Of course the AIG bonuses should go back! They were paid to people in the very group that lost money! They were paid to people who have already left the firm, putting the lie to the idea of retention bonuses! Also, they couldn't get jobs anywhere else anyway, so retention bonuses are unnecessary! And it's all just unmitigated greed! They're lucky to have jobs at all! They should be volunteering to work for free, wearing sackcloth and ashes, and grovelling on the ground in front of every taxpayer they can find, begging for forgiveness!
The very handsome retention payments they received over the past week were set in motion early last year when the firm's former president, Joe Cassano, was on his way out the door. Financial Products was already running into trouble on its risky credit bets, and the year ahead looked grim. People were weighing offers from other firms, and AIG executives feared that too many departures could lead to disaster.
So AIG stepped in with an offer to employees of Financial Products. Work through all of 2008, and you'd get a lump payment in March 2009. Stick around through 2009, and you'll get paid through 2010. Almost all other forms of compensation -- bonuses, deferred payments and the like -- have vanished.
DEAR Mr. Liddy,
It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:
I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in -- or responsible for -- the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.
. . .
I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.'s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable -- in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.'s effort to repay the American taxpayer.
The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity -- directly as well as indirectly with the rest of the taxpayers.
I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country's call and you are taking a tremendous beating for it.
But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn't defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut. . . .
I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It's now apparent that you either misunderstood the agreements that you had made -- tacit or otherwise -- with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.
You've now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.
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. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.
Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.'s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.'s promises and are not inclined to return the money as a favor to you.
The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to "name and shame," and his counterpart in Connecticut, Richard Blumenthal, has made similar threats -- even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.
So what am I to do? There's no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn't disagree.
That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.'s or the federal government's budget.
Are we better off because a skilled trader has left, and his book will now be wound down by someone who doesn't know it, or the markets, as well? What trader with any alternative job opportunities would voluntarily walk into the mess at AIG Financial Products? Normally you would attract outside talent into the disaster zone by promising to pay them better than normal--but of course, AIG can't do that any more.
Moreover, presuming these accounts are basically accurate--and I've no doubt that AIG is painting itself in the best possible light--could we really expect him to do otherwise? I've heard a lot of complaints along the lines that the AIG people who didn't immediately volunteer to work overtime and be paid in cigar bands are not merely immoral, but unpatriotic.
I know and like some of those commentators, and I do believe in their fervent love of their country. I do not, however, believe that this love would actually keep them working long hours for little-to-no pay at a company that was failing because people in another department, people long since given the sack, had screwed up royally. Not when there was no possibility of saving their job, but only of salvaging some shreds of value for remote and hostile shareholders.
Nor do I think that they would feel that they were shirking their moral obligations if they accepted a job at another firm rather than lashing themselves more firmly to the deck of the Titanic. Perhaps there was some long lost period in American history where people identified so thoroughly with the corporations who employed them that they treated their employer's ethical obligations, its best interest, as identical with their own, willingly incinerated their careers on the altar of failing firms. But if so, thank God it's over. That's not patriotic, it's creepy.
Normally you would attract outside talent into the disaster zone by promising to pay them better than normal--but of course, AIG can't do that any more.
No, but AIG can offer them a job; some of these people still need to work to pay their bills. If not, I'm sure there's young talent ready to step in and get a lot of great experience even if they're not going to make the big bucks _right_now_.
Anyhow, I think you're contradicting yourself here. On one hand you're saying: "What trader with any alternative job opportunities would voluntarily walk into the mess at AIG Financial Products?"
Well, what trader with any alternative job opportunities would voluntarily not walk out of the mess at AIG Financial Products? What's the distinction between this and "willingly incinerated their careers on the altar of failing firms"?
Did you actually *read* the resignation letter? The guy leaving was an Executive VP whose salary was $1. His entire compensation package was based on the bonus plan. Not only that, most of the current employee compensation packages were based not on salary, but on the bonus plan.
As far as "what trader with any alternative job opportunities would volunarily not walk out of the mess..." Many of these employees turned down other gigs to stay and help out based on being paid according to the bonus plan.
They were the ones - like your imaginary "young talent" who were *not* making the big bucks now - they weren't making much - if anything. They were promised pay in the future by contract. Pay we are now demanding they return through an ignorant and draconian tax enacted specifically to strip them of something they earned.
The mind boggles.
I'd like to point out that said ignorant and draconian tax faces opposition from both the Senate and White House and is effectively dead. The only pressure these employees are now under is Cuomo's threat to name them, which while perhaps shady, certainly gives them no legal obligation to pay back their salaries.
I'm not commenting on the bonus clawback per se, more the general notion that it's feasible and/or prudent for AIG to retain its top talent by paying them more than their market value.
Face the facts: working at AIG is now effectively the same as working at a government job. Any "top talent" they now have is going to be too bureaucratically constrained to really justify the salary that "top talent" demands.
Maybe I'm a pessimist, but the end game here isn't that AIG gets back on its feet and becomes a healthy company again. No, either it gets wound down and its assets or sold off or it becomes a permanent government sponsored enterprise like Fannie Mae.
With that said, we're already screwed. The best we can currently do is be watchful of the current employees looting the coffers or making side deals (i.e. accepting bribes) for selling the assets at an undervalued price.
AIG employees are now government bureaucrats. Let them be paid as such. If they don't like those terms, we'll find someone who will.
Where most of us work, the reason companies give big bonuses rather than big raises is that the former are discretionary. If the company falls on hard times, then there aren't as many bonuses for people. It is hammered into us that bonuses are not an entitlement.
Therefore, most of us structure our employment agreements such that to bulk of our compensation is from our base salary.
It seems that AIG's position in the last year would qualify as "hard times."
But apparently, in trader la-la land, people are supposed to be lauded for taking the "risk" of accepting a $1 salary and putting the rest in the bonus plan, and then treating that bonus plan as an entitlement even when the company needs to be bailed out more than once.
We're not buying it.
Good point:
"Look at me, I'm such a good guy that I'm willing to accept a $1 salary! I truly care about this country and this company!"
"What? I'm not getting my guaranteed bonus? F you, F this company, and F this country!"
Again: deferred compensation. At no point was AIG's FP division expected to have a good year; the entire reason for these jobs was to break up the entity and sell off the pieces.
A half-done job when a company is trying to wind down and sell off business entities with complex accounting histories is sometimes worse than no job at all, because the replacement then has to dig into the account history and documentation from ground zero, figure out what was going on, figure out how much work his or her predecessor had done, and then try to resume work from there. This can take weeks and waste the time of not only the worker and his payroll, but also the prospective buyer(s), who may run out of patience (or credit lines, in this economy).
The deal AIG made with workers like the one described was, you are a statutory employee at a salary of $1. Stick around for a year and do a full year's worth of work, and we pay you at the end of the year through the accounting magic of our bonus structure. Since you have more experience than a new recruit and since you're being asked to wait a year to get paid, we will sweeten the payment sufficiently to make this deal worth your time and expertise.
To repeat: This isn't a company performance bonus, it's a deferred compensation plan routed through existing accounting structures. In retrospect it wasn't politically expedient to set things up that way, but it's a year too late to realize that, and now it is what it is.
We're supposed to believe that these AIG executives are so valuable that we piss them off at our extreme peril, yet they were suckered in by promises of the "accounting magic of our bonus structure?"
In my career as a software engineer, I have been told bonuses would go down for the following reasons:
* The SARS epidemic (remember that?)
* Reduced travel post 9/11
* A lawsuit settlement I had absolutely no involvement in.
* The "competitive marketplace" (i.e. demands of Wall Street) demanding that compensation be limited.
I accepted that.
What I will not accept is whining from some of the very people who crammed these things down on me that they should not suffer when their company is on government-subsidized life support.
Stuff happens to all of us; I don't see why Wall St. executives should be exempy. Especially when we've been told over and over again how their high compensation is necessary because of the great risks they take.
Did you actually read the letter? Nowhere in this letter does the guy state his salary is $1, or even what his salary is. The salary of $1 per year referenced above is in regards to Liddy's salary, not DeSantis', and is not mentioned by DeSantis in the letter.
From the article:
"Well, what trader with any alternative job opportunities would voluntarily not walk out of the mess at AIG Financial Products?"
Presumably, one who stands to receive a large bonus if he stays X number of months. In that case (if the bonus is big enough), it would make more sense to work at AIG long enough to earn that bonus, and then take another job somewhere else, assuming that job will still be available. Workers make these sorts of calculations all the time, albeit usually with less money at stake.
What I don't get about Mr. DeSantis's letter is why he's planning to donate all of his bonus to charity if he feels no guilt about the money. If he feels he deserves the money and it's honest pay for honest work, then he shouldn't need to make a show of giving it all away. He ought to buy himself something nice. Maybe he could buy himself the most ostentatious car he can find (maybe a Bugatti Veyron? Although is bonus alone won't cover it) and drive satellites around the buses that are giving tours of the mansions of AIG execs.
Lots of these people have been getting death threats and as a result fear for their own saftey as well as that of their family. Given that, and the fact that ninety percent of it may be taxed away anyhow, perhaps he feels it to be a small price to pay to hopefully alleviate some of the vitriol directed his way.
Then again, if it was just me and I didn't have a family to worry about - I'd buy something truly ostentatious and then have a press conference where I'd set fire to it on national teevee.
But I'm an ass like that.
According to another part of his letter, he had already agreed to work for a base salary of $1. I don't understand why people would expect highly skilled people (or, indeed, anyone) to work long hours for no compensation other than public demonization at the hands of congressmen.
Nobody "expected" him to work for $1 base salary. That was an agreement he made. He took a risk. It blew up on him.
It didn't blow up. The media and politicians called his deferred compensation a "bonus" and let the rhetoricians and blowhards do their work spinning the situation and tapping into the ignorance of the public.
The only risk he took was expecting his contract to be honored and not taxed punitively by a bunch of showboating congressmen and AGs.
I thought these were wuderkind geniuses whose unique insights are so valuable that we dare not scare them away from providing their irreplacable services to dig us out of this mess.
But they didn't see that expecting AIG to solvent and able to make a bunch of lump sum payments right now might not be the most prudent move?
Nowhere in the letter does he state that he was only receiving a $1 salary.
C'mon John, they knew the government was backing AIG, so they had a reason to believe they would be paid, as per their contracts. This isn't just a case of a risky venture going bad. It wasn't risky. These guys were sideswiped by purposeful political violence so that a bunch of politicians could grandstand. Sick.
Oh, so the plan all along was for us to be paying it.
This is supposed to make me less angry?
This seems worse than a pre-bankruptcy splurge. We'll sign a contract with our "company" that guarantees you a huge payment, at a time when we both know the government will have bailed us out.
JohnMcG(since I can't seem to nest replies deep enough to respond to you directly), of course the plan was for taxpayers to be paying the salaries of the employees of a taxpayer-owned company. They had the same right to expect their employment contract would be honored as any soldier, postal clerk, or customs guard does.
They no more deserve to lose their paychecque for the spectacular failure of the company than does a congressman for the spectacular failure of a bill he supported. It'd be different if we were actually going to fold the company, of course, but as long as we expect them to keep coming to work, they should expect us to keep paying them.
Adding to my last point, the only ones that would voluntarily stick around are those that are getting paid more than their market value to other firms -- a premium to stay at AIG.
The real question is whether or not the premium is worth it the taxpayer. How much of a better job will these guys do at unwinding the books than someone making market value, or less than market value? Are they really working hard, or just treating the position as a temporary sinecure?
I think you're overthinking this, and that an awful lot of people are. Keep it simple: the government provided emergency funds to a private enterprise that, absent those funds, would now be nonexistent in any meaningful sense. The government has the right to determine how that money gets spent, and one way it should be able to regulate the spending of that money is to insist that employees at a company that failed in its most elementary fiduciary responsibilities not be given bonuses. Even if some of the individuals aren't to blame. On the simple Darwinian business level, we don't want to reward incompetence, and that applies to the organism of the company as well as to the individual workers within the company. If we feel too guilty about such a thing, we can content ourselves with the fact that absolutely everyone who has their bonuses cut will make several times the median income for this country. No one is going to be suffering beyond what we consider acceptable thanks to cutting these bonuses.
