Fire the AIG management

by philg

AIG has been in the news again, this time for bleeding taxpayers out of hundreds of millions of dollars to pay employee bonuses for a job well done in 2008.  Most egregiously, the very division that bankrupted the company is sucking down $165 million in 2008 bonus.  Is there some sort of contract that would require the company to pay these bonuses?  The company essentially went bankrupt in the fall of 2008, though the U.S. governnment tried to avoid the actual word “bankruptcy”.  When a company goes bankrupt, it doesn’t pay most of its obligations under old contracts and certainly does not pay bonuses to the employees who ran it into the ground (not for moral reasons but simply because it no longer has the cash).

The AIG management has said that they needed to do this in order to retain critical employees.  This shows a worrisome lack of basic business knowledge.  To give an employee an incentive to stay, you would offer money to be paid in the future, after the accomplishment of some goals or at least remaining at his or her desk for another year.  One guy received $6.4 million.  For most rational people, that would be an incentive to take some time off and enjoy life, not to keep going into work at America’s objectively stupidest company (they ran up losses far larger than traditional candidates for this title, such as G.M. and Chrysler).  The manager of your local McDonald’s is savvier about retention strategy than the AIG executives.  McDonald’s doesn’t say “We had a bad year last year and you might be discouraged, so we’re writing you a fat check unconditionally in hopes that you will like us and stick around this year.”

AIG has some complex problems.  Figuring out that writing people checks for what they did last year isn’t a “retention incentive” does not require a lot of thought.  Would we trust a manager who can’t figure out the simple stuff to figure out the complex stuff?  I say “no.”  We (the taxpayers) own AIG.  We should fire the top 20 managers immediately as an example to the rest.  They should be replaced with people who have never been employed by AIG; it would be bad to promote the next tier of AIG employees up to the top because that would effectively be a reward for their demonstrated incompetence in 2008.

Is it risky to replace the top management of a company?  We voters do it every 4-8 years for the U.S. government, a vastly more complex operation than AIG.

[Update following a review of the comments:  I recognize that these bonuses, from the perspective of early 2008, were for the purposes of “retention”.  However, the company essentially went bankrupt in late 2008 and there is no way that a bankruptcy judge would have approved the payouts at 100 cents on the dollar.  I guess you could argue that the banks that sucked down billions of dollars from AIG did not suffer the effects of a constructive bankruptcy, so why should the employees.  On the other hand, these are the very employees who were responsible for the bankruptcy.  Foreign banks got billions of dollars, dwarfing these bonus payments, but they had nothing to do with AIG’s self-inflicted wounds.  If we can’t stop Wall Street’s “heads I win; tails you lose” compensation structure, 100 percent of U.S. wealth is going to be transferred to Greenwich, Connecticut, the Hamptons, and the Upper East Side.  Why not stop it here and now?]

25 thoughts on “Fire the AIG management”

  1. If AIG had been allowed to go into actual bankruptcy, instead of double-secret-probation bankruptcy, all contracts would have been open for rewrite at the direction of the judge. Instead, by simply giving them money. our government has somehow, again, managed to make a bad situation even worse.

  2. Philip,

    I have been reading your blog since the Dawn of Blogs 🙂 not too long ago, this is by far the best column and best advice. Sounds like Ronny Reagan and the ATC episode :-). One of the things you point out that others have not mentioned or seen is the concept of ‘payable in the future if goals are met’. These payments feel like ransom payments.

    Paul

  3. Presumably the reason why the government wanted to avoid an outright bankruptcy is that it takes months or years for the courts to go through the mess and clean it up. In a company like AIG, that would mean putting 400Bn in international transactions in doubt for at least 2 years, i.e. paralyzing the international financial system even more than it is already.

    There is no good option for this, but rather than a bailout, we should have some form of expedited bankruptcy process where the government takes over a company if a regular bankruptcy would cause sever harm to the economy. There already are such provisions for national security purposes.

    Of course, there is also the issue that for some odd political reasons it is not acceptable to nationalize a bank or large insurer but it is acceptable for corporate fraudsters, most of them in the UK, to privatize a big chunk of taxpayers’ money.

    Regarding the specific issue here, the employees in question should all be terminated with cause for fraud, and the whole UK division of AIG be wound down and the bonuses unpaid. Let them sue in a US court if they dare. Once they set foot on US soil, they can then be arrested for fraud and sent to cool their heels in federal prison. That’s how the government unwound the UBS money laundering operations, by arresting one of their Swiss executives when he came to the US.

