Bonuses At AIG

by hilzoy

From the WSJ:

"American International Group Inc. will pay $450 million in bonuses to employees in its financial products unit. That division was at the heart of AIG's collapse last fall, which compelled the U.S. government to provide $173.3 billion in aid to keep it running.

Chief Executive Edward Liddy told Treasury Secretary Timothy Geithner in a letter dated Saturday that the next payments to employees of the financial products unit -- whose woes caused massive losses at the giant insurer -- are due on Sunday, and added "quite frankly, AIG's hands are tied."

Those payments are in addition to $121.5 million in incentive bonuses for 2008 that AIG will start making this month to about 6,400 of its roughly 116,000 employees. AIG, which was rescued in September as it faced potential bankruptcy, is also making over $600 million in retention payments to over 4,000 employees.

Together, the three programs could result in roughly $1.2 billion in retention and bonus payments to AIG employees."

If you want to get really angry, consider that this division, whose members will be getting nearly half a billion dollars in bonuses for the remainder of 2008 and 2009, has about 370 employees. That's well over a million dollars a person, to a group that lost over $40 billion (so far!), and bankrupted its parent company. Nice work if you can get it.

As far as I can tell from reading this explanation from AIG, and this letter from its CEO to Sec. Geithner, there are two issues. One is contractual: they promised their employees all this money back in the spring of 2008. To which I can only say: what sort of idiot would commit a company to paying a bonus to an employee even if that employee took down the company? And what sort of Treasury Secretary would commit the US to rescuing AIG without securing the authority to renegotiate those contracts?

The second, which is much harder to accept, is that no one but the idiots who put these trades together understands them well enough to unwind them. (See pp. 3-4 here.) When I say that this is hard to accept, I don't mean that I don't believe it. For all I know, it's true. I just mean that I hate the thought of it: that the people who worked in this division, having wrecked their company, done serious damage to the world financial system, and required hundreds of billions of dollars of taxpayers' money, might actually be in a position to extort even more.

And extortion is what it is (morally; I am not a lawyer, and I'm not trying to make a legal claim.) If I ran someone down in a car on a deserted road, it would take a lot of gall for me to ask him to pay me an exorbitant price to take him to the hospital since there's no other car around. When you run someone down, taking him to the hospital is the least you can do, and payment shouldn't so much as enter the picture. 

Likewise, when you run the world financial system and the American taxpayer down, it takes a lot of gall to ask for not just a performance bonus, but a retention bonus as well. Any remotely decent person would stay and try to unwind the damage s/he had caused, if s/he was the only person who could do so, and would be content with his or her salary. (After all, it's not as though people in financial services are generally underpaid.)

If the people in the AIG Financial Products felt this way, they could have made all these legal issues about contracts vanish by simply declining their bonuses. And they could solve the retention problem by agreeing to stay around as long as they're needed, at their existing salaries. Instead, they are using our predicament to extract even more money for themselves. And that's obscene.

Comments

[Neil the Ethical Werewolf]

no one but the idiots who put these trades together understands them well enough to unwind them

That's what my friend who works in the finance business (not for AIG or anyone else who's likely to get bailed out) told me. Basically, $100 million is something like 0.1% of the money that's tied up in these trades. We the people now owe 80% of AIG. Having new folks try to understand the deals and clumsily unwind them will cost us a lot more than 0.1% of their value, so it's cheaper to just pay the bastards their money and have them do it.

I'm somewhat more attracted to an alternative where we enslave these people for six months and make them unwind the trades for nothing. But that's neither legal nor feasible and I'm not sure what other options we have.

[Ethan]

And what sort of Treasury Secretary would commit the US to rescuing AIG without securing the authority to renegotiate those contracts?

I don't know, a Secretary who is aware that the Constitution prevents the government from "impairing the Obligation of Contracts"?

Assuming for the moment that AIG's characterization is correct--i.e. that the contracts are airtight--I don't see how you can blame anybody other than the folks who are owed the money.

There are so many outrageous aspects of this whole crisis, I don't really understand why everybody is getting worked up over "AIG intends to do things it is legally obligated to do".

[Ethan]

Which is not to say that these compensation agreements aren't outrageous speaking from a societal perspective.

An interesting historical comparison. I'm currently reading Snowball, the recent biography on Buffett. The author mentions how shocking it was, in the mid 80's, when Buffett became one of the ten wealthiest men in the country. It was almost unheard of for a man to become so wealthy purely by managing the wealth of others.

Nowadays, it seems like that's the only way for a person to become so wealthy.

[zhak]

Don't you wonder about the mentality of the AIG employees willing to accept their "bonuses"? Have these people no shame or self-awareness? I hate to sound either blood-thirsty or flippant, but at least back in the day, people had the good grace to jump out of buildings.

I think we're seeing the ultimate example of our responsibility-free culture.

It's sickening.

[Catsy]

I don't know, a Secretary who is aware that the Constitution prevents the government from "impairing the Obligation of Contracts"?

