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March 16, 2009
By: Hilzoy

More On Bonuses At AIG

From the WSJ:

"American International Group Inc. will pay $450 million in bonuses to employees in its financial products unit. That division was at the heart of AIG's collapse last fall, which compelled the U.S. government to provide $173.3 billion in aid to keep it running.

Chief Executive Edward Liddy told Treasury Secretary Timothy Geithner in a letter dated Saturday that the next payments to employees of the financial products unit -- whose woes caused massive losses at the giant insurer -- are due on Sunday, and added "quite frankly, AIG's hands are tied."

Those payments are in addition to $121.5 million in incentive bonuses for 2008 that AIG will start making this month to about 6,400 of its roughly 116,000 employees. AIG, which was rescued in September as it faced potential bankruptcy, is also making over $600 million in retention payments to over 4,000 employees.

Together, the three programs could result in roughly $1.2 billion in retention and bonus payments to AIG employees."

If you want to get really angry, consider that this division, whose members will be getting nearly half a billion dollars in bonuses for the remainder of 2008 and 2009, has about 370 employees. That's well over a million dollars a person, to a group that lost over $40 billion (so far!), and bankrupted its parent company. Nice work if you can get it.

As far as I can tell from reading this explanation from AIG, and this letter from its CEO to Sec. Geithner, there are two issues. One is contractual: they promised their employees all this money back in the spring of 2008. To which I can only say: what sort of idiot would commit a company to paying a bonus to an employee even if that employee took down the company? And what sort of Treasury Secretary would commit the US to rescuing AIG without securing the authority to renegotiate those contracts?

The second, which is much harder to accept, is that no one but the idiots who put these trades together understands them well enough to unwind them. (See pp. 3-4 here.) When I say that this is hard to accept, I don't mean that I don't believe it. For all I know, it's true. I just mean that I hate the thought of it: that the people who worked in this division, having wrecked their company, done serious damage to the world financial system, and required hundreds of billions of dollars of taxpayers' money, might actually be in a position to extort even more.

And extortion is what it is (morally; I am not a lawyer, and I'm not trying to make a legal claim.) If I ran someone down in a car on a deserted road, it would take a lot of gall for me to ask him to pay me an exorbitant price to take him to the hospital since there's no other car around. When you run someone down, taking him to the hospital is the least you can do, and payment shouldn't so much as enter the picture.

Likewise, when you run the world financial system and the American taxpayer down, it takes a lot of gall to ask for not just a performance bonus, but a retention bonus as well. Any remotely decent person would stay and try to unwind the damage s/he had caused, if s/he was the only person who could do so, and would be content with his or her salary. (After all, it's not as though people in financial services are generally underpaid.)

If the people in the AIG Financial Products felt this way, they could have made all these legal issues about contracts vanish by simply declining their bonuses. And they could solve the retention problem by agreeing to stay around as long as they're needed, at their existing salaries. Instead, they are using our predicament to extract even more money for themselves. And that's obscene.

Hilzoy 12:56 AM Permalink | Trackbacks | Comments (33)

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Comments

There are a number of comments in your post waiting for action, but the biggest one that jumped out at me came from this line. "Any remotely decent person would stay and try to unwind the damage s/he had caused, if s/he was the only person who could do so, and would be content with his or her salary."

It is very clear that these are NOT decent people, remotely or otherwise. The clear immoral extortion behind this business of holding up the AIG management proves it. Nor, in fact, are the top managers of AIG "...even remotely decent ..." individuals. These are all people who would feel perfectly happy to be pirates (called privateers, but actually just pirates with a license that's good as long as they themselves could enforce it) on the Spanish Main, or similar pirates off the coast of Somalia if that job paid enough.

Since modern piracy at sea doesn't pay enough, they gravitated to Wall Street where they succeeded in defeating the other, lesser, sharks in the highly nasty environment there.