Incidentally, as a lefty this is part of what annoys me a lot about our conversation on such matters, because we are damned inconsistent about when fairness matters and when it doesn't. When people say that we shouldn't have a welfare state because it's unfair to take from one person to give to another, that's a principled stance. I just wish that it was more equally and evenly applied to your standard corporate welfare. And in this era, with this set of bailouts, with the enormity of the financial transfer from the government to these financial firms, I guess I just don't want to hear about the injustice of redistribution for a long, long time.
This is precisely why the government shouldn't be in the business of bailing out firms who make bad decisions. It gives people like yourself the idea that you can somehow just walk in the front door and change the rules based on some ill-perceived notion of "fairness".
Truly, I think the people who stayed to help based on a deferred bonus plan were insane. Who couldn't have seen this coming?
Frankly, I think they should all just drop whatever they're working on and leave - last person out turn off the lights.
Let the idiots in congress, and the morons walking around outside with protest signs go figure out how to fix it.
Of course AIG asked for money. Just about everybody in a deep enough hole turns to panhandling at some point - and that's exactly what it was, no matter how many suits were worn at the meeting. Thing is, Uncle Sam should have been a bit more careful about saying yes. Where exactly do you get the idea that the libertarians of the world were unanimously in favour of this bailout? Yes, a few soft libertarians(e.g., our hostess) were, but I seem to recall her getting roundly criticized for that position by libertarians of a purer strain. The harder-line libertarians never supported any of these bailouts - on the contrary, they were screaming as loud as anyone about it, even if they were using more wonkish arguments than anyone else - and it's utterly foolish to claim otherwise. Libertarianism isn't the biggest movement in the world, but it's certainly big enough that you should say away from the generalizations.
As for the "Randroid nonsense", this isn't about letting society burn because it doesn't respect you enough, it's about realizing that you're not getting paid for the work you're doing, and thus that you should walk out, just like you would if your boss in any other context told you that the paycheques were cut off. It's not the fault of the management that this nonsense about bonuses blew up and Congress started yammering about passing bills of attaintder, but if the people see that they're not going to get paid, why are they still there?
My libertarian self actually agrees with Freddie, in this instance (Other than my huge pet peeve of invoking natural selection as something prescriptive, rather than a descriptive explanation of natural genetic selection. Only rare libertarians believe in "social Darwinism," whatever that means.)
To your point about how "we can content ourselves with the fact that absolutely everyone who has their bonuses cut will make several times the median income for this country", I'm curious if you read the man's letter. Yes, he can easily make several times the median income for the country. By not working for AIG. At AIG, he was making $1 per year base salary (which is not several times the median income of any country in the world now or ever). His pay for the hard and long work he was doing was the "bonus" (which could more properly be referred to as "contracted pay for a set amount of work", kind of like the arrangement you might set up with a day-laborer, though obv. for much more money.)
So we can content ourselves that fairness dictates that this guy should work for $1 a year?
To your point about the government being able to make whatever restrictions they want on a company they bailout, I'd say that's accurate -- if they make the restrictions as they are bailing it out. I think it's a bit contrary to anyone's understanding of "fairness" to start making retroactive restrictions that contradict language you expressly put in the bailout bill. That's like me agreeing to spot you bail money and then an hour later saying, "Remember how you I got you out of jail? Yeah, well part of that is that now I get to sleep with your wife. It's only fair, I bailed you out of a tight spot so I get to set the conditions."
But ignoring the amazing retroactive, punitive aspects of Congress's actions, your general point is right, it's congress's money, they can say how they want it spent. They can say, "No salaries above the median wage for anyone!" And then see how a financial services firm does with the national median employee rather than anyone who actually knows anything about finance.
My point being, what's congress's goal here? Did they bailout AIG to have the pleasure of a whipping boy that they could abuse in public for the amusement of their consituents? If so, bang-up job. I hope the constituents regard that as a good use of their money.
On the other hand, if they bailed it out with the hope of containing the damage its collapse posed to the financial system in general and with the outside hope of having it re-emerge as a profitable firm from which they could recoup the bailout money, I would suggest that treating it like an abused dog is not likely to produce either outcome.
It may be stupid, but hey, at least it's fair, right?
You're comment is completely incorrect. Just because they gave a bailout doesn't mean they can do whatever they want.
The conditions of the bailout is spelled out in the committee bill that Christopher Dodd was apart of and he himself wrote in the provision that (This is from CNN):
"Dodd said he agreed to the Treasury Department's request, which made the limits apply only to future bonuses. Dodd's provision, as originally proposed, operated retroactively, meaning that it would have applied to any firm, such as AIG, that benefited from the first wave of federal assistance."
We are a country of LAWS people, we don't live in a Absolutist state.
I think I must not have been clear if you think my comment was completely incorrect despite the fact that we agree.
My point was, if Congress had put restrictions at the time of writing the bailout bill -- in other words, if they had kept Dodd't ammendment as you describe it being originally -- then, yes, they could have nixed the bonuses. What runs contrary to the sensible functioning of a nation of laws -- which I agree we are -- is what they did, which is to say expressly allow the bonuses per Dodd's rewritten ammendment and then later retroactively try to pull them to punish those they suddenly find themselves upset with.
Perhaps the confusion arose from my second point which was that although Congress can put whatever restrictions they want on bailout recipients -- again, so long as they do it as they are bailing them out and not retroactively after the fact -- that doesn't mean that the restrictions are necessarily sensible.
My example was that Congress could certainly make a condition of some new bailout that you not pay anybody more than $40,000 per year but if you are bailing out a company in an industry where the average salary is multiples of that you should not expect anyone who knows the business to continue working there, so the bailout would be stupid. Unless your goal as a congresscritter was not to save the company but rather give yourself a convenient group that is beholden to you upon which you could heap scorn in satisfying but ultimately wasteful ways.
Sorry to have not been clearer.
Not quite, when the federal government offered to buy 80 percent of AIG’s equity, it had the right to attach conditions onto that payment which AIG could accept or refuse. It made a specific decision at the time not to require AIG to renegotiate or cancel any retention bonus agreements that it made prior to a specified date. AIG accepted the money on those terms and once it did so, the federal government lost any “right” to attach any new conditions onto its payment.
I just wish that it was more equally and evenly applied to your standard corporate welfare. And in this era, with this set of bailouts, with the enormity of the financial transfer from the government to these financial firms, I guess I just don't want to hear about the injustice of redistribution for a long, long time.
Clearly you don't understand what's happening here. The people who screwed up AIG have been fired. AIG stockholders have been wiped out. We didn't bail out AIG to save either of them, we did it for the millions of average policyholders who would otherwise be cut off.
The question going forward is whether AIG should be run as a competitive business or a noncompetitive gov't agency. In the latter case, we probably should have let AIG go bankrupt because it's going to happen anyway.
"Keep it simple: the government provided emergency funds to a private enterprise that, absent those funds, would now be nonexistent in any meaningful sense. The government has the right to determine how that money gets spent, and one way it should be able to regulate the spending of that money is to insist that employees at a company that failed in its most elementary fiduciary responsibilities not be given bonuses. "
We live in a country of common law and legal protections. The government does not have absolute power to do what they will.
The truth is that in the agreement, and Christopher Dodd (a democrat) has confirmed this, after first denying it, admitted in the bill, he approved wording to provide existing bonuses to companies that receive TARP funding!
So the TRUTH is that AIG is NOT Bankrupt because the politicians decided to SAVE AIG and because of that, they would be liable to multiple CLASS ACTION Lawsuits that they would LOSE because they they painted themselves into a CORNER with the legislation that they wrote.
So if the feds bail out GM and Chrysler, then they have the power to break UAW contracts and dealer agreements? After all, they have the right to determine how their money is spent - surely that applies to breaking contracts with one class of employee just as much as it does with another, right?
I'm a first time commenter. The moral of this story to me is that the government should not bail out companies from their own mistakes.
Given human nature, the outrage was bound to happen, and Congress was naturally going to follow the torch-wielding mob. The torch-wielding mob is compelled to cut off its nose to spite its face because it's an emotional response. The inevitability of the public to fail to understand the complexities involved (and I include myself here) and thus over-react so as to make matters worse creates a compelling reason to allow the market to correct itself through bankruptcy. That's better, in my opinion, for our culture.
We've now thrown lots of money at AIG only to make it more difficult for the right people to be in the right place to do the right (and best possible) thing. An L-shaped recession seems to be the lesson both people and businesses need.
Also, I hate to drag unions into the discussion, but please at least consider this: many of the same people who constantly say that unions are malign and destructive of business, and who insist that unions must rework their contracts in order to better the parent industries of the particular unions, now say that we have to honor contracts, the "spirit of the employment agreement", and that cutting the bonuses is unAmerican and coercive. I don't understand why it is a vast imposition to rework the contracts of many people who, by anyone's lights, screwed up royally to the detriment of all of us, but it's fine to ask union members to constantly give up hard won benefits and wages. As I'm constantly told when it comes to members of the UAW, hey, they can look for another job if they don't like it!
Union contracts get blown out when the company writing them asks for bankruptcy protection.
The US government specifically bailed AIG out to prevent them from doing so.
That doesn't mean they can blow out the contracts or simply pass a bill of attainder to nullify payment.
If they wanted to re-work the contracts, they should have allowed AIG to go into receivership and had a judge do it - you know...the LEGAL way.
One problem with this argument is that the salaries of the UAW workers at GM and Chrysler are a big part of the problem that those companies face going forward. That's not the case at AIG.
The real difference between the unions and AIG is that the unions are being asked to give back compensation for future work; the people at AIG are being asked to give up compensation for work they've already done, only because they were promised that compensation.
Since when is the validity of a contract dependent upon whether the compensation is for future or past work?
Laws like the Connecticut Wage Act for one; wages are defined as payment owed for services already rendered.
And no matter that we have laws that protect these executives. This conundrum is an easy one to riddle out - but the modern "progressive" can ignore real government capriciousness and malice represented by the bill the House passed while they carp on and on about pedantic "social justice" and other leftist nonsense.
Well, GM is contemplating making benefits for current retirees less generous. This is promised compensation for work already performed.
I don't think ridicule and sarcasm is the correct response to those who were angered by the AIG bonuses.
Here's what most Americans know:
* For many years, we have been accpeting lower raises, bonuses and reduced benefits from our employers justified by the demands of "Wall Street."
* Their jobs are shaky or they've lost them.
* Those who haven't are gettin low or no wages or bonuses because of, you know, the economy and all.
* Though they may not completely understand it, AIG did have some hand in the housing bubble and subsequent crash.
* AIG has come to the government (i.e. us) more than once for billions in bailout money.
* AIG is paying out bonuses that amount to more than many of us will earn in our entire careers.
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Now, I will allow that the concept of "bonuses" is different for AIG than the rest of us, but I think it was incumbent on them and the architects of the bailouts to get out ahead of this issue and explain it before hand rather than pay them out, look at the outrage, and then wag a finger at us for our ignorance.
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One may think these bonuses are prudent, but they do not jibe with how most of us relate to our employers. When the companies we work for fail, we're out of a job. We don't get a "bonus" to stick around and help wind things down.
And we're doing important work like engineering, teaching, etc. It is difficult for us to believe that the work these AIG people are doing is so terribly important that it demands a completely different compensation scheme than engineers and scientists have.
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As for the "patriotism" thing, AIG has effectively asked all of us to lash ourselves to the mast of AIG with the bailouts. A demand for some reciprocity doesn't seem out of line.
--
I agree that some politicians have cravenly used this issue for their own benefit. But what's behind this anger is real, and demands to be addressed more throughly than snarky lectures like this.
Or else we may have a real class war on our hands.
It's entirely correct to ridicule and treat sarcastically those who get it wrong. It doesn't matter if they get it wrong out of ignorance or emotionally satisfying blindness to facts.
The same information we use is the same information available to anyone to use. I'm nothing special; I've got my 7-to-4 job with a wife and a house that needs work and I find the time to read a little bit about how the world works.
We're all supposed to be intimately familiar with the compensation scheme of AIG?
I figured out pretty quickly that they were deferred compensation payments rather than performance bonuses. Sadly, the media and Capitol Hill had already started up with their self-righteous indignation.