I fail to see what part of placing reasonable conditions on billions of dollars of free taxpayer money constitutes "impairing the Obligation of Contracts". It's simply saying: look, if you want this money, you need to make this contractual condition go away. If you can't find a way to legally make that happen, you don't get this taxpayer money that you're asking for.

The sheer chutzpah of these thieves is mind-boggling. At this point they are in all seriousness lucky some crazy homeowner or day trader that went off the deep end hasn't done them mortal harm. They seem either unaware or uncaring of the depth of the loathing they've engendered--both from the public and from the government. Sooner or later something will give, and I'm betting we reach a point where the Obama administration stomps on them hard.

If these "idiots" really have bonuses written into their contracts that they get irrespective of their job performance or success, and a company full of high-priced lawyers can't find a way to legally say "you are the direct cause of this company's financial ruin and there is no world in which you're entitled to any kind of bonus", they're a hell of a lot smarter than the people who hired them.

I call BS.

[sanbikinoraion]

Yes, indeed, if they want their contractually-obligated bonus they can take their contractually-obligated redundancy, too, since that's what they would have been without the bailout money.

[Turbulence]

If the bonuses really are contractually obligated, perhaps Congress could pass a special bill mandating a tax on these 43 AIG employees that just happens to work out to 110% of their bonuses. If contracts are sacrosanct, let them keep their bonuses for a few months before the IRS hammers them.

[Andrew]

I find it ironic that many of the same right wingers demanding that union auto workers be mandated a pay cut are now screaming that multi-million dollar executive bonuses are sacrosanct.

[Slartibartfast]

To which I can only say: what sort of idiot would commit a company to paying a bonus to an employee even if that employee took down the company?

More to the point, or more to another point: what sort of company contractually obligates themselves to pay bonus during times of non-performance?

At one time in my career, I got on the "bonus list"; once on, you don't get back off until you leave the company. Bonus was keyed to both your personal performance, performance of your division, and overall corporate performance. This seems to be fairly straightforward. Bonuses were determined at the close of the financial year, and were awarded very shortly thereafter and asynchronous to the merit increases.

Now, it may very well be that at AIG, the bonus determination was made last year, based on the previous year's performance, or something similar. Still, it looks very stupid to be passing out many millions of dollars in bonus now, nearly a quarter of the way through 2009, when AIG was in really, really bad trouble more than six months ago, and was only in bad trouble a year ago.

[Slartibartfast]

If the bonuses really are contractually obligated, perhaps Congress could pass a special bill mandating a tax on these 43 AIG employees that just happens to work out to 110% of their bonuses. If contracts are sacrosanct, let them keep their bonuses for a few months before the IRS hammers them.

Uh...that kind of violates the prohibition on bills of attainder, doesn't it?

[Slartibartfast]

Maybe the right thing for these people to do would be to do what John Galt would have done: if you've royally screwed up the job, refuse the pay, because you didn't earn it.

[Brian]

Technically, Slartibartfast, bills of attainder only apply to criminal acts. But even if it were: Congress is quite good about writing in tax exemptions that look general but turn out to only apply to a few special companies; they could turn their talents to good.

[Slartibartfast]

Technically, Slartibartfast, bills of attainder only apply to criminal acts.

The clause thus prohibits all legislative acts, ''no matter what their form, that apply either to named individuals or to easily ascertainable members of a group in such a way as to inflict punishment on them without a judicial trial.

Unless I've completely misunderstood, what you've said isn't strictly correct. But IANAL.

Congress is quite good about writing in tax exemptions that look general but turn out to only apply to a few special companies

We're talking about taxes on personal income, not corporate income.

[Jeff Darcy]

Contracts are enforced by governments, who may and do arbitrarily limit their terms. If you try to make a contract that involves an illegal act, e.g. to have someone killed, you will quickly find that the contract is not considered legal or valid (quite beside the fact that asking the courts to enforce it might get you indicted as accessory to murder). To take the government out of this equation is to say that the company with the most guns gets to enforce their own contracts, which is obviously not much of a free market. In this case, the government can and should nullify any contracts requiring these bonuses. Good luck to anyone who thinks they could take the government or the company to court for breach of contract after that.

[Jeff Darcy]

As to bills of attainder, a law specifying that certain general types of contracts are nullified when any company accepts government funds doesn't qualify. There is a bit of an ex post facto problem if the bonuses have already been paid out, but not a bill of attainder problem.

[Jeff Darcy]

I do wonder, BTW, how the clause in the constitution about "impairing the obligation of contracts" might apply to corporations which hadn't been invented yet, and particularly to corporations which are mostly owned by the government itself. This is yet one more example of how granting full personhood to immortal and amoral corporations was a mistake.

[TJ]

If Geithner wasn't in on the scam the solution is simple. Cut the bonus amount out of the bailout money and let AIG's counterparties go after the bonuses. I'm pretty sure they would.

[Slartibartfast]

If you try to make a contract that involves an illegal act

Irrelevant, here. So far as we know, at least.

a law specifying that certain general types of contracts are nullified when any company accepts government funds doesn't qualify

That wasn't what was being discussed when I brought up bills of attainder.

