An interesting contract in reporting today. Reader (Tom C) sent me the Wall Street Journal version of this story, by Michael R. Crittenden and Liam Pleven, titled “AIG Execs Returned Only $19M Of $45M In Pledged Repayments.” I decided to look at Bloomberg as well, as found one on the same subject, “AIG Should Trim $198 Million in Awards, Feinberg Says,” by Hugh Son. But the Journal has now fallen in line with Bloomberg and has a similar finger-shaking-at-government-interference headline, “U.S. Wants AIG Retention Pay Cut.”
Now look at the difference in emphasis via the headlines. The first highlights that AIG did not live up to its promise to return bonuses, while the Bloomberg version puts the focus on the presumed interference of the pay master, Kenneth Feinberg. But even the Bloomberg version contains a doozy:
American International Group Inc., the insurer that gave bonuses to the derivatives staff blamed for its near-collapse, was advised by the Obama administration to reduce a pending $198 million payment to the employees.
The order from Kenneth Feinberg, President Barack Obama’s special master on compensation, was revealed today in a report by Neil Barofsky, special inspector for the Troubled Asset Relief Program. Feinberg didn’t specify how much the payments for New York-based AIG should be reduced, Barofsky said.
AIG sparked a national furor in March after awarding about $165 million to employees in the unit that sold credit-default swaps. Obama called the bonuses an “outrage.” The bailed-out insurer has said the pay is needed to keep staff unwinding the derivatives. Payments included $7,700 to a kitchen assistant and $87,500 for an administrative assistant, according to the report.
“It is unclear whether Federal Reserve Bank of New York officials knew that thousands of dollars in payments would go to non-essential AIG Financial Products support employees, such as the kitchen and mailroom assistants,” Barofsky’s report said.
In the waning days of the Bush Administration, AIG kept brazenly enlarging the number of recipients of retention bonuses. At one point, it added 2700, who received much lower amounts on average than earlier recipients. I speculated at the time that this was done for the sole purpose of lowering the average amount received to make it less offensive.
The Wall Street Journal story focuses, as the headline suggests, on the proposed bonus cut, without giving the reason why (aside from suggesting the reasons were political, as opposed to AIG is a ward fo the state and should be treated as such):
The U.S. Treasury is pressing American International Group Inc. to reduce $198 million in scheduled retention payments as company and government officials continue to wrangle over pay packages that set off a political firestorm earlier this year.
A report from the special inspector general for the government’s $700 billion financial rescue plan said the Obama administration’s pay czar has informed AIG management that the retention payments for AIG’s financial products division should be reduced. Kenneth Feinberg, Treasury’s special master for executive compensation, has not indicated to AIG management what figure would be acceptable, according to a copy of the report obtained by The Wall Street Journal.
AIG management has previously said it would try to reduce the pending payments by “at least” 30%.
The Journal does include this tidbit:
The report by Special Inspector General Neil Barofsky found that only $19 million, or less than half, of the $45 million in pledged repayments had been received by the end of August. Company officials told investigators that receiving the additional $26 million could hinge on how Feinberg and AIG negotiate the second set of repayments.
But the story only gets to how widespread the supposed “retention” bonsuses were towards the end. Recall that the rationale was to keep employees with essential expertise from leaving. Yet the story, remarkably, tries to pass off clearly unwarranted payments as no big deal because the amounts were small:
The report also provides new details on the range of retention payments handed out to employees at AIG’s financial products division. Individual payouts from the $168 million handed out in March ranged from $700 for a file administrator to more than $4 million for one executive vice president, investigators found. Approximately 62% of employees in the financial products division received a retention award of more than $100,000, though some employees — such as a kitchen assistant who received $7,700 — received much less.
Clearly, if staff who were OBVIOUSLY not mission critical got bonuses, it suggests that managers and higher ups who were similarly dispensable were also paid unjustified retention bonuses.
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My anger at the banksters is overflowing! I am getting pisssed off!
This situation has become a disgrace. AIG should be liquidated, sell off the BU’s one by one until the gov’t is repaid. And what of all the TARP recipient banks that missed scheduled dividend payments the other day? No one cares? What happened to winding down Fannie’s and Freddie’s portfolios? And why is Citigroup still issuing NEW debt with FDIC guarantees? We are going to head straight into a new crisis before the existing one is anywhere near resolved.
Ah AIG, the fresh ground disturbed, by hasty attempts to hide the body’s of so much crime, if exhumed forensic examination of the roots embracing the corpses will tell a long (fat) tail of corruption.
Skippy…AIG is the grave…that they keep throwing dirt upon…to hide the crimes.
