A Working Class Hero Is Something to Be

by Eric Martin

There was much fanfare in March of last year, when an indignant AIG vice president, Jake Desantis, quit in a huff over the great injustice of being asked to forfeit a portion of his enormous bonus by dint of the fact that the firm that was scheduled to pay that bonus would have gone bust absent a massive infusion of taxpayer dollars.  

But to Desantis, and his many defenders, this was unconscionable, and a distressing sign of looming class war and hoary socialism, etc.

Then, early this month, AIG made the following announcements:

American International Group plans Wednesday to pay another round of employee bonuses, worth about $100 million, said several people familiar with the matter, a year after similar payments at the bailed-out insurance giant infuriated many Americans and inflamed Washington.

This week's retention payments go to those employees at the company's Financial Products division who agreed recently to accept 10 to 20 percent less money than AIG had initially promised them two years ago. In return, they are to receive their payments more than a month ahead of schedule.

The company is still scheduled to pay out tens of millions of dollars more in March, mostly to former employees who did not agree to the concessions.

AIG executives have been scrambling to hammer out a compromise before March 15, when the firm faces a deadline to pay nearly $200 million in bonuses to employees at Financial Products, the unit whose risky derivatives deals brought the insurer to the brink of collapse in 2008. Government and AIG officials have been eager to avoid a repeat of the public furor that erupted last March when an earlier round of payments -- worth $168 million -- went to the same set of employees. [emphasis added]

It appears that the expedited timeline might have take on an added sense of urgency due to some, shall we say, inconvenient facts for those asking for millions of dollars in bonuses for their stellar performance:

AIG, the bailed out insurer, said on Friday that it lost $8.9bn in the fourth quarter of last year, as charges on its massive debts weighed down its performance. [...]

In a filing with the US Securities and Exchange Commission, AIG noted that if management’s plans do not move forward as stated, “AIG may need additional US government support to meet its obligations as they come due”. Moreover, it warned that without additional support in such a scenario, there could be “substantial doubt” over AIG’s ability to continue as a business.

Awesome.  But let's not question the insanely high levels of compensation we're paying out on the taxpayer's dime.  Any suggestion that losses should be borne by the private sector is socialism.  Unless we're talking about the blue collar labor force - in which case, government assistance to help those affected by market losses is also socialism. 

I know it's a bit tricky to follow, but such is the magic of free market capitalism.

Comments

[efgoldman]

Solid.

Brass.

Balls.

Where's Thullen when we need him.

[Ugh]

I guess I'm suffering from outrage fatigue cause this really doesn't bother me that much. First, if these are retention bonuses then I don't know what the fncking problem is. AIG says if you work here for the next year we'll give you a bonus of $X. That has nothing to do with how AIG performs. You work, you get paid, period. But for some reason because the compensation is called a "bonus" and the company loses money then OUTRAGE!

Second, even if they're not retention bonuses, I don't know why people seem to think that bonuses are somehow exclusively dependent on the overall performance of the corporate enterprise. In my experience with large corporations, bonuses are both tied to individual performance and corporate performance. Indeed, they might not be tied to overall corporate performance at all, they might only be tied to the performance of a specific business unit of the corporation, such that bonuses can (and must, if there is a contract) be awarded even though the corporation loses money overall.

Now, obviously, this whole situation with AIG is complicated by the gov't bailout such that, without the bailout AIG might have declared bankruptcy (and based on the article that seems likely) and there would be no bonuses at all (though I think, but don't know, that employees are first in line in the bankruptcy estate). But the facts remain that (a) AIG has not declared bankruptcy and (b) it seems to me that it is legally obligated to pay these bonuses (especially if they are retention bonuses).*

Is AIG supposed to repudiate these contracts because people is angry?

*Obviously one can question the wisdom of agreeing to pay bonuses, retention or otherwise, in the first instance, but where was the yelling then?

[Uncle Kvetch]

But let's not question the insanely high levels of compensation we're paying out on the taxpayer's dime.

Well, President Hope&Change certainly doesn't think we should, and he's a Marxist. So I think that pretty much settles it.

It's their world. We just live in it.

[Eric Martin]

Ugh,

Legally obligated? I believe that is contingent. They've already restructured/reduced some of the bonus payouts, so presumably they could do more. Further, the autoworkers unions' deals were broken, so one would assume the same possibility here. Unless you can differentiate?

And I don't care much about whether we call these "bonuses" or just "annual salary." The point is, the taxpayer should not be paying for such high compensation packages.

That is all.

[Ugh]

They've already restructured/reduced some of the bonus payouts, so presumably they could do more.