I do wonder, BTW, how the clause in the constitution about "impairing the obligation of contracts" might apply to corporations which hadn't been invented yet

Again, IANAL, but I'd guess that they apply in much the same way as the Bill of Rights does to people who haven't been born yet. Or were you talking about corporations, in general, in their current form?

[Eric Martin]

The government shouldn't come in and void the contracts, but rather should condition the bailout money on a restructuring of those agreements.

[Jay C]

Oh, and by the way:

Regarding the "contractual obligations" dodge: the following analysis comes from Robert Reich - who certainly knows more about these things than I do: and he dismisses it in one paragraph:

AIG's arguments are absurd on their face. Had AIG gone into chapter 11 bankruptcy or been liquidated, as it would have without government aid, no bonuses would ever be paid (they would have had a lower priority under bankruptcy law that AIG's debts to other creditors); indeed, AIG's executives would have long ago been on the street. And any mention of the word "talent" in the same sentence as "AIG" or "credit default swaps" would be laughable if laughing weren't already so expensive.

[J. Michael Neal]

The problem with Reich's argument is that AIG didn't go into any sort of bankruptcy. It would have without government intervention, but that didn't happen.

As with a number of things about this mess, the operative question is whether or not we can afford to let AIG fail. If we can, we can condition the bailouts on restructuring the contracts and not paying the bonuses, or at least could have.

If we really can't let AIG fail, we don't have that option. If the executives say that they will collect their bonuses so long as there is a legal way to do so, and that they won't accept a bailout if it requires giving them up, it turns into a game of Chicken, and they have the upper hand. These people are already rich; they don't need the bonus money in order to make ends meet. They need the bonus money because they measure the length of their genitalia against those of their brethren by how big their compensation is, and by how tough they can be. If the choice is between letting the company fail, or agreeing to forgo their bonus, they choose the former, even if it means that they lose their bonus to bankruptcy. That's based upon my experience with people in the finance industry.

Sure, this makes them even more despicable than the case Hilzoy lays out in the next post, but what do you do?

[Slartibartfast]

Reich's If-then hypothetical is only a hypothetical, and one in which the if-condition never occurred.

So, it's more or less irrelevant. Bankruptcy court can void or restructure contracts, but you can't just void them by saying, well, you could have gone bankrupt.

[Slartibartfast]

Or, what J. Michael Neal said a couple of minutes before.

[Slartibartfast]

Now, I have seen people renegotiate debt from the position that, well, if I can't renegotiate this, then I'll have to file bankruptcy. I did that myself, many years ago.

But that wasn't done, here.

I'd think that what ought to have been done is that the government come to AIG and say: look, we're willing to bail you out, on the condition that you renegotiate your employee bonuses down to some number less than or equal to X. It's up to you to decide just how you're going to do that.

But some part of the above didn't happen. Maybe none of it did.

I'm now wondering if AIG was obligated to pay their bonuses even if they were terminated for cause. It'd be interesting to see just what these purported contracts promise.

[Jeff Darcy]

No, Slarti, the bit about illegal acts is not irrelevant and it's rude of you to dismiss it so curtly. Even if one were to ignore the many criteria (e.g. conflict of interest, misuse of government funds) under which those contracts might be considered to involve illegal acts, the whole discussion of illegal acts was merely an example of how government routinely "interferes" with contracts. Bankruptcy law provides another example, if you prefer. Interpretation of a contract's validity is up to courts, not to the parties themselves, and the courts routinely hold contracts (or parts of contracts) invalid for a whole host of reasons that might apply here. This whole argument about "impairing the obligation of contracts" is one big red herring, because the government exercising its duty and prerogative to interpret and enforce contractual obligations is not impairing anything. It's an essential part of making contracts meaningful.

Also, applying a law to entities (unborn persons) that didn't exist at the time the constitution was written is not at all the same as applying it to whole classes of entities (corporations) that didn't exist yet. That's a false analogy. Assuming a textualist position, when the battle between textualist and intentionalist interpretations still rages, is more than a bit disingenuous. Was it the framers' intent that the injunction against "impairing the obligation of contracts" should apply to paper entities owned mostly by the government itself, and/or to entities which would be in bankruptcy (where courts have repeatedly upheld such contractual modifications) without such ownership? That seems like a dubious proposition at best.

Is it too much to expect that defenders of AIG should engage with counterarguments instead of ignoring them? As Greenwald pointed out, why are the AIG bonus contracts more sacred than the automakers' contracts with unions, or any other contract? You can't just hide any arbitrary act from law or moral duty by making it part of a contract.

[russell]

From reading Liddy's letter to Geithner, it seems like he's trying to do his best in a crappy situation.

He may well be contractually bound to pay the bonuses. The folks who are going to receive them are not, I imagine, legally bound to take them, but I'm sure they'll take them nonetheless.

These folks are building a deep and wide well of outrage and well-justified resentment towards themselves and their industry.

Sometime soon, AIG will likely need more money.

Sometime soon, Congress will consider reforms to the laws that regulate the financial sector.

Sometime soon, Liddy and/or others will consider what the fate of the AIG's financial products division should be.

