardly imagine what a judge with any experience would make of an insurance company arguing that contracts are sacred and inviolable.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

You mean, like if the government offered things called "courts" where people could go and claim, "I'm in a contract dispute with this other person, and want you to vacate part or all of the contract," and had a person called a "judge" who had the power to in fact do that? Or a special type of court called a "bankruptcy court" where people could erase part or all of their financial obligations? Or where there was an elected "Congress" that would tell a company in financial trouble, "We'll help you - but only if you first tear up your contracts with your labor union"? The horror - thank goodness we don't live in a country like that.

Do you find yourself transported back in time to last November, when Sorkin felt quite differently about contracts?

Bankruptcy would give G.M. enormous leverage with its debt holders — and, perhaps more important, with the U.A.W., whose gold-plated benefits are one reason G.M. is no longer competitive. A bankruptcy filing would also give G.M. the cover to close plants, rid itself of unprofitable brands and shed dealerships.

Wow.... G.M. would need an industrial-strength shredder. And it gets better... Why should auto workers have their salaries slashed and lose their benefits, despite the "sanctity" of their contracts?

Part of the problem is summed up by comments like this one in The Detroit Free Press, made by Kandy O’Neill, 39, an assembler at G.M.’s plant in Lake Orion, Mich., where she builds the Chevy Malibu and Pontiac G6. “I think we’ve given enough,” she said about the cuts to her salary and pension plan.

“Everybody wants to come down hard on the workers,” she said. “Nobody knows what we do inside there but the people who work there. It’s hard. It is not an easy job.”

When you read a line like that you might sympathize with her, but then you realize that nothing can be accomplished without bankruptcy. Ms. O’Neill: your company is asking the taxpayers - many of whom don’t have health care coverage - to pay your salary and health insurance.

And Mr. Sorkin, you're asking the taxpayers, many of whom aren't getting $3 million bonuses this year, to... Oh, why am I still pretending that you intended your argument to do more than give you a lot of media attention for being contrarian. I can't believe you're so obtuse as to not see the contradiction, or have had a transformative experience that has caused you to abandon your earlier anti-contract stance. Do you believe a word you wrote in either article?

Seriously, here we have AIG that is bankrupt - it survives only through the injection of gargantuan amounts of taxpayer money and the implied (or is it express) promise that the U.S. Treasury continues to stand behind its obligations with a blank check. No, it hasn't gone through bankruptcy proceedings, but only because it's the unique and special recipient of an unprecedented bailout. It's perfectly reasonable, and perfectly consistent with contract law, to argue that the bonus contracts requiring a huge outlay of taxpayer money to reward AIG employees violates public policy.

But let's take a step back - Sorkin argued, "imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right." My response so far treated that remark seriously, whereas it's not a serious comment. It's a slippery slope argument - and he admits it ("As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is.") I guess he hasn't studied logic.

My sarcasm should not be used to feed the slippery slope - although the government gives businesses and individuals both tools and opportunity to escape contracts, for the most part the government does seek to uphold contracts, and help others uphold them. Nobody in the business community would look at the AIG bailout, and the billions poured into upholding AIG's poorly considered contractual obligations, and conclude based upon the voiding of an oversized bonus contract, "The U.S. government can't be trusted to uphold contracts." Sorkin has to know that.

(The auto industry unions are facing a similar issue - but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)

First, no, it wasn't a negotiation - it was a condition the government imposed as a prerequisite to issuing GM and Chrysler bailout money. The contract was entered through a negotiation, and is being abrogated because the government didn't want bailout money to support a compensation structure people like Sorkin argue is unjust to taxpayers. You know, because UAW members get health benefits. Second, Sorkin himself favored unilaterally tearing up their contracts through a Chapter 11 filing.

But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave - the buzz on Wall Street is that some have, and more are ready to - they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.

That's speculative, and although beneficial to AIG is not something I find particularly compelling. I suspect that, had it wished to do so, by now AIG could have brought people into the Financial Products division and got them up to speed, to the point that the people who created this mess could be given their walking papers. Sorkin's argument actually lends weight to the argument that the contracts should be declared void. If in fact their was an implicit threat, "Give us millions and millions of dollars, or we'll finish ruining the company and take down the world economy," it would be unconscionable to reward that behavior. The idea that they could walk away and trade on their inside information to the detriment of AIG and the country? Probably illegal, and certainly something AIG should have covered in its employment contracts.

And how does any of that explain why AIG gave these bonuses to employees outside of the Financial Products division, under the same exceptionally generous terms?

For better or worse — in this case, worse — someone at A.I.G. decided this company needed to sign bonus agreements last year to keep people before the full extent of its problems became clear.

And again the question arises, why? Why these unusual, "bulletproof", anti-employer contracts that guarantee extraordinary bonuses over a two-year period? The only compelling reason I can think of remains that AIG suspected that it would be taken over by the government and wanted to be sure that compensation would not be affected - regardless of performance, losses, or taxpayer subsidy. Liddy's comments support that thesis:

“We cannot attract and retain the best and brightest talent to lead and staff” the company “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he said.

So this pay structure was created in anticipation that the U.S. Treasury would take over AIG?

Let them leave, you say. Where would they go, given the troubles in the financial industry? But the fact is, the real moneymakers in finance always have a place to go. You can bet that someone would scoop up the talent from A.I.G. and, quite possibly, put it to work - against taxpayers’ interests.