Posted by: Rick B on March 16, 2009 at 2:51 AM | PERMALINK

Forget those guys. Any one of them whose contracts require bonuses should be fired. Thanks, bye.

Posted by: Turgid Jacobian on March 16, 2009 at 2:51 AM | PERMALINK

AIG = Allowing Irreversible Greed.
AIG = All in Greed.
AIG = Arn't I Greedy.
AIG = A$#holes, in general.

This is sick. Why in the world are we helping these companies that keep sending millions to people who do not know how to run a company? They cry yet get paid millions on the "average joes" taxes. Furthermore, I fear this is just the tip of the iceberg. Look what Enterprise rent-a-car did to get bailout funds:

http://www.butasforme.com/2009/02/25/alert-enterprise-rent-a-car-may-have-fired-employees-as-fake-evidence-when-lobbing-for-bailout-money/

Not to make excuses for these people, but the bailouts are making crooks out of everyone that touches the money.

Posted by: Jessica on March 16, 2009 at 3:56 AM | PERMALINK

I think there will be a huge uproar, and our current Pres. will have his hands full.

The American people want to see someone in jail, already. OK, we have Bernie Madoff... but more of these arrogant sob's. If the taxpayers and govt are beholding to folks like these AIG people, it is a sad state of democracy, or oligarchy.... since it shows who really IS in charge.

I dunno... if these bonuses are paid, then AIG personnel should be sued for mismanagement and not fulfilling THEIR obligations.

Wishful thinking?

Posted by: Clem on March 16, 2009 at 5:32 AM | PERMALINK

Something that has troubled me for a few weeks is the disconnect between Wall Street and Main Street when it comes to the payment of bonuses. This was actually mentioned explicitly a few weeks ago by a woman quoated in -- I believe -- a WSJ article. She sayed something along the lines that, "Main Street understands the word 'bonus' to be something paid at the end of the year based on the employee's or, at least, the company's performance. But Wall Street understands 'bonus' to be part and parcel of one's compensation, something you count on getting."

Now we read that AIG may be "contractually required" to pay these bonuses. Assuming that these stories are correct, it seems pretty clear that when it comes to our financiers, 'bonus' is just a word that covers large lump-sum payments that are part of an employee's base line compensation and that will and must be paid no matter how well either the employee or the company performed.

What I don't understand is: Why are these compensation packages structured this way? Whether your annual salary (and that is what this amounts to) comes in a stream of monthly payments or is broken up into a series of erratic chunks, you get taxed on your annual salary, so I can't imagine there are any tax benefits here.

The only thing I can figure is that it is a lot like CEO compensation: these people are being paid exorbitant amounts of money, amounts that clearly cannot be justified. So, rather than be forced to admit (on their public books or in testimony) "I have an annual salary of $25 million," these people would prefer to say, "I have an annual salary of $3 million." I would imagine that any public filings about compensation might have an asterisk next to compensation (*employee also eligible for annual bonus payments) or something. I mean, CEO's have been notorious for using this dodge over the past decade or so whenever their companies get in trouble to make it look like they, too, are sacrificing: "I slashed my salary by 50% to get us through this crisis. (Although most of my compensation is in the form of bonus payments or stock options, which I didn't touch)."

Here's the thing, though. The financiers are setting up their compensation this way proactively, even before the destroyed their companies. To me, it looks like they actually knew ahead of time that they don't really deserve the sums they are paying themselves, but they want the money anyway. And just because they've bankrupted their companies and torpedoed the entire world's economy, they're determined to get it.

Posted by: swellsman on March 16, 2009 at 5:36 AM | PERMALINK

swellsman - I suspect the annual reporting is one reason for bonuses, as you suggest. But just as important was to give strong incentive based on performance. That may seem like a paradox, considering how AIG has performed overall, but I imagine AIG may have given incentives for things like this: 1) volume of sales - both total and based on diversity 2) bond ratings 3) share prices (options) 4) new products developed and implemented 5) industry rankings, which may not all take profitability into account (eg. best company or division to work in) 6) meeting efficiency standards, such as sales volume per person or manhour).