These folks will likely get their million-plus. They should be careful not to spend it all in one place, because they may not see any more when it's gone.

[Slartibartfast]

No, Slarti, the bit about illegal acts is not irrelevant and it's rude of you to dismiss it so curtly.

It's rude of me to observe that no illegal act has occurred, as far as we know? I'm very sorry you saw that as rude; it wasn't intended to be.

Bankruptcy law provides another example, if you prefer.

Also irrelevant, at present. The problem with your various examples of ways governments interfere is they don't apply in this situation. If you bring up one that does, or even might, apply, I'll not be so curt next time.

Sorry if that was rude. Really. We're just having a conversation, aren't we?

Also, applying a law to entities (unborn persons) that didn't exist at the time the constitution was written is not at all the same as applying it to whole classes of entities (corporations) that didn't exist yet.

Ah, but corporations did exist. Not in their current form, but they certainly did exist, and long before the US Constitution was a glimmer of thought in the minds of the Framers.

Is it too much to expect that defenders of AIG should engage with counterarguments instead of ignoring them?

You think I'm defending AIG, somehow? Interesting, and rather rude of you to assign intentions to me that aren't there.

[TJ]

Sure, this makes them even more despicable than the case Hilzoy lays out in the next post, but what do you do?

Get rid of them anyway. If essentially we're just shovelling money to the counterparties, cut out the middleman (AIG). Talk directly with the counterparties, if we're so scared of them going down.

[J. Michael Neal]

As Greenwald pointed out, why are the AIG bonus contracts more sacred than the automakers' contracts with unions, or any other contract?

They aren't. I'm not making any sort of argument that they are sacred. I'm arguing that these ******* have structured this whole thing such that we are over a barrel.

As for the autoworker contracts, I'm in favor of leaving them as is.

[J. Michael Neal]

Get rid of them anyway. If essentially we're just shovelling money to the counterparties, cut out the middleman (AIG). Talk directly with the counterparties, if we're so scared of them going down.

So, what's your plan for all of the insurance policies people have with AIG that get ****** when it goes down? If we could let them fail, we wouldn't feel such urgency to pay off the counterparties.

[Slartibartfast]

Here's another approach. Not sure that it'll work, though.

Link via the widely admired Instapundit.

[russell]

Ah, but corporations did exist.

That's true, but the legal standing and favorable legal treatment they receive is a relatively recent innovation. In this country, anyway.

[gregspolitics]

Having persons who helped create this problem receive retention bonuses is, of course, outrageous, absurd and disgusting, and somewhat contrary to capitalist principles. And it looks bad, which is really the main problem as it allows Republicans to play faux populists while Obama is stuck with the pragmatic responsibility of solving the problem created by Republican rule. BUT solving the problem is the main point and those of us who want Obama to succeed should not play into the hands of those who want him to fail. As I understand it, $70B of money to AIG is from TARP capital injections and another $110B is from the Federal Reserve's loans made last fall. The money from the Federal Reserve is not taxpayer money. As I understand it, including what Bernanke said on 60 minutes last night, the Fed basically gave AIG an acount at the Federal Reserve with $110B in it to use to meet their obligations. This was a loan, just like when your bank makes a loan to you by putting a no doubt much smaller amount into your account. In both instances, the money supply gets expanded. In other words, the Fed printed money, digitally, of course. This loan is to be paid off through moneys realized from sale of AIG assets and there is really no reason to believe that it will not be paid back, with interest, and, therefore, profit to the Federal Reserve, as AIG has valuable assets that can be sold profitably over time. For the same reason, I also expect that the TARP money that went to AIG is also likely to be returned in full, with interest. The funds paid out in bonuses can be viewed as funds paid from the loan made by the Federal Reserve, funds which will be repaid and cost the taxpayers nothing in the end, and have never, in fact, been taxpayer dollars. Fundamentally, all of this is not being done to save AIG, it is being done to save the economy and the Obama Administration is correct to keep its eye on that ball. Thus, my concern is not the bonuses, but that Obama and his admin have not done a better job of explaining what all of this is for in the first place. If allowing a few idiots to receive their bonuses is necessary to solving the problem, then so be it. For the future, of course, we need legislation that properly regulates the financial instruments that caused the problem, works to avoid the creation of "too big to fail" institutions and that provides a method of resolving problems like this in the future that would give the govt the legal ability to say no to such bonuses. However, I might add that it may be, as a practical matter, that the bonuses should be paid to keep important people on board, and so it may be better that the Obama Admin can claim that they have no choice because of the law rather than having to say that the bonues make sense for any other reason. It seems to me that a lot of us on the outside looking in keep demanding some perfect solution in which the economy is saved and all of the bad people suffer some grotesque punishment, but that is not reality and after 8 years of an administration that pursued its agenda without regard to reality, we voted in an administration that would deal with reality, no matter how unpleasant.

[Slartibartfast]

There are a few other innovations that are a lot more recent, russell. Does that mean we can or even should do away with those, as we please?

Unbinding corporate contracts at whim is, I think, a can of worms that we might want to consider declining to open if other options are available.

