Over a weekend, word leaked out that AIG is paying yet more retention bonuses. This move is making a complete and utter sham of the supposed punitive elements of the rescue. But clearly, there was not enough of an adverse reaction to the earlier announcements of retention bonuses to deter the giant insurer. A few Congressmen saying bad things hasn’t put a dent exhorbitant CEO pay, so why should it be more effective here?
Some readers have written in to say they have friends or family at AIG who had worked very hard for many years and continued to work hard, and deserved better.
I hate to say it, but the party line on capitalism is that the participants are supposed to bear both risk and reward. Top people at AIG were very well paid just on a cash basis. Yes, it is sad if savings in the form of stock holdings are wiped out, but the government is not supposed to be in the business of saving private enterprise from its bad decisions. There were hardworkng people at Enron and Bear who were not at all culpable in the demise of those firms, but they had their savings wiped out.
I have a hard time understanding why anyone at AIG is deserving of any more than what a top government official would earn. The ONLY argument I have heard is from David Merkel, that for certain types of business, it would be hard for a newcomer to get up to speed on the existing book of business.
But are there as many people like that as are getting retention bonuses? And more to the point, those people are as often likely to be rank and file, are they not? Sorry, but this pattern looks like abuse to me, pure and simple.
And perhaps most important, AIG planned to keep these bonuses secret. That alone strongly suggests they do not pass the smell test. They are living on government life support and have the nerve to lie by omission about what they are doing with senior level compensation.
From Bloomberg (hat tip reader Glen):
American International Group Inc., the insurer under fire for paying 168 executives not to quit after a government takeover, is giving retention awards to at least 2,000 more employees, according to a person familiar with the matter.
The “retention bonus” equals as much as a year’s salary and recipients were ordered to keep the payment secret, said the person, who declined to be named because the plan was labeled confidential. Awards were offered to as much as 10 percent of staff at businesses that are for sale, including plane-leasing and insurance units in the U.S. and overseas, the person said.
AIG said in September that 130 executives will get awards, just days after the New York-based firm got a government rescue package that now totals $152.5 billion. AIG Chief Executive Officer Edward Liddy told Congress last week the payments will go to 168 people, with some getting as much as $4 million.
“If it has the money to give these disguised bonuses to thousands of its employees, then I think it is time for Mr. Liddy to write a check to the federal government repaying the money it took,” said Representative Elijah Cummings, a Maryland Democrat, in a statement yesterday.
Nicholas Ashooh, an AIG spokesman, said life insurance unit chiefs were allowed to give retention awards to as much as 10 percent of their staffs, and selected “closer to 7 or 8 percent” of workers. There are about 37,000 employees in AIG life units around the world, Ashooh said. A typical payment is equal to about six months of salary, he said….
Yves here. There is nothing so arcane about life insurance (in contrast, say, to reinsurance) that the employees would be in possession of such special knowledge or skills as to make them irreplaceable. Back to the story:
Units that AIG is trying to sell employ about 70,000 people, which means that as many as 7,000 could receive payments, the person said.
Cummings said he felt deceived by the company. “Liddy told me in writing that his company was awarding 168 retention payments,” he said. “There is no way around that figure. I cannot imagine Mr. Liddy accidentally overlooking a few thousand employees targeted to receive these funds.”….
The insurer requires recipients to keep the payments confidential, according to a contract obtained by Bloomberg News. Exceptions included financial and legal advisers, as well as immediate family. If awardees tell other outsiders about the existence of the program, they will forfeit future payments, the contract says….
Assistant Treasury Secretary Neel Kashkari, who supervises the U.S. financial rescue program, has called some of AIG’s bonuses “excessive for a failing institution.”