What's that supposed to mean? First, if people are able to be more productive outside of AIG, you create an economic efficiency by having them switch jobs. Second, how are the people at the heart of this disaster "real moneymakers"? You're going to gamble your company on their next scheme? Third, why are we assuming that they, and any other employer they join, would be working against taxpayer interests? Fourth, no small number of the employees getting these bonuses no longer work at AIG - how in the world does it benefit anybody to give them a retention bonus now?

“The word on the street is that A.I.G. employees are being heavily recruited,” Ms. Meyer says.

How does that justify the bonuses, even if we leave aside those paid to employees who have already quit? A retention bonus is only persuasive if it's higher than the next guy's signing bonus. If these guys could get the same or more elsewhere, the bonuses won't keep them at AIG. If they can't, but we're obligated to pay them more than their market value if we keep them on AIG's payroll, then AIG should be searching the job market for their replacements. In contract talk, that's called "increasing efficiency".

The (Indefensible) AIG Bonuses

Although this article is exceptionally bad as journalism, it does suggest a few things to me:

• The bonus issue is even worse than people think - the contract calls for similar bonuses to be given next year, as well.

• Geithner has probably known about the bonus plan from the day the government took control of AIG. Obama has probably known since he took office.

• Recognizing how this would look to the public, Obama instructed Geithner to do something about the bonuses.

• Working closely with Liddy and AIG, Geithner apparently chose instead to find ways ot justify the bonuses, or depict them as unavoidable.

• There's no excuse - none - for this having been sprung on the public at the last second.

I'll take another look at it later, along with anything else that comes down the pike, to see if any of those impressions change.

Avoiding Consequences

You would think, from the way the latest bailed out company bonus scandal hit the press, that nobody could have seen this coming. Wrong. Quite obviously, AIG CEO Edward Liddy saw it coming. For that matter, everybody within AIG who was "entitled" to a bonus saw this coming. To the extent that Geithner and Summers didn't see this coming, it was because they were deliberately kept in the dark - and perhaps also that they chose not to ask.

Here's an interesting theory (albeit most likely incorrect) on how Liddy may have tried to scare Geithner out of any meaningful confrontation over the bonuses.

I take this to mean that if a bunch of AIGFP managers quit because they didn't receive bonuses promised in their contracts, then France could, if it wanted, to appoint its own designee. And if that happened, then it would equate to a default and those contracts would kick in, at a cost to AIG the US government of at least tens of billions.

I doubt that such an outcome was likely and, if it were, my preference would have been to talk to France about the many reasons they weren't going to do any such thing.

But really, I think the legalistic rationalizations are just meant to give Liddy cover - he wanted to pay the bonuses, and the best way to do what he wanted to do was to keep quiet about them until the secret could no longer be kept, thereby avoiding the chance that Congress will revise the strings it has imposed on bailout money, then dump a convoluted legal rationale on the credulous and compliant Timothy Geithner in order to avoid any serious action before the bonuses can be distributed. [Addendum: Certain key people, probably including Geither and Summers, knew about these bonuses for a considerable time before the news was made public; so part of this assumption was unfair to Liddy.]

Larry Summers is worried about having policy created out of anger? This is increasingly looking like the straw - a word that strangely enough fits, because in the larger scheme of things these bonuses are a tiny part of the bailout - that broke the camel's back.

"Okay, Then. Pay Back Our Money, and Do What You Want."

Why isn't that a perfectly legitimate response to the failed CEO of a failed company as he describes a plan to use perhaps half a billion dollars of taxpayer money to pay bonuses to the people who ran the company into the ground... so they won't quit. Seriously, had I presented this scenario to you last year as fiction, wouldn't you have protested, "Nobody is going to believe that"?

AIG has burned through $173,000,000,000.00 in taxpayer money because these yahoos screwed up. When the auto industry asked for a fraction of that, Congress was sputtering endlessly about overpaid workers and the need to renegotiate labor contracts as part of any bailout. Why are the idiots who played a central role in the collapse of the world economy immune from a similar demand?

If in fact AIG can't get out of paying these absurd bonuses because of "contractual obligations", well, guess what. Those obligations change the second AIG enters bankruptcy. So how about sending them into Chapter 11. Seriously.¹

You can blame the failure of AIG on... well, the division that's supposed to get the lion's share of these bonuses, and say, "The rest of the company was doing good work," but the incompetents in that division bankrupted the entire company. As for this nonsense,

But [AIG Chairman Edward Liddy] also told Geithner that he felt it could be harmful to the company if the government continued to press for reductions in executive compensation.

“We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses, which are now being operated principally on behalf of the American taxpayers - if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” Liddy said.

If he can't attract sufficient talent to lose hundreds of billions of dollars and run his company into the ground, my heart bleeds for him. But he thinks they're going to quit? Who's going to hire the losers who crashed and burned AIG? Liddy - if you finally get around to doing your job and firing the clowns who ruined your company, will you still owe them these bonuses?

Update: It just gets better:

"Any credibility that could have been given to Mr. Liddy’s argument that these payments are necessary to retain top talent was completely destroyed in last month’s 10-K filing when AIG itself disclosed that nearly $60 million of those retention payments are going to employees who will be terminated."

How incompetent do you have to be to negotiate a contract unavoidably requiring payment of "retention bonuses" to employees you're not retaining? This doesn't exactly back up AIG's other line, that they can't fire these people because they're the only ones who understand the toxic witch's brew they created well enough to produce an antidote.
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1. There would be a question of whether these bonuses constitute wages, and thus get priority for payment in bankruptcy; but I suspect that in a bankruptcy AIG would be shedding employees long before bonuses were due, while renegotiating compensation packages for any who remained on the job - provided the company didn't just liquidate.