[Slartibartfast]

Of course, once again: IANAL. Right about now it'd be good to have one of the various and sundry lawyers on the ObWi staff chime in on this point.

[BostonBob]

Perhaps we could get a brilliant lawyer, someone like John Yoo, to write a memorandum of law giving cover to those who would breach contracts, the enforcement of which is politically offensive.

[Slartibartfast]

That would be awesome, Bob.

[Ron]

The bonus payout excesses at AIG are just the tip of the iceberg of what is happening with the other Wall Street bailouts including Bank of America. Working productive Americans are bailing out the same crooks that destroyed our economy along with 45% of the wealth in the world and now the American taxpayers and our children will be forced to live a far lower standard of living with reduced prosperity and opportunities due to this but only we pay the price.

Washington has bailed out the banks, Wall Street & their Washington special interests and much of the cost is added to the national debt to by paid by this and future generations while real estate and investments continue to fall. Find out what a growing repudiate the debt movement could mean for treasuries, the dollar, gold and the stock market and how this is a better alternative than Washington’s plans to monetize the debt in future years and tax and destroy our remaining wealth by depreciating the dollar.

The Campaign to Cancel the Washington National Debt By 12/21/2012 Constitutional Amendment is starting now in the U.S. See: http://www.facebook.com/group.php?gid=67594690498&ref=ts

[Slartibartfast]

Oh...write off the National Debt? That would be even more awesome. Who could possibly object to such a thing?

Besides China, Japan, and a whole bunch of countries that hold our debt, I mean.

[Paul Halsall]

The seems to be no way out of this debt mess. Perhaps there should be a world wide cancellation of all debts and a new beginning. This was after all an approach that worked once in ancient Athens.

[Eric Martin]

Slarti: We required auto workers to restructure their binding contracts in order to receive bailout money (as mentioned upthread).

What's good for autoworkers is certainly good for executives.

I am a lawyer. I do transactional work: contract negotiation is a big part of it.

All contracts can be renegotiated. Conditioning massive amounts of government aid on contract restructuring is perfectly Constitutional, and is not unprecedented.

[Slartibartfast]

We required auto workers to restructure their binding contracts in order to receive bailout money (as mentioned upthread).

Sure. But we didn't require AIG to do the same. And now we can't, because the bonuses are already being paid. Sure, we can make future bailouts contingent on restructuring those contracts, but AIG already has something of a hammerlock on us, no?

I'm pretty sure we can't just hand them the money and say oh, by taking that money, you've agreed to thus-and-such.

Obligatory IANAL here.

[russell]

Does that mean we can or even should do away with those, as we please?

No, not at all.

My response to your post was, more or less, a knee-jerk reaction to your reference to the history of corporations. It wasn't particularly relevant to the topic at hand.

It's a topic I find interesting, but would be kind of a threadjack in context. Another time, perhaps.

My apologies.

Also:

IMO gregspolitics makes some excellent points, and I really like the idea of going after the bonuses as illegally excessive compensation, as suggested in the article slarti links to.

If they want to plead rule of law, then let's play by rule of law. I'm all for it.

[Prup (aka Jim Benton)]

Ron, this is the third place I know of where you have posted the same comment. Repudiation of the debt is neither practical nor sensible, unless you are heading for a sharia-like interest-free society, which ain't gonna work.

[Brett Bellmore]

It occurs to me that, while it would be quite obnoxious of anybody who helped their employer go under to demand a bonus, even if they were contractually owed it, we're talking about a fairly large number of people who were doing a variety of things, and to assume that everybody who's getting a bonus was responsible for the company tanking is kind of iffy. Some of the people getting bonuses might have been responsible for the company not tanking quite so badly as it otherwise could have.

IOW, I'm cautioning against making blanket assumptions where individual assessments are called for.

I'd also note that, were it not for our government's ability to shoot people who won't give it money, it's long-standing defitics would have constituted bankruptcy long since. Maybe they could have refrained from taking a pay raise themselves?

[Eric Martin]

But Brett: we can definitely say that even is some employees are doing a good job, the company itself has no money to pay bonuses to anyone.

[Slartibartfast]

My apologies.

As always: apology not needed, russell. But thanks for, as ever, erring on the side of courtesy.

This whole topic is interesting to me as well; not just the corporation-as-a-legal-entity conversation, but also the notion that we can and actually ought to exact some kind of justice or even vengeance on companies like AIG, even if that means cutting a legal corner here and there.

But: if our government failed to exact concessions similar to those it obtained from GM before it forked over the cash, who do we blame first? Let's say that the Fed gave GM every penny it could possibly need, without requiring anything at all in return. Does anyone think the government ought to then be able to force GM to do some things in return, even after it's given up the bailout lever?

Also, given that we own something like 80% of AIG, how could any significant fraction of shares be non-voting? If we own a huge bloc of voting shares, why aren't we voting them?

[Eric Martin]

Well, first off Slarti, shareholders don't get to vote on compensation. The comp committee decides exec comp (almost always) and the comp committees are appointed by...the executives!!!

There have been bills proposed that would require shareholder votes on exec comp, but the GOP and certain compromised Dems have shot them down.