  4. Your article is exactly why AIG should have been allowed to go bankrupt instead of being bailed out. When you throw money at a company as the government has recently, there literally are no rules compared with the well understood regimentation of creditor rights in a bankruptcy – and in fact, the very bailout that gave AIG money also explicitly allowed for AIG to pay out these bonuses you and others rail against. Since the directive to AIG by the very bill passed to save them was in fact to pay these bonuses, why should AIG management be punished for doing so? Just because it puts egg on the faces of the people who voted to give them money is not sufficient reason.

  7. My understanding is that these retention incentives were contracted in 2008 as future payments for people who stayed amidst the early fall meltdown, meaning they have now come due. They are not newly created bonuses.

  8. I like the article, but a minor quibble with your facts. The “retention bonus” is compensation for having stayed from the date it was agreed to (early 2008) to the time it is paid out. As I understand from the NYT reporting, these are not “incentives” for future behavior / retention – they are compensation for complying with the terms of a contract agreed to by the company last year.

    As much as I find it offensive that these people are getting effectively paid taxpayer money, the idea of the government choosing to invalidate contracts at will (as many seem to be proposing) is much more insidious and would threaten the very principals that allows our systems of compensation and business to operate.

    That said I don’t disagree with the gist of your article, which is that the government should approach AIG as if it were essentially a privately-held entity there the USG has the right to hire and fire at will, as long as it respects the contracts in place. However, I don’t think that AIG’s management decision to comply with a set of binding, pre-arranged contracts should be grounds for that dismissal.

  9. Also, the reason why there’s no bankruptcy here is that it the government is afraid of what would essentially be a “bank run” panic, except in the insurance sector instead of commercial banking. If folks believed that their policies might be at risk, anyone who _could_ cash in a policy would, and there’d be a rush to get out before all the money’s gone. Insurance works much like commercial banking because consumers trust the institution to hold (and invest) their money.

  10. AIG handed out bonuses because they are legally required to do so. They signed contracts to that effect. The Connecticut company would have to pay double the bonus amount promised, according to Connecticut law, if they breached the contract that required them to do so.

    Bankruptcy is an organized business procedure under which contracts could have been dispensed with appropriately. The government, not being able to collectively run a 7-Eleven (or even the Mustang Ranch in 1991, for crying out loud!) and make a profit, wrote the agreement that screwed us all. AIG had no part in determining the secret bailout arrangements.

    What the Congressional hearing could do is make an on-the-record demand that AIG retrieve bonuses and then hold AIG harmless for litigation afterward. That is, when AIG employees file suit against AIG for breach of contract, AIG wouldn’t have to finance its legal defense. That would be a federal expense. And when those employees are awarded bonuses that are twice what AIG gave them, AIG would only be liable for the amount agreed last Friday, not double the amount that might be awarded in court action. The amount paid by the government for AIG’s breach of contract would not be counted among the bills that AIG is required to reimburse, since it was the fault of government, not the company.

    … JJ

  11. “Is it risky to replace the top management of a company? We voters do it every 4-8 years for the U.S. government, a vastly more complex operation than AIG.”

    Yeah, and that seems to produce really great results…

    You’re right though of course. Though the real scandal is that they weren’t allowed to go bankrupt, and of course this is all just a shell game to distract from the vastly larger sums that have been funneled to the likes of Goldman Sachs and the other counter parties.

  12. In the final version of the American Recovery and Reinvestment Act of 2009, (supposedly) Chris Dodd added the “Dodd amendment”
    http://www.google.com/search?q=dodd+amendment

    It reads:
    ‘‘(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.”
    http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1:

    That basically guarantees all bonuses that were contracted before the date of the bill. As stated above, in a typical bankruptcy, these contractual bonuses would obviously not be honored.

    Of course, Dodd and Obama are “outraged”. But why did Dodd add that provision? Why did Obama sign it? I though he was going to review these bills “line by line”.

    Not surprisingly Dodd, Obama, Bush, McCain, and Shumer are the largest benefactors of AIG’s massive lobbying.
    http://www.opensecrets.org/orgs/recips.php?id=D000000123&type=P&state=&sort=A&cycle=A

    AIG isn’t taking our money. Our government is.

