The company is scheduled to pay another $198 million in retention payments to some 240 remaining FP employees in March 2010. Right now, according to AIG executives and Treasury sources close to the talks, the issue is that Feinberg wants FP's traders to return the rest of the retention money that was pledged to be returned in March of this year under pressure from Cuomo. FP executives say the contracts are outside Feinberg's jurisdiction. Feinberg counters that he could use the contracts as a factor when determining a trader's base salary for next year as indicated in the statute set by Congress. In theory, if an FP employee is due to receive $1 million on March 15, 2010, Feinberg has the authority to compensate by cutting their salary to $1. Of course then, the employee could simply quit.
Senior AIG executives contend that an exodus of traders over punitively reduced contracts risks blowing up the $1.1 trillion derivatives portfolio still left to be unwound, destroying the taxpayers' $180 billion investment in the company and potentially dragging the fragile economic recovery back into the abyss. "I'm trying desperately to prevent an uncontrolled collapse of that business," then-CEO Ed Liddy testified last March. "The financial downside for taxpayers is potentially very large and it's very real." The AIG executives see Feinberg's efforts to save a few million in retention payments, given the billions at stake, as a terrible business decision. "I just don't understand why you would treat people this way," one AIG executive says. "It's economic and financial terrorism on the government's own investment, by the government."
Feinberg, along with everyone in the Obama White House, recognizes the risks. "I'm concerned about that. I don't want to see that happen," Feinberg said as we pulled up to Lincoln Center. But privately, Feinberg has indicated to Treasury officials that he's not sure the FP employees are as crucial as they say. When the crisis erupted last fall, AIG hired McKinsey and Blackstone to study the portfolio and devise a strategy to wind down the trades. If a mass of FP traders leave, advisers might be able to stabilize the positions in time to bring in new traders. "You could triage it," a former senior FP trader told me. Essentially, as long as someone managed risks to interest-rate and foreign- exchange moves, traders could be hired to continue the unwind.
The question that neither I, nor (as far as I can tell) the regulators, have a good handle on, is how good a trader you need to unwind these positions. If it can be done by any kid out of business school, then Ken Feinberg is right, and the government should pressure them to give the money back. If it needs some expertise, then we're kind of in trouble, because no one with any qualifications beyond a pulse would want these jobs. Going to work for AIG means, apparently, that you cannot write a valid employment contract, since the government feels free to rip it up any time their polls dip. I wouldn't take this job, and I make considerably less than $500,000 a year, plus I'm manifestly unqualified.
Any attempt to decipher the truth of the case is further complicated by the fact that, at this point, the government is not trying to maximize the amount of money we recover from AIG; it's trying to minimize the political fallout from the various banker scandals. It might be less politically costly to spend billions on an AIG collapse than to allow the fine folks in Financial Products to take home $100 million.
Having once worked for a company that almost went bankrupt when it fired the entire sales staff after the founders determined they were making too much money - it never ceases to amaze me how irrational people can get when they get jealous.
Irrational? No, they're just champions in the fight against the dreaded Income Inequality.
This is probably a stupid question, but why can't he pay them in options tied to the stock price 1, 3 and 5 years out. If he also allows the options to be tradeable from day 1, then the traders can monetize them on a secondary market. This matches the risk and reward in a way that was missing before (i.e. taxpayers shouldered the risk).
Because the traders know full well that even with their best effort and expertise this sucker might still go down the tubes. They're willing to take a stab at it, but only if it's done with mostly other people's money. And if you're going to give them options valued at an equivalent amount then there's no difference from paying them cash.
I'm with Megan, I suspect that these probably aren't the only humans on the planet capable of getting the job done but it's an awfully big roll of the dice to find out.
OK, why not some blend? $200K now, with the option to earn $5 mil later, versus their current expected $1 mil (i.e. adding a factor of 5x up or down from their usual compensation). Also, if they don't want to tie it to general company stock, tie it to an explicit metric linked to the FP division's performance like it currently is, except make it longer term than merely 1 year.
Any compensation package you offer them has to be more attractive then the alternative, i.e. quitting and going to a credit focused hedge fund. If you are a bad trader, the scheme might be attractive.
If you are a top performer and can convince someone you are worth more you jump ship.
As to tying the performance to specific FP performance, that works. However, I would be hugely hesitant in that assumes the firm is solvent years down the road. What if the losses accelerate and AIG declares bankruptcy, then the promised payouts would convert to unsecured credit and I would likely receive only pennies on my promised $5 million.
Also, what if the economy remains weak when I am supposed to receive my $5 million. How can I be sure the government won't pull this again? After all, a lot of these guys stuck around when the could have jumped ship last year just because of these retention bonuses. If I was a trader at AIG, the government's word would have very little credibility at this point.
Much better to receive the cash today.
As I understand it that's what they're trying to do but the traders are balking at the proposed blend being too much equity and too little cash. At some point I'm sure they would take the equity if the potential upside is high enough, but by that time you're getting into ridiculous sums of money and paying more than you're getting. If the trader adds say $2.0 mil of value it makes since to pay him $1.2 mil in cash while paying him $5 mil in equity makes no sense.
Not sure this applies, but aren't there nasty tax implications of being paid with equities?
Derek
It might be less politically costly to spend billions on an AIG collapse than to allow the fine folks in Financial Products to take home $100 million.
Which does wonders for returning the moral hazard to the job. Screw up and you get bupkis.
While all sorts of traders can unwind the portfolio, the question is, can these "veteran" traders do so on terms that are incrementally favorable enough to cover the $200mm of bonuses?