[Bullsmith]

If blackmailing the government by holding a gun to the financial sector and threatening to cause massive harm to the country and beyond if you aren't paid money you clearly morally don't deserve is all okay because the government isn't allowed to meddle in contracts then to put it simply, this system we've got going is fucked.

Throwing up your hands and saying, what can you do, they've got us over a barrel, let's just work the rest of our lives to pay the banker's bad debts presents what social values? It's theft made legal, and it's what third world countries do.

[Eric Martin]

bull, please refrain from spelling out curse words, as some readers' work filters get triggered. Thanks.

[Slartibartfast]

Ah. Well, there goes that idea. Can't shareholders vote on compensation policy, if not specific compensation packages?

Thanks for your replies, Eric.

[Eric Martin]

I think you'd have to amend the bylaws to do that, which is possible if a bit difficult in terms of mustering shareholder votes. And sometimes that requires supermajorities.

[Slartibartfast]

Is 80% generally considered to be a supermajority, in your experience?

[Free Lunch]

It takes a special kind of fool to think that bonuses should be handed out for catastrophic failure. Were the bonus contracts really so badly written that people were being paid to destroy AIG and given special bonuses for doing a good job of it? Could Mr. Liddy please explain why he is concerned about retention? Why he wants the people who destroyed his company to stay around?

I could do the job of almost every one of them.

[Free Lunch]

Eric, the Feds own almost 80% of AIG. They can do what they want with AIG and it is irresponsible of them not to put their own slate on the board of AIG.

[Eric Martin]

Is 80% generally considered to be a supermajority, in your experience?

HA!

Yeah, I just thought of that. Of course, this would be retroactive. BTW, Disney shareholders voted down a similar proposal last week:

http://www.latimes.com/entertainment/news/business/la-fi-cotown-dismeet11-2009mar11,0,3311367.story

[Slartibartfast]

This seems to indicate that yes, the government effectively does have a supermajority stake:

The Preferred Stock is entitled to participate in any dividends paid on AIG common stock and is convertible into a number of shares of common stock equal to 79.9% of the outstanding common stock when converted. In addition to being convertible into a supermajority of the outstanding common stock of AIG, the Preferred Stock has the right to vote with the common stock on all matters submitted to AIG shareholders and is entitled to an aggregate number of votes equal to its equity share as converted (79.9%). AIG renegotiated the terms in early November but the government’s total equity stake remained largely unchanged. Thus, the federal government currently enjoys complete control of AIG.

What now, beyatches?

[Eric Martin]

Free Lunch: They can use shareholder powers to do what is enumerated in the bylaws, and to make amendments to those bylaws going forward.

But they would have to follow established procedures. But yeah, going forward, I would be in favor of clearing out the board - and management - via shareholder action.

[liberal japonicus]

Link via the widely admired Instapundit.

How did you get thru to Galt's Gulch?!?

[Deborah]

It seems clearer and clearer that all such entities should go through a period of government receivership, or bankruptcy, or something that renders any really stupid last-minute contracts void. AIG just continues to raise the specter of "if we have a supermajority, why can we not fire people who use our money for spa retreats?"

One thing about this that puzzles me is that this is a down economy, most especially in the financial sector. How intimidating is the threat "Pay me millions in retention bonuses, or I'll walk out that door and offer my services to the company down the street!"? I can be cynical, but the belief that people are absolutely panting to hire these geniuses and will pay whatever it takes seems a bit over the top.

[Steve]

I would have thought that someone would have pointed this out before now, but I guess not: The Constitution prohibits STATES from impairing the obligation of contracts. It does not prohibit the federal government from so doing. Read your Constitution!

[(The Original) Francis]

First, it's worth noting that this is largely water under the bridge. The govt made a bad deal and we're now seeing one of the consequences of it.

That said, one of the powers I have not discussed to date is the power of Congress to declare that certain contracts are void as being in violation of public policy. This goes back all the way to the Gold Contract (?) cases.

[Sapient]

Steve, there are legal impediments to impairing contracts other than the contract clause. There's the due process clause (for example). My feeling is that there's an unjust enrichment case to be brought against these people, and with any luck the government will bring the case and get the money.

[Justin H.]

A possible solution is to just publicly name every individual who received a bonus. Or just threaten to. This might not necessarily make them refuse the bonus/pay it back, but I'm willing to bet a good portion of them would. Call it blackmail if you will, but you can get the salaries of other government workers (teachers) rather easily. Considering the government owns 80% of the company, I would consider them fair game.

[bedtimeforbonzo]

For all of the gripes and misconceptions people have about the car business, I can say that its employees -- at the dealership level, where everyone here has dealt with someone -- earn what they earn. There are no freebie bonuses like at AIG or where Slarti referenced his personal experience. You make what you make; in that way, it's as on-the-level as any business I know.

Our bonuses are monthly. During the whole second half of 2008, most months went by without a single salesman in a six-man department not making even the modest first-rung bonus; in the old days, if you didn't make such a level, you won't home with your tail between your legs.