I'm not claiming to be intimately familiar with AIG's compensation scheme. I'd just read that many of the payment recipients had agreed to work for a balloon payment after one year of employment.
Quit whining. You didn't mind sarcasm when you were using it in a previous comment.
Let me revise -- if you are hoping to keep a populist revolt at bay, I don't think sarcasm is your best tool.
I wholeheartedly agree.
How much compensation did he receive in 2005? In 2006? In 2007? And was he worth it? If someone is paid $20 million while presiding over losses of $200 million, it strikes me that he's being more than generously compensated already. Does the letter make any mention of these statistics? Do we have any information on the matter at all?
I appreciate the argument of fairness, as someone mentioned above. But when one applies these sorts of arguments, one must be both consistent and steady. Using the fairness argument opens the door for its use in other discussions, and switching arguments from fairness, to legality, to pragmatism, to whatever in order to justify the same policy is not only not persuasive, it marks the person running from one argument to the next as not being of good faith.
It doesn't matter what he was paid previously.
And if you read the letter, you'd see that his division within the company was profitable before he left to take this position and clean up someone else's mess.
So, now that more are realizing that these were not performance bonuses but deferred compensation, what happens?
A finger in the wind at all times, eh?
1. This particular trader was being paid $742,006 via the bonuses to remain and dismantle the AIG-FP division. His $1 "salary" was a stunt: he was being handsomely compensated for performing work that will bring in no profits in a failed division of a failed company. If his own core business (looks to me as if he's a trader in energy commodities) wasn't AT ALL involved in the CDS that brought the company down (by his own representation), then his expertise isn't urgently needed in dismantling the FP division. It's no skin off our collective noses if he decides to bugger off and find another job, because there are a lot of financial professionals out there looking for jobs who will accept a relatively low compensation package to come in and clear up what's left of the FP's business. I'm guessing you can hire five younger professionals looking for a job to do some of the basic work of clean-up for what DeSantis was owed this year via his retention bonus.
2. This particular trader was content to be highly compensated (he doesn't tell us how much, but I think it's safe to say it's well above his 'retention bonus' for this year) in the years when his division of AIG was producing profit through incurring substantial risks. I'm in a very safe profession because I don't like risk exposure, and I'm compensated accordingly far less than someone involved in high-risk, high-profit businesses. If DeSantis was concerned about the downside to risk even in his specific field of business expertise there were safer places to be doing energy trading than the FP division of AIG. He either knew that AIG's FP was engaged in exceptionally risky trading as a whole (he was a VP in the division) and thus understood what he was getting into, or he didn't know (and that's equally bad, but in another way). So now he's complaining because he doesn't want the consequences to fall too heavily on his doorstep, or be held culpable in any way. I have no idea why you think ordinary credit card holders are 100% culpable for their bad decisions regarding debt or ordinary mortgage holders are the people primarily responsible for underwater mortgages, but think that someone like DeSantis ought to be insulated from the relatively greater consequences of his relatively more extraordinary risks because he was one of the guys making money while his colleagues lost more money than anyone else in history has managed to lose. Part of working for a company is making judgments about that company's long-term prospects. If you have marketable skills and you're working for a company that you think is in serious risk of short-term collapse, then why aren't you guilty of a dumb economic decision when you soldier on, by the same kind of calculus that allows you to excoriate ordinary people for bad financial decision-making?
3. This particular trader is welcome to bugger off and find a better job if there's a better one out there for him. That's business. Given his expertise in energy commodities, I'm sure there is one. I see no reason in his editorial to suspect that he's specifically and personally vital to the work of closing down FP. If he is specifically and personally vital because he has detailed knowledge of the CDS that brought the division down, then his entire posture of innocence about those trades is called into question. Show me someone who's quit because of bad compensation who AIG must have right now in order to successfully manage the closure of the FP division, who cannot be replaced by a more affordable professional, and who has superb job prospects elsewhere. Find me that person and I'd at least wonder why someone who was specifically involved in the CDS line at FP has superb job prospects elsewhere, but I'd be willing to accept that this specific person needs to be compensated sufficiently to retain them for whatever time it takes to dismantle the division. DeSantis by his own admission, if you trust everything he says, is not that person.
There are always people who, despite being profitable to a company, who end up losing their jobs when the company goes bankrupt. It is up to employees, when a company is going under, whether or not to trust that their salaries or bonuses will be granted, and to make their employment choices accordingly. This guy may have done a great job, but the fact that he was "promised" a bonus by his bosses has nothing to do with the taxpayers. He is at fault for thinking that he is owed something, when the money is not coming from profits, but from the public. It is unfortunate that the company can't pay him what they promised him, but that is between him and the company, and, so long as we are paying for it, taxpayers have every right to cut off any bonuses, or even "salaries."
It wasn't "promised"!
It was a contract. You know - "legally binding"...
I can't make a contract on your behalf, without your consent. The company can't make a contract on behalf of the taxpayers. If they do, they should go to court to figure it out. That doesn't mean that we're obliged to honor it.
Does Grand Moff Geithner's explicit sign-off count as taxpayer consent?
A contract is a promise. An exchange of promises - one party promises to do something (work, deliver goods, etc.) and the second party promises to provide something of value, perhaps even a peppercorn or a penny, in exchange.
That's the heart of a contract. Everything else is about the timing, the conditions, and what happens if one or the other party fails to uphold their promise.
This promise becomes "legally binding" when the contract is properly written and accepted by both parties. That part is important. It means I can't simply write a contract with someone, perhaps without their knowledge, and attempt to have it enforced simply because it's a properly written contract. In some cases even if a contract is accepted by both parties it may not be "legally binding" because of some part being un-lawful. Plus, contracts can almost always be modified by consent of both parties.
Perhaps this might be a solution for the future:
1) Have highly-skilled, highly-compensated professionals such as these AIG-FP employees volunteer to serve in a sort of economic version of the Army Reserve. These "reservists" would agree ahead of time to serve in an economic emergency, such as the bankruptcy of a systemically important firm, and they would agree to do so for a reasonable salary (say, whatever the top GS rank's salary level is). This would obviate the need for $1 per year salaries, retention bonuses, and other nonsense.
2) Modify whatever regulations must be modified so that there is an orderly receivership/bankruptcy procedure available for systemically important firms such as AIG.
3) In the event of such a bankruptcy, give the judge the ability to draw from the "economic reserve" to staff the firm while it is wound down.
Sounds nifty, won't work. You're trying to get the best and brightest to work bad jobs with irregular schedules on a government pay scale. It's one thing if you have to leave your company to go fight for your country(or have a baby, or whatever), but how do you think your boss at Goldman Sachs would take it if you got "called up" to fix the problems at Bear Stearns? Yes, working for competitors is usually a great reason to give someone a leave of absence.
On top of that, why do you assume this would help? These companies are already big financial firms, they already have a lot of smart people experienced in finance working for them. It's not a lack of smart that's the problem, it's an excess of either stupid or bad luck. Furthermore, these jobs tend to be complicated - you can't just jump in and know the details of a multibillion dollar portfolio, and trying to do so will probably result in disaster.
Megan, I used to work for IBM. In down or up times, our compensation was determined by how the company as a whole did, how we did, and how our division did. I worked in Microelectronics, which was a perpetual money-losing division in the early part of the decade. Thus, my bonus was nil. It mattered little that I performed with excellence or that other divisions did well. if I didn't like it, I could go elsewhere. (I did.)
I do not feel sorry for this guy, or any others. Appearances matter. And here's what it appears: employees of a failing company are getting paid with taxpayer money just like they were part of a successful company. These guys were part of a massively failing division, one that took the company with it. They chose to stay, despite appearances. The rest is whinging. They are free to go elsewhere if they don't like the heat.
On DaveinHackensack's point, let's say that the Economic Emergency Reserve executives got paid the top SES salary that the federal government pays, with the 25% or so locational bonus for working in Hartford. I think in 2009 that would probably clock in around $250,000 or so. But DeSantis apparently thinks he's entitled to to three times as much as that for his specific skillset in the dismantling of AIG. Do we really think that there aren't qualified financial professionals available on the current market for around 250k who can be brought in for a year to competently dismantle the FP division of AIG? Seriously?
But Timothy, we've just proven that AIG can't make a credible committment to pay anyone anything.
Maybe this logic works at a university, where people really are almost entirely autonomous. But in most companies, there's a massive learning curve for people hired in from outside . . . and the higher up you go, the sharper the learning curve. Could we find someone who will do the job for $250,000? Maybe. Is that person any good? There is, as anyone who's hired knows, a substantial information problem with low-level hires (and even high level hires--witness Larry Summers). For a trader, $250,000 is a low-level hire. Hell, since the $250,000 is based on *household income*, he'd better be single, or have a wife home with the kids, which means he's also young and inexperienced. Which means there won't be a great deal of public information on him.
This low-level hire will now be expected to close down a book of business with which he has zero familiarity, in an organization with which he has no accumulated social capital. If you'd read the editorial more closely, you would have seen that this particular trader did, in fact, do something specific, not related to CDSs, that benefitted the whole company: he helped arrange the sale of the bond unit to UBS. The whole financial products division is being shut down, not just the CDS book, which means that AIG does, in fact, require people who were not in the toxic asset division to be there.
You seem to me to be saying, in essence, that he does not deserve to be paid a lot of money as a matter of justice, because he works in a risky area. That is true. But you also seem to be arguing that he deserves NOT to be paid a lot of money because he works in a risky area, which is absurd. He didn't take any unprofitable risk, except signing a contract with his employer long before the bailout which Congress decided it didn't want to pay off.
The only justice issue I see here is the unfairness of promising someone a lot of money to get them to stay on, work very hard, and take substantial career risk by passing up other opportunities, and then reneging. I am not overwhelmed by the unfairness of people in the financial products division making a lot of money or not having jobs; I am interested only in the practical question of how we wind these things down at the least cost to the taxpayer. It may be emotionally satisfying to hire an entry-level trader to close up billions of dollars worth of business rather than give someone stupid enough to have accepted employment with AIG one red cent. But how much are you willing to pay for that emotional satisfaction?
I am interested only in the practical question of how we wind these things down at the least cost to the taxpayer.
This is reductionism. Would you be willing to pay these guys $10 million dollars each if, net-net, that decision ended up saving the taxpayer $1 compared to the alternative of turning the company over to new hires at 250k each? Ridiculous, perhaps, but there's no way to figure out how much we're really saving without actually running the experiment.
But how much are you willing to pay for that emotional satisfaction?
How much are you willing to pay to avoid social unrest and class warfare, especially at a time like this?
Moreover, Megan, do you accept that class warfare and social unrest have adverse, if difficult to quantify, effects on the economy?
Tell you what - when the Communist revolt is on the horizon, I'll take your talk of class warfare seriously. Until then, avoid inflammatory phrases like "class warfare and social unrest", and use some accurate ones like "occasional resentment and political pressure for some moronic law".
I am saying that in this labor market, are you prepared to tell me that you cannot get someone with sufficient competency to wind down positions that DeSantis claims were without blemish or problem for far less than what DeSantis is being paid? What do you think happens in companies that go into receivership or are otherwise liquidated? You often have to figure out who is owed what without social capital or detailed specific knowledge of every aspect of that company's business.
If you say, "But he was promised! Contract is sacred!", tell it to the UAW. They're being told to accept renegotiations in order to save their businesses. Why are traders at AIG not subject to the same dire necessities? There is no money to pay what DeSantis is owed unless it comes through the federal government's salvation of the company: look at the scale of the company's losses were it left unprotected in relationship to its assets. Why shouldn't the federal government say, "Given the scale of problems here, we are unprepared to pay high salaries (however you package or describe them) even for high-value expertise...we simply can't afford it. If you want to stay and help wind down the FP's books, you'll just have to accept a reduced compensation package". How is that different from the logic of the UAW renegotiations?
The difference is that employee salaries are a big part of GM's woes, but not AIG's.
I should add: if the top GS salary isn't enough to cover the bills of these economic reservists, their firms could do what the employers of some military reservists do and pay them the difference between their higher civilian salary and what they're getting paid on active duty. E.g., employee/reservist John Smith makes $750k at J.P. Morgan. He gets called to active duty to staff XYZ bank during its receivership. The government pays him at a $150k annual rate for his time; J.P. Morgan pays him $600k while he's on active duty. When I was in the Army Reserve, there were reservists who had this sort of deal with their employers, the numbers were just smaller.
