AIG Again

by hilzoy

From the WSJ:

"American International Group Inc. is in discussions with the government about Washington backstopping some of its troubled assets and is considering selling units through initial public offerings. (...)

Backstopping of assets would be similar to government guarantees on troubled assets owned by Citigroup Inc. and Bank of America Corp.
Were the federal government to extend to AIG the approach used with those banks, that could lessen some of the pressure on AIG from distressed assets still on its books. It could also mean the government wouldn't need to lay out as much money upfront. In AIG's case so far, the government has bought assets rather than backstopped them.
The discussions reflect a potentially major shift in how AIG and the government, which got an 80% stake in the firm from the bailout, approach the situation facing the company, which is trying to repay a government loan of as much as $60 billion that is part of the bailout. As of Wednesday, it had borrowed $38.3 billion. A spokesman for the Federal Reserve, which made the loan, declined to comment.
The discussions also reflect the reality that the financial crisis has made AIG's initial strategy for repaying the loan -- selling off assets -- increasingly difficult. Finding buyers willing to pony up tens of billions of dollars -- or able to borrow such sums -- has been an uphill battle.
So far, AIG has announced sales of only a few smaller businesses that, at least based on deals where a sale price was announced, will earn it a little over $1 billion. That is about what AIG is paying employees in retention payments to keep them from leaving for rivals, which could further erode the value of its units."

Ah, yes: those retention bonuses. I can see paying bonuses to people who did well last year, and helped keep AIG from being in even worse financial shape. But I can't understand this at all:

"American International Group Inc., the insurer saved from collapse by government money after losses on credit-default swaps, offered about $450 million in retention pay to employees of the unit that sold the derivatives, according to two people familiar with the situation.

About 400 workers at the financial products unit may get the money in two installments, said the people, who declined to be named because details of the payments were confidential. The business was responsible for about $34 billion in writedowns since 2007 as the market value of swaps AIG sold to banks plunged amid the subprime mortgage market collapse. (...)

"I was extremely disappointed -- but not surprised -- to learn that AIG will be awarding bonuses to the very division that drove the company into the ground,” said Representative Elijah Cummings, a member of the House Committee on Oversight and Government Reform, in an e-mail. AIG shouldn't be awarding "millions of unmerited dollars to employees while at the same time begging the U.S. government for financial life support.""

I find it hard to understand why anyone would offer bonuses to the very people who just single-handedly sunk the company. AIG says it's because it needs them to help unwind their positions. Is there no one else on God's good earth who could do that, and who wouldn't be inept enough to lose $34 billion and put the global financial system at risk? Is there any such thing as failure in the world of finance?

And why, exactly, did we go along with this? We, the taxpayers, own 80% of AIG. Presumably, we could have stopped this. Why on earth didn't we? If it comes to that, haven't we had enough time to prepare for further AIG losses? I understand why we couldn't let them go under out of the blue, but if they were going to take another big hit, couldn't we have done some sort of gradual, orderly bankruptcy between last October and now?

I don't get it. If anyone does, please feel free to enlighten me.

Comments

[Tony P.]

Is there any such thing as failure in the world of finance?

The Angel Clarence answered this question, saying unto George Bailey:
"No man is a failure, who has friends."

Even in the workaday world of mechanical engineering, it has been my experience that failure (or more accurately, the acknowledgement of failure) often has more to do with whether the people evaluating your work are your friends, than whether the machine you designed actually works. Evidently, this applies in spades to the world of financial engineering too.

--TP

[Brian]

Hilzoy, you are treating performance bonuses and retention bonuses as one and the same thing, which they are not.

Generally a performance bonus is given as a reward for prior performance to those who've earned it in the evaluator's eyes, e.g. something like 'we pay you a bonus in Feb. 2009 for your 2008 calendar year performance'. I agree it makes little sense for these to be given out in the failed dept's/divisions/companies.

Retention bonuses are usually a promised future payment to keep certain employees from bailing on the company. I can see these being potentially sound. Some employees have skills/knowledge that are valuable now, regardless of whether or not they caused or didn't cause a mess previously. E.g., it very well may be cheaper to promise to pay an existing skilled employee 30K dollars come July 2009 to get her to stay in place 6 months to unwind positions, versus paying 100K to hire an outsider to come in and figure out the lay of the land, then unwind the positions herself w/in that same timeframe.

