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What Happened? The AIG Bonus Kerfuffle

By Brian | March 17, 2009 | Share on Facebook

[The third in a series of "What Happened" posts that endeavor to explain the causes and impacts of the Current Financial Crisis(TM) - the first two parts are available here and here.]

Today’s discussion is inspired by AIG’s payment of retention bonuses last Sunday, March 12, 2009, and the stinging reaction it engendered from Barack Obama, Barney Frank, Ben Bernanke and others. As before, those who are bored by such things should move along quickly and quietly.

First, the standard disclaimer:

This comes from me and from me alone. While I’ll do my best to remain factually accurate and politically dispassionate, no one should take this as a statement made by or on behalf of my employer. I haven’t vetted it with anyone at work, and I can’t say with any certainty that some of my colleagues wouldn’t disagree with all or part of it.

What I’ve learned about reading the New York Times, particularly with a political story, is that the actual events the occurred to generate the news story can be quickly and easily found at the end of the article – relegated to the bottom by the commentary of politicians who need to express their outrage, surprise, or exultation in the newspaper, as well as references to past news stories that connect the dots for those readers who aren’t really paying attention, but just need to know that this thing is very much like that other thing they sort of read about weeks ago (a process I’ve called “news cataloging” many times on this blog).

Their story on the AIG bonuses was no exception. 1,150 words, and we don’t find out what actually happened until the last 200:

A.I.G. had set up a special bonus pool for the financial products unit early in 2008, before the company’s near collapse, when problems stemming from the mortgage crisis were becoming clear and there were concerns that some of the best-informed derivatives specialists might leave. It locked in a total amount, $450 million, for the financial products unit and prepared to pay it in a series of installments, to encourage people to stay.

Only part of the payments had been made by last fall, when A.I.G. nearly collapsed. In documents provided to the Treasury, A.I.G. said it was required to pay about $165 million in bonuses on or before Sunday. That is in addition to $55 million in December.

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.

The financial products unit is now being painstakingly wound down.

Retention bonuses are not new, nor are they sinister. Keep in mind that in early 2008, AIG wasn’t in the mortal danger it’s in now, nor had it received billions of taxpayer dollars to remain solvent. Back then, it was “merely” dealing with the collapse of the housing market. It knew that layoffs, pay cuts, and uncertainty were in its future, and it wanted to make sure that the key people in the company didn’t abandon ship for higher ground in the midst of all the trouble. Also note that when things got really bad, they delayed payment as long as they could, and even re-negotiated the deal for the largest payouts into a performance-based structure (which, technically, is the opposite of a retention plan). And also note that these payments weren’t just designed to line the pockets of the super-rich: four hundred employees were involved; only seven of them received more than $3 million, and the rest were much, much smaller – all the way down to bonuses as small as $1,000. And the top 25 executives agreed to forego their base pay for 2009, receiving only $1 as salary and taking their chances on the 2009 bonus making up the difference.

UPDATE: New information is being reported today, suggestin that more than just three employees received very high (i.e., greater than $1 million) bonuses. I’ve commented on this and a few other things regarding this post here. I still stand behind everything I’ve said here, but suggest you read the follow-up post as well to get the full story.

Everything about this scenario reads to me like a management team that was thinking about the long-term implications of a severe, short-term downturn. They were positioning the company to remain strong through the bad times, and emerge competitive when the market came back.

So how did our leaders respond?

Rep. Barney Frank: “These bonuses are going to people who screwed this thing up enormously. Maybe it’s time to fire some people. We can’t keep them from getting bonuses but we can keep them from having their jobs. In high school, they wouldn’t have gotten retention (bonuses), they would have gotten detention.”

Sen. Richard Shelby: “These people brought this on themselves. Now you’re rewarding failure. A lot of these people should be fired, not awarded bonuses. This is horrible. It’s outrageous.”

Fed Chairman Ben Bernanke: “It makes me angry. I slammed the phone more than a few times on discussing AIG.”

Sen. Charles Grassley: “I suggest, you know, obviously, maybe they ought to be removed. But I would suggest the first thing that would make me feel a little bit better toward them if they’d follow the Japanese example and come before the American people and take that deep bow and say, I’m sorry, and then either do one of two things: resign or go commit suicide.”

President Barack Obama: “All across the country, there are people who work hard and meet their responsibilities every day, without the benefit of government bailouts or multimillion-dollar bonuses. And all they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules. This isn’t just a matter of dollars and cents, it’s about our fundamental values.”

I’m sorry, but enough is enough. For a while, I thought our leaders were, to use Senator Claire McCaskill’s words, “idiots who didn’t get it.” But we’ve been through this several times already.

They get it.

And they’re intentionally misleading the less informed among us.

They want us to believe that these “bonuses” are rewards for excellent performance, like a ballplayer who gets a bonus when he wins the World Series. They don’t want to talk about variable compensation, where portions of an annual salary are put at risk each year, based on individual performance, performance of a company, and performance of the industry as a whole. And they don’t want to talk about retention bonuses, where companies (particularly companies who have had a horrible year) identify key personnel and incent them to stay. And they certainly don’t want to talk about the massive pay cuts that roughly everyone on Wall Street has absorbed this year, choosing instead to aggregate the current year numbers into millions or billions and gasping in horror at the large sums.

