Two Thoughts on the AIG Bonus Scandal

I normally don’t comment on politics here, but wanted to share a couple thoughts I had about the recent churn and furor over the $165M in bonuses paid out to approximately 370 employees in the AIG financial products division.  As everyone now knows, this is the same division that apparently ended up with such large unhedged exposure that it required $170B of US government “investment” to prevent global economic collapse.

Now that’s chutzpa.  World record chutzpa.

Obama is pushing hard to get this reversed.  Trouble is, the contracts were signed before the bailout, and Connecticut actually has a law that requires double payment of withheld compensation.  Way to go, worker protection laws.  A couple thoughts:

  1. Avoid Bankruptcy at your own peril.  Our legal & financial system is like a giant, complex distributed system.  As anyone who works on distributed systems knows, common definitions and patterns are essential.  We have a pattern that’s been built over more than a hundred years for having debts greater than ability to pay.  It’s called bankruptcy.

    The problem is, AIG never went bankrupt.  That means all of the common agreements and assumptions, both written and unwritten, about failed businesses no longer apply.  In a bankrupt company, all debts are subject to negotiation, including wages and compensation.  Every state is different, but the lattitude to control the existence of prior contracts is huge.  By not letting AIG go bankrupt, we’ve probably actually limited the number of options we have in this and thousands of other situations tremendously, because there isn’t a hundred+ years of legal precedent for businesses that “should have failed but didn’t because of US government investment”.  Nope.  None.  As a result, a lot of laws that apply to companies that don’t go bankrupt apply here.

    This should be a giant warning flag to anyone who thinks keeping the auto companies in pseudo-bankruptcy is a good idea.  (They themselves are beginning to realize that negotiations with creditors, suppliers, distributors and the UAW are very complicated when you can’t invalidate contracts…)

  2. Sunshine may be the best disinfectant. I’ve heard a variety of proposals on this topic, ranging from the fatalistic (you can’t take the money back) to the extreme (we’ll fire anyone who takes the bonus.)  I’m skeptical that the latter really has teeth (Here.  Take $3M.  Don’t come back!), and I’m concerned the former declares defeat.

    Here is a middle proposal.  Publicity.  Cuomo is right on this one.  Give in to the subpoena. Publicly list the name of every single employee of AIG that receives a bonus over $5000 this year.  Name, Title, City, State.  Give them the option of declining the bonus, or appearing on the list.

    In this economy, with this attention from the public and the government, that list is one place I wouldn’t want my name to be.  It would follow you forever, and that’s assuming the government doesn’t directly target you.

Just a thought.  It might be naive, and I’m not sure of the legality of putting names on a list like that where a lynch mob might literally come out with torches and pitchforks.  But it’s a thought.

2 thoughts on “Two Thoughts on the AIG Bonus Scandal

  1. You are exactly right that bankruptcy was the best option. Given that it’s too late for that, I think what’s happening now is perfect. The outrage may be the only was to prevent, or at least reduce, more of this in the future.
    The Cuomo idea, in my opinion, would be counter productive. I’d predict a lawsuit, but not from who most might expect.I think AIG would find a “poster child” person. A sympathetic single mom, for example, only getting a $10k bonus. It might difficult, and certainly not the norm, but I bet they could dig up one sympathetic person in that pile people and money.
    Congress and AIG benefit from defusing the outrage. I’d rather not give that to them.

  2. Oh, so you were the voice inside my head today. 🙂 You’re exactly on target regarding non-bankruptcy. In general, anybody who expected to have hundreds of billions of dollars thrown at walls like wet noodles and not have rampant corruption and greed, isn’t being realistic. I’m lacking on outrage because none of it is surprising.

    I did hear one defender of AIG report that many in the industry are compensated at a subsistence salary and rely on bonuses to be competitive (the example given was $40K salary and $60K bonuses). That doesn’t seem outlandish, and the defender was disingenuous in implying these were what people were complaining about, but your $5K number might need revising up a bit. Some of these guys may owe more in income and property taxes than their base salaries cover. The fellows who are getting $2M retention bonuses mailed to their retirement homes are fair game for the pitchfork mobs, though.

    I’m still pretty disappointed that nobody is dumping a load of bricks on S&P yet. They’re the knuckleheads who rated these AIG securities AA, which kept AIG’s rates down and multiples high. If they had rated appropriately, AIG would have been less profitable and less competitive, but they would have had to become more stable to sell their wares to investors. I see S&P as this round’s Arthur Anderson, but it hasn’t hit yet. Unless AIG lied to S&P, but if that were the case Cuomo would be jumping up and down with fists full of indictments.

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