$165m is 1/10 of 1% of 175bn, but ohhh snap!

The $165m bonuses to be paid out by AIG to executives belonging to the Financial Products division of the insurance firm is nothing compared to the bailout money they received in several tranches.  But it sure was enough to infuriate perhaps more people than the 1st, 2nd, and other times they received the bailout money.  A post from BaselineScenario yesterday, written by James Kwak, pointed out how this might have been the tipping point and speaks a lot about the kind of system there is in the US:

  • The bonus contracts – which have still not been released to the public – reflect the instinct of Wall Street to favor its employees over any other stakeholders.
  • The failure of the Treasury Department and the Federal Reserve to review and renegotiate the bonus plans as a condition of federal assistance last fall – despite the fact that the plans had been public knowledge since May- reflects the rushed, ad hoc nature of the deals that were struck.
  • The seeming inability of the government to do anything but throw up its hands reflects the failed strategy of the bailouts so far: provide as much cash as needed, but do everything you can to minimize the impact on the companies being bailed out.
  • The testaments to “the best and the brightest”  – here, referring to the people of AIG Financial Products – reflect, I don’t know, either absolute, brazen obscenity, or a world-historical example of making the mistake of believing your own hype.

Indeed it is a shame and a surprise that a lot of these contracts are drawn without consideration for performance.  It doesn’t matter if they brought huge inflows for the firm. The much bigger outflows the people caused the firms should have been enough a reason to prevent bonuses from still being paid out.  What happened to pay for performance? If bonuses are given out because they brought in huge revenues at one point in time, then these same bosnues need to be withdrawn for the losses they caused! The sum may be a miniscule part of the overall amount the firm received being bailed out, BUT in no way does it render these bonuses appropriate, if at all ethical.

The Congress could have prevented this.  If the bailout plan they drew for the firm entailed a thorough review of pending bonus contracts, they could have done something about it and prevented further public outrage.  After all, these Congress people are experts when it comes to inserting ridiculous provisions in bills they pass.  This would have been the one of the few things they do right.  The pace at which these bailout have been enacted point out to the inadequate efforts that came from the Congressmen who are so fond of bashing the activities of these firms when they themselves are unable to do things right.

From today’s WSJ, White house is said to be considering making use of some provisions included in the stimulus law, which would “allow the Treasury secretary to claw back payments if they were “inconsistent with the purpose” of the Troubled Asset Relief Program or “otherwise contrary to public interest.”  Furthermore, it was reported that the bonuses currently under fire have been part of a SEC filing done in May of 2008.  Following is a breakdown of those who received bonuses, including those who left more than a million bucks richer.


Ed Liddy, the current CEO, appears in Congress today. I could only hope he doesn’t get berated for what’s going on in the firm that’s not of his own doing.  He was appointed in September but I don’t believe he has much to do with this.  If the contract has been in place since May, then apparently it was not under his review that the contracts were made.  Today, he wrote a piece for the Washington Post saying it is his utmost intention to bring back the money as soon as possible (emphasis mine):

Taxpayers should also know that AIG has a plan to return money to the government, and we are making progress. We have transferred to the government securities or equity interests that have real value and prospects for future appreciation. We are selling assets and significantly reducing our risk exposure. The business unit that was the source of our greatest losses is being shut down. And we have agreed with the Federal Reserve and the Treasury to pay off AIG’s existing loan through a combination of asset transfers, securitization of the cash value of certain life insurance businesses, and cash from the sale of businesses.

Suffice to say, he is doing what he can.  And it’s unfortunate he is becoming the scapegoat.  Contracts are contracts and they must be honored.  The big task of getting back the money is now directed to the legislators.

So where do I stand on this whole AIG debacle?

  1. The bonuses are despicable.
  2. But they need to be paid to keep the sanctity of contracts
  3. Yet it would be appropriate to find ways to get the bonuses back.
  4. The “blackmail” document from AIG about the potential detrimental effects is secondary.
  5. AIG’s failure, I believe, is too big to fail. What can be done is for its branches to be split up so a problem of this magnitude could be avoided.
  6. The government has now gained significant involvement that finally letting AIG fail could prove a total waste of taxpayers’ money.

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