Market conditions being what they are, and management responding to them, the first-rung bonus level was lowered for 2009. So now two or three guys are hitting it, but just barely.

I suppose this whole AIG mess is good for the image of car salesmen. But I doubt it. Very few of us will ever come face-to-face with one of these AIG cruds.

[Andrew]

I would be in favor of clearing out the board - and management - via shareholder action.

Not gonna happen. The problem, of course, being Delaware.

"...Such are the lengths to which Delaware jurists and state officials go to nurture the state's golden goose, an incorporations stronghold that provides the state with about one third of its $3.3 billion in annual revenue. For 109 years, Delaware has cultivated its role as the best place to incorporate by carefully tweaking its constitution, laws and court.
[...]
The Delaware State Bar Association's corporations law section, made up of hundreds of the most respected corporate lawyers in the world, constantly monitors developments and makes recommendations to lawmakers after careful deliberation, lawyers said. Nearly every year for the past 40 years, the state has made some adjustment to the corporate code.
[...]
Today, 61 percent of the country's Fortune 500 companies are incorporated in Delaware [including AIG]. Fifty-five percent of U.S. companies traded on the New York Stock Exchange and Nasdaq have their legal home here. Since January 2003, 81 percent of all initial public stock offerings by U.S. companies on American exchanges were by companies incorporated in Delaware.
[...]
Concessions to shareholders, such as allowing them to vote on executive compensation, could silence claims that Delaware is too favorable to management, Elson said.

"It's not what Delaware does, it's what it doesn't do. The federal government comes in when there's a vacuum," Eisenberg said.

"The risk of inaction is so much greater than the risk of action," said Wilmington lawyer Grant.

Castle agrees that Delaware should act preemptively. "We'd be better off in Delaware if we get ahead of the pack," Castle said.

On the other side, many Delaware lawyers say "not so fast." The state has built its legal franchise by not having knee-jerk reactions that create unintended consequences.

"We ought not to be bullied into making changes to our corporate law that we don't think represent good corporate policy," Hamermesh said."

[Eric Martin]

But Andrew: I'm pretty familiar with Delaware corporate law (the DGCL) for the reasons that you stated - many of my clients choose to incorporate there.

But I was unaware that the DGCL removed shareholder votes on board members and amendments to bylaws. Is that what you're saying?

[(The Original) Francis]

Ah, I was thinking of the Gold Clause cases for the holding that the federal government may impair private contracts as being in violation of the public interest (more or less).

[bedtimeforbonzo]

Slarti certainly has this right: "I'd think that what ought to have been done is that the government come to AIG and say: look, we're willing to bail you out, on the condition that you renegotiate your employee bonuses down to some number less than or equal to X."

Of course, that's what we should have done. And now, as Bullsmith so eloquently put it, we're fncked.

Meanwhile, as Free Lunch says, since we own 80 percent of AIG, isn't it high time we start calling the shots?

I think the overriding frustration to this whole thing was expressed by Paul Haskell: "There seems to be no way out of this debt mess."

When all of this started -- or was brought to the fore with the first big bailout in October -- I bought into the whole, "Heaven forbid, we have to do this or the whole economy will unravel to unimaginable depths."

Now I'm not so sure.

Even with the TARP monies, these companies seem best at soaking us. With this is as backdrop, consumer confidence has been low and, perhaps, rebellious. The Dow Jones looked at one point as if it might touch 6,000. And the real economy doesn't seem measurably better.

Perhaps we should have fncked them instead. Perhaps we should have let them all fail or say hello to Mr. Bankruptcy -- GM included. No more handouts. Clearly, the government doesn't do the handout business well and the recipients of the handouts treat the money as if it's there's to blow.

Fnck 'em.

Need a handout, sorry, taxpapers are tapped out, Mr. Wall Street Executive. But here's the number of a good bankruptcy attorney. Use it.

[Andrew]

I was unaware that the DGCL removed shareholder votes on board members and amendments to bylaws. Is that what you're saying?

That is what I was saying, but I may be mistaken. This (mis?)conception is based on something I saw on the news, but looking through the Delaware corporate law, I can't find anything to back that up. Granted I am not fluent in legalese, so it is entirely possible I have missed something.

[J. Michael Neal]

Slarti: We required auto workers to restructure their binding contracts in order to receive bailout money (as mentioned upthread).

What's good for autoworkers is certainly good for executives.

Absolutely. In fact, in this particular phrasing, what's good for autoworkers is better for executives. The problem isn't in determining what is good; that's obvious to everyone but Brett. The problem is in figuring out what is possible. I'm not a lawyer, and, even if I were, I haven't seen the contracts for the AIG folks. However, I think that it is certainly possible that the choice is between paying the bonuses or not injecting money into AIG, with injecting money and not paying the bonuses not being on the table as an option. If that's the case, I'm inclined to say that we need to inject the money, and figure out a way to punish the bonus receivers later.

