OT: the other side of the AIG coin

[Climb01742]

here's an eye-opening piece from one of the AIG employees who received a bonus. if his story is true -- and i have no reason to doubt it -- he and his colleagues seemed to be owed an apology from an awful lot of people, myself included. my anger at these bonuses appears misplaced. again, if the perspective in this letter is accurate, a lot of people on the public stage were fools, or worse, lately.

http://www.nytimes.com/2009/03/25/opinion/25desantis.html?em

[jhcakilmer]

If true, this is just another casualty of the "let the market take care of itself" system. Without the proper regulation and oversight, this is a perfect example of what happens, and who gets hurt.

"Casualty of incompetence"

[Hardlyrob]

It wouldn't surprise me a bit if this letter is true.

Congress and the press are really good at braying about "injustice", but when someone really looks at the entire picture, it is rarely what hits the headlines. Neither are good at dealing with complexity, because it doesn't suit their goals.

As someone in the Regan administration famously said (can't think of who right now) "Where do I go to get my reputation back?"

Rob

[Sandy]

If true, than this is just another causualty of the "let the market take care of itself" system. Without the proper regulation and oversight, this is a perfect example of what happens, and who gets hurt.

I would have no doubt that the letter is true.

I think it was more of AFTER there was no "proper regulation and oversight", the regulation was not proper and the sight was over the top, especially relative to the Kings and Queens involved in the first place. The poor pawns get hurt as the Kings and Queens tried to cover their own butts.


Sandy

[bigman]

I also believe the resignation letter to be accurate. The question remains how does an entity have the capacity and brashness to enter into these agreements given their overall financial health without some serious clauses that could decrease the amount of bonus? What would have happened if uncle sam never gave AIG a dollar?

The bonuses are not the issue, the bailout is.

[93legendti]

Here's what Ed Koch wrote:

...The public saw with their own eyes Senator Chris Dodd, chairman of the Senate Committee on Banking, Housing and Urban Affairs, state during a television interview that he had nothing to do with writing language in pending legislation that authorized the payment of bonuses to AIG employees. Dodd was fingered by the staff of the office of the Secretary of the Treasury as in fact being the person who wrote the enabling language allowing the bonus payments, with their urging.

To make matters worse, we then learned that the amount of the bonus payments was underestimated - it has now grown from $165 million to $218 million. Furthermore, an increasing number of employees - now up to 400 - were found to have received those payments.

The American public, unbelievably docile up to this moment, exploded with anger directed at AIG employees for taking the bonuses and at the Congress and the President for enabling the bonuses to be paid. Then everyone ran for cover, with members of Congress who voted for the legislation and the president who signed the legislation vowing they would undo what had happened, denouncing AIG and the employees who received the bonuses and demanding the money be returned. The House membership threatened that if the AIG employees failed to return the bonuses, they would be subject to a 90 percent confiscatory tax...

If President Nixon (or Pres. Bush), his administration and a compliant Congress had done what this President and this Congress have done -use the United States tax code to punish employees of a company seen as having engaged in legal conduct that they disagreed with - the press and respected government observers would have denounced Nixon (and Bush)and called for the removal in the next election of every involved member of Congress...

http://cgis.jpost.com/Blogs/koch/entry/hearings_required_scorn_and_imprisonment

It is outrageous that the privacy of these AIG employees was violated and they face mobs protesting outside their homes--all in the name of diverting attention from the colossal incompetence of the Congress, Sec. Geitner and the President. This is Chicago Politics practiced on a national scale.

The buck may have stopped with Pres. Truman, but this President passes the buck to those most politically expedient to tar, feather, skewer and ride out of town on a rail - all in the name of rescuing precious poll numbers.

To make matters worse, now Sec. Geitner wants to seize the "crisis" as an opportunity to limit executive pay for companies who did not even take TARP funds...This is one of the worst moments in the history of our democracy.