The 90% "bonus tax" is just plain stupid across the board.
I'm waiting for somebody to explain to me even one good thing about it.
In our modern world, I kind of wonder what should be most disturbing about it -- that in it Congress tries to violate every basic principle of sound legislation and legislative responsibilty that it can in as small a legislative package as possible...
... that's three-for-three there! ... or that in plain pragmatic terms, it is just so self-defeatingly stupid.
(Except for the purpose of political profiteering by whipping up the ignorant populist vote, of course.)
I'm sure there's young talent ready to step in and get a lot of great experience even if they're not going to make the big bucks _right_now_.
Okay, now I'll grant that thinking hasn't been a big feature in this whole argument, but shut your eyes and think real hard for a minute: who is better qualified to handle winding down the positions and shutting down AIGFP? The Executive VP who has been running them for eleven years, or some 26 year old MBA who can't get a better job at a going concern?
Considering that the 11-year veteran executive VP says that he's not at all accountable for AIGFP's losses because he wasn't involved at all in the CDS trading and knew nothing about it, maybe the 26-year old MBA might do a fair enough job. Unless in fact DeSantis knows a great deal about the division's positions as a whole, not just his own, at which point a lot of his protestations of total dewy-eyed innocence ring a little hollow.
I think you're going way over the top here. If someone was making this kind of ham-fisted argument that a second year graduate student could do your job just as well as you, you would rightly recognize that it was completely ridiculous. Even, yea, if you had made a major error in one of your published articles. You get rightly pissed off when conservatives who know absolutely nothing about academia start acting as if they know how to run the place better without even very well imagining what the challenges are--because dammit, if being a professor were actually *hard*, if the choices made weren't simply a matter of some simplistic conspiracy theory--why, then, we can't just fix it by throwing the evil bastards out, and where does that leave us?
Interesting that you (indirectly) bring up education as a parallel.
I thought one of the main critiques of the current education regime is that teachers are compensated based on their tenure rather than their results, thanks to the entrenchment of the teacher's unions. It rests on the assumption that the best teachers are those who have jumped through administrative hoops and accrued a number of years of experience.
Education reformers get "rightly pissed off" at the notion that the way to fix bad schools is to throw more money at these same administrators and teachers who have presided over the failing schools. There needs to be room for innovation and new ideas, and some new blood in the teaching profession.
But, in this case, you are adopting the teacher's union argument. We can't possibly replace the expertise of these experienced teachers! How can you insult them like that?
These traders are being caught in a transformation. Ordinarily, I would have some sympathy, execpt that these are in large part the same people who have engineered transformation over the past twenty years that have devastated the lives of many families, to a resounding, "Tough ___." Now it's their turn.
1. DeSantis doesn't attempt to explain specifically what he knows about AIG-FP's operations that make him a uniquely valuable person for unravelling those operations. Indeed, he spends some time specifically absolving himself of knowledge of those aspects of his division's operations that caused the global shockwave that we're still reeling from.
2. When I set out to explain to outside critics what they misunderstand about academia's operations, I try to be as specific as I can be. I also, frankly, try to point out that there is usually a mismatch between the intensity of the criticism and the stakes of any particular misconduct or failure. The consequences of the misconduct of a Ward Churchill, for example, are pretty small even set against the general production of academic knowledge within the specific field of Native American history. I can explain those consequences at a pretty granular level, and even set out a self-critical account in which some of Churchill's problems are more complicatedly distributed in scholarly writing. DeSantis (and his many silent colleagues) aren't offering that specificity, and the stakes involved in their errors of judgment are global and pretty damn close to apocalyptic.
3. I've been the first to observe that the labor market for academia is one of the reason why academics have relatively few options when they're unhappy with some aspect of institutional policy. Most specifically, that there are many job-seekers looking for a very small number of attractive positions, and that many of those job-seekers can do a highly competent job from the get-go. I think I'm a much better teacher for my years of experience, but for the most part academics aren't hired for their teaching competency. (A problem, yes, and a tough one at that.) I think I'm a wiser, maybe more subtle, scholar for my years of knowledge-production, but there are young scholars whose productivity vastly outshines mine, and they have more fire in the belly than I do. I think I'm a better institutional actor because I understand more about how higher education works and doesn't work than when I started out, but a new scholar could get up to speed pretty quickly on that score.
That's just me, mind you: I think probably there are a lot of senior faculty whose positions could be filled competently if not ideally by junior faculty. If my institution had just catastrophically failed and an outside interest were attempting to salvage it from the wreckage, they might legitimately conclude that the only way to do so was to shift out some very expensive senior faculty in favor of junior positions, at the cost of some of the value that experience brings.
That's how labor markets work when failure and catastrophe are at the door. The claim that there are indeed indispensible people who should not be subject to a serious test of cost/benefit is a really tough claim to sustain under those circumstances. When times are flush or an institution is generally successful, it's often a lot easier to sustain the argument that the people making things work well are the people you have to have.
Now if you want to argue that it shouldn't work that way, that we need to rethink the harshness of markets in the face of disaster, that we need to stand loyally by people who have tried their best, that we need to be sensitive and forgiving and aware of context, I might go along with you. But then that applies to the auto worker as well as the investment banker, to the homeowner as well as the executive, to the credit-card debtor as well as the credit-default swapper. If the choices made at AIG need sensitive, interior explanation, then be systematic about that: where's the sensitivity for the economic practices and lifeworlds of the other 95%?
It appears that the mess at AIG FP was caused by two classes of people - the financial operators who created and sold the CDSs, CDOs, etc., and the managers who were nominally responsible for ensuring that the operation of the group were both profitable and not damaging to the company.
In the short term the group was hauling in huge, even obscene, amounts of money through the trading of their exotic instruments. We know now that these instruments were fundamentally flawed and necessarily led to the meltdown that we're now in the middle of.
Was FP aware of the inevitability of the crash they were heading towards? (although the dominant conversation is about "unforeseen risks") There are plenty of credible reports that knowledgeable observers understood the nature of the situation and warned that, just as no bubble can last forever, the mortgage-backed securities bubble would sooner or later burst.
Why didn't the operators and managers at AIG FP heed the warnings, question their assumptions, and conduct business appropriately?
If they weren't aware of the warnings they were incompetent.
If they were aware and disregarded or dismissed them then they were incompetent at another level.
If, as a cynic would say, they knew and didn't care because they were pulling phenomenal amounts of money out of the system into their own pockets, money that would never have to be paid back because "they were just conducting business", then they were acting criminally, if not legally then morally. They plundered the public good, the financial system whose necessity is argued because it serves the public good of lubricating the gears of real economic activity, for their own profit even at the cost of poisoning that same public good for the rest of us.
The real question about AIG FP is: "who were these people, these financial operators and managers" who ran the ship aground? It appears that these people are largely gone from the scene and, as they say, out of sight, out of mind. Where's all the money THEY pulled out into their own pockets? How do we get THAT money, those ill-gotten gains, back? Surely it must be possible. AIG FP must know who was paid what when. It can't be that difficult to identify who was actually responsible for all the badness. Let's fix blame where blame's due and do what we can to both recover that plundered loot, and fix things so that these people, or the next generation of like-minded pirates, do not find us the public such easy prey.
As for the current members of AIG FP; if they are indeed working hard and diligently to unwind the bad stuff, then surely they should be rewarded for their efforts. But perhaps using the same system of salary and bonuses paid out in the short term for work whose effectiveness will only in the long term be evaluated is not the answer. Perhaps their rewards, which should be commensurate with the value they provide, should somehow be structured to the actual realization of their efforts.
Freddie wrote:...Keep it simple: the government provided emergency funds to a private enterprise that, absent those funds, would now be nonexistent in any meaningful sense. The government has the right to determine how that money gets spent, and one way it should be able to regulate the spending of that money is to insist that employees at a company that failed in its most elementary fiduciary responsibilities not be given bonuses. Even if some of the individuals aren't to blame....
Freddie, you're underthinking this. Sure, since government is bailing out AIG, government has the right to determine how AIG's employees are compensated. For that matter, it could insist that the employees all wear funny hats. The question is NOT what CAN government do, but what SHOULD it do.
The government decided it was cheaper for taxpayers to keep AIG afloat long enough for its operations to be wound down in an orderly manner. This may or may not have been the right decision. The government could have allowed AIG to fail and run the risk that AIG's failure would crater the rest of the economy. It choose not to go that route. Once that decision was reached, the question became how to best manage AIG's assets. The complex financial instruments owned by AIG-FP require active management -- or the losses associated with those instruments will grow ever larger. The bonus program AIG offered its employees was created to get the people necessary to provide that active management.
For comparison, assume you're the bankruptcy trustee responsible for managing the assets of a bankrupt home builder. Those assets include 500 homes ready for sale and another 500 that are in some phase of construction. Do you actively manage these assets -- find renters for the completed homes and make weather tight the homes that are partially completed -- or do you just put up a fence around the whole mess and allow the weeds to grow? Prudence may dictate managing the assets, which will require hiring people. There are plenty of construction workers, so most of those people could be hired at bargain rates. They'd be happy to get a job. You're also going to need people with specialized skills and talent. Those people may be in short supply and you may need to offer them a package that keeps them on the job for as long as it lasts. That's what AIG did. The alternative would have been to staff AIG with a bunch of people from Treasury. Good people, sure. Their inexperience and lack of skill would have (most likely) resulted in mismanagement that cost the taxpayers far more than the bonuses paid to AIG employees.
Timothy Burke -
It was my impression that AIG is winding down all aspects of its business to sell off -- not just the part that dealt with credit default swaps. DeSantis says he's been involved in selling off the commodity index business to UBS. I'm not sure his knowledge of the CDS business or lack thereof is relevant.
I understand that there are other positions to wind down at FP. But the point that's being made by those who defend the retention bonuses is that it is the CDS business that requires the retention of the people who understood the complex network of deals that the firm made, in part because they have to guide the flow of bailout funds to the counterparties. If DeSantis was trading in energy commodities and his positions were basically sound and profitable and his operations transparent, then: 1) it should be pretty easy to wind down his positions and 2) it should be reasonably simple for someone other than himself to do so. If his positions were so complex and opaque that his personal expertise is necessary to successfully close them down, then I question his assertion that his own trading posed no issues whatsoever to the FP division's continued health.
The middle initial of AIG stands for "insurance." It is not "CT" for commodity trading or "ET" for equity trading.
Like most of the insurance industry, premiums paid by the insured are traded on various commodity and equity markets to make massive profits for the traders and exectuvies.
AIG acted as if premiums were their personal risk capital and not funds to be managed in trust in the best interest of the insured.
I have the impression that such insurance companies act shocked when they are actually expected to pay a claim.
I wonder how many people were laid off in order for the "commodities" or "equities" that were being traded would be "profitable."
Perhaps if AIG had focused on it primary responsiblity, which was managing premiums to have funds available to pay claims, it would not in the trouble it is in today.
Well, no. The "I" in AIG stands for "international" as in "American International Group". That's more than a mere quibble. One of the lines of insurance AIG wrote related to commodity prices. A steel mill, for example, might buy an "insurance policy" that the price of coal and iron would not rise above $x. This allowed the enter into long term contracts without the risk that rising commodity prices would make the contracts unprofitable. AIG, in turn, entered into commodity trading to hedge its exposure on these "insurance policies". The primary purpose of the commodity group was to manage AIG's exposure to rising and falling commodity prices from the policies it'd written. That the commodity group was "profitable" was just gravy.
Up thread, several posters opined that the government could and should not be bound by AIG's contracts with its employees. This ignores a set of very important facts: AIG entered into these contracts before receiving bailout money from the government. The government was aware of the bonus program BEFORE agreeing to give AIG money. The government considered and rejected the idea of requiring a modification of the bonus program as a condition of giving AIG the money. The government, therefore, accepted and ratified the employment contracts. Having ratified the contracts, the government has no legal basis for voiding the contracts now.
Sadly, legality is somewhat null when the "L'etat, c'est moi" crowd in Congress gets their hands on it.