As for what someone said, yes, I'd bet that the contracts of at least some of the people in question, with those getting the most being most likely, are written such that AIG is legally obligated to pay the bonuses. My experience in the financial industry, admittedly far away from this in both geography and nature, is that those at the top don't really receive "bonuses;" they receive "salary that's called a bonus for a variety of reasons." I never had a contract like that, and, personally, I'd rather have gotten salary spread out through the year rather than a lump sum at the end, but I don't have the tax issues that those that make more do.

In fairness, I should point out that I could be considered one of the leeches. Citigroup gave me a bonus for 2005, even though I was debilitated for four months, affecting my performance, and quit for medical reasons in October. Technically, I shouldn't have been eligible for a bonus at all, since I wasn't working there at the end of the year. I thought that was very nice of them. I've heard that the management of CDMI (the little corner of Citi where I worked) has changed a lot in the intervening years, and it likely wouldn't happen now.

[Eric Martin]

Andrew: Although I've never researched this question, I don't think it is as you assumed.

Now, you are right that shareholders don't get a vote on executive compensation unless set forth to the contrary in the applicable bylaws.

Further, shareholders might be precluded from certain votes in a company's bylaws, but that is not the default position of the DGCL. At least, to my recollection.

[bedtimeforbonzo]

"What's good for autoworkers is certainly good for executives."

It's good to see this talk coming to the fore.

The UAW definitely has not had the auto industry's overall health and existence in mind over the past two decades.

But auto workers, whether they earn their paycheck from General Motors or Ford, are giving up concessions at the drop of a hat lately. What's better -- a good-paying job or no job at all? Clearly, auto workers see the handwriting on the wall.

They're desperate.

They're scared.

Too bad AIG execs and employess haven't shown the same.

[Joey Bananas]

And baseball players who bat .225, and quarterbacks who throw 20 interceptions, and basketball players who don't make the play-offs should give back their bonuses and option payments, too....

[hilzoy]

Fwiw: I don't like solutions of the form: do X, which is probably not legal, and dare the would-be bonus recipients to claim their money in court. I like the rule of law.

It also seems to me perfectly possible that the people who put some of these trades together are the only ones who understand them, not because they're more talented than anyone else, but just because the deals are crazily complex and having created them in the first place gives you a leg up. In which case, there would be a case for retaining them. The fact that they would insist on retention bonuses makes them scumbags; it doesn't make them wrong about their value to us.

Which just makes me think, yet again: we need to avoid getting into these situations in the first place. We probably need to ban some kinds of pointless and exotic derivatives entirely, and to create an exchange for the rest; to treat CDS like insurance (regulated, requires collateral); to do something major to reform the ratings agencies so that companies who have taken on as much risk as AIG don't get to go on monetizing their high ratings until right before they collapse; to create some sort of standard procedure for restructuring large and/or systemically important institutions; and (probably most of all) preventing corporations from being too big to fail.

Since we didn't do any of these things, we're stuck with a bunch of bad, bad alternatives.

[Eric Martin]

And baseball players who bat .225, and quarterbacks who throw 20 interceptions, and basketball players who don't make the play-offs should give back their bonuses and option payments, too....

If taxpayers are bailing out the sports franchises employing those athletes to the tune of hundreds of billions of dollars?

Abso-freakin-lutely

[Sapient]

As to hilzoy's comment: I think there are things that might be done within the "rule of law" to redress taxpayer grievances with some decent lawyering. There are many theories having to do with fraud, unjust enrichment, fraudulent conveyances (as Cuomo mentioned today), and others, which a strong basis in legal precedent, grounded on the concept that society doesn't sanction people gaining wealth from bilking others. In this case, the transactions are complicated, the compensation packages are not yet public, the bailout legislation didn't have enough explicit safeguards, so we really don't know. But that doesn't mean that someone who looks at the contracts, the behavior, and the law can't come up with a theory to get some of that money back.

The worst part of this is that public opinion is being formed out of ignorance. I think it's silly to jump to the conclusion that doing something to prevent these people from being rewarded for possible wrongdoing is somehow not lawful. The AIG lawyers are the ones pounding the table that these contracts are set in stone. I'm not sure they're representing the public interest.

[bedtimeforbonzo]

"If taxpayers are bailing out the sports franchises employing those athletes to the tune of hundreds of billions of dollars?

"Abso-freakin-lutely."

Not quite right.

I've never begrudged a pro athlete for taking what many view as an obscene bonus or salary: If that's what ownership is willing to pay them, that's on them (the ownership).

Now -- and this is already the case -- if pro teams are squeezing tax dollars out of city and state government to build their sports palaces, again, we might hold the owners accountable but I just don't see the nexus that would create us (the taxpayers) to ask the athletes back for their money.

Also, I think the whole analogy just doesn't make sense.

When city and state governments pay pro teams to build stadiums and arenas, they are doing it with their eyes wide open. In fact, they often woo these teams with big bucks and free land (so as not to lose the team to another city). This might seem outrageous to those who don't like to see their tax money already going to the rich and famous. But it ain't a scam.

What AIG did -- Lehman, Citi, etc. -- was a scam, one so mired in muck that it has brought down our economy.

Easy to pick on high-profile athletes.

But that's just taking our eye off the ball where it belongs -- holding these Wall Street bums accountable for the mess they've created.