Finally, the EU is telling the President to stop acting like a socialist. Oh the irony:
EU presidency: US stimulus is 'the road to hell'
By AOIFE WHITE, AP Business Writer
Wed Mar 25, 3:38 pm ET
BRUSSELS – The head of the European Union slammed President Barack Obama's plan to spend nearly $2 trillion to push the U.S. economy out of recession as "the road to hell" that EU governments must avoid...

http://news.yahoo.com/s/ap/20090325/ap_on_bi_ge/eu_eu_us_economy/print;_ylt=A0LEVIaYj8tJHRsAZBzozAt.;_ylu=X3oDMTExa mxoMWc5BHNlYwNzcgRwb3MDMgRjb2xvA3JlNAR2dGlkAwRsA1d TMQ--

[johnnymossville]

The phony shock and "stunned" outrage towards these AIG people by the govt. and administration, (the same ones who wrote the policy) and the fanning of hate in the general public based on petty class warfare is so banana republic it's scary how fast they are dragging this once great country down. To top it off, they are just getting started. Now that the pitchforks are out, Did O return his $100+k AIG Bonus yet?

We live in interesting times.

[RPS]

if his story is true -- and i have no reason to doubt it -- he and his colleagues seemed to be owed an apology from an awful lot of people, myself included.Something seems out of context with this letter. I'd like to know the real purpose and intent.

[don'TreadOnMe]

"As someone who has an enormous sense of entitlement, a taste for the finer things in life, and is morally bankrupt, I'm starting to think I picked the wrong profession.

The reason his contract should no longer be honored is because the company he worked for is bankrupt.
The only reason why A.I.G. has any money to spend on bonuses - or even on paper clips - is because we the taxpayer gave that money to them. We didn't contract to pay him any g*dd*mned bonus.

It's also interesting that the man was paid three quarters of a million dollars to, essentially, trade things back and forth. (it looks like they're also trying to sell the company, so I imagine he had plenty to do with getting it ready for sale -- this is more pointed at the general case of these very high salaries.)

There's some economic utility in this kind of trading, but mostly, he and AIG are just extracting value out of the economy. And the economy has gotten so messed up that trading, instead of production, pays on the order of 20 times the average wage.

That $700K he was paid is a claim on real goods and services, and I doubt very much that he's providing even close to that kind of utility to the system as a whole. As far as I can see, most of what they do is simply taking from other people; for every dollar they win, the system as a whole loses. Again, there is some value there, because commodity traders help constrain volatility (buying low and selling high means that they help move their chosen commodity back toward true economic value), but that kind of compensation seems wildly excessive to me.

It's the nature of capitalism that things get out of adjustment, but there's a difference between ordinary maladjustment and downright dysfunction. The modern Wall Street is largely based on fiction, and they can use that fiction to take vast amounts of wealth from the world.

I'm not saying that janitors should be paid $700k; I am saying that when speculation pays better than real investment, real investment doesn't happen. Many of the brightest people go where the money is, and if that area is wealth-subtractive, we all suffer."

[LegendRider]

Bills now winding their way through Congress would tax between 70% and 90% of bonuses paid to any executive earning in excess of $250,000, if he or she is employed by a business that received more than $5 billion from U.S. bailout funds. With popular outcry at a fever pitch, too few Democrats and only some Republicans are prepared to stand up to this juggernaut.

But would the courts uphold this legislation? The AIG bonuses were made pursuant to valid contracts entered into before the receipt of the bailout money. They were ratified in the legislation that provided for the bailout, and efforts to find loopholes in these contracts have proved unavailing.

Thus any sensible system of limited government should consider the proposed bills unconstitutional. Special taxes on some forms of income (but not others) and retroactive taxes put in place after business transactions are complete both merit strong condemnation. The bills in Congress are rife with both elements.

Full article here:
http://online.wsj.com/article/SB123802257323941925.html

[gone]

But would the courts uphold this legislation? The AIG bonuses were made pursuant to valid contracts entered into before the receipt of the bailout money.

There is an interesting dichotomy between the perceived sanctity of the AIG contracts versus the contracts the UAW had with the automotives which have pretty much been scrapped.

[Tobias]

The AIG bonuses were made pursuant to valid contracts entered into before the receipt of the bailout money.Does anyone know what these contracts actually state, or what they are based on? If the payment is a fixed amount for sticking around, why are they called a bonus at all? Wouldn't that be regular compensation paid out once a year? There has to be more to it than is being stated by both sides.

[goonster]

the EU is telling the President to stop acting like a socialist.