"Where most of us work, the reason companies give big bonuses rather than big raises is that the former are discretionary. If the company falls on hard times, then there aren't as many bonuses for people."
The bonuses you describe have nothing whatsoever to do with this situation. These bonuses were offered in exchange for staying through the year, which they did (even if they left when the year was up).
When my children were young, I had to have a full time nanny, because I had to work evenings and my son needed extensive therapy. I couldn't afford to have my nanny leave unexpectedly and didn't want my children to face too much turnover, so I promised an extra month's pay if she stayed a full year. I had two nannies, each for one year, and both would have left earlier, probably on short notice, if it hadn't been for the promised bonus.
Should I have tricked them into staying by promising a bonus and then refusing to pay it, after they had stayed the full time?
No, you shouldn't have tricked them.
On the other hand, if the nanny had looked around and saw that you had just been laid off from your job as an auto worker, they would probably be unwise to accept this offer.
And if part of the rationale for them receiving this bonus was their irreplacable financial acumen, that wouldn't pass the laugh test.
You're right, generally one doesn't hire nannies to run financial companies. What precisely are you trying to prove?
To convert the metaphor properly, what if the bonus was based on her extensive and difficult-to-replace knowledge of the son in question? Ann loses her job, her brother loans her some cash to tide her over, and Ann uses some of that money to keep paying the nanny(say, for when she's out at job interviews). She cleared this with her brother in advance, but her sister-in-law gets pissy, and tells her to fire the nanny(and to hell with the bonus money!) and hire the 12 year old across the street as a babysitter. Ann's son winds up in the hospital because of inadequate supervision, and the hospital bills cost Ann's brother twice what the nanny would have. Exactly how smug should the sister-in-law feel about her financial acumen in this scenario?
As suggested in a roundabout manner above, AIG is intended be the whipping boy. AIG was not bailed out to save AIG; it was bailed out as a conduit to pass billions of dollars to Goldman Sachs, Bank of America, Deutsche Bank, Societe General, BNP Paribas, et al. in payment of credit default swaps held by those banks. This happened while the former Goldman Sachs CEO, Hank Paulson, was playing Treasury Secretary. All of the bailout money passed to the banks to repay CDSs. AIG is the scapegoat; it is a catspaw in this mess.
Where is the public outrage against Goldman Sachs, which bet against the mortgage-backed securities at the same time it was selling them to its clients as a AAA investment? Goldman Sachs execs were paid large bonuses out of the bailout money, but where are the crocodile tears for them?
This whole outrage over bonuses to AIG is a redirect from the real criminals to the fake criminals. Remember that this past weekend, AIG release the list of counterparties for its credit default swaps. So why isn't the press' furor directed at the banks that double-dipped in the bailout? Goldman Sachs in particular got $13 billion from AIG in addition to $15 billion or so from TARP funds (if memory serves). In other words, Goldman got repaid twice for the same losses.
We are being spun on this big time, and people need to stop jumping on every bandwagon of popular discontent and think for themselves a little.
Ann, the outrage over Goldman Sachs is rightly restricted to the "fringier conspiracy sites". Didn't you see Megan's latest Maxine Waters post?
A dismissive response is not a response. I listed facts. You gave an ad hominem. And a reference to an irrelevant link (I checked the link - there was no commentary there). Can you give a real answer?
The response was tongue in cheek, although reading it again, I can see how it could have been taken literally.
Anyhow, the comments on that post (including my own) touched on this. I would prefer it to be discussed further, but, I would not expect it to happen on this blog given our hostess' dismissive "conspiracy" reference.
I would imagine that Megan isn't dismissive of the entire idea of financial industry players have a variety of conflicting interests. I would imagine her opinion is that Maxine Waters is a total and complete moron who brings utter disrepute on any idea she is associated with. The underlying thesis of all her questions was that Goldman runs the entire US government and Tim Geithner has to get approval from Goldman to take any action. I think that will earn you a place in the loony bin. Also, don't forget that Maxine Waters is already completely ethically compromised with regard to all this bailout crap as detailed previously on this blog.
Ok, thanks for the clarification below. It is sad that legitimate questions can be so easily railroaded by simply mentioning the word "conspiracy".
Aren't NBA, NFL, and MLB stadiums all built with taxpayer money, essentially the same as a bailout?
I demand an investigation into the outrageous salaries being paid to professional athletes at taxpayer expense. I move that all such teams be required to limit their pay to the median income of about $40,000.
What? They won't be able to attract talent at those salaries? Ridiculous. We'll just be getting rid of the elites who have been screwing up the country. No doubt the moral health of our new athletes will more than make up for any supposed dearth of athletic talent.
And TallDave wins the award for "Most Completely Irrelevant and Pathetic Republican StrawMan Argument". TallDave, if professional athletes salaries weren't artificially supported via a variety of mechanisms such as stadiums that are constructed and operated at taxpayer expense, with the teams taking most of the profits, most of them would be lucky to make $40,000 a year. I've got news for you TallDave, if the NBA, NFL and MLB went under tomorrow it's not as if all of those players would go out and find jobs as orthopedic surgeons or theoretical physicists. If it weren't for professional sports most of these guys would be very tall and very fast janitors with good hand/eye coordination.
It's entirely germane. People are arguing that since AIG receives government money, it should not pay for top talent. Why are major league sports any different?
Players on the Detroit Lions were paid millions of dollars last year, and yet they did not win a single game. Why does Detroit not demand their salaries be capped at something much lower? Because everyone knows if they did that, the team would be even worse.
Oddly, people seem unable to figure out the same logic applies to AIG. All markets are competitive.
I don't think the principle being asserted is that companies receiving government money should not pay for top talent. I want Boeing and Lockheed to have the best engineers, for example.
The problem is a company in such distress that it needs a bailout to survive giving out huge payments.
--
Again, I don't think most of us share MM's beliefs that:
a.) The work remaining at AIG can only be done by a certain set of individuals.
b.) These individuals are the current AIG employees.
I think it's worth noting that, generally speaking, subsides for stadium construction (which I generally oppose) happen during boom times for the (yes, largely imaginary) economic benefit of the populace.
It's not with a gun to the region's head that they better bail out the sports franchises or it would ruin the local economy during a down time.
--
And I think it remains to be proven that the work to be done at AIG requires superstar-level talent and salaries.
See Megan's next post:
Well, "millions" seems to represent the difference between the salary demands of the current execs and the twentysomething MBA, so I would be willing to accept a less efficient liquidation of their assets in return for the moral satisfaction of not being held hostage, the implementation of a moral hazard, and the message that finanical work is not some sort of magical hocus pocus that only a certain group of people could possibly do.
A solid if unspectacular job is what's needed here. Maybe a new graduate might not be up to the job, but a decent professional wihtout a bloated sense of entitlement would probaby suffice.
The problem with the AIG bonuses was symbolic. I think most Americans compared of the talk about union workers and market traders; one group expected to take salary cuts, retirement cuts, health-care cuts in order to get tax-payer help for their industry while the other expected million-dollar bonuses, doled out in secret, despite tax-payer bailouts.
And my guess is that most Americans don't know the difference between AIG's profitable traders and the derivative traders at the root of the problem, so the whole company takes the hue of recklessness, irresponsibility and greed. The symbolism has a feel of the 1920's robber-barons vs. the pre-union workers.
Symbols matter, they take on a life of their own. If my neighbors' ability to sustain their standard of living declined while mine increased, which is what most Americans see when it comes to bonuses vs. union contracts, the reward for work is out of balance. The truth is that a corporate executives simply aren't as valuable as the market had made them appear to be; and an auto mechanics, farmers and teachers are far more valuable then the market claims.
The AIG outrage should be perceived as the expression of that imbalance. It's not logic. But it is how cultural understanding develops.
My concern here is cultivating entrepreneurial endeavors, protecting the drive to launch a business see it grow and become profitable. There is a vast difference between this and the greed of over-leveraged derivatives trading; a difference that gets lost in the outrage over symbols. I worry about conflating giant corporations like AIG with entrepreneurial companies, the meme that business is bad. For growth, we need entrepreneurs as much as we need an improved health care system, clean energy, better schools, and a controlled budget. I would consider "too big to fail" as much a barrier to growth as too-generous union contracts. But growth doesn't require more investment bankers, more auto workers, or more insurance/finance schemes too complex for Warren Buffet to understand.
This is simply not true, as was pointed out at the time these discussions were being thrashed around. In particular, those who have retired from GM and are receiving pensions, etc. have already performed the work. So yes, these people were asked to give up compensation for work already performed.
I don't follow you at all. How did you arrive at this conclusion? Finally:
Wasn't someone going on recently about being more civil? Further Tim's point seems pretty obvious . . . and sound. He's talking about consistency. Which brings me too:
That's it? That's the sum total of your argument? There is a lot of opinion flying around here, and that's okay, as long as it is acknowledged to be an opinion and nothing more. The only amendment to this rule is that opinions must be consistent. And that's what people against these bonuses have been pounding on rather consistently.
If GM negotiated in early 2008 with the UAW workers to obtain UAW labor in 2008, and GM was in such straits it had to promise the UAW workers extra money to not leave right then and take valuable, likely irreplaceable skills given the situation, to competitors, then it would be right to lay the UAW next to AIG for comparison. I would support the UAW receiving the payments for 2008's labor, even if that came from bailout money.
That is not the UAW worker's situation, however. Not even close.
Of course, in its own way the UAW situation is worse.
The UAW worker develops a specific set of skills that are not transferable to other industries. He feels secure in doing so because his union has a contract that will guarantee him a job, health benefits, retirement, etc. so long as he performs his job duties.
Now, he is being told that this secure job isn't so secure, and he must give up some of these guaranteed benefits for the good of the country. And he can't very well take his skills developed on the assembly line and get a job elsewehere.
I would say the impact is in the same general ballpark.
Having worked in Michigan industrial production facilities in my youth, including auto parts line production, the idea that a UAW worker has a "specific set of skills" made me smile a bit.
They were, in my experience, typically semi-skilled laborers, not finely trained craftman. So while you might find the occasional tool-and-die level skilled worker in a UAW-staffed production facility, most UAW workers were nowhere near that skilled or useful. Put simply those guys didn't invest squat in their jobs, John. They just made a higher wage because of an unusual set of circumstances that lasted long enough to make people think it was normal.
Ultimately this is exactly what I'm getting at.
If you accept a harsh but necessary relationship between risk and consequence in a largely unregulated free market, and you accept that economic failure delivers a hard blow to everyone involved in a corporate enterprise and you accept that labor markets set prices fairly against what the needs and resources of an employer are, ok.
If you argue that people ought to know what they're getting into, and ought not to argue for special considerations or extenuating circumstances later on, ok.
DeSantis worked for the specific division of a large firm that not only destroyed the whole company but came close to destroying the global economy, and in specific the assets and savings of many people who believed those savings to be in highly secure, risk-free investments. DeSantis argues that he bears no responsibility for the decisions of his colleagues, and should accept no additional consequences beyond the loss of value of his AIG stock and the inability of his company to pay him a regular base salary this year.
But his company's circumstances have changed radically since he was promised his $742,000. That's no different than the way in which the auto industry's circumstances have changed since the UAW's previous contract was signed. If circumstances dictate that the latter must be revised if the jobs involved are to be saved, why shouldn't circumstances dictate that the initial compensation promised to DeSantis needs renegotiation? His company is in even more dire circumstances than the auto industry, in many respects.
If that means his services are no longer affordable, and that AIG will have to make do with less expert, less knowledgeable, less experienced staff to do his work at much lower compensation levels, then that's how labor markets work.
Unless it isn't how they ought to work. At which point, fine, but then let consistency take hold in the other direction. If we should care about the subtle complexities of how a company like AIG got into its crisis, we should care with the same curiosity and sensitivity about how homeowners came to sign bad mortgages. (And in both cases, let's not let people get away with hand-waving vagueness: let's really drill down into the specifics.) If we should care about context, let us care about it overall. If we should care about loyalty to people who are doing their best job under difficult circumstances, let's care more universally. If we want to blunt the harshness of risk, let's look to blunt that everywhere.
