AIG Is Obligated To Pay Bonuses? Bull!
By Laura Wilson
The plaint that credit default swap-promulgating AIG (AIG) is contractually obligated to pay out millions in bonuses to the same pitted brass that led the company, the industry, and the entire economy off a cliff is a bunch of horse hooey.
If you are on the management team of a company that lays off workers, can’t pay its bills, leaves shareholders holding nothing, and has to take public bailouts, it’s your damn job to make a deal to restructure that company, or wind it down responsibly.
Your bonus is getting to keep porking up to the paycheck trough while other workers are losing salary, severance, and health care.
New York Times: The payments to A.I.G.’s financial products unit are in addition to $121 million in previously scheduled bonuses for the company’s senior executives and 6,400 employees across the sprawling corporation. Mr. Geithner last week pressured A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.
The payment of so much money at a company at the heart of the financial collapse that sent the broader economy into a tailspin almost certainly will fuel a popular backlash against the government’s efforts to prop up Wall Street. Past bonuses already have prompted President Obama and Congress to impose tough rules on corporate executive compensation at firms bailed out with taxpayer money.
A.I.G., nearly 80 percent of which is now owned by the government, defended its bonuses, arguing that they were promised last year before the crisis and cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.
I sure would like to see those AIG contracts - I’ll bet I can poke a hole in the specious supposition that the company really, really wants to do the right thing, but its little hands are tied. Since the public bailout of AIG, we all have an ownership interest in where the money is going, and are entitled to ask probing questions.
New York Times: “We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner on Saturday.
Still, Mr. Liddy seemed stung by his talk with Mr. Geithner, calling their conversation last Wednesday “a difficult one for me,” and noting that he receives no bonus himself.
“Needless to say, in the current circumstances,” Mr. Liddy wrote, “I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”
I know contracts inside and out, at the real-world, down and dirty level, not the black-box, ivory tower, theoretical stratum that gets adjusted as the tectonic plates of business deals crash into each other.
Although I have chosen not to practice law anymore, I am really good at understanding the terms of these agreements, and evaluating when it would appropriate to reward corporate players for their performance.
And, when it is not.
New York Times: Of all the financial institutions that have been propped up by taxpayer dollars, none has received more money than AIG, and none has infuriated lawmakers (and Ben Bernanke per 60 Minutes) more, with practices that policy makers have called “reckless”
The bonuses will be paid to executives at A.I.G.’s financial products division, the unit that wrote trillions of dollars’ worth of credit-default swaps that protected investors from defaults on bonds which were backed in many cases by subprime mortgages.
The bonus plan covers 400 employees, and the bonuses range from as little as $1,000 to as much as $6.5 million. Seven executives at the financial products unit were entitled to receive more than $3 million in bonuses.
Any attorney who advises that these bonuses are appropriate ought to have his or her head checked.
Base salary, maybe, if not outrageous. No bonus. No severance unless everybody else also received proportionate assistance. Don’t care what the contract says - attack it in bankruptcy or wind down - I saw it many times in the Silicon Valley meltdown.
But the official also said the administration will force A.I.G. to eventually repay the cost of the bonuses to the taxpayers as part of the agreement with the firm, which is being restructured.
AIG’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall. AIG had set up a special bonus pool for the financial products unit early in 2008, before the company’s near collapse, and when problems stemming from the mortgage crisis were just becoming clear.
There were concerns that some of the best-informed derivatives specialists might leave.the company. AIG then locked in $450 million for the financial products unit, and prepared to pay it in a series of installments to encourage people to stay.
This poignant issue is near and dear to me, as I have shut down management bonuses before, even when I would have received some of that money, and even when I really needed it.
I also have been lucky enough to work with one of the premier corporate governance experts in the country and with a bankruptcy and wind down expert whom I hope will end up on the federal bench.
In the past, I have known both of these gentlemen to express support for my assertion that it is appalling for a destitute company to pay out management and deal bonuses to the team that took the company under.
New York Times: A.I.G.’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall.
Under a deal reached last week, A.I.G. agreed that the top 50 executives would get half of the $9.6 million they were supposed to get by March 15. The second half of their bonuses would be paid out in two installments in July and in September. To get those payments, Treasury officials said, A.I.G. would have to show that it had made progress toward its goal of selling off business units and repaying the government.
Nice. You just keep holding that moral compass you got there, guys.
Laura is a business consultant and an advocate for information security, consumer protection, long-term shareholder value, and better management decisions. Her specialty is finding and fixing risks and threats to sensitive data. Her experience includes international banking, credit card, and mortgage companies, venture capital portfolio companies, and software and technology providers. She practiced law in Silicon Valley during the tech boom and meltdown, handling corporate governance and information protection.
