Apparently, $175 billion doesn’t buy what it used to.
AIG has decided that it has no choice but to pay out $165 million in bonuses to employees due to contractual obligations. And the government has decided it has no legal recourse to stop the payments.
To make matters even worse, AIG CEO Edward Liddy has the gall to ask the government to reconsider limitations on executive compensation, saying that such limits curtail the company’s ability to “attract and retain the best and brightest talent to lead and staff the AIG businesses.”
Are you kidding me?
First of all, the fact that AIG agreed to contracts where they would have to pay out these kind of bonuses in a year the company lost $99 billion ($61.7 billion in Q4 alone) is absurd and highlights the ridiculousness of the typical executive contract structure. Reform is needed now and responsiblity must start with the board of directors.
Secondly, the idea that AIG had no choice but to pay out these funds is laughable. AIG lawyers said the company would be subject to lawsuit if the bonuses weren’t paid. Now I’m no lawyer, but I say if an executive wants to sue the company because he or she didn’t get a bonus, then bring it on. Even if the legal argument is sound, the public outrage would be enormous. Plus, at least they would be the ones fighting to get their money as opposed to the government fighting to get it back.
Third, the US government should absolutely have the right to stop these bonuses. The government is the one that decided the company was too big to fail. If it wasn’t for the government – and the US taxpayer – AIG would have been gone long ago. We own the vast majority of the company. What’s the point of making that kind of investment if we can’t have a say in how to use the $175 billion in taxpayer money we’ve doled out?
One of the reasons this financial crisis is likely to linger for a very long time is that we are so concerned about honoring contractual obligations, especially to holders of debt and credit default insurance. I understand how important the sanctity of the contract is in a capitalist society, and I understand how not honoring certain contracts could trigger a ripple effect that brings down our entire economic system. But this is a crisis of unprecedented proportions and extraordinary measures clearly are called for. Certainly, we can find a way to have companies in the eye of the storm extricate themselves from ludicrous executive contracts.
AIG is the poster child for the reckless, greedy behavior that played a large part in getting us into this current mess.
We must set an example.
The bonuses are a fucking outrage.
Treasury Secretary Timothy Geithner has a chance to prove that he is not the impotent, incompetent clown I think he is by stopping this debacle from happening.
You say it more emphatically that I, but I agree totally with the assessment of this shameful situation. The AIG CEO and Board of Directors are a joke — totally void of leadership and backbone.
Chuck Bolton
http://chuckbolton.wordpress.com/
I think you said it quite well in your own post! Great point about most contracts including some language about the compensation committee ‘out’ and ultimately having some discretion about what if any bonuses to pay out. And thanks for listing the names of the AIG board – i’m usually a even-keeled capitalist, but the behavior and antics I’ve seen over the past decade, and culminating this year, have made me furious.
Thanks for stopping by!
I share your outrage! However, I disagree on breaking the contracts. This would undermine our democratic free society. However, contracts can be renegotiated. It’s time for all U.S. corporations to rethink this idea that executives should be rewarded regardless of performance.
Without question, the bigger issue is the need to rethink executive compensation. it’s about time boards all over corporate america realize that the benefits and pay are way too excessive and unaligned with the interests of shareholders.
still, while i share your concern about the sanctity of contracts, I don’t think we should act like all contracts are the same. chris bolton (who left a comment above) makes a very good point that almost all executive contracts give the companies and their compensation committees some sort of ultimate discretion about bonus payouts.
also, let’s not forget that our government has already approached our crisis in an ad-hoc basis, letting some companies fail, bailing out others. let’s not forget that had the government not stepped in the first place to save AIG that none of those executives would have even had a job let alone receive dime one of a bonus.
in terms of contract renegotiation, that’s also very important, and one of the other kind of side outrages to this story is that in the article AIG says they think they can get 2009 bonuses reduced by a whopping 30 percent! like that’s some kind of big accomplishment. what a joke …
couldnt agree more deadman. how can these people complain to govt about compensation when they would be getting zero compensation if it werent for govt keeping them alive? i have been very impressed with your handle on the current economic crisis, thank you for your fresh outlook and insights.
thanks dude. it’s a total joke. the lack of perspective and sense of decency on the part of AIG management is truly extraordinary.
btw, i really appreciate your insightful and regular comments as well (except for the feeding dogs with xylitol joke!)
i dont remember making the xylitol joke, maybe someone stole my alias. or maybe there is in fact more than one dude. be careful out there…
The government bailed out AIG for 180 BBBBillion dollars. 165 Million handed out in order to give people the incentive to make the right decision for the firm as opposed to the right decision for the individual seems like a sound investment. This is less than 1/1000th. Besides, if every firm that took a bailout stops giving bonuses, then the talent will most certainly move to other firms that did not take the bailout. Those non-bailout firms will make all of the necessary innovations to sink and out compete the AIG’s of the world and the tax payer will have wasted 180 Billion plus the other 700 Billion in bailouts to be handed out over the next year, all for the sake of 165 million and a short sighted sense of fairness.