I would argue that one of the side effects of IRA's and other inducements for unsophisticated investors has been that management has become more focused on stock prices than fundamentals. This is why CEO's started getting huge salaries, actively sought celebrity status, and received so much pay based on stock options and performance bonuses. It is also the reason they pushed Congress to ease regulations, added celebrity politicians and CEO's to their boards, and virtually bribed auditing and rating firms to compromise standards.

Posted by: Danp on March 16, 2009 at 6:29 AM | PERMALINK

"Capitalism is the extraordinary belief that the nastiest of men for the nastiest of motives will somehow work for the benefit of all."
- John Maynard Keynes

Posted by: OldUncleDave on March 16, 2009 at 7:42 AM | PERMALINK

these people should be in jail.
my best friend was told to take a 15% pay cut at his job, and was warned that another 5% cut will be coming next quarter- but he is just happy to be working! My wife's company gives performance bonuses, and she exceeded her goal in the last quarter of 2008, but her bonus didn't come thru- because her company is trying to stay afloat- and, as you may guess- she's just happy to have a job at this point...of course neither of them work in the "Entitlement"- I mean "Financial Sector"!

all the while our tax dollars are bailing out these criminals!

revolution time! toss the to the wolves! burn them at the stake. lets make some martyrs the old fashioned way!

Posted by: effluviantOne on March 16, 2009 at 7:57 AM | PERMALINK

what I keep missing in coverage of this snafu is that this division is in London. Not only are the taxpayers paying bonuses, they are doing so for people who don't even live in this country. Why would we expect these employees to care about the us taxpayer? Are any of them actually us taxpayers? Figure a 40% British tax rate on bonuses, and we just paid the Queen two hundred million.

Posted by: Northzax on March 16, 2009 at 8:03 AM | PERMALINK

The world I grew up in, vs the world I live in now:

http://www.nytimes.com/2007/12/23/business/23wealth.html?_r=1

George Romney, on the other hand, voluntarily turned down $268,000 in pay over five years when he was chief executive, which was equal to about 20 percent of his total pay during that time. In 1960, for example, he refused a $100,000 bonus. Mr. Romney had previously told the company’s board that no executive needed to make more than $225,000 a year (about $1.4 million in today’s dollars), a spokesman for American Motors explained at the time, and the bonus would have put him above that threshold.

Posted by: Steve Paradis on March 16, 2009 at 8:30 AM | PERMALINK

Not only that, Northzax, but the Brits last month made some draconian cuts in the compensation for the execs of their bailed out institutions. No bonuses at all, and pay was slashed to what we would consider a normal living wage.

Posted by: Blue Girl on March 16, 2009 at 8:32 AM | PERMALINK

My friends husband who works for one of the big 5 auditing companies was told that they were taking a 15% cut, no "Contractually obligated" bonuses would be paid out and if they didn't like it the company is happy to take their resignation. This company attracts the best and the brightest out of B School. And the employees are just happy to have a job so they all said fine. Towns and city's across the country are giving up vacation days and "contractually obligated" raises to save other people's jobs. As Barney Frank said this morning that AIG employees might be entitled to their bonuses but not to their jobs. There should be a hiring frenzy to replacve these people or they will continue to feel they are more entitled that the rest of the world. These are the people that completely failed at their jobs (or did they do them so well that this was the inevitible outcome which is my view). I betcha if the Feds came in tomorrow and seized all the books for forensic examinations that these folks would be happy to give up their bonuses in exchange for staying out of jail. Drug dealing can be a complex and intricate business and dealers often help to "unwind" that process. Do they get bonused on it? No, they get to stay out of jail for the next 100 years. That is all.
Even Madoff feels he should not be in jail. He pleads guilty and in his unimagainable arrogance he thinks he should still be living in the lap of luxury. These people's arrogance is astounding. The ability of them to deny culpability, even to themselves, is mind boggling. They all feel they are too important to be punished.
Treat them like drug dealers.