The "EU" isn't telling the US anything. That's the Czech PM, who happens to hold the revolving EU presidency this year, but is also a dead man walking because he just lost a vote of confidence by his own parliament. Topolanek is embroiled in a pitched battle with the Czech socialist party, so his comments should be viewed in that light.

Anyway, the rest of the article you cited is filled with comments of other EU leaders distancing themselves from Topolanek's remarks. Did you read those?

edit: Topolanek may be right in his assessment, or not, but his remarks do not represent the consensus view of EU leadership. He is also, I think, premature in crowing about the "successes of the EU". They have huge financial and economic problems of their own, and the EU partnership itself is pretty shaky at the moment.

[Ray]

There has to be more to it than is being stated by both sides.
Or less. There's an understandably huge amount of anger and frustration on the part of the average citizen who doesn't begin to understand this stuff but knows it doesn't pass the stink test (even if it may be necessary). Something like this is a very easy thing to understand on a surface level so the press grabs it, everyone gets righteously pissed about it, and the politicians respond to that populist rage. Its never the real issues that people get hung on, its the ancillary stuff like the cover-up, perjury, etc. Because EVERYONE understands that.

The bonuses, THESE bonuses in particular, have got to be the least important part of the AIG story, but they're easy to understand and get pissed about.

-Ray

[goonster]

The bonuses, THESE bonuses in particular, have got to be the least important part of the AIG story, but they're easy to understand and get pissed about.

Quoted for Truth. :beer:

[Tobias]

The bonuses, THESE bonuses in particular, have got to be the least important part of the AIG story, but they're easy to understand and get pissed about.

-RayNot in my opinion. And not because of the dollar amount (which I think you are refering to) but because of the long-term message it sends about taking risks and being responsible for one's decisions.

Failure should lead to failure -- seems simple enough to me. I don't want anyone or any company being bailed out. The unintended long-term consequences could become far too great; not worth the risks IMO.

[93legendti]

AIG gave Pres. Obama $110,332 in campaign contributions. AIG gave Sen. Schumer $111,875. Sen. Dodd got $281,038 from AIG.

[93legendti]

Best line about AIG Outrage:

"...Soon the device migrated to the op-ed pages. Writing in her May 18 Times column about Obama’s inability to show much if any anger over the A.I.G. bonuses, Maureen Dowd cracked: “Barack Obama even needs a teleprompter to get mad.”...

[1centaur]

The reason his contract should no longer be honored is because the company he worked for is bankrupt.
The only reason why A.I.G. has any money to spend on bonuses - or even on paper clips - is because we the taxpayer gave that money to them. We didn't contract to pay him any g*dd*mned bonus.

It's also interesting that the man was paid three quarters of a million dollars to, essentially, trade things back and forth. (it looks like they're also trying to sell the company, so I imagine he had plenty to do with getting it ready for sale -- this is more pointed at the general case of these very high salaries.)

There's some economic utility in this kind of trading, but mostly, he and AIG are just extracting value out of the economy. And the economy has gotten so messed up that trading, instead of production, pays on the order of 20 times the average wage.

That $700K he was paid is a claim on real goods and services, and I doubt very much that he's providing even close to that kind of utility to the system as a whole. As far as I can see, most of what they do is simply taking from other people; for every dollar they win, the system as a whole loses. Again, there is some value there, because commodity traders help constrain volatility (buying low and selling high means that they help move their chosen commodity back toward true economic value), but that kind of compensation seems wildly excessive to me.

It's the nature of capitalism that things get out of adjustment, but there's a difference between ordinary maladjustment and downright dysfunction. The modern Wall Street is largely based on fiction, and they can use that fiction to take vast amounts of wealth from the world.

I'm not saying that janitors should be paid $700k; I am saying that when speculation pays better than real investment, real investment doesn't happen. Many of the brightest people go where the money is, and if that area is wealth-subtractive, we all suffer."

A reasonable question might be: why did AIG think the guy was worth $700K? A reasonable answer might be: he was worth more than $700k to them. Why? Because the skills and knowledge to trade billions of dollars of derivatives contracts with best execution and appropriate risk offsetting (within the trading book only) is quite rare and the consequences of getting it wrong potentially hugely more expensive than $700k. Guess who would pay for those mistakes? That answer might be the taxpayers, or it might not, depending on the other side of the trade being supported by the government or not. Odds are a lot of counterparties are not supported by the government, so the US taxpayer might have (if the guy did his job right) saved many millions for their $700k. Not that such considerations should get in the way of "outrage" (which if it had continued a while longer I would have nominated for Time's Man of the Year, the first time a word would have earned that honor).