Tim,
His company's circumstances may have changed, but AIG still has the money to pay him. He is an unsecured creditor of a technically solvent corporation. Unless you want to let all of the unsecured creditors go and declare bankruptcy, there is no justification for treating a certain class of unsecured creditors any differently. If you want to imagine the argument as it applies to the UAW, I have no problem with that. GM bondholders will have to take a haircut, union members will take a haircut, and some suppliers will probably take a haircut. If none of these people take a haircut, why should union members? If none of AIG's counterparties have taken a haircut, why should these employees?
If the executive VP claims not to have known what was going on, then he doesn't seem to be very well qualified, does he? Could you answer this question? Note that I am not asking you to confirm the antecedent, only the conditional.
More generally, were these people being paid what they were worth before? There seems to be a vast consensus that indeed they were not. If that's the case, then why not go for the younger person? This is, as you note, really the question. It's not rhetorical, and it deserves to be answered.
all of this to say, they should have let AIG go down like Lehman did - but nobody here is mentioning the presidential election ongoing at that time - as poor a job as Mr. Liddy did, why did he not counter with the election item? For that matter, BearStearns should have been left to fail as well - only FRD and FNM should have been treated as they were - however, lacking a time machine, we should let any current tipsy-prone entities (AIG or otherwise, ignore previous BAD money decisions) fail - then we could avoid all this bonus/compensation/retention claptrap, eh? I am pretty sure Paul O'Neill would have done the right thing, but then the Shrub fired him back in 2002 for too much frank talking (and i *DON'T* mean BarneyFrank) - carry on
Megan,
FYI, when reading this blog's RSS in Google Reader, only the first few paragraphs are shown, and there is no indication that there is more content under the fold.
btw, i only found this post cuz i stumbled on your TallGirl post of 364days ago, and was disappointed to find that comments thereon were now closed - i wonder re the height of the AIG-FP moneylosers vs non-money-losing-retention janitorial crowd?? And just for flavour, add in birthorder and birthmonth data. We are all creatures of our DNA/epigenetics and our environment. So it goes. I am 6'1" and married to a 5'9" woman who is 6yrs my junior and we are both second children ;-)
I think you should have acknowledged that you have switched arguments. The prior one was that it was 'different' for the UAW because what was being renegotiated was remuneration for future work, not work already performed. In fact, that claim is false, and the contracts renegotiated after the work was performed. Just as in the case of AIG.
So do you agree that this argument doesn't work, and that you are trying out a new one?
Where did I argue that "prior one"?
Actually, it's more complicated than that, because the retirees also didn't do any work to get those benefits. The retiree health benefits are negotiated as part of the current union package, mostly because of the UAW's slightly odd structure, which gives non-working members voting rights; contract negotiations have come to be dominated by retiree needs. The other difference is that these things were negotiated with the UAW, which represents the collective market power of the workers. This would be as if congress let the workers collect their pensions, then taxed them away. And in general, no, I do not think that solvent firms should be allowed to cut pension obligations--health benefits are more complicated because they do change every few years, so no one can realistically say they were promised any specific thing during their work years.
This simply isn't true. Why would you say something like this? No, the retirees negotiated years ago in good faith while they were workers. They've fulfilled their part of the bargain and have since retired.
Iow, yes, they've already fulfilled their side of the bargain. So the argument that it's different because the AIG employees have already done the work fails because it's false to facts.
The argument that contracts are inviolable can be put to rest, I trust?
It is true, SOV; look it up. Retiree health benefits are negotiated as part of current wage negotiations. For that matter, so are pensions, but they never go down, only up, so that's the problem of the current workers who are sacrificing wages to secure more benfits, not me. Moreover, health benefits could not *possibly* be said to have been negotiated when these workers were working, because most of the treatments they're getting for things like heart attacks, strokes, etc., didn't exist when they were working.
In fact, retiree health benefits have been renegotiated already (something you can't do with pensions); it's just that GM doesn't have the money to make good any more. The company is insolvent.
I am fine with the workers negotiating a giveback in order to keep the company solvent. I am also fine with them demanding to wait in order to get in line with the other creditors, though practically, this would be moronic. What I would not be fine with is if the workers negotiated a new wage, Congress let them work for six months then said--"Surprise! You actually make minimum wage!"
(To JohnMcG @ 12:44 - no reply button available)
Of course, that's it! If they couldn't fully divine depths of potential Congressional stupidity they must be the basest of fools. So screw 'em!
Jeebus.
It doesn't mean that they are the basest of fools.
But it does make it harder to swallow the argument that they are people whose skills and expertise are so essential to our economic recovery that we dare not piss them off.
Every single last employee at AIG should be immediately fired - that's what Air America just said.
Let's say I promise my daughter that if she performs some unpleasant household chore for the next year, we will go on a trip to Disney World.
During that year, due to circumstances that were somewhat foreseeable on my part, I lose my job and go on welfare.
Meanwhile, she continues to perform her unpleasnt chore. The end of the year comes, and we proceed with our trip to Disney World.
Now, my daughter is completely innocent, and fulfilled her part of the contract. Neither could she have possibly foreseen that our financial situation would change, rendering it less likely that I would not be in a position to fulfill my half.
Still, I suspect if word got out the a welfare recipient had just taken an expensive vacation to Disney World, there would be no shortage of outrage. I suspect it would be directed at me, rather than my daughter, but there would be outrage nonetheless.
I should have been an adult and had the tough conversation with my daughter that our financial situation had changed, and that the trip to Disney World was no longer feasible, and renegotiated the contract.
This is what AIG should have done. Would it have been "fair" to my daughter to renegotiate the contract? No. But it still would have been the right thing to do.
These employees had legally binding compensation contracts with AIGFP. This wasn't some vague promise of future compensation. Additionally, your description of the DisneyWorld trip has a variety of glaring holes. Let's reimagine it. Let's say you made a bunch of promises of compensation to a variety of people in addition to your daughter. You lost your job, but your rich uncle promised to cover all of your debts. You proceeded with paying off all of your various promises. However, when your daughter asked for her trip to DisneyWorld, you told her to go kill herself. That seems to be your proposed solution to the DisneyWorld problem. Does that seem problematic?
Of course that's problematic, which is why I didn't propose it.
There's considerable space between telling someone to go kill himself, and proceeding in a difficult circimstance as if nothing happened.
I provided my proposed solution in my post -- I should have been an adult and explained to my daughter that circumstances had changed, and we would need to alter the agreement. Not just closed my eyes and hoped the situation would change between now and when the situation would come due.
And if my rich uncle kept us afloat, and I didn't tell him about the Disney trip, and we went on it anyway, and word got back to him, I don't expect he would be terribly pleased.
However, I believe your theoretical rich uncle was told about the agreement to go to Disney World and didn't complain. Additionally, you didn't approach any of your other creditors and tell them that times had changed. Your uncle didn't complain about not renegotiating with those creditors(even though those other creditors were even wealthier than your daughter). What incentive do any of these employees have to give the money back (other than attack by a roving mob) if no other creditor involved is being asked to make a sacrifice? I'm not willing to argue that all the UAW workers should give up all their benefits and salary so that GM bondholders and suppliers can collect at par for debts that are trading at a deep discount. Are you willing to make the argument that the autoworkers should reduce their pensions while creditors get paid at par? If you aren't then your position is not particularly consistent.
@Bobar
To be honest, I'm not sure what the correct course of action is, and am probably inclined to think that these execs should get their compensation.
And maybe an out of work dad should still take his daughter to Disney World. But that wouldn't be popular with everyone.
The tone of MM's original post suggested that anyone who was angry about the payouts, particularly in light of them being revealed to really be deferred compensation, was a willfully ignorant moron or hateful opportunist.
I think the anger is perfectly understandable. And if we're going to get through this crisis without a populist revolt, people like MM are going to have to do a better job of explaining why things work this way than just cackling at the foolishness of anyone who could see anything wrong with this.
That we are in this situation is a result of people not being straight with us -- we weren't told about these payouts, they weren't explained beforehand, they weren't re-negotiated. People just kinda hoped we wouldn't notice.
That's not going to fly.
Eh, it's all moot anyway. The Tax of doom isn't going to pass. All sound and fury and all that nonsense. If it somehow manages to revive and pass the Senate then we can talk.
I'm amazed at how many people still don't seem to understand the bonuses. Libby testified before Congress (and the transcripts have been widely posted) and others have explained what happened. But the bonuses still get called performance bonuses by some.
A part of me thinks it would be just for all these guys to quit and for AIGs portfolio to tank and for us to be out billions of dollars.
As far as the perception issue goes, the President (and even Congress to some extent) are supposed to LEAD the nation, not FOLLOW the polls. Too often our elected leaders just parrot what the polls say and refuse to stand up and tell people what's really going on and actually explain things. But that of course presumes that our elected officials actually understand what's going on...
Oh, and as to Mr. Cuomo's claim that he's not making any threats, that's patently absurd. The only reason to release their names is to shame or threaten them. Disclosing that the amounts of bonuses and that they were paid to certain employees by position would be adequate disclosure to let the taxpayers know all they need to know. Disclosing names and addresses is gratuitious and given the rhetoric being thrown about is only reasonable as a threat.
One quick observation: I've seen the argument made in a few places that if AIG were allowed to fail, the executives would not have been paid their bonuses, and therefore they should not receive them now.
While I'm not sure whether that's true (I'm not a bankruptcy/restructuring expert), the bigger point is that AIG did not fail, and these contracts were not amended as part of the bailout. Ergo, it's a dead-end argument -- the contracts must be upheld or, at the very least, tested through the judicial system, not through our insane House of Reps.
Thank goodness the Senate and BHO aren't supporting that ridiculous tax. It's good to see some sanity about this.
The Congress has just as much to blame on this debacle. We're they the ones who approved the bailout with the provision that existing bonuses are to remain intact?
Why isn't there calls for Christopher Dodd to work for $1 a year, since he is more the cause of the AIG furor than the letter writer who just happened to work for the company! Why is Barney Frank whining about this when it is he who approved it all!
I have read the feedback on the NY Times and it seems like those Americans all want to become Socialists. It seems obscene to those readers that a person in the USA makes over $100K a year.
However, it is obscene to me that they dare compare their lousy $30K a year salary to a man who has several degrees and worked 14 hour days to meet the American dream.
It seems that a sense of envy has come over them, that because they didn't have the sense to go to school and become a wall street trader, doctor or lawyer.
Does that mean that they feel the same way for a GM or Chrysler shift worker whose union helped drive their companies into the ground? Should we say that they also do not deserve our sympathies because they were part of the greed (American Top 3 earn much more than Japanese counterparts and have outrageous legacy costs), and combining that with the cost cutting, quality issues and lack of innovative design (GM designs were horrible until their feet were put to the fire) that all these people deserve to drown when the ship sinks.
Why not? You are demanding that of this guy and to say otherwise is hypocritical IMHO.
Folks you have been duped.. (again)
.
Timothy Burke -
It was my impression that AIG is winding down all aspects of its business to sell off -- not just the part that dealt with credit default swaps. DeSantis says he's been involved in selling off the commodity index business to UBS. I'm not sure his knowledge of the CDS business or lack thereof is relevant.
....
THERE IS NO V.P. in that unit named DeSantis.. trust me.. this is a phony made up story.. yeah working for $1.00.. folks do your homework.. there is no story here.. go home...
"(Liddy) realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand."--resignation letter.
The contracts were never ethical, not 5 years ago and not six months ago. This man was making somewhere in the range of 1.5 million dollars scavenging a sinking ship. Presumably he was doing even better during the good times, when his branch of the company was making $100 million in profit. As the President said recently, something is incredibly wrong when an executive is making hundreds of times more than your average American worker. He profited outrageously during the good times and he sought to guarantee exorbitant compensation during the bad--shame on him.
Yes, god forbid we pay people what they're worth. The horrors!
(Note that I'm not saying everyone who earns at that level is worth it - clearly, many aren't. But you suggestion that not only is nobody earning at that level is worth it, but that it is unethical to try, is total nonsense)
What possible amount of labor could have been worth a $750,000 bonus? These guys aren't creating anything. They aren't providing anything people need.
It's like a kindergardener who invents a child fantasy game no one understand but him having a temper tantrum because people won't pay him a million dollars to play anymore.
I work my ass off and have made others millions of dollars with my efforts. Yet, I just filed bankruptcy to escape from a brand new house that just dropped $300,000 in value and is filled with construction defects that made me and my family very very sick.