Yves here. When the Bush Adminstration, dispenser of financial institution handouts, voices disapproval, you know things are out of hand. Back to the story:
In one instance, an AIG manager of an overseas unit told his superior that the payments weren’t needed because employees were unlikely to leave, the person said. The manager was overruled, said the person…
The 168 managers in the first round get awards of 100 percent to 300 percent of their annual salaries, the person said. Those payments were approved by an AIG compensation committee two days after the company’s Sept. 16 bailout, the insurer has said. That rescue included an $85 billion loan that saved AIG from bankruptcy, shortly after the government allowed investment bank Lehman Brothers Holdings Inc. to fail.
The insurer’s rescue package was expanded last month after continuing losses from credit-default swaps…
AIG, under pressure from lawmakers to limit executive compensation, said on Nov. 25 that Liddy, 62, will receive $1 in salary through 2009. The company said it will freeze salaries and forgo 2008 bonuses for seven top leaders.
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why do we keep allowing this to happen?
some people never learn, that is why we have guillotines..
Perhaps it’s time for Mr Bernanke to answer the questions on behalf of the Fed as 80% equity holder in AIG.
But it is noteworthy that Mr Kashkari refers to AIG as “a failing institution.” That’s progress for Treasury. Maybe he will even get to point of admitting that AIG is a failed institution that has been nationalized. Laissez-faire nationalization: only in America.
Myrtle Beach,
This is why you allow it happen.
All the peace makers turn war officers.
From Genesis to Revelation.
Police & Thieves in the Street
All the crimes committed day by day
No one try to stop it in any way
http://www.youtube.com/watch?v=WQriZQbTcjk
Who are the police of the CDS market & who are the thieves in that market.
Are they not the same people?
What are Credit Default Swaps?
Why do they exist?
Who is doing this?
Why are they doing this?
Where did your pension go?
Who owns your Government?
Why are you a salve?
What are you going to do about it?
Oh!
Stupid little me.
You’re going to wait until you run out of food.
Good luck with that.
By the way. How do you grow your food?
If you don’t grow it. Is it close by?
Do you get your food from 1000 miles away from your next meal?
Just a thought.
Take care Myrtle
are these bonuses illegal? thank, why aren’t they illegal?
we’ve had nothing but lawlessness since bush took office.
we have a lawless congress. the sight of the Congress handing one man immunity over the dispensing of the an entire $350,000,000,000 to $750,000,000,000,000 is beyond belief.
But they did it.
This defies credibility. It is outright theft!
It does seem that prosecution should be attempted, at least. I hope the authorities are thinking the same way. It’s the sort of thing that justifies jail time.
This is hush money, pure and simple. AIG is hiding the truth and paying others to do so. What are the odds that will get away with it?
This is an example of the kind of “Fundementals” that kept the market from tanking on Friday given the confidence news on the street about the auto industry and the Madoff debacle. It is sad to think that the market is being manipulated to keep the charade from falling apart. It is even sicker to understand that this is giving time to the super rich to protect their wealth before they let the market collapse entirely.
“have a hard time understanding why anyone at AIG is deserving of any more than what a top government official would earn”
Are you now advocating a national incomes policy in addition to nationalization?
you guys have the leverage all wrong here.
AIG has far more leverage over the US government than the government has over it.
the reason? the CDS market. if AIG were to file for Ch11 in order to restructure AIGFP, all the European mega-banks, not to mention JPM & GS would all be rendered insolvent.
since the govt has no board representation, in theory AIG could file at any time. and that would throw a huge spanner in the works at a time when the govt is trying to stabilize the system.
now, for full disclosure there are a lot of folks who think that's going to happen *anyway*, once the govt has ring fenced the critical liabilities (e.g. through the Fed SPV's). that's one reason why the debt still trades at distressed levels despite the existence of the govt sr pref.
i am also skeptical of the idea that asset sales will forestall a ch11 filing. i heard last week that the ILFC PPM shows a pro forma ROE in the mid-single digits. that's not going to fly (pardon the pun) in the current environment. liddy and udvar-hazy are smoking crack if they think AIG is going to get anything close to what they are asking for.