Compensation is about supply and demand. It is best not engineered for political or philosophical reasons. I think it's very fair to ask whether AIG was correct in its need to pay retention money (I'd rather use that term than "bonus" because bonus means extra and retention money is supposed to be "enough") to that many people in those amounts in order to preserve the value of the business (ultimately, for taxpayers), but somehow I never hear that discussion. Probably because the people asking would just not be able to understand the arguments.

Why are taxpayer dollars any more powerful than private investor dollars when it comes to changing contracts? If private investors had bought 80% of AIG, should they have been outraged that the company they bought into lived up to its preexisting contracts? The government is an entity that we trust (?) to invest our dollars wisely, but it specifically chose NOT to create bankruptcy for AIG and so can't pretend that it has the same powers as a bankruptcy judge after the fact. The government COULD have made its investment while abrogating contracts, but either wisely or dumbly did not (the consequence would have been a litigation claim from the employees and probable mass defections last fall with potentially huge costs to the system and taxpayers, but whatever) yet has the gall to call foul on others rather than themselves when the public (and they?) figure it out. Another example of the observation that government does complex things badly perhaps.

Trading has never been about investment, but the trading function is critical to any investment firm. It is the sheer size of the money being moved that leads to big compensation for traders, not the relative value of trading vs. investing. A 25 basis point error on a mere $1B of trading is many times the amount of that guy's retention payment. Might such errors have occurred if the experienced trader left (to work for hedge funds and tell them all about AIG's trading book so AIG could be picked off) and a junior trader who had no choice but to work for a firm that was going away in a year or two took his seat? That's the question to ask (especially if you are about to invest billions of my tax dollars), and I don't know what the answer would have been.

[1centaur]

There is an interesting dichotomy between the perceived sanctity of the AIG contracts versus the contracts the UAW had with the automotives which have pretty much been scrapped.

The UAW is being asked to renegotiate. AIG workers could have been asked the same thing but were not. Same party on the other side. Government is not talking about changing the UAW contract itself or taxing 90% of anything above "fair" compensation.

Tobias asked: "If the payment is a fixed amount for sticking around, why are they called a bonus at all? Wouldn't that be regular compensation paid out once a year? There has to be more to it than is being stated by both sides."

Retention payments are often negotiated when somebody new buys into a company where people are the key assets, such as in the investment business. They have by convention been called bonuses because they are in addition to regular salary and because the term sounds appealing to those getting them (the bonus being typically the main goal for the year of investment people), but they are not performance based, other than the performance of being there. Most retention bonus plans last longer than a year for obvious reasons. 2-3 years is typical. Many AIG commentators have confused retention bonuses with performance bonuses, some intentionally I am sure.

[Ray]

Not in my opinion. And not because of the dollar amount (which I think you are refering to) but because of the long-term message it sends about taking risks and being responsible for one's decisions.

Failure should lead to failure -- seems simple enough to me. I don't want anyone or any company being bailed out. The unintended long-term consequences could become far too great; not worth the risks IMO.
You're arguing against the bailout generally. Legitimate argument, and probably at the root of the anger that generated the outrage at the bonuses. I don't know which is the lesser evil - letting it go down and seeing just how bad that makes it for the whole economy and for how long, or bailing these firms out and keeping the economy vaguely afloat despite the horrible message it sends about corporate consequences. I was just arguing that the bonuses are probably the least important detail in this overwhelmingly big issue. But its the easiest to understand and get pissed about, so the press and, ultimately, politicians feed on that detail.

-Ray

[DreaminJohn]

I'd just like to note that 1Centaur has provided some of the most thought-provoking content I've read (or heard) anywhere on this subject. So thanks for that.

Just one more reason I hang out here, albeit mostly lurking.

[SamIAm]

I'd just like to note that 1Centaur has provided some of the most thought-provoking content I've read (or heard) anywhere on this subject. So thanks for that.

Just one more reason I hang out here, albeit mostly lurking.