Posted by: Bethie on March 16, 2009 at 8:43 AM | PERMALINK

Near as I can figure it,

Foreign investors had a wad of US dollars sitting in their accounts.

They, like we, wanted to invest these dollars rather than stick them in a mattress.

With the dot com bust, stocks were not tempting and real estate was doing well.

Mortgages, as loans backed by hard assets, were tempting investment vehicles.

With so many willing lenders, interest rates stayed low and more homeowners than ever bought in. America played a massive game of musical chairs.

Everyone worth risking money on moved if they were inclined to but the mortgage loans were still in high demand.

To create the demand for mortgages so brokers could accept the foreign investment, they introduced new loans (interest-only) that put payments within reach of people that couldn't afford a standard mortgage. Ever rising home prices allowed these people to believe this wasn't foolish.

The demand stayed high and eligible people were gettign scarce. Finding mortgages for people now were associated with bonuses. Get any warm body to sign on teh dotted line. Falsified income became routine. Higher risks were disclosed to teh creditors, but they were assured the risk was blunted as they bundled thousands of these new higher risk mortgages together so even if dozens went bad, it would not lower the return much.

Each investor gets a piece of these packages of mortgages (tranches, I think they're called.) AIG insures these loans to add value to the investment vehicle and investors still riding the wave lap in with spoons.

AIG's insurance allowed these mortgage package to be divided into multiple tranches at different interest rates and risk of loss. These were very popular as it accommodated the conservative and high risk investors.

Liquidating these assets (placing a value on them) would require contacting all parties that own pieces of these packages and having them agree to a sale price lower than the purchase price (just like most mortgages these days).

No one entity owns a single homes within these groups of thousands of homes so not a single home can be sold. Most entities owning a stake have pooled money together from still more investors. Securing THEIR agreement to take a bath is nigh impossible. SOME people will want to ride out the tough times and don't care if their capital is tied up for a while. This is a healthy buy and hold mentality except that it forces those who would take greater risks (business loans) to lose access to this money.

The loss of this investment capital is felt as the money available for loans decreases. Demand for these loans squeezes out all but the most creditworthy and even the credit worthy must pay very high interest.

Eneter the fed offering massive amounts of money to banks to supplement the capital until teh mortgage mess can settle out. This first round of financing was NOT accompanied by a requirement that the money be lent to customers.

Banks used the money to buy up competitors (Merrill Lynch, Wachovia, etc.). With fewer parties loaning money, decreased competition should increase interest rates still more.

January 2009, Barack Obama assumes the helm of the luxury liner SS America. Proposals to fund teh banks with those requirements that the money be circulated are floated and shouted down by outrages voters and members of Congress.


This is what I've got so far.
Alternative views welcome.

Posted by: toowearyforoutrage on March 16, 2009 at 8:45 AM | PERMALINK

Toowearyforoutrage:

That's all OK, but it's an oversimplification. A large amount of the problem was caused by Credit Default Swaps, which were essentially bets made by party A with party B that the CDO's owned by party C wouldn't go into default. When they did, the parties A owed more to the parties B than they had.

And, being thus insolvent, went under. Or at least they should have. We've been propping them up. AIG, for example, being an insurance company, was the "A" party to much of this stuff. That's why bailout money is flowing through them to other institutions such as Deutsche Bank. They were "B" parties.

The underlying mortgages were repackaged over and over. That's why they positions can't be unwound. No one can figure out, for any one foreclosure, where it was repackaged and repackaged, so that repossessions or other relief to lenders can occur. The original lender sold that mortgage off as soon as they could, so they aren't owed anything. And that mortgage and 1000 others are part of who knows how many levels of CDOs, and CDO's owning other CDO's.