Yves,
It all depends on who is being paid the retention bonus and for what. The core insurance company is very healthy and strong. The holding company executives got stupid and should be gone, but punishing the people who make the core business function well is misguided, unless you want the taxpayer’s investment to go down the tubes.
The dismantling of the company into it’s component parts needs to happen asap. Segregate out the profitable life and annuity businesses, which will sell and a good multiple and try to package some of the junk with it.
Back to the payments, it depends on whom you’re trying to retain. Some of their people will be highly sought after, we don’t want a bunch of incompetents running the viable, profitable units, lest they end up like the holding company.
If it were not for government intervention, no employee would be earning ANY salary. AIG would have collapsed, A Chapter 11 could not have been organized given the absence of DIP financing. Every penny of compensation is on the back of taxpayers.
The Fed chair’s pay is set at more or less government pay scales. And regardless of what you think of him, Bernanke certainly has a very important job and works bloody hard.
People who work for failed companies that are on government life support do not have a God-given right to premium compensation. I can see it keeping it for the rank and file only because ratcheting down their pay could put a lot of them in bankruptcy, and presumably a lot of businesses will be sold to private sector buyers who will opt to keep the same pay scales more or less in place (and mechanically, it would be a ton of work and very controversial).
But I do not see the case the executive class, which given the size of AIG, is large. The reports I have heard is that AIG was clearly rudderless, dangerously so, after Greenberg was ousted (one buddy compared it to being in a car where the axles had been pulled out and the it was only a question of time before the wheels came off). So the top executives, who presumably were talented and had options, chose to stay with a company that was clearly headed for serious trouble (AIG is an aggressive, risk-seeking company; you simply cannot have lax oversight in an organization like that). I have trouble mustering much sympathy.
How can anyone argue that a company that is effectively bankrupt should be paying its executives as if things were more or less normal? If they had filed for bankruptcy, they would not be earning the same pay. But because taxpayers are chumps, the execs get a better deal?
It doesn’t matter if some businesses are good if the whole enterprise is a goner.
This to me says capitalism is over. Didn’t Max Weber say something along those lines, that in the end it was doomed because people are greedy?
In the Depression, people were ashamed to be on the dole, Now not only are executives not mortified, they actually have the nerve to extort something approaching market pay for a profitable enterprise.
I think you’re conflating two different issues. The first issue is should intervention have taken place at AIG? My answer is no. Second, what should happen now that taxpayers have a stake? My answer is that you want the best and brightest, which requires market based compensation, otherwise, the best and brightest will leave.
If your argument is that there are no competent people at AIG and the evidence is that they had to be bailed out, at least I understand where you’re coming from but that’s just a lack of understanding about the various parts of the business. I think that case is much stronger with commercial banks whose Asset Liability Committees should have sniffed their trouble out. In fact, some did, like Wells Fargo. But rather than allowing the incompetent to be eaten by the competent, our government steps in so that we can’t tell which is which, but I digress.
Bonuses are paid to retain key people within companies that have filed for bankruptcy protection all of the time. It’s in our interest to know if the right people are being retained but the idea itself is not without merit.
Yves,
I have been a life actuary, and worked in all corners of life insurers, including setting compensation policy for representatives. I have also managed life insurance assets, and have been an equity analyst on the buy side across all sub-sectors of insurance (there are nine of them). I know the industry.
I'm not crazy about what is going on at AIG. When writing for RealMoney, I told people to avoid the name because the accounting could not be trusted. I worked there for three years and uncovered two $100M+ reserving problems, and with my boss another two, and another $1 billion error in another division.
As I was explaining to one of my sons this evening, the insurance business has ethical problems because the complexity of the promises made, which makes it the industry with the most unique accounting rules. This leads many to take it to the limit, and beyond.
I have tried to be an ethical member of that industry (note: I am not in it now), and it has cost me at a variety of points.
I have learned that there are players who are rainmakers, with personal contacts that are worth a lot in terms of sales. You don't bonus them, you lose profitable business.