    When it comes to economic policy, there is no fundamental change between the Bush and Obama administrations. Bush started picking which companies will win and which will loose. Obama is continuing that policy. We are footing the bill. Directing your anger at AIG is misguided. Our government is the wrong doer here.

  13. http://www.washingtonpost.com/wp-dyn/content/article/2009/03/16/AR2009031602961.html

    You’re making the mistake of evaluating the term “retention incentives” as of the present day, rather than as of the day in 1Q 2008 that the contracts calling for them were signed. Without those retention bonuses, these guys would have been out the door (and perhaps relocated to their preferred extradition-unfriendly tropical jurisdiction), rather than sticking around to try to clean up their mess.

    Retention incentives are pretty common at failing large businesses — those signing contracts for them are betting their professional futures that the company will be around, and solvent, long enough to pay out. The quirk here is that, after those contracts were signed, U.S. taxpayer funds filled the solvency-guarantee pool, thus turning those bets political.

  14. Phil, you certainly raise some very good points.

    However I believe that the AIG bonus flap is misdirection. The US government has already spent $2 Trillion (2000 billion) on the bailout – so this is less than 1% of the total.

    Now today, when everyone is focused on AIG, we have the Fed announcing they will purchase Treasury bonds directly. This is called “quantitative easing” and basically means that the USD is going to be further debased. Overall, much bigger news than AIG.

  15. In some ways it is unfortunate that the AIG employee bonus payouts have gotten so much attention.

    A conservative friend argued that this is nothing compared to the $2 billion in “pork” in the latest spending bill. I hastened to point out that even pork turns into economic activity for some district somewhere for something, not like bonus money going to people who no longer work for the company or even live in the US.

    My hope is that AIG really blows things up as the poster child for excesses throughout the financial sector. If it leads to increased awareness and action on things like shareholder’s rights and compensation excesses, hooray.

  16. You can’t have your socialism cake and eat your capitalism dog food. When the government “bailed out” these firms it promised to rescue capitalism. Looks like that is a success so far.

    Give a man a fish and you feed him for a day. Feed a man with stolen fish and he’ll learn to steal them, too.

  17. Employees enjoy a very high level of priority in the bankruptcy process; It’s not at all clear that a bankruptcy would have avoided these contracts. In any event, the collateral damage of an AIG bankruptcy would have far, far exceeded the $85M or so in cash that the government is going to lose in bonuses after taxes.

  18. Steve: Employee salaries and benefits are typically paid during a Chapter 11 reorganization, but I don’t think that the idea of adding a $6.5 million bonus check to an employee’s compensation has ever been reviewed by a bankruptcy judge.

    As for the “collateral damage of an AIG bankruptcy”… how bad would it have been? Millions of people losing their jobs? Could we have seen the stock market fall by more than 50% from its peak? Oh wait… all of those worst-case scenarios did happen AND our grandchildren will be stuck with paying back the $300 billion or whatever we’re going to borrow to keep AIG operating in a simulation of the world circa 2006.

  19. We’re missing the forest for the trees. The problem with virtually all bonus schemes is that they are improperly aligned to the success and profitability of a company. This isn’t unique to AIG. It’s at the root of the entire crisis. AIG may give us some particularly egregious and galling examples of how very wrong this system is, but instead of focusing on a few individual cases, the industry wide problem needs to be addressed systematically. I’d love to see these bastards swing but $165m is only the tip of the iceberg.

  20. I do hope the rascals get away with it; may their luck hold. That said it is odd that anyone would want to hire ex AIG staff, a typical resume would read … lost billions underwriting the entire housing market. There was no need for a retention bonus, it was either AIG or the poorhouse. This was another scam run for the benefit of the old boys.

  22. It might have really been best to let AIG go bankrupt. In that case, as stated by many people, all or most contracts would be abrogated (or could be broken by a bankruptcy judge), the company would be dismembered and new management would take over. Of course, after carefully examining what was left, the new owner might decide to pay bonuses to certain employees who remained. It would be all up for grabs.

    Apparently the higher powers decided that such a move would be too dangerous for the world economy. So the US Government is propping it up. But is it necessary to micromanage every aspect of its function now? The bonuses, after all, are about 0.1% of what was given to AIG. If that is helpful to keeping the company together, that might be the right thing to do. We don’t know who is getting the bonuses and whether they are the folks who caused the problems or whether they are the ones who helped the most to save the company. And, in fact, some people might be in both categories.