And, since the folks who dreamed up this mess are "the best and brightest", we the people must pay them retention bonuses, lest they go elsewhere.

Posted by: CN on March 16, 2009 at 9:14 AM | PERMALINK

Look at it this way; for guys like these, a million dollar bonus and no place to invest the money is one of the circles of hell.

Of course, I can think of others...

Posted by: Jim 7 on March 16, 2009 at 9:15 AM | PERMALINK

Pay the bonuses in AIG stock.

Posted by: martin on March 16, 2009 at 9:18 AM | PERMALINK

Hilzoy, I love your analogies.

"Angry" doesn't capture how I feel. I find myself musing on the idea of "Taxation without Representation." The big difference is that in the year of our Lord 2009, the King has been replaced by AIG financial psychopaths. I would like to have a vote in determining whether or not American citizens are obligated to pay $1,000,000 bonuses to people who claim to be "the best and the brightest" and who produced the current financial mess.

My vote is no. I don't care what AIG's re-bailout contractual obligations were. I say, sue the bastards, don't feed them. If we don't have laws that allow us to do this, let's make them.

Posted by: PTate in MN on March 16, 2009 at 9:19 AM | PERMALINK

AIG says that they have to pay these bonuses to 'keep good talent.' What I want to know is, if the people receiving the bonuses are the very morons who got the economy into this trouble in the first place, why the hell would you *want* to keep them?

Might AIG do better by recruiting from a deeper talent pool- like the average group of high school dropouts?

-Z

Posted by: Zorro on March 16, 2009 at 9:34 AM | PERMALINK

I work for a large corporation that has an incentive program. In January 2008 we were told the requirements to get the bonus. In March 2008 they came back to us and told us that the company was not on schedule to meet the 2008 goals so there would be no bonus for that year. Why couldn't AIG have done that?

Posted by: Gingerpye on March 16, 2009 at 9:40 AM | PERMALINK

Where are all these people? Why isn't anyone in T.V. or radio following them around 24/7 for some kind of response to these issues? Why is it that they seem so remote from the rest of the country and protected from the consequences and reactions to their behaviors? Get them all front and center before the country to answer.

Posted by: Varecia on March 16, 2009 at 9:42 AM | PERMALINK

I note that these are 'retention bonuses' - why are these people being retained? (I assume it's the bonus they get for not quitting)... Also it looks like the bonuses have to be paid again this year - again, why aren't these people on the street?

I wrote my congressman asking for a law that exempts corporations from paying bonuses while receiving bailout money. (Perhaps it should be to prohibit bonuses while receiving the money...)

cheers-

Posted by: Eric on March 16, 2009 at 9:51 AM | PERMALINK

One more thing... these AIG idiots + their brethren at places like Lehman + Bear Stearns call themselves 'Masters of the Universe.' What I want to know is: what universe, and what color are the skies there?

-Z

Posted by: Zorro on March 16, 2009 at 10:18 AM | PERMALINK

What idiot company makes bonus guarantees in the middle of a massive crisis? Hell, what idiot company makes bonus guarantees to employees already on payroll? In my experience working for an investment company, guarantees are only given to new employees as a way to entice them to leave their stable work pay for something new. Once the guarantees are done, they still usually get quarterly bonuses (more a commission payout then a bonus, but called a bonus anyway). But i've never seen this giving guarantees to employees already in the firm. Especially at a time like this. Insane.

Posted by: Kevin on March 16, 2009 at 10:32 AM | PERMALINK

Hilzoy calls this obscene. I call it daylight robbery.

I went to Wikipedia to find the biggest bank robberies. There was a message at the top of the page: This list is incomplete; you can help by expanding it. Had to laugh. The best and the brightest at Financial Services have obviously taken the editors' request literally, because they've pulled off the biggest heist in human history. Not content with merely bankrupting their companies and driving the global economy into the ground, they are walking out the door in broad daylight with the biggest loot ever under their arms. So huge, unprecedented and audacious is this scam that it has blinded us collectively to the scale of the crime.