There are a few people who have genuinely unique skills in terms of product design, compensation design, asset management, etc., who deserve bonuses because that make the place a lot more profitable, but they are not numerous.
On the Commercial P&C side, the business terms can vary a great deal, and skilled managers/analysts are valuable. Worthy of bonuses? I'm not sure. Reinsurance? Same deal.
Some people are more valuable than others in the industry, and you want to keep them if you can. There are solvent competitors that would like them. Maximizing the value of AIG would mean you have to pay out some bonuses, though not nearly to the degree of the old AIG, where they flowed like water.
I sympathize with the desire to not pay bonuses at AIG, but consider what might have happened had the government not "rescued" AIG:
1) The operating subsidiaries would have been okay, but the parent company, and AIG financial products would have failed, possibly causing failures at many derivative counterparties.
2) The healthy subsidiaries would still be profitable, and superior employees would expect bonuses. If not, they would look for greener pastures.
3) In bankruptcy, no bonuses at AIG parent or AIGFP.
I'm not trying to be an apologist for the industry, but I understand how profitability works here and it is lumpy — some things are called bonuses, and they are contractually guaranteed if certain standards are met, but they are called bonuses.
I understand the anger of many here. You know that I was in favor of letting AIG fail, and the government not getting so engaged in bailouts. This is why I wrote a piece saying why the government should not bail out or own insurers. It brings us into all of these arguments that are bad enough inside a public corporation, but impossible when the government is the main owner.
Sigh. I've said enough. Wishing you nothing but the best, Yves.
David
Solvent, stable competitors have had months now to poach from AIG. Whoever is still there isn’t worth the same salary + bonus to anyone else.
Per David Merkel’s comments:
1. Some people at AIG may be worth paying in order to keep, but he suggests (and the Bloomberg article about bonuses being paid to people who didn’t merit them confirms) that AIG is paying bonuses too broadly. Look, even Treasury, who has been loath to say ANYTHING bad about its bailees, is unhappy.
2. I am personally disgusted by the “everyone for himself” attitude embodied by the pay philosophy, although AIG was known for being extremely liberal with money,. One can imagine that staffers whose main loyalty is to their pay package would be quick to exit.
Now in fairness, loyalty has to run both ways, and in the last decade and a half, companies have become very quick trigger to cut staff at any sign of profit deterioration, when in the past they would instead choose to ride a rough patch out and use the downturn only to do needed house-cleaning. So this “every man for himself” posture has been deeply inculcated.
In the old days on Wall Street, when the house had a bad year, everyone took a hit and accepted it, even the performers that had done well. And if I am finding virtue in an older Wall Street compared to now, you know our values have gone down the toilet.
And while we’re debating the merits of paying retention bonus to charlatans we get news that $50 billion Ponzi scheme fraud committed by Bernard Madoff. http://www.theaustralian.news.com.au/story/0,25197,24797739-601,00.html
YS & DM:
I opposed the AIG bailout and Eric Dinallo's letting the AIG insurance subsidiaries "upstream" $20 billion to the AIG parent. The AIG parent should have filed bankruptcy months ago. That Goldman and the rest of the AIG parent's counterparties would have lost tens of billions is too bad as far as I'm concerned.
However, when it comes to the bonuses, I ask who is getting them. Look at the Enron bankrupcty. Enron had two legitimate businesses: Houston Natural Gas and General Portland Electric. These companies went on operating normally while Enron was bankrupt. Eventually, they were auctioned off and the proceeds went to Enron's creditors. Similarly, AIG's insurance subsidiaries should be permitted to continue normal operations and be auctioned off eventually. I see a failure to do that, by limiting the compensation of AIG insurance subsidiary employees as a form of "asset stripping" for the benefit of the AIG parent CDS counterparties, literally, I see Goldman as the beneficiary here. This assumes the retention bonuses are going to AIG insurance subsidiary employees. If to AIG parent empployees, I say, push AIG into bankruptcy now. Consider, will the AIG insurance subsidiaries be worth more or less, when sold if these employees leave?