The Author gives permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author and to Information-Security-Resources.com
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Filed under: Class Action Lawsuit, D&O Liability, FEATURE ARTICLE, Financial, Government, Sarbanes-Oxley, Uncategorized
Comments
15 Comments on AIG Is Obligated To Pay Bonuses? Bull!
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Given that AIG is a publicly traded company, that should make the employees AT Will Employment. This is not a union shop that has ‘contracts’. Don’t believe this comment about contracts in place that can’t be changed. It is up to the descretion of the Management and BOD to change the compensation strategy especially when the company is not doing well. I worked in some very large companies such as Digital Equipment and Quantum. Bonus plans change. I don’t believe that AIG can’t change their bonus plans. What do they think we are clueless??
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We “need” the experienced traders at AIG! The value of AIG financial products are easy to price. They are worthless. Written by a company that would be gone if not for the taxpayer. Let these traders go and stop making payments to AIG. The taxpayer still hasn’t been told exactly what thier money was spent on.
Preach on! I have heard of pay for performance but this is ridiculous. And these guys should never be crying for a bonus the way the handled the business unit. They should just be happy there isn’t a pay structure set up where the employee has to pay for the losses he created for a company.
These execs should all be ashamed of themselves for their management of public funding.
It’s obvious where this is going. Either we have civil unrest, or these people will bankrupt the country. There’s no other way. The entire dialog has shifted from whether we should give $170 billion to a single private company to keep billionaire investors from losing money because “the whole world will unravel” otherwise, to whether we should give multimillion dollar bonuses using taxpayer money to the specific managers who in a just nation would be charged with criminal fraud.
This will not end until there is civil unrest. This will not end until the public engages in some level of behavior that frightens our government into submission. The longer it takes for that to happen, the more damaged our country will be. Everyone has to have a sense of how terribly damaged the country will be based only on the money that has been handed out so far. We’ll be a nation where everyone labors under heavy taxes that go to pay interest on the debt that was borrowed to pay off billionaires’ losses. We’ll be a nation of poor who struggle to pay foreign creditors and in exchange for high taxes receive no health care, no schooling, no university, no infrastructure, nothing. We will be a third world country.
What the international bankers used America to do to so many countries over the past sixty years they are now doing to America herself. There are no patriots left here, only cowering, obese “consumers” who don’t even need to be bribed with riches. Here most Americans will abdicate their patriotism for a refi. They will trade their liberty for an 84 month car loan.
Perhaps we’ve come far enough where Americans don’t even know what freedom is any longer, so they don’t see what we’ve lost. I once had some idiot tell me that freedom was the ability to “better yourself” in the sense of earning more money and acquiring nice things like a nice house and car, etc.
Freedom is the ability to do what you want when you want. It is something that we in the land of the free have little understanding of any longer. For us freedom means the freedom to submit to vague excuses for wars that take our young, kill people who actually do understand freedom and who are willing to fight using rifles against tanks and jet fighters for their own freedom from our domination. We understand the freedom to submit to one sided contracts and elections between one president who will leave our troops in Iraq and another who will also leave our troops in Iraq even though 80% of Americans want our troops out of Iraq right now.
We understand the freedom that the recently emancipated slaves understood, “I have the great good fortune that I can now choose any master instead of just one, but woe, I still must choose a master.” And so we learn to choose our masters and do what they say and from this lifetime of training to experience power as the ability to choose a master, a different boss periodically if the boss agrees to it, it’s no wonder that we’re no longer competent to operate a representative government. It’s not a representative government. It’s neither a democracy nor a republic. It’s a company with bosses. We get to elect the boss, but the boss is a boss, not a representative. And we have no right to even peek behind the scenes into the secret meetings about who gets the money.
There will be hell to pay when the money is gone, but then it will be too late to do anything other than flee this place.
It seems to me if these bonuses need to stand for any reason, the equitable thing would be to pay these genuises in credit default swaps, the very ones they created, which are toxic and worthless now. However, pay it out to them as if they are worth $ for $. In other words, let them eat their own poison.
However, I can’t imagine any judge would let these bonuses go through. I’d rather see AIG go bankrupt then pay these bonuses. Since the company is effectively bankrupt, how can we be held to any of their contracts? These people should be on their knees begging for forgiveness.
Most of these posts miss a critical point. Semantics. I haven’t seen the pay structure like everyone else here. But I have worked on a ‘bonus’ structure before where what most consider ‘bonuses’ are NOT what are being paid. Suffer me an example: I go to work for an automobile dealer selling Yugos. I am hired as sales manager. I am paid based on units sold that financing is completed on. BUT, I only make minimum wage all year long and am paid the ACTUAL commission on the sales at the end of the year after all the vehicles are delivered and the financing has been confirmed.
If I work all year long for my minimum wage base and just before its time to settle up my ‘bonus’ of the ACTUAL amount I have earned and a group of frustrated customers and consumer advocates rush the dealership disgusted at the quality of the Yugos, my management might decide to change vehicle lines. My management might decide to go to some source outside the dealership for financing to move forward with operations, but NONE of that frees the dealership from the CONTRACTUAL OBLIGATION to pay me for fulfilling the duties for which I was hired.
Misunderstanding the term ‘BONUS” is no excuse for railing about topics that one doesn’t comprehend.