I work in finance. There is such a thing as failure, it's called AIG and Bear and Lehman and plenty others. I am not familiar w/ ObWi's authors' views on supporting these bailouts in general. However it wouldn't make sense IMO to have supported bailouts and then to also question why there seems to be no failing in the world of finance. Let the incompetent/greedy jerks fail, don't bail them out. Then yes, there will be such a thing as failure in the financial industry.

[CharleyCarp]

Brian, my understanding of the bailout was to save some of the institutions, to keep their failure from killing the economy, and not to save any particular individual human beings. It doesn't surprise me that a number of people in the financial services industry would fail to see the difference.

[russell]

About 400 workers at the financial products unit may get the money in two installments

At an average of $1,125,000.00 per person.

One million, one hundred twenty five thousand dollars. Each. For blowing up the store. Or they'll quit and go work for someone else.

Are there really other jobs for these people to go to? Who would hire them? I want to know, because I want to make sure I have no holdings in their new employer.

Really, the government should just take over the damned banks, fire the folks that blew them up, run them until they're solvent, however long that takes, and then sell them. The shareholders and executives will get nothing, and the rest of us will get a nice return on the tax money that we've sunk into this mess.

Enough of this "backstopping troubled assets". Take them over and throw the bums out.

These guys want a million and change, each, or they'll take their bat and ball and go home.

Meanwhile, other folks are losing their jobs and homes.

I say give them their million and change, but they have to go door to door and collect it from all of the rest of us, one dollar at a time.

[Slartibartfast]

I don't see the point either, hilzoy. What's special about these people, other than they know the proper rituals, and where the bodies are buried.

Oh. Maybe that's it. Maybe they're in effect holding the company hostage because they're the only ones with the knowledge to pick apart the hairball. The magoo got you into this mess; the magoo can get you out.

[Slartibartfast]

Yikes. Got my numerator and denominator switched. Russell's got it right.

Need. More. Coffee.

[bedtimeforbonzo]

This is only the beginning. Soon after the stiumulus is passed, look for another bank bailout of sorts and, of course, Detroit, which looks downright ethical compared to Wall Street, will come calling again.

This economy is in deep sh!t.

[hilzoy]

Brian: what I don't get is: why would AIG want to retain the very people who blew up the company?

[John Miller]

hilzoy, I think Slarti may have the reason. It may be a form of bribery to keep their mouths shut. I would keep pretty silent about a lot of things for a million dollars.

Actually, as Brian points out, some degree of retention is not unusual in these kinds of circumstances, during a transitional period, adn some sort of incentive beyond normal salary is usually included. But the amount here is staggering.

The question is not why retain, but why at such obscene amounts.

[Slartibartfast]

I wasn't actually thinking "to keep their mouths shut" so much as "so that they'll tell us what we need to know to sort this out, because it ain't in the computer".

But bribery is also a possibility.

[John Miller]

Or a combination of both.

[Sophocles]

He's saying the framus intersects with the ramistan at approximately the paternoster.

[Comrade Dread]

I don't get it. If anyone does, please feel free to enlighten me

Sure.

We don't have friends in high places. They do. Therefore, they get to loot to their hearts content and we end up with the bill and the diminished lifestyles.

Close the loopholes and raise taxes on these jackholes now, please.

[russell]

The question is not why retain, but why at such obscene amounts.

Actually, my question is why retain.

For a million and change, you can probably hire five really good accountants.

Make a public works project out of it. Fire the guys who are there now, take their pay and bonuses, and hire five times their number of accountants, attorneys, and maybe some financial analysts. All on the public dime, it'll be a financial industry WPA.

They will, somehow, get it done.

If the guys that are there now need a million and change to keep them in place, they must have some really hot irons in the fire elsewhere. Good luck to them, and remind them to not let the door hit them in the @ss on the way out.

[Don the libertarian Democrat]

"Is there any such thing as failure in the world of finance?"

Not if you successfully lobby.

[d'd'd'dave]

Here's what I don't get.

Some are carping about how the bailout money is being used while at the same advocating more bailout money.

If you're going to give them money - don't bitch about how they use it. If you're going to bitch about how they use it - don't give them money.

This is why the best stimulus is a tax holiday. Everyone just keeps some of their own money. Simple. Then everyone can bitch to themselves about how they spent their own money.

But this won't work because we have to do some social engineering at the same time ... so we can bitch later about how the social engineering didn't work because some bad guy (of the opposing political spectrum) messed it up in some way.

[Phil]

Some are carping about how the bailout money is being used while at the same advocating more bailout money.

