Big bonus plans at A.I.G
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| Sun, 03-15-2009 - 4:05pm |
I used to believe if a company failed, it went out of business, restructured or got bought out. Now it seems a company fails, the government bails it out, and the people who caused the failure get rewarded. It is quite a system we are developing.
http://www.iht.com/articles/2009/03/15/business/aig.php
American International Group, the insurer that has received more than $170 billion in taxpayer bailout money from the U.S. Treasury and Federal Reserve, plans to pay about $165 million in bonuses to executives in the same business unit that brought the company to the brink of collapse last year.
Word of the bonuses last week stirred such deep consternation inside the administration of President Barack Obama that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.
Lawrence H. Summers, director of the National Economic Council, on Sunday called the A.I.G. bonuses "outrageous." Having said that, he quickly added on the ABC "This Week with George Stephanopoulos" program: "The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system."
Another top White House economic adviser, Austan D. Goolsbee, described a seemingly visceral reaction by Mr. Geithner to word of the bonuses. "He was really upset by the news. He stepped in and berated them, got them to reduce the bonuses." Mr. Goolsbee, speaking on "Fox News Sunday," added: "I don't know why they would follow a policy that's really not sensible, that's obviously going to ignite the ire of millions of people."
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 company. Mr. Geithner last week put pressure on 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 Mr. Obama and Congress to impose tough rules on corporate executive compensation at firms bailed out with taxpayer money.
Senator Mitch McConnell of Kentucky, the Senate Republican leader, adopted the same language used by Mr. Summers in calling the A.I.G. bonuses "an outrage," though he said it was important to know whether the contracts had been entered into with knowledge that taxpayer bailout money would be available to help pay for them. "I think skepticism among my colleagues for additional bailouts is very, very high, and that includes me," he said on "This Week."
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.
"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."
An A.I.G. spokeswoman said Saturday that the company had no comment beyond the letter. The bonuses were first reported by The Washington Post.
The senior government official, who was not authorized to speak on the record, said the administration was outraged. "It is unacceptable for Wall Street firms receiving government assistance to hand out million-dollar bonuses, while hard-working Americans bear the burden of this economic crisis," the official said.
Of all the financial institutions that have been propped up by taxpayer dollars, none has received more money than A.I.G. and none has infuriated lawmakers 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 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.
Mr. Liddy, whom Federal Reserve and Treasury officials recruited after A.I.G. faltered last September and received its first round of bailout money, said the bonuses and "retention pay" had been agreed to in early 2008 and were for the most part legally required.
The company told the Treasury that there were two categories of bonus payments, with the first to be given to senior executives. The administration official said Mr. Geithner had told A.I.G. to revise them to protect taxpayer dollars and tie future payments to performance.
The second group of bonuses covers some 2008 retention payments from contracts entered into before government involvement in A.I.G. In his letter to Mr. Geithner, Mr. Liddy wrote that he had shown the details of the $450 million bonus pool to outside lawyers and had been told that A.I.G. had no choice but to follow through with the payment schedule.
The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken. The official noted that even a provision recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place.
But the official said the administration would require 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.
A.I.G. did cut other bonuses, Mr. Liddy explained, but those were part of the compensation for people who dealt in other parts of the company and had no direct involvement with the derivatives.
Mr. Liddy wrote that A.I.G. hoped to reduce its retention bonuses for 2009 by 30 percent. He said the top 25 executives at the financial products division had also agreed to reduce their salary for the rest of 2009 to $1.
Ever since it was bailed out by the government last autumn, A.I.G. has been defending itself against accusations that it was richly compensating people who caused one of the biggest financial crises in American history.
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 autumn.
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 autumn, 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 this past 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 business units and repaying the government.
The financial products unit is now being painstakingly wound down.

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Just a follow-up...
http://www.cnn.com/2009/US/03/15/AIG.bonuses/index.html
Still not good enough, but it's a little better.
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Conservatives like to prattle on about the redistribution of wealth. Oh, yeah....there's a redistribution of wealth, all right,
>"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 heard on the news that it would cost twice as much, in legal fees,
"
I think that there is so much involved that we don't even know about.
"...credit default swaps are
"That's where I'm losing it as well."
DH
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