Here is a quote from the Wikepedia about the ancient Japanese samurai
“Most samurai were bound by a code of honor and were expected to set an example for those below them. A notable part of their code is seppuku (切腹 ,seppuku?), which allowed a disgraced samurai to regain his honor by passing into death, where samurai were still beholden to social rules.”
Please pay special attention to the sentence “were expected to set an example for those below them” and the sentence “which allowed a disgraced samurai to regain his honor by passing into death”.
For detailed about “seppuku”, google it and see if you dare to finish reading it.
Ah, that explains a lot: Why a country that does not have oil, coal, iron, timber, copper, diamond… none, nib, absolute no nothing, having been the only country that was nuked twice, can get rebirth and prosperous from the nuked ashes nonetheless in only 30 years.
For Japan to sell a car in the northern America market, she need to buy the iron ingot, oil and all the related material from other countries that are located thousands miles away, makes the car, and then packages this bulky product and shipping thousands miles via the ship to the USA. With these disadvantages, it almost like that the Japanese car maker having blinded his eyes and tied one arm behind when she is trying to compete with the America domestic car maker. Still, the Make-In-Japan beats the shits out of the big three of the USA.
Will a CEO in the USA ever feel “disgraced” like a samurai does when something he is in charge of has been totally messed up? Has the CEO ever considered to “to set an example for those below them” while he is dispatching thousands pink-slip to those below him?
Never!
That explains everything for those miserable countries on this planet, be it in America or Africa.
Senator Charles Grassley, the top Republican on the Senate Finance Committee, said on Monday that AIG executives should perhaps “resign or go commit suicide,” adopting what he called a Japanese approach to taking responsibility for their actions.
http://www.reuters.com/article/newsOne/idUSTRE52G3BQ20090317
To ask the american CEO of a functionally bankruptcy company to seppuku (切腹) like the Janpanese samurai will do?
Heck, no way!
The american CEO goes to church to pray and redeem every Sunday. His god will always forgive him for whatever evil deed he has commited.
From Monday morning to Friday evening, he is devil. Sunday morning, he pray for redemption in the church, sing and hymn the praises to god.
Sunday afternoon he play golf.
Monday morning he has recharged his stamina and guts well enough to commit evil behavior for the coming week.
He always keeps himself under the mentally-healthy status.
No suicide, thank you very much.
A BONUS is defined as, “something given or paid in addition to what is usual or expected”. Logic would indicate a business would only grant bonuses as a reward for increased productivity or performance. I’ve NEVER heard of giving bonuses to employees who LOSE money for the company or drive it into the ground EXCEPT in Third World Banana Republics.
A solid look at the USA clearly indicates it is currently competeing with countries such as Argentina for the title of most CORRUPT, INEFFICIENT and MIS-MANAGED. And frankly Argentina is much better off because at least it is not currently viewed as an international War Criminal nation nor international Securities Fraudsters, which is the international reputation the U.S. now ‘enjoys’.
Your beloved GW Bush worked solidly for EIGHT FULL YEARS to drive your nation into the GROUND and anyone who believes that the damage he wrought can be turned around in a few months is as STUPID as the millions of deadbeat Americans who are “millionaires” on paper but who in actuality haven’t a miserable DIME to drop dead on.
I hope the world forecloses your country.
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Ben,
You sound nothing more than a raving idiot spewing talking points you’ve heard but cannot fully understand. Why don’t you try engaging in conversations about substantive ideas instead of the old and tired America- and Bush-bashing idiocy? Any decent and thoughtful person with half a brain will tell you that the seeds of the current problems were sowed over the last several decades, one on top of the others. Some happened during the Bush years; some happened way before he was in office. Drop your partisan tone and adopt some principles and core beliefs, then come back for some adult conversations.
[...] Is Obligated To Pay Bonuses? Bull! - Laura Wilson, Information-Security-Resources.com Corporate Liability [...]
I know, AIG is not exactly a laughing matter, but sometimes humor is the most
effective way to deal with a problem of such magnitude, that it defies human
understanding. I have written a spoof that requires some input from knowledgeable
people. I don’t know, if Hank Greenberg is the culprit, but you can change the characters.
This document is on Google and can be viewed, if you provide an e-mail address.
Please feel free to send me your own version plus suggestions what to do with it.
The problem is that AIG didn’t enter bankruptcy; so their is no valid legal reason to cancel the contracts. The whole mess stems from this. Bankruptcy would have nixed the bonus. Since their is no legal reason; as much as I hate paying more; the Contracts need to STAND — they are legal documents. Breaking contracts because it is inconvenient is the worst thing we can do. You set a very dangerous precedent trying to cancel these contracts. Each can of “worms” we open will cause more problems. And the harder they are trying to dig out of the mess they are creating, is creating more of a mess. I’m not saying AIG is innocent; they have made mistakes also; but trying to change laws to “fix” something that doesn’t need to be fixed is going to cause more problems!!! When does government let go of any power we give them?
Tell me what you're thinking...
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