The fact that these paper pushing clowns are upset that real working people are angry with them makes me think of a great new reality TV show:
AIG executives working at real jobs. Perfect. Let these overpaid executives be a fireman for a week, then a nanny, then a truck driver, etc... Let's follow them with cameras to see how well they do at the dirty jobs we are all forced to slave away at just to break even.
Imagine the climax of each episode, when the AIG executive has to avoid answering phone calls from bill collectors, has to run after his repossessed car, and has to work a second shift while his electricity gets cut off.
Imagine what it would be like AIG executives, if you had to actually contribute something REAL to the world, instead of simply engaging in activities so complex and meaningless they are passed from one crony to another.
Let's face it, this is not about default swap deals, this is about the "evil" corporations Ralph Nader was talking about in 2000. It's about deregulation. It's about usury. And banking and insurance are on the top of the list of those who brought down the mighty USA.
Screw throwing these guys in jail or punishing them. Make them work 2 or 3 jobs like the rest of us and deal with absurdity of payday loans and credit cards to maintain their standard of living.
No human being should make a $750,000 bonus unless they actually DO something to help mankind. This is MADNESS and must stop now.
raaa,
I agree with you 1000%!!
Okay, Insurance 101. So a lot of people have houses. Those people know that every once in a while, a tornado will come along and rip up their house. They don't want to keep the value of a new house in the bank, so they hire an insurance company and give them money regularly in exchange for a promise that if a tornado comes along, the company will buy them a new house. One person can't bankroll their own house, but the insurance company deals with a thousand people, and knows that in an average year, 10 houses will get blown away. So, they charge 2%, get enough to buy 20 houses, spend 5 houses worth on overhead, pay out 10 people, and put the other 5 aside as profit, which they then build a financial portfolio out of, just in case a really big tornado comes along and blows away 50 houses in a year and they have to dip into their accumulated funds to pay out.
Now, this isn't strictly necessary - they could charge 5%, pay out from cash on hand in the bad years, and keep way more profit in the good years. However, competition drives people to saving up, instead of just charging three times as much, so we wind up in the same place.
So you have a really big insurance company, and they sit on a really big pile of cash. Thing is, you can't just hold cash on the scale of billions. It has to be invested somewhere - stocks, bonds, whatever. Hey look, now the insurance company is a finance company too! These people are responsible for making sure that portfolio grows instead of shrinks as best they can. Given that the difference between him being successful and unsuccessful is the difference between your insurance premiums being 1% or 3%, I'd say you care quite a lot if he's good or bad at his job.
Or maybe you're using the tired old chestnut about how moving money around is useless and doesn't create value. I'll avoid Finance 101, because it's 3 AM here, but I'll put it this way. If you want to buy a house without saving up hundreds of thousands of dollars first, finance has value to you. If you want to start a company and raise money by selling shares, the existence of equity markets is the difference between success and failure. Remove the option to ultimately IPO from Google, they'd never have gotten the money to buy their servers, and you'd still be searching with Yahoo. Remove the option to buy and sell the shares afterwards, and the robust market in which that trading happens, and that IPO loses most of its value.
Even shuffling around old, established stocks has value in the form of price discovery and the maintenance of a market for those people who gave their money to the company for an equity stake decades ago(or, more likely, their successors). Yes, an individual stock market transaction doesn't build a factory or train an employee, but the existence of a market where a company can go raise cash to do those things does.
"So you have a really big insurance company, and they sit on a really big pile of cash. Thing is, you can't just hold cash on the scale of billions. It has to be invested somewhere - stocks, bonds, whatever. Hey look, now the insurance company is a finance company too! These people are responsible for making sure that portfolio grows instead of shrinks as best they can."
AIG was holding other people's money in trust to pay out pensions and insurance claims. Did their responsibility to keep those funds growing include having their staff make such risky trades that the company is almost bankrupt and the national and the world economies are in a very dangerous crisis? Did no one, including Jake DeSantis, realize the risk that was being taken with other people's money and the consequences of those risks? Were there not less risky ways to fulfill their responsibilities? Or were they just interested in their bonuses and increasing the value of their shares of AIG?
These investments didn't look risky at the time. I didn't say they made good decisions - clearly they didn't. I am saying that the difference between investing hundreds of billions of dollars wisely(and thus financing a large swath of the economy and allowing a monumental amount of economic growth) compared to unwisely(and thus squandering that potential growth) is worth giving a whole lot of people $750,000 a year. They do not create "nothing" - they allow most of everything to be created. Whether they did that job well or badly is not in dispute, but raaa's claim that nobody is worth $750k because they create nothing is fundamentally stupid, and I wanted to call him on it.
Boo-hoo for Jake,
Good riddins! You don't get rewarded for a bad job. Please.......this whole thing makes me sick! How about for years and years now, the middle class has been underpaid in our checks and overtaxed on EVERYTHING. Paying more than our fair share and Wall St riding on our backs. We pay 35% of our income for taxes and the wealthy anywhere from 1-15% of taxes.
Now they are being asked to back back this money is the right thing to do. Corporate GREED is part of the problem as to why the economy is the way it is. What.........they will have to sell their mansions for a smaller house...sell their bmw's and bentleys for a compact car, make their own coffee, sharpen their own pencils............ooooooooohh my what are they to do? PUHLEASE!!!! I have no empathy for them at all! That goes for any exec making outrageous salaries and bonuses off our backs. This country needs to get back to basics. President Obama did not create this mess. Look at the mess he took on and what the President makes per year. It is a job that these guys couldn't handle in a lifetime! He's not whining. Please, some of you on here are just as ignorant and arrogant as the execs are. Get of your high horses and come back to reality and let the wealthy pay their fair share to help this country. The middleclass is tapped we don't have anything left to give!!
Once AIG was a gummint dependent, Jake was a welfare child. TANF doesn't pay $750k per year. Give him and the others TANF equivalent payments, or at most, the standard salary for a government accountant, because that's all they're doing now. Bloody welfare kings.
McG,
We're supposed to believe that these AIG executives are so valuable that we piss them off at our extreme peril, yet they were suckered in by promises of the "accounting magic of our bonus structure?"
In my career as a software engineer, I have been told bonuses would go down for the following reasons:
* The SARS epidemic (remember that?)
* Reduced travel post 9/11
* A lawsuit settlement I had absolutely no involvement in.
* The "competitive marketplace" (i.e. demands of Wall Street) demanding that compensation be limited.
Now, I've worked for someone who was in the same position and instead of rolling over and taking it he started his own company. He now gets a dividend check for $8 million every three months.
Why did you put up with such behavior on the part of your employer? Why didn't you and your buddies do something about it?
My theory, you're just too weak and submissive to ever stand up for yourself like a man.
Or, I have a family to support that includes a child with a chronic illness, making getting by with little or no health insurance not an option.
NA07
Boo-hoo for Jake,
Good riddins! You don't get rewarded for a bad job. Please.......this whole thing makes me sick! How about for years and years now, the middle class has been underpaid in our checks and overtaxed on EVERYTHING.
Then why did you chose to be middle class?
jmo3,
It's not by choice. Is that all you can come up with? Life has its ups and downs and you have to take what is handed to you. I have worked very hard all my life. I didn't have Mommy and Daddy to hand me everything. If you make 250,000 or more........pay your higher taxes and suck it up like a man. Get your hands dirty jmo3 instead of sitting on a keyboard all day long. Software engineers come a dime a dozen.
"Software engineers come a dime a dozen."
Blog comment writers engaging in personal attacks are even cheaper per dozen.
Oops, I just saw my price level drop!
You guys are talking past one another on several points but I think the main division runs along two categories:
1. (A group that included Megan) believes that traders and/or execs with high degrees of experience, intelligence and market savvy will consistently (or reasonably consistently) outperform those with less intelligence/experience/savvy.
2. Believes essentially in efficient market hypothesis for traders -- that once you have a person with some minimal level of intellectual competence (a level met by any Ivy League graduate) performance in trading is all luck.
Group 1 believes that many traders at AIG and other places -- traders who were not responsible for the meltdown -- deserve good payout because they are talented people who demonstrated their talent by making bad bets.
Group 2 believes that the fact that the meltdown ever happening proves that no one on Wall Street knows anything about the future. The people who made no bad bets in this case -- according to this argument -- were just lucky.
Personally I tend to side with Group 2. If Wall Street had any idea who was smart, it would not have put a bunch of stupid people in a position to destroy it. This may seem crazy to Megan and others -- her example in one of these comments concerned how absurd most people would find the suggestion that a college kid could do their jobs as well as them -- but I think it's perfectly possible that intelligence and experience don't matter -- because the job itself is impossible.
Is it really any more ridiculous to assert there's no skill whatever in trading than to suggest there's no skill in picking stocks? I don't think so, yet most economists would say that no one has ever proven skill in picking stocks. Yes, some folks beat the market for many years, but no more than chance would suggest given the number of people playing.
But these are brilliant experienced people! Yes, but they are trying to do something impossible -- predict the future. It's like flying. It would not matter how brilliant you were, you could not figure out how to fly by flapping your arms. Experience wouldn't matter either.
Okay -- that's my two cents on why I'm in group 2, but I don't really expect it to convert any of the people in group 1. This conversation is probably a waste, but I thought it might be interesting to consider why it's a waste.
When you say "Group 1 believes that many traders at AIG and other places -- traders who were not responsible for the meltdown -- deserve good payout because they are talented people who demonstrated their talent by making bad bets", you mean "by NOT making bad bets", right?
I did indeed mean "by NOT making bad bets." I wrote that right before going to sleep last night, so it's really a miracle it's as coherent as it is.
That's a great comment, Scoop. And after I read it I had a vision of a group of alchemists (back when it was a respected profession) scoffing about the notion that some amateur who hadn't gone through their difficult and arcane training could possibly claim to have a better chance of turning lead into gold.
Mmmm . . . I'm not arguing that these guys are genius stock (etc) pickers. But executing a trade well is a skill. Knowing who the players are in the market matters, especially when you're trying to sell off large portfolios that are hard to liquidate. I don't think that traders "deserve" huge salaries, and if the government can get them cheaper, yay! But I certainly don't think that they deserve to be reneged on because they committed the unspeakable sin of being highly paid.
I did not mean to try to state (or misstate) your view the way you think I did. I didn't mean "deserve" in the moral sense that many folks on this thread would use it. I intended it in the sense of "merit" as you clearly do, too.
I'm not saying that you -- or anyone in group 1 -- wants to spend money needlessly. We just disagree about how much skill is really involved in this job.
I doubt that either side will change its opinion (and without good studies, that's all either side has) until someone comes out with fairly definitive research. Sadly, I haven't read of any such research in the pipeline, so we're all stuck with gut feeling, which is a lousy way to respond to a crisis, but the only way we have.
Can I ask a simple question. Why do the AIG traders (and traders at other firms presumeably) get paid a good portion of their earnings in bonuses? Is it because of something in the tax laws, or is it a way of passing on a portion of the company's profits to those who helped create those profits. Assuming that it is the later reason, then paying bonuses serves two purposes: they encourage employees to work harder/smarter, and they allow the company to easily reduce employee compensation when times are hard and profits are low. It is difficult for me to believe that any company would not provide itself lots of flexibility in the amount it is obligated to pay in bonuses. So can it be that AIG is contractually obliged to pay the bonuses? I have a hard time accepting this - unless there is something in the tax laws, and it saves the company money by calling part of the salary a bonus.
I also just do not get why Jake DeSantis had no salary ($1.00 year) as such at all in 2008. Is that what he is actually saying? Why was all of his pay to be a bonus after the year was over? Very weird, no?
The compensation policies of the financial industry seem to be not only VERY very generous, but very different from those of other industries. Who would work without a salary at all? Who would wait for actual pay until the end of the year? What is the deal here guys?
I retired from a large company (not in the financial industry). We had bonuses that were clearly performance tied. They were also tied in to company performance of course. They did not pay out in multiples of our base salary, not hardly.
And, FIRST and foremost, we all had a regular salary that was paid every 2 weeks, yes, as we went along.
I just not understand the setup of AIG's pay/bonus agreement with DeSantis and the reason for it.