    What happens if all the best people quit? If I worked for AIG I think I would be angry myself. Probably I would have lost a huge amount of my retirement which probably would have been in AIG stock. If I felt that I had done my best and now my well earned and well deserved bonus was being “clawed” out of my hands, I think I would be inclined to take a hike. Fortunately I am not in that situation.

    One can also argue that AIG never would have been in such dire straights had not the New York state regulators under then Governor Spitzer forced out the man who seemed to really know how to run the firm, Hank Greenberg. At least that’s what Greenberg argues. He may be right.

  23. This is nice – now that the government has decided that if you get taxpayer money, contracts have no meaning, and those contract incomes get a 90% tax, we can do the same with the auto unions. Take 90% of the money that is contractually paid to UAW workers back into government coffers as “penalty” for honoring legal and binding contracts!

    Almost universal agreement exists in the root cause of the financial meltdown being toxic mortgages. Clinton’s 1999 executive order forced Freddie and Fannie to release funds to people that would have never qualified earlier, and yet the powerful Senate Banking committee blocked other banks from following suit. Then, when Congressional leadership changed (2004), and Chris Dodd (D) took over the banking committee, the banks were forced to provide loans that, for the prior 50 years, would have never been allowed. In an attempt to lessen the impact of these toxic assets, the financial institutions bundled these toxic assets with more solvent ones, but the effect overwhelmed the system.

    The American people voted into power the very people that perpetuated this economic meltdown. I am incredulous that “we the people” would actually do this, but then, ignorance is bliss.

    And yet, on Wednesday of this week, massive bonuses were paid out to Freddie and Fannie executives WITH NO PRESS COVERAGE!! Were they not one of the first bailout targets? Is this not a quasi-government organization? So instead of a balanced approach to sharing blame, it is pointing the finger at “it ain’t in my back yard” !!!

    If, as a Senator suggested, these executives that took taxpayer money and squandered it, should commit suicide, then Washington will be a lonely place, with all the dead politicians that [should] have taken the same path.

  24. Phillip,

    While your analysis and reason is very sound, I have to agree with a few of the comments; why are we bailing-out AIG in the first place? I don’t buy the “too big to fail” argument – bankruptcy is not an end to all operations. The profitable units would continue on under a new flag and the others would serve as an example of what to avoid going forward.

    The bonus thing is huge on principle only, but the magnitude of the event is minor as mentioned above. On principle, I find the 90% tax bill to be even more saddening than the bonuses, themselves. Tax is the wrong lever and creates incredible distortions. Mr. Stupid doesn’t make Mr. Angry go away.

  25. Reading these posts just further inflames my outrage at the indiscriminate spending of my tax dollars. From AIG, to the Pelosi/Frank coverup of the Fannie Mae/Freddie Mac dive, to the free health, food, education, housing, etc. of illegal aliens, to the Economic Recovery plan of the current administration…it goes on and on ad nauseum, and all at my {read our} expense. During who’s administration will these loans, aka thefts, come due? Will we steal from the social security bank, or maybe borrow some more money from China, just to meet the interest payments on notes we can never expect to be able to repay?

    The buck should be stopping here…and now. Americans are SO apathetic. We think we have no power, yet we do hold all the cards. Supply and demand. Cease the demand, the supply has no where to go. Think of it. Countries do it all the time…economic sanctions. Your child’s toy is painted with lead, made in China. ALL Americans, stop buying ANYTHING made in China. Today. Sanction this, Batman. You can’t understand your customer service rep answering from New Delhi? Cancel the product or service until the call center for that company is back in the USA. The list goes on and on. We, as consumers, have created the monster by continuing to support it. Only we can kill it.

    Corporate greed would cease to exist, if we just let them all go bankrupt. So what if a few execs jump off the Pru or Hancock buildings. One less convict to feed and house.

    We elect murderers. liars and thieves, because they promise the world, and deliver more of the same. I have the great displeasure of being from the state that Ted the murderer and Barney the thief hail from…I’m eagerly awaiting the Pelosi’s investment in local real estate.

    We have the power, we just cannot imagine using it. Saving the starfish, for anyone familiar with the story, begins with one. I’ve already started…what are you waiting for?

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