+1000

And another thing, no way does the proposed tax legislation make it into law and if it does, it gets struck down posthaste as unconstitutional, not to mention stupid.

How do you break a contract? Renegotiate if both parties are willing or declare bankruptcy. The government did not want AIG to go bankrupt so the contracts are valid and should be paid.

[johnnymossville]

I'd just like to note that 1Centaur has provided some of the most thought-provoking content I've read (or heard) anywhere on this subject. So thanks for that.

Just one more reason I hang out here, albeit mostly lurking.

I agree, I read it two or three times so I could fully take it in.

[RPS]

Failure should lead to failure -- seems simple enough to me. I don't want anyone or any company being bailed out. The unintended long-term consequences could become far too great; not worth the risks IMO.It's too bad we will never know what would have happened if the government had let the problem work itself out through the system under existing laws and policies; then change laws to prevent a repeat.

I find it interesting that some smaller banks are now returning or turning down "help" because they either don't need it or because the financial help is more trouble than it's worth. That part I like -- that's how it should unfold IMHO. Granted it's not the same magnitude, but the principle applies.

[SamIAm]

Bills now winding their way through Congress would tax between 70% and 90% of bonuses paid to any executive earning in excess of $250,000, if he or she is employed by a business that received more than $5 billion from U.S. bailout funds. With popular outcry at a fever pitch, too few Democrats and only some Republicans are prepared to stand up to this juggernaut.



On a side note, how did the current congress and president arrive at this magic number of $250,000. It just keeps turning up like a bad penny or fundamental constant of nature.

[johnnymossville]

On a side note, how did the current congress and president arrive at this magic number of $250,000. It just keeps turning up like a bad penny or fundamental constant of nature.

I'm gonna blame the teleprompter for coming up with that doozy.

[Samster]

no win possible here, though the letter makes some noteworthy points. as shown by some of the commentary that comes with it on the nyt site, he's not likely to get a lot of sympathy given how wealthy he already appears to be. it's a shame that this economic fiasco we're in so often comes down to "you've made more in one bonus than what many americans will make in a lifetime" kinds of statements. thinking seems to be a lost art.

and as noteworthy as the some of desantis' points are, you have to admit that the banking sector (generally) seems to have succeeded in "tearing a hole in the fabric of our economic universe." (rolling stone quote, almost). and we're re-employing these very people to fix the problem they created. how can that not piss you off?

[Birddog]

and we're re-employing these very people to fix the problem they created. how can that not piss you off?
and we re-elect the misguided morons that let this sheite blossom in the first place. Congress and the regulators didn't learn much from the deregulation of the S&L's in the 80's.

Birddog

[Samster]

and we re-elect the misguided morons that let this sheite blossom in the first place. Congress and the regulators didn't learn much from the deregulation of the S&L's in the 80's.

Birddogthat also pisses me off. perhaps even more. in fact, no matter how you look at it, from whatever angle, whichever party, i can't see any way not to be completely pissed off.

[Climb01742]

I'd just like to note that 1Centaur has provided some of the most thought-provoking content I've read (or heard) anywhere on this subject. So thanks for that.

Just one more reason I hang out here, albeit mostly lurking.

and he does it without gratuitous axe-grinding or cheap shot taking. he delivers light, without the partisan fire. he has his beliefs but his intellect is what shines through and illuminates. kudos.

[DukeHorn]

Correct me if I'm wrong, but the overall earnings of AIG from the past few years were also driven by the profit margins of the AIG financial products division. It stands to reason that if AIG-FP was bringing in profits, the bonuses in AIG-FP were extremely high even for the folks not participating in the credit default swaps (the wealth begets wealth metric). As a recipient of prior bonuses that were based on wealth generated through the extremely high margins of the AIG-FP division, you'd think Mr. DeSantis would (if he was "concerned" with being logically clear about his compensation) offer to return some of the performance bonuses of the past few years. In fact, I'm still unclear why we're not pursuing those performance bonuses (as opposed to these current bonuses which are pretty chump change in the grand scheme of things).

Also let's be very clear about something. There were only two offices for AIG-FP. They had 377 employees including Mr. DeSantis (and he was a senior executive under Cassano). Do we really think that this guy didn't know what was going on?