Read about AIG in the Mop and Pail (GlobeandMail) today. Thought it might be of some interest (tho it has nothin to do with far sexier topic of “retention” bonuses):
How high-risk mortgages crept north
http://www.theglobeandmail.com/servlet/story/RTGAM.20081212.wmortgage13/BNStory/Front/home
AIG shares now trade ($1.80) for less than 10 pieces of Chicken McNuggets. This company is now nothing more than an old-fashioned bust-out, writ large. Break it up into pieces and sell off the assets, after the government has ring-fenced the critical liabilities. The next time AIG attempts to pay bonuses, Treasury should push the company into bankruptcy. Adios, money hole.
We need to go after these people when the dust settles. A definitive record of who made money out of the collapse of capitalism is all that’s need to rebuild tomorrow.
Rich people taking care of themselves. Nothing to see here. Move on please.
So what can we do about it other than bitch among ourselves?
At least send this column via email or fax to your Congressional representative. Ask why, as the taxpayers representative, they are not doing anything about his.
Just a comment,
This bonus thingy is ridiculous. The bailout of all financial institution is ridiculous too. The over-leveraged financial system should be left to fail, because it has already failed. By delaying failure, it is effectively delaying recovery. Seriously, if the institutions were left to fail, new institutions will be formed to replace those failed. Capital goes to where the return is. Think Adam Smith.
Lim
"At least send this column via email or fax to your Congressional representative. Ask why, as the taxpayers representative, they are not doing anything about his"
YOprition JOJO
George Carlin on "the American Dream"
http://www.youtube.com/watch?v=kJ4SSvVbhLw&feature=related
Carlin has a little lesion for you. Trust me he's right.
One question:
Are they getting any of these individuals to sign any kind of employment contract with a non-compete agreement in it?
If not, how can they really describe these as “retention” bonuses? They are just hand-outs to keep people happy.
However, even on that count is there any kind of analysis as to whether these “bonuses” are consistent with market salary rates? I guess the argument is that you need to overcompensate people who are working for an entity that faces the threat of bankruptcy? Therefore by “bailing out” such an institution we are not only accepting “business as usual” but also must accept that there will be a premium on certain costs. Amazing. Therefore to “save” the assets we need to actually throw even more money at the company
I too appreciate that there are many “innocent” and “deserving” people at the company. I use the quotes merely as emphasis rather than as a snub. There are plenty of “innocent” and “deserving” people who work for the auto companies yet we never give them a thought. Maybe it is because we “understand” cars. we see them as a simple commodity whereas “insurance” and “finance” can be imbued with magical mysteries that require superior intellect. Its similar to pseudo vegetarians who will not eat animals with “faces.” Here we are willing to kill off the familiar but accept that these “wizards” are somehow special.
I agree with the anonymous comment on “Leverage” above. The government is saving AIG because they know that if it goes down it will bankrupt a huge number of other companies. That is why AIG’s managers are being so arrogant. They are going to “trade through” this and try t come out the other end with the company intact.
This is all going to end VERY badly.
There is TOTAL lawlessness in our so-called elected leaders. To allow this kind of outright theft of our nation is treason!
There is a WILLFUL disregard for all things TRUE and JUST in our leaders of finance and government.
History tells us that eventually, a LOT of blood is going to be shed because of this….and I mean literally
I’d wager that part of it is hush money, and the reason you won’t hear more is that AIG has been a more politically connected part of the establishment longer than GS.
“Some readers have written in to say they have friends or family at AIG who had worked very hard for many years and continued to work hard, and deserved better.”
LOL.
Hard work, eh? Deserved?
Big deal. Pull your collective head out of your asses and look around.
This is America. Hard work per se is meaningless.
What matters is making as much money as possible however you can, period, and if that means that others have to suffer than tough sh-t.