When will we recover our sight and see this obscenity for what it truly is: the biggest bank robbery of all time - and convict the perpetrators accordingly?

Posted by: Goldilocks on March 16, 2009 at 10:49 AM | PERMALINK

So who would employ these guys after the left AIG?

Posted by: tomj on March 16, 2009 at 10:50 AM | PERMALINK

I got a better idea. Lets charge all these people with RICO violations and see if they can explain how these instruments aren't a form of racketeering. We can freeze all their assets and throw them in jail until they provide a coherent explanation.

Posted by: bdop4 on March 16, 2009 at 11:05 AM | PERMALINK

tomj: So who would employ these guys after the left AIG?

McDonald's

bdop4: Lets charge all these people with RICO violations and see if they can explain how these instruments aren't a form of racketeering.

Now, that's a good idea. I hope someone from the DOJ is monitoring these blogs, b/c RICO might be the AIG version of using mail fraud to nail Al Capone.

-Z

Posted by: Zorro on March 16, 2009 at 11:11 AM | PERMALINK

The bonus payout excesses at AIG are just the tip of the iceberg of what is happening with the other Wall Street bailouts including Bank of America. Working productive Americans are bailing out the same crooks that destroyed our economy along with 45% of the wealth in the world and now the American taxpayers and our children will be forced to live a far lower standard of living with reduced prosperity and opportunities due to this but only we pay the price.

Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasuries, the dollar, gold and the stock market and how this is a better alternative than Washingtons plans to monetize the debt in future years and tax and destroy our remaining wealth by depreciating the dollar.

The Campaign to Cancel the Washington National Debt By 12/21/2012 Constitutional Amendment is starting now in the U.S. See: http://www.facebook.com/group.php?gid=67594690498&ref=ts

Posted by: Ron on March 16, 2009 at 12:29 PM | PERMALINK

If you want to get really angry, consider that this division, whose members will be getting nearly half a billion dollars in bonuses for the remainder of 2008 and 2009, has about 370 employees. That's well over a million dollars a person, to a group that lost over $40 billion (so far!), and bankrupted its parent company. Nice work if you can get it.

So, reading between the lines, what the argument really boils down to is that these guys totally fucked up and now they are needed to help unfuck up, but if we don't give them enough money to keep up their lifestyles, they won't hang around and clean up their mess, they'll go off to some other high paying entity. That about it? These guys fucked up, who is going to pay them big bucks to come in and take down another major business? Are those people really that stupid, or do they think we are that stupid. The AIG guys are probably stuck where they are and have no place to turn to. Not a one of them would hesitate for an instant to wield that advantage like a cudgel over a working stiff punching a time clock to force him to take a big cut, so why should we hesitate?

Posted by: majun on March 16, 2009 at 1:20 PM | PERMALINK

"The second, which is much harder to accept, is that no one but the idiots who put these trades together understands them well enough to unwind them. (See pp. 3-4 here.) When I say that this is hard to accept, I don't mean that I don't believe it. For all I know, it's true."

The WaPo's series "the Beautiful Machine" about the AIG-created mess pretty much makes the case that these guys absolutely do NOT understand them at all.

Anyone wanting to understand how AIG ruined our economy needs to read the series.

Posted by: Cal Gal on March 16, 2009 at 2:16 PM | PERMALINK

'The underlying mortgages were repackaged over and over. That's why they positions can't be unwound.'

Can't remember who, but I seem to think it was a woman governor, recommended that everyone facing bank foreclosure demand that the bank produce the note. Of course this won't work when the mortgage is still held by the originating bank, but if the note has been sold and sold again, the bank may not have the note and may not even be able to figure out which bank DOES have it.

An interesting wrinkle, I thought.

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