When companies are selling a division, shutting down a division, or otherwise significantly altering some aspect of their operation, they need experienced, trustworthy people to help them achieve the goal. Those people will, of course, realize immediately that they are in effect "building their own gallows", because once the project is over their job may well go "poof". The normal inclination of people in that position is to immediately start looking for a new job, since they anticipate that they have, at most, 12-18 months before the merger, asset sale, wind-up, bankruptcy proceedings, whatever are over, and they have a high probability of being unemployed at that point.
To keep those people focused on the project for that 12-18 months when the company needs them, the company promises to pay them a retention bonus. In sum, it is build your gallows, and we will pay you something for your effort. That retention bonus usually works out to be more than the employees would otherwise make over that time had the employee simply kept working the regular job they had before learning of the whole "gallows" project.
It sounds to me like AIG promised these guys a "gallows" assignment in exchange for "gallow" pay plans. The AIG folks built the gallows, now President Obama et al are upset that AIG promised to pay the people to swing those hammers and knot those ropes. So, yeah, I can see how the workers would be a bit raw.
A very common practice throughout America employed by companies in similar situations was reneged on. The response from the "tough cookies!" crowd is, in essence, once the taxpayer money showed up the gallows-builders should have clued in the game had changed.
Not really, since this is a bit unprecendented. But I am quite sure anyone in the financial sector asked to perform under similar circumstances is veryyyyy aware of this situation and will take it into account going forward. Hence, we can expect to pay more--and pay up front--for any services taxpayers want from financial sector players.
Agreed, the major effect of Congress and the administration’s little tantrum over retention bonuses which they ratified in the legislation that they wrote, passed and signed into law is that (a) the current bailout is going to be even more expensive and ineffective than it was before and (b) so will any future attempts to “reform” both the financial sector or any other sector of the economy. The latter may actually prove to be a good thing as it may embolden the opposition to Obama’s proposal to effectively nationalize the health care system if that the players – including consumers – realize that they cannot trust either him, his administration or the members of his party in Congress no matter what assurances he gives them.
This is an odd way to argue; do you realize that you are agreeing with me? Really, this isn't difficult - the retirees have already fulfilled their contractual duties. And their benefits have been renegotiated.
True or false?
There is no 'but but but . . .' at this stage of the game.
I am agreeing with you that companies should not be able to shed contractual agreements promised at the time of work once the work is done short of bankruptcy. Do YOU realize you're agreeing with me?
I am not agreeing that the health benefits were paid for work done by the people now collecting them. The current health plan is a part of ongoing union neogtiations, not a pension-like earned obligation.
I should say--short of bankruptcy or negotiation, since workers working in near-insolvent firms of course have the right to renegotiate in order to keep the concern going and save their jobs. That being what the workers, through their union, have done. I certainly don't think congress should be able to change the deal now in return for past money, though I think they have a perfect right to request changes in return for future moneys. I feel the same way about AIG--if we can get the talent for less, we should. But if we can't, we shouldn't tax back the part we didn't want to pay.
The dialogue on the bonuses does presume a lot about the dastardly folks who wrote those CDS contracts that doomed the company and the country. But maybe if your Congressional folks had paid some attention to both the history of the company and the presentation by the Acting Director of the Office of Thrift Supervision, they might have asked some very hard questions of the S&P representative.
OTS made two key points in the testimony. The first was that the AIG FP models for writing CDS contracts on subprime loans were good enough to lead FP not to write any such CDS contracts after 2005(Most of the discussion of the subprime crisis has consistently made the point that the packaging of really bad stuff occurred after 2005). The second point was that through the end-of-year 2008 none of the underlying securities against which CDS contracts were written have had events of default. They are still money good to this point,with no more than 2 years to run on the contracts. Good modeling led AIG FP to see the crisis coming well ahead of most other folks ( including those at Merrill,Bear,Lehman,etc).
The company history that is germane is that AIG changed leadership in 2007 and in 2008. If PWC was not a new auditor in 2007,after the finite risk insurance debacle,it was certainly a changed one. It downgraded the value of the CDS portfolio in late 2007 even when the models ,now apparently validated according to OTS, did not show a need. There is a question to be asked as to why this happened and what was missed about the models in the examination of AIG FP.
It was coincident with the PWC decision that AIG decided to wind down AIG FP. That decision led to the compensation structures that has now precipitated so much anger. It's a very common model in the construction industry,usually over a shorter period of time. It's called clean up and go. If you give me the agreed production,you can clean up and go. Give me three high-tension splices and you are done for the day. Get the instrumentation to test and you are done. As long as there are independent quality tests,there's no problem. The company or the employees move on to do other things. Base ball players and others get similar incentive bonus scheme offers, ones that kick in after so many plate or mound appearances.
S&P and the other rating agencies,whose model quality was already suspect,also reached a conclusion similar to PWC and downgraded AIG. It was the downgradings by the suspect rating agencies that precipitated the subsequent collateral calls and the need to raise capital to meet them.The question to be asked of the S&P rep was why he made his errors, in the light of the findings of OTS.
Then we have the apparent failures of the AIG leadership in September,2008. Why didn't they resist the collateral calls. According to OTS, there was no need for response. Why not force the demands into arbitration,where the S&P model would have been fully tested ( and probably found wanting)? Why didn't the AIG leadership purchase all the underlying securities initially from the counter parties? Why didn't the Fed try to help them out in this regard? There would have been no capital losses,an income stream, and the CDS payments. Presumably the underlying securities could have been the collateral for a loan secured from the Home Loan Bank Board through the AIG thrift.
There is much to be still revealed about the AIG collapse and the decisions to reward a very limited set of 'counter parties' who had suffered no observable losses to that point ( other than as measured by ratings agencies that were already known to be incompetent in their ratings management and systems). Goldman will not be able to hide forever behind the notion that everything was covered by their responsibilities to their shareholders and the sanctity of their commercial contracts.
People may not like the notion that AIG FP traders made so much money last year, even though the aggregate payroll for the 400 plus folks at AIG FP appears to have been below that of the Yankees. They may also not like the way in which Manny Ramirez acted last July and August and still got paid at the rate of $ 20 million per year.They may not even like the fact that there are master mechanics in New York City, required by contract to be present at all union high value construction and never required to operate a piece of equipment, that earn in excess of $ 250,000 per year. But these are all the results of free bargaining by people with skills that others haven't been able to showcase.
This is an assertion with no corroboration, and not on point at that, since the contention is over an insider. In point of fact we know that competent outsiders with no detailed knowledge of the inner workings of a firm can come in and successfully unwind its untenable positions. We also know that in many cases the banks making this claim were doing so out of self-interest, to hide even more malfeasance than had already been revealed. As those competent outsiders subsequently discovered.
You don't suppose that there's just a tiny chance of that, in this particular division of AIG?
And why does anyone suppose the burden of proof for these claims flow both ways? The people making these claims of the necessity of the specialness of these people are the ones who should be doing all the work. Not the skeptics who are saying "Show me the money."
(Shrug) Why so up in my face? The prior post asked why this sort of retention bonus/deferred compensation scheme is used. Having helped implement in the past such schemes in similar situations at companies in AIG's industry, I explained why AIG might have used them in this situation.
You then say "In point of fact we know that competent outsiders with no detailed knowledge of the inner workings of a firm can come in and successfully unwind its untenable positions." Etc. Etc.
*We* ... *know*... *this*? No, we don't know any such thing. You just claim that.
I certainly have no idea whether AIG's portfolio, operations and regulatory compliance strictures allowed that sort of move. I am guessing you haven't the slightest idea either, since inside knowledge like that would keep prudent people from posting about the matter in public forums.
Finally, while personal experience is only anecdotal evidence, it is still evidence. And so I present my experience and resulting opinion as evidence that, yes, it is often the case that, for distressed operations, bringing in "new blood" right away may not be the best move. If my viewis not convincing on its own--and I understand it likely is not--consider modern bankruptcy court proceedings, where a common feature of failed enterprises is that the current management continues operating the business, despite having demonstrably failed to operate profitably. In your view, are those innumerable instances where federal judges, sophisticated bridge lenders, loss-suffering secured creditors, etc. did not grasp that competent outsiders with no detailed knowledge can come in and do the work? Or are those many anecdotes suggesting something to us: despite having failed to turn a profit, the very people who failed are often the best to continue operating a business, at least in the near term.
Sigh. I get tired of saying 'assumes facts not in evidence'. In fact, people are quite reasonably ticked off that these people who claimed super-skillz with no apparent justification - quite the contrary, in fact - are being munificently rewarded. This is in fact a position contrary to capitalism and the free market. Nobody is in a mood to hear about how 'naive' their conception of capitalism is, and how these apparently contradictory rewards are perfectly in accord with the principles of a demand economy . . . only they just don't have the super-skillz to realize it.
You're not making any sense. I'm not saying that the issue is one of what one 'should' do; it's an issue of consistency. Nor am I saying that those health benefits are being paid for the work already done, that's off-point too.
What I am observing - quite clearly I had thought - was that saying renegotiating contracts was 'different' for AIG because one side had already fulfilled their contractual obligations, unlike with the UAW, is simply false to facts. The retirees have already fulfilled their contractual obligations - they've already put in their years of work and retired.
I don't see what is so difficult to acknowledge about this fact.
You are perfectly free to argue that it's 'different' for AIG in another way, of course. Just not in that way.
(Shrug) Why would you think that? I took the prior post as asking why it was justified. And, um, no, we do know this, as it has happened with other institutions. Please try to avoid misreading me so badly in the future. I am making no claims for this particular institution, AIG, and have said so in another post. Just that the notion that only insiders can do the job is rendered untenable by the fact that there have clearly been instances where this is not the case. Further, in some of those cases, it took outsiders to discover malfeasance over and above what had already been admitted too. Surely you don't disagree that institutions like AIG may well have an interest in making sure that no one from the outside gets a good close look at what's been going on?
That's leaving off principled objection and verging on blatant propagandizing.
Libby was hired specifically to figure out how to salvage AIG. He is supposedly qualified to do so (I'm not sure exactly who hired him, but someone hopefully chose him for good reason). He looked at the people working at AIG and the investments and he decided to offer the retention bonuses to those people. He probably knows a lost more about the situation than anyone on this board.
When "we" decided to bail out AIG instead of letting it go bankrupt, Congress specifically put in language that the bonuses would be paid (and apparently deliberately did so as that language was changed).
So we have Libby's decision in the first place and then Congress (and Obama's advisors) backing him up.
Only after a fairly uninformed public threw a fit did Congress decide to pretend like it had no idea and was equally outraged (well, until it had to admit that it did know) and Obama's advisors also pretended like they didn't know and were also outraged (oh, wait, they knew, too).
Meanwhile, these guys did the work they were contracted to do only to find that they're too rich and Congress is throwing them under the bus.
This is what we get when the Federal Government chooses not to use bankruptcy and instead decides to invent a new "bailout" process on the fly.
I USED to own a mortgage banking company until this past September 2008 when the market got the better of it. The stress and hours of the industry caused me to have a heart attack followed by an addiction to anti-anxiety medication in an attempt to save all I had built over the past 9 years. The collapse forced me to file chapter 7 bankruptcy and loose just about everything I have. I never did sub-prime, pick-a-pays, no-docs, or liar loans as they have become to be known. We did FHA and conforming business but never the less were bundled in the masses as a mortgage company and were destined to fail. Isn't that exactly what has happened to the employees of AIG. While I am not in agreement with government bailout money going to pay these outlandish bonuses, it is not fair to chastise all for the wrong doings of a few. I feel that the statement that most of those involved in the "problem" children are long gone is probably accurate, and if it is not then Mr. Libby should be held accountable for retaining anyone who was responsible for this debacle. I have tried posting, writing and speaking out about the industry to get anyone to listen as I could tell story after story and show documented proof as to where a lot of problems where, but no one has been willing to listen. I give credit to this gentleman for speaking his mind and having the guts to publish his feeling, I wish I could have afforded to do the same about the mortgage company and what a select few did to me to put me out of business (GMAC/RFC mostly). So to you sir I say touche. To anyone else who wants to know more about the true going on behind the scenes, I invite you to email me directly at lyle5170@yahoo.com and I will be happy to answer any questions asked openly and honestly, and that goes for the politicians as well.