Also, I would never advise a firm to break the law because the (fickle) public will be on my side. It is not only unjust, it is wrong. How does one clean up wall street while advocating dishonesty. And, I think you underestimate the shit storm unleashed if and when contracts start losing their enforceability. Enforceable contracts are one of those important things that keep the power on, the blog running, and that toilet flushing. If you are hoping for some debt to disappear, think again.
a) the point is the govt. should have a say in how the company is run given that it has given so much money and now owns 80% of AIG. These people wouldnt even have jobs if it werent for the government
b) the total amount of bonuses and retention payouts was initially expected to be $1.2 trillion according to a WSJ article and this $165 million was only a first tranche of payments expected to come
c) this idea that talent will move elsewhere is laughable. if you havent noticed, unemployment is now at almost 9% and the financial sector in general has been decimated by job losses. and many of these people (not all of course) are the same folks who had jobs and created the mess that AIG got itself into.
d) my guess is that these bonus payments aren’t as ironclad as AIG management and lawyers would have you believe. And even if they are, contracts are renegotiated ALL THE TIME. they do it in sports, they do it in business, they forced the auto unions to do it, they do it for gym memberships for heavens sake, they do it everywhere. The president has a responsibility to press as hard as possible using the full power and influence of his office to make this happen, and I’m glad that he came out with a much more forceful statement today regarding these bogus bonuses.
e) When it comes to other contracts, such as those guaranteed by the credit default swaps which occupy a large portion of our current problem (esp. with AIG), many institutions were continuing to buy these instruments even after it was quite clear there was no way they could be honored without government intervention. A lot of institutions are betting that the government will not allow these companies to go bankrupt and benefiting from that philosophy. That’s fucked up. You know what else is important? The free market, but clearly the government has decided it’s too risky to let the market do its work, so stop pretending like we need to respect the sanctity of contracts if doing so continues to make it impossible to climb out of this mess.
You forgot that “the best and the brightest” ran this company into a ditch. I don’t want any of them working for me.
Second, where are the contracts in question? I think it’s more smoke being blown up our collective asses. I want to see the contracts.
http://girldujour.wordpress.com/2009/03/17/i-want-to-see-those-aig-employment-bonus-contracts-now/
you’re right to be skeptical, but im assuming the contracts exist. im not as certain that they are as ironclad as the company would like you to believe, however.
“Hands Are Tied….We Got A Contract” WHAAAAAT !
Yes, your hands WILL be TIED and there WILL be a CONTRACT….
put out on each and every one of you.
I APPLAUD ANY EFFORT TO PURSUE THESE AIG & MERRILL “LEGAL CROOKS” !
I AM OK With Whatever it Takes to BLOCK payment of one penny to these AIG & MERILL FUC_ _ PS.
I TOTALLY Agree that this AIG (and MERRILL) BONUS situation which is to be footed by the “peon” US taxpayer is absolute, BULL ____T.!!
How can we all unite to Assure these ASSH____ES DO NOT GET A SINGLE PENNY and taking it further…reverse this “boil with puss” legal “contract” binding the US Taxpayer to cover the AIG (and MERILL) bonuses through a taxpayer-funded bailout agreement.
IT is so frustrating to hear how supposedly “legal” this bonus situation is because it was “in a contract”/
I say…these ASSH______ES need another type of “CONTRACT”….one contract put out on each and every one of them!
The words “legally binding Bonuses” within the context of the AIG and MERRILL FUC___PS … is the Ultimate definition of the word “Obscene”.
It makes the words below look like “Get Well Wishes” on a Hallmark Card:
AIG & MERRILL BONUSES are: FUCKED, DOUBLE-FUCKED and TRIPLE-FUCKED.
Burn ‘em and their houses, cars, golf bags and their Viagra prescriptions.
outrage is understandable. vigilante justice is not acceptable. i still believe in the rule of law, not the rule of the jungle. our system failed us but it is still the best one out there. the only way we will recover from this mess is to stay united and not pit american vs. american. here’s hoping the haves understand that as well as the have-nots.
I have a post at the link below that explains my point of view more fully.
http://experiencepoints.wordpress.com/2009/03/17/180-billion-vs-165-million-scapegoat-time/
I think the big question is whether the government should run AIG into the ground (a controlled demolition, if you will) or try to help it succeed. If we want to run it into the ground, the government probably shouldn’t have thrown in 180 billion dollars. If we want it to succeed, then we should ask our selves do we think the share holders (as represented by the board of directors), who have everything to gain from the firm succeeding, or the politicians (that have many masters) are better at making decisions for the firm?
The ideas that all of the best and the brightest are responsible for the collapse of AIG and will not be able to get a job because of 9% unemployment are both wrong. AIG needs good economic and financial models in order to minimize its losses in such a hazardous environment. The assumptions of some of the models clearly failed, which precipitated AIG’s near bankruptcy. That does not mean AIG should abandon all models and start doing business on hunch and intuition. AIG needs new models, and they needed them a year ago.
Secondly, the guys that are in a position to understand and reconstruct and be creative with these models are far and few between. (I have been working on a PhD in economics in an area that uses similar methods for the last 4 years and it is not like this stuff is easy.) The ones that can do it eventually will, and they will go to the firm that pays them for success. If we could find out which would be creative, then AIG could probably sack all but two people. But, that is like only funding research that will eventually earn Nobel prizes -its impossible to predict. Hypothetically, if I were working for AIG and they did away with bonuses, I’d keep working there until either I got fired or I solved a compelling risk control model, then I’d knock on Goldman Sachs door.