I'm with Megan, I suspect that these probably aren't the only humans on the planet capable of getting the job done but it's an awfully big roll of the dice to find out.
People don't think this ever happens but I'm sure Goldman, AIG, Deutche Bank, Nomura, etc. looks at every $1.5 million a year trader and tries to figure if they can't just replace him with a fershly minted 150k a year MBA grad. The current compensation is just at the cusp of it making more sense to hire a newbie - but only just. The $1.5 million is the least they figure they can pay given the risk reward tradeoffs.
I don't know, if I'm a guy like Fuld and I'm getting my $100 mil a year payout I would be pretty leery of rocking the boat for an extra $1 mil next year. Sure the shareholders are getting screwed but as long as I'm getting enough of mine in cash I don't really care. I'll take a token amount of equity to show that I have "skin in the game" but as long as I'm making enough in a year to buy a MLB team I'm probably inclined to think everything is fine as is.
Not that I think you could just replace everybody in the place with a freshly minted MBA, but there's probably some middle ground. Certainly there are a fair number of very smart, very experienced folks working there but every last one of them can't be irreplaceable. I mean they're paying retention bonuses out to the cooking staff so they can't be trying too hard. Am I to believe that the traders can't perform w/o Jim Bob's french toast? Problem is I'm not sure the pay czar can just show up with the two Bobs and sort it out. Nor do I think it's advisable with that much money on the line to try.
When the first AIG pay controversy hit back in the spring it was the defining moment for Obama.
What we need is a speech.
Either stand up for the policy decision, or get out.
Derek
I think a bigger issue than the particular trader's skill, is the intimate knowledge they have of the portfolio. Let's say we believe that these guys are not particularly good, they don't add $200 million in value and we as shareholders let them go.
The first thing I would imagine they would do is go to work at their nearest hedge fund, and begin massively shorting all of the positions AIG (and us as taxpayers) currently hold. Knowing that their is going to be a large liquidation and a huge reduction in prices. The shorting would have the affect of reducing the prices that we as taxpayers get for our derivative assets.
If this impacted value by 1%, then the portfolio decline would be over $11 billion in value. Significantly more than bonus payout.
Their may be non-competes involved, however, if you willingly are breaking their employment contracts by not paying them legally obligated payments. I cannot believe that any court would allow those to hold.
Also as an aside, non-competes (even in the financial space), typically have some kind of geographic exclusion. I.E. you couldn't work for a competitor in Connecticut. It wouldn't stop them from going to work at a competitor based say in Bermuda.
So I imagine it would be hugely short-sighted to let these guys go. Almost as short-sited as selling Phibro for tangible book, when it is one of the few profit centers for Citi.
Hopefully, this sad state of affairs will actually dissuade future Tres. Secretaries from bailing out firms like AIG; the position a true libertarian should take is that the government should have let AIG go right into Chapter 11.
Of course, the "too big to fail" companies could also be regulated so that any bonuses are tied to longer term performance if there is any expectation that the State will have to bail them out. That would also have the benefit of minimizing traders jumping ship to Goldman. Of course, the traders would just move to London.
Did the jobless recovery yield to a jobs boom while I wasn't looking? If these guys up and quit in a fit of pique they can presumably be denied both severance and unemployment, and with a turkey like AIG on their resumes (and the fact that they aren't reliable) how employable will they be? Anyone who has a job now is nuts to quit it and trust that s/he will find a new job pronto.
I say kick these money hogs out immediately. Let'em take their chances in the unemployment line. Kudos to Feinberg for growing a pair and standing up to the shakedown.
Could even a set of recent grads do any worse than the geniuses who got us into this mess? In a just world the present AIG crew would be in the poor house or the jail house, much less demanding bonuses for taking government money.
Heh, I love this: first, we bail the companies out, then we run them the rest of the way into the ground at taxpayer expense.
The question that neither I, nor (as far as I can tell) the regulators, have a good handle on, is how good a trader you need to unwind these positions.
Trading is viciously competitive. Claiming the newbs should do this job is a bit like saying "Dad had an accident last week, so let's have the dog drive today." But this kind of tension is what happens when you have gov't bailouts, which is why so many of us are skeptical of them.
Any attempt to decipher the truth of the case is further complicated by the fact that, at this point, the government is not trying to maximize the amount of money we recover from AIG; it's trying to minimize the political fallout from the various banker scandals.
Don't worry, I'm sure the government will do a much better job deciding whether you really need that surgery.
Trouble is, I don't trust derivatives traders to really unwind the positions. Once, long ago in the early days of derivatives, I did. The position being 'unwound' ended worse than when it started; so triggering one of the first derivatives disasters. The problem is that the rest of the market has a good ides of what the unwinders are trying to do, and trade on that knowledge. That can leave the unwinders pretty helpless.
In the AIG case, there is no deadline. So the guys who say they are experts can go on spinning out the 'unwinding' process ad infinitum, endlessly repeating their claim that they are essential to the process. That is dangerous, risky and will prove more expensive than you think.
If whoever is reponsible for the FP dealing has her or his bonus made conditional on measured success in reducing net liabilities; bonuses are fine. Bonuses for turning up and churning the paper would be disgraceful for the future. But if these guys signed to stay on for that sort of bonus, we are stuck with paying today.
Any idea that the traders should be paid because if not paid they will sabotage AIG is saying that we should yield to blackmail. Sometimes you have to yield to blackmailers for a while; but this is not one of the occasions. Any shorting these guys attempted could be beaten by the Government, and that is known to the people who might employ the former AIG traders. A massive failed bear squeeze against the US Government would wreck any financial firm in the world (and turn into a useful financial windfall for the US), so the squeeze will not be tried.