A kitchen assistant is far more deserving of a $7000 retention bonus than an AIG Senior VP of Looting is of one penny.
The not-so-subtle denigration of lower paid workers here is ugly.
Such denigration is better directed way up the pay ladder.
I agree with crazyman. It seems as if the 7k for the cook is worse than the $160 million for the gang of thieves. The clowns at the top caused this mess and should be punished for their arrogance, stupidity and misdeeds. The kitchen help didn’t participate in the American financial carnage and should still be awarded their bonuses – they actually produced something of value.
I hate to say it, but you and Crazyman are missing the point.
The rationale for the bonuses was not to pay for work performed, but as an inducement for people with critical skills to remain.
In case you missed it, we chronicled here how when AIG was unwinding its CDS trades in January/Feb, it did so at par, with the result a breathtaking multibillion transfer to counterparties, meaning all the big banks. Why did that happen? Because the traders involved were pissed that they were not being paid and were currying favor with the dealers. So the failure to pay a few tens of millions resulted in losses of billions, literally.
So you pay them or you pay more.
Similarly, for certain kinds of insurance products, you really need to know the contracts to unwind them. If you are in programming, it’s like dealing with code you did not write.
You may or may not like it, but some people in AIG did have specific know how, and the absence of that knowledge would make for a much more costly unwind. Secretaries and kitchen staff do not qualify, sadly. But they serve to prove a broader point I made in the post, and you chose to ignore: that those examples prove the retention bonuses were spread to personnel, who, contrary to what AIG told the government and the public, were NOT mission critical. And not doubt, that included many more dollars to undeserving managers than the chump change that went to the secretary and kitchen staffer. Those cases conclusively prove that the justification for a good bit of the bonus payments was a complete fabrication.
Perhaps management did not know how to identify mission critical knowledge and skills and so handed money out to everyone. Or, almost as bad, they got their MBAs from the “Everybody Gets a Trophy” and “There is no I in TEAM” school of management, and so they didn’t want to hurt anyone’s feelings. After all, “The Office” and “Dilbert” didn’t just pop out of thin air.
My money is on the post above that surmised that the additional staff lowered the average cost of a bonus for PR purposes.
In any case, it is high time we started to move seriously to dissolve AIG – if we can’t do that before the next market crash, then when would we be able to do it?
I’m thinking now’s a good time to start sharpening the guilotine’s blade.
Vinny G. — hastily searching the barn for a file, but finding nothing but lots and lots of pitchforks…
The Tar and Feather list just gets longer. I am beginning to think that lower level AIG Apparatchiks should be tarred and feathered as much as their masters.
Look, they are in a very difficult business. The traders are very stressed. They carry the weight of the world on their shoulders, and when appropriate, toss it to Sam.
The organization is akin to asbestos removal, you can’t even watch what they are doing or it might give you cancer, look at how much they have to pay someone to cook for them. It really must be horrible, we should be thanking them as Mr. Bendouche points out when ever a reporter is allowed access to the scene.
They need a secure location with limited access and no identifying marks on the building. The only thing we haven’t paid for is bars on the windows.
There is a political side to this issue. Having an Obama Administration official blocking the bonuses of the back-of-house folks will have political implications. Of course this is no accident; the leadership at AIG were quite clever to set up this little booby-trap.
As any architect knows when designing a building; you put more goodies into the design than you really need, in order to be ready with convenient sacrifices the day when the client inevitable demands a value engineering exercise. AIG have gone one step further and while setting forth their bonus policy they were careful to place back-of-house landmines to go off when the Obama Administration started luridly groping bonus policy with the all-too-visible hand of government. Why else would the AIG leadership give these bonuses to admin staff?
But this problem just proves the short-sightedness of the hybrid solution implemented to solve the original AIG problem — nationalization with little-to-no government control. This model is clearly not working, nor will it ever. There were only two possible solutions to the original problem. One was to allow the free market to work –in other words let AIG fail. Being no expert on these things myself, I certainly respect the wisdom of those who say this would have provoked an international financial meltdown. Fair enough, in that case, if this firm really was critical to the financial security of the United States, then the second solution should have been to treat AIG like the military and nationalize it. That way, assuming a reasonably competent and honest government (I know, I know…), critical decisions like who to keep and how much to pay them could have been taken with the goal of minimizing the losses to the taxpayers.
