This week has featured a lot of discussion on AIG. There is widespread outrage over the payments of bonuses to employees. There is finger-pointing and flip-flopping regarding who knew what and when in regards to the bonuses. We have the House and the Senate proposing and passing legislation to address the bonus issue. AIG CEO Edward Liddy testified before the House Financial Services subcommittee on Capital Markets. Obama and team have been making statements which appear, at times, to be inconsistent... I'm pretty much spent on the issue, but will offer my thoughts.
I have not been able to find a clean, clear and accurate report of what these bonuses are all about. Certainly, some portion of these were so-called retention bonuses. I've read differing reports and opinions on the exact nature of these payments. In one version, these were payments which were paid to AIG employees to stay on staff for a period of time while the company begins down its path of controlled destruction. This makes sense to me - especially for certain employees. Some useful contributors may choose to cut their losses, quit or pursue early retirement. It may be worthwhile to entice them to help clean up the mess with a bonus payment.
The other version I have heard of this is that these were negotiated well before the federal bailouts. Many of the employees in the the financial division of AIG which caused so much of the problem were paid largely in bonus compensation in the "good years" when CDS seemed like great products. When the economy began to turn sour and these financial instruments began to lose money, AIG took the position that these were extraordinary circumstances and not the fault of the individual employee. So, they wrote a contract to protect the bonuses at a certain level despite actual performance.
Both of these are plausible explanations because I've witnessed both of them first hand in my own work life. Many people will argue (quite vociferously) that these employees do not deserve any sort of bonus. Why should we pay the people who destroyed the economy - or at least destroyed AIG - to stick around? Fair point. However, let's remember that not all employees are created equal. Also, despite engaging in a practice which has led to the destruction of the company, these may well be some of the only qualified individuals to help destroy the cancer itself. Further, it is also very likely that senior management and even the executive leadership and Board of AIG did not see this as the fault of the employees who we now say created the mess. This is precisely the same argument that many people are using to say that we should not punish the delinquent homeowners.
Regardless, the people are angry. And their anger is all over the place. Personally, I think most of the anger is misplaced, but this is due to the myriad of opinions, stories and rhetoric out there trying explain this mess. At the end of the day, my anger traces back to the government interfering in this mess in the first place. A disorderly collapse of AIG may well have caused a very ugly situation back in September. But, now we are treated the politicization of every action of this company as it tries to destroy itself. Ed Liddy's opening remarks and various appendices can be found here and provide interesting reading material.
While most of America was concerned with AIG bonuses, the real AIG story this week was the release of details of how AIG has used the money it has received from the government thus far. The details can be found in Liddy's testimony linked above. In summary, a whole lot of banks have received money as payments from AIG on various contracts and financial derivatives. This includes tens of billions of dollars to many foreign banks. It also names the largest recipient as Goldman Sachs ($12.9B), who has already receives billions in TARP money - and not so coincidentally is the former employer of Henry Paulson, Robert Rubin, John Corzine, Jim Cramer, Erin Burnett, Josh Bolten, George H.W. Bush IV, Neel Kashkari, Robert Zoellick, and many others in the government and in media. I have a hypothesis that "too big to fail" means "would cause Goldman Sachs to lose money."
The story doesn't quite end here. Now Congress has to act. So, the House quickly drafted and passed H.R. 1586. Note that the bill was introduced on March 18 and passed on March 19. No matter what you might think of the Constitutional or ethical merit of this bill, it is ludicrous to introduce and pass legislation so quickly without time for sufficient debate and review. At least this bill is short enough that it is plausible that most members actually read the full text.
That's all for now... I'll leave you with a link to a statement in favor of the legislation by libertarian-friendly Rep. Tom McClintock (R-CA).
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