Regardless of the marketing BS and propaganda regarding the primacy of hard work in making money and being successful in modern America, how can any reasonable person look at the last 25 years of American history and draw another conclusion?
The well-born, connected, and just plain lucky don’t care about the welfare of the nation and they get ahead just fine. And their kids are doing just fine too. I see no reason why normal Americans should operate any differently, other than naivete and gullibility.
Sheep get sheared.
@ David Merkel
“The healthy subsidiaries would still be profitable, and superior employees would expect bonuses. If not, they would look for greener pastures.”
Superior employees should absolutely be encouraged to look for greener pastures. That is precisely what all employees of a failed entity should do in fact.
And without our tax dollars that is precisely what they would be doing ~ which is the only precisely the right and proper thing to do.
As 79.9% owner of AIG, the government could put a stop to this nonsense tomorrow if it wanted to, without even one line of new legislation.
Of course, I said something similar a few weeks back when it was reported that AIG was trying to renegotiate the terms of the loans with the government to make them more favorable. My point then was – is the government renegotiating with itself or something?
What we have is an ideology problem. The current administration does not want to “interfere” with the running of a “private business”. Nevermind that the entire construct is literal and contradictory nonsense when said “private business” has received billions in public funds in exchange for a majority equity stake to the government.
We keep hearing that the individual insurance businesses are perfectly healthy and viable while the parent holding company is a trainwreck. Ok. So what are we waiting for? The trainwreck to spread? Our government is failing us here.
The financial ruling class caused this crisis and has a great deal to answer for; unbelievably, they remain in charge even in the incoming Obama administration, i.e., Larry Summers and Tim Geithner, and will continue business as usual unless the people rebel: any takers?
The necessity of retention bonuses is a signal to any potential buyer of any of AIG’s businesses not to pay too much, because the business is so fragile.
“Are they getting any of these individuals to sign any kind of employment contract with a non-compete agreement in it?”
I worked for a failing insurer many years ago. Our retention bonuses weren’t paid up-front, so there wasn’t a need for a non-compete agreement. I was replaceable certainly, but it would’ve been much more expensive to replace me. Then again I didn’t get anything like a bonus of 100% of salary.
While this sounds like a money-grab to me too, the turnover on the marketing side is heavy enough that I’m sure a good chunk of these fellows could get jobs quickly, if they started looking. Revenue for insurers is heavily dependent on how an insurer keeps its agent force happy (which is why there are so many of these obnoxious retreats that you’ve heard about), so if the point-of-contact go, they can take the agents and their revenue with them.
Since our founding nearly a century ago, the AIG Companies (Collectively “AIG”) have focused on being a leader in corporate social responsibility. As a global financial services organization, we have committed our resources to developing products and services that address the needs of our clients as well as promote a corporate culture that values integrity, diversity, innovation and excellence.
AIG recognizes that its investments in support of our customers, employees and the communities in which we operate are critical to our success. AIG’s ongoing efforts to be an outstanding corporate citizen and promote responsible and sustainable business practices are essential to our long-term business objective of creating value for our shareholders and serving the interests of our clients.
From AIG’s website
Joe SixPack here. I’d like to line up all the C-level executives at all the socialized financial institutions who have taken taxpayer money and hit them each real hard one time in the face with a shovel. Then I’d like for each of my working class brethren to get to do the same.
I hope all of you rich assholes burn in hell. Naked Capitalism –what a farce.
I must say though, it warms my heart to see the super rich stealing from the super rich. This guy Madoff is A-OK in my book. I hope there are more Madoff’s out there so more of the criminal super rich can lose all of their ill-gotten gains:
http://online.wsj.com/article/SB122914169719104017.html
God bless you, Mr. Madoff. :)
Hi everyone,
…they are trying to save the System…
I heard this over and over.
Which System? United System? Cowboy System?
We don’t have a System…
Who is the Market?
A bunch of people trying to make more money than others…
When someone get rich is because many others got poorer.
That’s the System…
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