By staying with the hybrid route, the current Administration now finds itself with the financial version of security firm Blackwater on its hands. They now face similar moral hazards and ambiguities between private and public functions as those that exist in Iraq between US soldiers and the semi-private security contractors. In both cases we are facing the “junkyard dog” scenario that Deepsouth mentioned yesterday in comments. Languid government regulators too powerless (or unwilling) to stop the pillage. But better yet, in the AIG case, with the added political debacle of the feral junkyard dog very publicly digging its fangs into some sympathetic working class innocent bystanders. The fallout from this might just convince the Obama Admin to keep their dirty mitts off other bonus policies. Nice.
What is the legal justification for voiding these contracts? And why in God’s name are they once again trying to modify the contracts after the service has been performed? This seems to me an attempt by the government to selectively get the benefits of bankruptcy (voiding contracts) without having to go through all of the obligations of bankruptcy.
Clearly, what needs to happen is AIG needs to go through bankruptcy; if the government is going to continue to avoid that, then they need to abide by all of AIG’s contracts and take all of the political heat for interfering.
Yves your bona fides for taking the analytically cogent high road in this crisis are beyond reproach, and I very much appreciate your efforts here and your point of view, despite my occasional verbal graffiti.
At the risk of beating this now dead horse, my ire is directed at quotes like the one below.
“It is unclear whether Federal Reserve Bank of New York officials knew that thousands of dollars in payments would go to non-essential AIG Financial Products support employees, such as the kitchen and mailroom assistants,” Barofsky’s report said.
Apparently, officials of the Federal Reserve Bank of New York are, by implication, OK with millions in retention bonuses — mafia style — being directed at Sr. VPs of Looting, who, truth be told, would probably be glad to work for half their pay given the job market for their “talent” if their bluff was called — but God Forbid that a few “thousand dollars” of crumbs trickle down to the human donkeys that carry water for the “talent”.
We can take this idea to its logical extreme. We might get to a point where we breed a certain subset of the population — cattle style — to do the dirty work. We don’t need to call them humans, so anti-slavery laws will not apply — sort of a regulatory arbitrage.
Maybe something else suitably Orwellian — like “Servicers”. We can breed them on farms and have them work the bathrooms, kitchens, parking garages and deli counters while we display our talent for redistributing the wealth they create into our own wallets. It will be like France before the revolution. Oh, imagine the parties we’ll have. Ha ha haa ahahahah.
I think I’d prefer to take my chances with a collapse of AIG and their fellow looters like Goldman Sachs and let their “talent” go a-walking with the trades tangled up like a bad fishing knot and collapsing. If they have that much talent, then they’ll work with their bond holders and their stock holders to save their collective rears as best they can. It would be a game of chicken that I think we (society) would ultimately win.
And it might be the thunderstorm that brings on the sunshine of a late afternoon, and an evening rich with a starry sky and the promise of a better day tomorrow.
Contract schmontract. After dumping over $100 billion into the company, we the taxpayers own the employee’s bitch asses. If they don’t like what we pay, they can join the other 10 percent of the population in the unemployment line and eat government cheese and like it. So, in conclusion, AIG employees and their contracts can suck it.
Crunk D- That is not the way it works, no matter who the owner is. One side cannot just unilaterally violate the contract. You have to renegotiate it. Now, AIG should be in a very strong position to renegotiate these; most/all of the AIG employees have no leverage in this economy. The question is, why weren’t these renegotiated when the bonus pay issue first came up almost a year ago? It looks like total incompetence on the part of the new owners of AIG, who want to retroactively void the contracts.
MattJ,
One side absolutely CAN just unilaterally violate the contract if one side is the United States congress.
Of course, that would require them growing a collective spine. What are the odds….?
I doubt these retention bonuses were in the form of contracts. They were offered after AIG was in government control. There may have been some written paperwork, but I sincerely doubt these agreements were in the form of a normal employment contract (those are typically heavily negotiated and take weeks to months to finalize).
“The rationale for the bonuses was not to pay for work performed, but as an inducement for people with critical skills to remain.
In case you missed it, we chronicled here how when AIG was unwinding its CDS trades in January/Feb, it did so at par, with the result a breathtaking multibillion transfer to counterparties, meaning all the big banks. Why did that happen? Because the traders involved were pissed that they were not being paid and were currying favor with the dealers. So the failure to pay a few tens of millions resulted in losses of billions, literally.”
Those “critical skills” does that include gambling and losing hundreds of billions?
Yves, are you saying that if we don’t pay the very conmen that traded these worthless pieces of paper, that had their ratings agency conspirators rate this garbage as pearls and got AIG into this situation, a bonus to “unwind” their con, then we lose?
How about this: if any favor currying is uncovered, we claw back the funds fraudulently obtained, and imprison the perps?
I think I prefer that over giving them “bonuses.”
I’m dumbfounded. AIG committed a massive fraud. When is the Justice Department going to act?