Note the following quote:

AIGFP only had 377 employees. Those 400-odd folks received almost $3.5 billion in compensation in the last seven years, a very large part of that money coming from the sale of credit default protection. Doing the math, that averages out to over $9 million of compensation per person.

Then please note Mr. DeSantis' quote from his letter:

I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G.

As an attorney, I'm quite struck by the fact that he didn't say that he didn't know about the credit swap defaults. So interestingly enough, one can infer that (a) he did know (due to his seniority and a recognition of the extremely high margins in his 377 person division), (b) he did nothing (because he wasn't responsible for them), and yet (c) he pocketed huge bonuses in the prior 7 years.

Let's not crown him as a saint with his self-righteousness.

PS And if you think his letter wasn't vetted by his personal attorney to make sure that he wouldn't perjure himself if called upon to testify, you don't understand corporate America.

[DukeHorn]

I'll respectfully disagree with part of 1centaur's analysis:

Compensation is about supply and demand. It is best not engineered for political or philosophical reasons. I think it's very fair to ask whether AIG was correct in its need to pay retention money (I'd rather use that term than "bonus" because bonus means extra and retention money is supposed to be "enough") to that many people in those amounts in order to preserve the value of the business (ultimately, for taxpayers), but somehow I never hear that discussion. Probably because the people asking would just not be able to understand the arguments.

Let's be clear, for most white collar workers you can make the above argument, but I think the extension of the above to senior management isn't entirely accurate.

There have been numerous studies that show that companies have bid against themselves with "retention payments" to senior executives when there has been no need. From a common sense perspective, it's fairly obvious. The Board of Directors (in many instances) has a good relationship with senior management since they're the ones that directly interact. How often are minor shareholders going to oppose what the compensation committee recommends? In essence, you're asking folks to declare the compensation for a good friend of theirs. You think they're going to low-ball that person?

As I've remarked before, free market theory is great in a vacuum. What it fails to consider is that human nature still applies and that human variables (whether greed or friendship) will throw off that "supply and demand" curve that supposedly puts everything in a tidy perspective (sort of akin to how you can play with the shape of that bell curve with variables, right?).

Look at this quote from Financial Week in early 2008

Performance-based bonuses for chief executive officers of large public companies took a nosedive in 2007. But companies more than made up for that drop-off by doling out bigger discretionary bonuses and other payments not tied to a specified financial target.

So, as the economy started its decline, the target was shifted from financial targets (ie revenue generation) to a non-specified target. What's the free market logic behind that? There is none. It's a "we'll scratch your back" by changing the metric for your compensation.

Are we going to pretend that this doesn't occur and that compensation is purely supply and demand? Come on.......

[keno]

would your comments remain the same if desantis's compensation and bonus were based on the profitablility of the deals he was responsible for? Other than the military, hopefully, the all for one, one for all mentality is hardly the underpinning of our society. I think that his analogy of the electrician causing the house to burn down should not affect the compensation of the plumber is fair.

keno

[1centaur]

DukeHorn - respect back atcha, in that we have some agreement. I suspect that AIG did not need to retain all the people they did nor did they need to pay exactly what they did to do so - they probably overpaid for the assurance of being able to conduct business close to usual (not writing new contracts as much as trading old ones I presume) because they gained emotional comfort from that assurance. Maybe they also feared being blamed for a talent exodus and overpaid for career insurance.

I also agree that retention pay for senior management, the ones that just supervise people and set policy, is likely to be for political or philosophical reasons in the small sense. Again, the people setting the pay may personally know those senior executives and not be willing to admit to themselves, well we need the people with the technical skills (trading CDS correctly) but we don't need their bosses so much, no matter how true that might be. At the micro level, compensation has many human elements to it. Supply and demand is a big picture, long-run concept. This year, Shaq may be paid too much to play because the boss likes him and his glory years are a recent memory. 2 years from now some exec's going to look at payroll and stats and future drafts picks and figure Shaq's worth 75% less.

On the trader's lack of knowledge, my experience of traders is that they have blinders on. They are focused on the act of trading. They may have a general sense of what the CDS was meant to do, but the big picture sense of uncovered insurance that must surely someday fail that in retrospect looks obvious is particularly likely to have gone over the head of traders.