They also want us to believe that financial firms are opposed to the idea of making money and are, instead, only interested in making their top executives rich. They complain when banks use TARP money to shore up their balance sheets, rather than making risky loans all over again. They complain when banks invest in advertising campaigns and employee incentive programs, or spend money to bring geographically diverse teams together for face-to-face communication. They even complained when AIG, who writes insurance for financial companies all over the world, paid their contractually obligated claims to their international clients (and, for that matter, their American clients who had, themselves, received TARP money).

What I’m learning from all this is the hidden dangers of nationalization. Our leaders, who have purchased 80% of AIG on our behalf, have made it clear that retention of key employees is not a priority. Nor is meeting contractual obligations to employees or clients. Advertising is also bad, even when years of empirical evidence suggest that it’s a highly profitable investment.

If these folks were actually in charge of a financial firm, I can only imagine they’d put it out of business inside of six months, and then blame the “incompetent” leadership that preceded them for the result. As Megan McCardle says in her excellent post, What to do about AIG?, “do we want to make a point, or do we want to make money?” As I think the Democrats are learning after six years in the wilderness, running things is a lot harder than standing on the sidelines and complaining about those who do.

Speaking of which, Barack Obama thinks “everyone, from Main Street to Wall Street to Washington, [should] play by the same rules.” I wholeheartedly agree.

Here’s what I propose:

I work on Wall Street. This is how my salary is determined. I don’t complain (even in a year like this, where I took a substantial pay cut), because I know I have the opportunity to earn more than my expected salary if I (and my firm) exceed expectations. I accept that risk willingly, knowing that sometimes there will be high returns and sometimes there will be low returns.

President Obama wants us all to play by the same rules. What do you say, Mr. President? Ready to put your money where your mouth is?

Topics: Money Talk, Political Rantings | 10 Comments »

10 Responses to “What Happened? The AIG Bonus Kerfuffle”

  1. Ilya says at March 18th, 2009 at 5:43 am :
    All I can say is I wish I could express myself on this subject as lucidly as you do, Brian. But then, I don’t have to. I can always use your rants as the expression of my own thoughts. Thanks!

  2. Brian says at March 18th, 2009 at 8:08 am :
    Thanks, Ilya. I appreciate the endorsement, especially from someone who also works in the industry and understands this stuff well…

  3. Konstantin says at March 18th, 2009 at 9:21 am :
    Thank you for the article Brian. When will the people stop counting other people’s money?

  4. FamilyGreenberg.Com - AIG - One more thing… says at March 18th, 2009 at 5:05 pm :
    [...] What Happened? The AIG Bonus Kerfuffle [...]

  5. Clancy says at March 24th, 2009 at 7:10 pm :
    Thanks so much for this “series”. I’ve never paid much attention to economics and now that I actually want to, I didn’t have a clue where to start or what had happened. This was a good “base” for me to start from. Thank you for taking the time to write them. :)

  6. Jeff Porten says at March 25th, 2009 at 10:01 pm :
    Coming late to this parade, but… you’re kidding, right? The last time I saw this idea floated, it was a Saturday Night Live sketch parodying Ross Perot.

    Good point made re nationalization, although a bit overblown and dismissive. Will refute at great length sometime shortly.

  7. Brian says at March 25th, 2009 at 11:39 pm :
    No, actually, I’m not kidding. Let me ask the question in a way that’s more palatable to your way of thinking: George W. Bush got paid his full salary for each of his eight years. Do you think he earned it?

  8. Jeff Porten says at March 27th, 2009 at 11:52 pm :
    Sure do.

    Surprised?

    Let’s put it this way: anyone who is president and who needs his salary to incentivize a good job should be impeached immediately.

    Hence: there are no requirements to fulfill to get paid for the job. You’re elected, you get paid until impeached. That’s the step we skipped, but I’ve got no problem with his salary.

  9. Brian says at March 29th, 2009 at 8:22 pm :
    anyone who is president and who needs his salary to incentivize a good job should be impeached immediately.

    Well, two thoughts here:

    First, impeachment doesn’t work that way. Impeachment is for when Congress accuses the President of committing a crime. How he is or is not incented is not a crime by any stretch of the definition.

    Second, I was not suggesting that Bush (or any other President) was motivated solely by his salary. The salary is a quantitative way to measure progress against a set of metrics. Right now, the only external incentive (read: other than self-motivation, love of country, etc.) a President has to do a good job is re-election, and in the second term, there really is none. Have you noticed how both Clinton and Bush’s troubles really accelerated in their second term?

  10. Jeff Porten says at March 30th, 2009 at 1:28 am :
    Yes, I used “impeached” metaphorically to mean, “anyone who is president and who would be the least bit affected in their actions by a pay-for-performance structure has no business serving in office.” Sorry, I presumed that was obvious.

    Last time I checked, W just got a $7 million bonus for his presidential work in the form of a book deal. I’m not sure that I’ve ever heard of an ex-president going hungry. So the idea of using salary as a presidential incentive strikes me as batshit crazy.

    As for your interesting misreading of presidential history: Clinton’s troubles started in 1994. Bush’s troubles started when he invaded Iraq, although it took the country a few years to catch up to the obvious mistake it was to the contemporaneous few of us who said so.

    That said, I do agree with you about the problems of a lame-duck presidency, which is one of several reasons why I oppose presidential term limits — or term limits for any elected office.

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