Who are these "some?" Links and cites, please.

[Ian]

At the end of the Bloomberg article, it notes that the retention bonuses aren't even certain to work. Many of these managers are getting jobs at competitor institutions.

So the answer is no, there is no such thing as failure in the world of finance. These people are still in demand.

[Slartibartfast]

Maybe what's needed is not so much retention as quarantine.

[russell]

If you're going to give them money - don't bitch about how they use it.

Is there any other context in which you give money to another party for some agreed-upon purpose where this same advice applies?

This is why the best stimulus is a tax holiday.

I have no particular objection to a tax holiday, but I don't see how it helps with the availability of credit to businesses.

Are we all going to get together, pool our tax rebates, and lend them to, frex, the general contractor working on your building projects so he can make payroll?

The freezing of the credit markets is the problem that was supposed to blow the whole economy up, and which the bailout is supposed to address.

I'm sure you understand all of that perfectly well, and I find your comment here frankly kind of baffling.

[d'd'd'dave]

//If you're going to give them money - don't bitch about how they use it.

Is there any other context in which you give money to another party for some agreed-upon purpose where this same advice applies?//

I don't know - probably not many. But that is exactly what happened here so my comment is appropriate. To one extent or another such things will always happen when the govt (or anyone) throws a pile of money at something. That is why it is better for each individual to make their own decisions with their own small stake.

// but I don't see how it helps with the availability of credit to businesses.//

You're correct. It doesn't. The second part of comment (re tax holiday) is more relevant to a new stimulus than the next bank rescue matter.

[Hob]

Ddddd, I think you just missed Russell's point by a mile.

Saying "that is exactly what happened here so my comment is appropriate" is a non sequitur. Your comment was that if you give someone money, you can't be picky about how they use it. Russell's point was that in the real world, when you give someone money for an agreed-upon purpose, that means you do get to be picky about how they use it. That's what "an agreed-upon purpose" means.

Or do you also think that if I pay a guy to fix my car, and he hands my money directly to a crack dealer, and does not fix my car, I should have no recourse because I'm just a sucker?

[russell]

To one extent or another such things will always happen when the govt (or anyone) throws a pile of money at something.

What "such things" are you talking about? That people will bitch about how the money is spent? Or that some folks will take public money and put a million bucks of it in their own pocket? Or both?

In either case, how does that differ from how private money is spent? Do you think that private entities never "throw money" at things? Do you think they never act foolishly, or inefficiently?

Keep in mind that the problem in question *was not created* by government. Government is just trying to pick up the mess.

That is why it is better for each individual to make their own decisions with their own small stake.

That's a lovely thought. It's also a thought appropriate to a world, and an economy, made up of self-sufficient farmers, small landholders and businesspeople, and artisanal production.

It utterly fails to scale to the world we actually live in.

[Brian]

Hilzoy, I don't know the answer to your q of course. I think it's possible that that division could cause more than 450MM in damage imploding though, so they may be trying to avert even larger problems.

I also don't know the degree to which the federal govt is now involved in making policy decisions at AIG. So who knows?

[DougL]

d'd'd'dave: before the first round of $700B in bailout money was a done deal, there was a lot of discussion on putting some reasonable limitations on how the money was going to be used - i.e., make sure the money goes to ease liquidity, don't pay bonuses with the money, etc.

And "very serious" voices objected. "ZOMG! Nationalization. Communism!" and "If you put too many [read: any] restrictions on how the money gets used, institutions that need the money won't take it and disaster will follow!"

You can't have been paying any attention to what's been going on and be surprised that the money was handed out without any significant strings attached and try to even say with a straight face that there were no objections or that nobody could've known that having no restrictions on how the money would be used might turn out this way.

[fishbane]

You can't have been paying any attention to what's been going on and be surprised that the money was handed out without any significant strings attached and try to even say with a straight face that there were no objections or that nobody could've known that having no restrictions on how the money would be used might turn out this way.

Sure you can. Just look at this comment thread. Not like that's _rational_, but I don't think expecting people to be rational is a growing business on the intertubes.

My take: of course spending $billions in a hurry was a clusterfuck. What do you expect? More interesting is what we do now, and how the next package works. Republicans, as a block, seem to be more interested in obstructionist behaviour because that looks like a lifeline for job security, Democrats seem to be running with the herd, and the rest of us, well, I'm looking for a job right now.

It would be nice if someone did something that made working stiffs more capable of, you know, working.