Well sure, two parties to a contract can agree to amend the contract at any time, I'm just assuming that the employees who are due these bonuses have already compromised (as the article says, less pay in exchange for getting paid earlier) and aren't willing to further do so, hence AIG is "legally obligated" to pay them.

Further, the autoworkers unions' deals were broken, so one would assume the same possibility here.

Again, the union agreed, no?

the taxpayer should not be paying for such high compensation packages.

With which I think I agree, but isn't the time to complain when the deal was struck and not when the compensation is due?

And I'm not sure why the gov't is still propping up AIG in any event, didn't it already turn over all its $$ to Goldman?

Anyway, I'm pissed off in general today so feel free to ignore me.

[Eric Martin]

Ugh,

I hear what you're saying, but if the government wanted to condition the bailout money on a restructure, it could have. Same goes for the "next" round of bailout money that AIG is demanding.

Further, I'd have to actually see the "contracts" in question. Most employees, even at big firms, are "at will" and not guaranteed any amount of money. And there are almost always "out" clauses for economic conditions/downturn. I assume AIG would have taken care of itself in this instance. Seems more like a convenient excuse than anything else.

Even, as you say, if the complaints should have come when the deal was struck (and I did complain then) I reserve the right to re-complain when the payments go out. Sh*t, I'm paying for it, I think I deserve at least that much.

(PS: I'm kinda cranky today too. I blame the snow!)

[Slartibartfast]

I started to write a comment that began "This is much like...", but then I couldn't find anything to compare it with.

Let's just say that I agree with Ugh that this is Not Good, but the time to have negotiated pay limitations was when you actually had leverage.

I don't think there are any levers left, now, that don't involve setting some expansion-of-government-power precedents.

[Eric Martin]

Slarti: That depends on whether or not AIG comes back with hands out

[chamblee54]

"I guess I'm suffering from outrage fatigue"
I think this is what the "beneficiaries" are hoping for. If they wait it out,and ignore the outrage of the common people ( who they hold in contempt), then they get their big bucks.
You can only be angry at so many things. PR is cheap. You can buy a lot of deflection for what these insurance people are getting.

[efgoldman]

I can't believe that, in all this mess that nearly brought down the whole Western financial system, there isn't something prosecutable, or at least something civilly actionable by a regulator.

Then again, the DOJ has been so busy not prosecuting war criminals, they might not have time or resources to not go after anyone at AIG.

[Sebastian]

"Most employees, even at big firms, are "at will" and not guaranteed any amount of money."

As someone who has recently started learning a lot more about eployment law than I ever thought I would:

A) if these are retention bonuses, the company can't get out of it with an at will firing. They can fire at will, but the still owe the bonuses unless they can show good cause.

B) if these are performance bonuses, and the employee performs whatever is required by the bonus, that is a contract liability that the company can't really get out of.

C) if these are general bonuses, the company of course can opt not to pay.

Now I strongly suspect that at least some of the retention bonuses are higher than they should have been.

I also suspect that AIG has been scandoulous about performance bonuses.

And I also wonder if some of them are discretionary bonuses.

But as usual, because reporters tend to be both sensationalistic and annoyingly vague, I can't tell what is really going on. So I don't know which part to be mad at. (and there is the off off chance that I shouldn't really be mad at all.)

[Eric Martin]

Seb,

Those are good points.

I'll also cop to the fact that part of this story is just that I'm angry about the whole mess.

Also, compensation aside, the REAL CRIME was the fact that Goldman and the many other counterparties got paid out (with taxpayer money) at a hundred cents to the dollar on AIG debt, when by rights they should have taken a hit like everybody else.

The taxpayer money blown in that enterprise makes the excess compensation look relatively minor.

[Jacob Davies]

I guess I'm with those who think that the real outrage is that this kind of thing wasn't barred when the actual bailout was taking place.

The time to get your conditions into a deal is before you sign it, when the other party still wants something you've got.

That said I support across-the-board restrictions on bonus payments and structuring under the rationale that the bailout demonstrated an implicit government guarantee of the banking industry and that gives them a right to regulate it closely. But I can't muster much outrage at any one incident.

My preferred approach is to chop the biggest financial companies into much smaller pieces that can fail without crashing the economy, and then let them fail - bail out depositors, but fire the employees, zero out the shareholders and creditors, and sell the smoking wreckage to the highest bidder. This has a strong basis in antitrust law, does not involve a government takeover, and would probably have helped the whole economy by reducing the monopoly power of banks over business. That this obvious approach was not made a condition of the bailouts was insane; that none of the politicians who voted for the deal anyway will be punished is just depressing. I don't have much hope that it will happen now (see above on getting conditions into a deal prior to signing it).

You get the government you vote for. Americans continue to vote for politicians who screw them over. I think they're convinced they are in fact so clever and classless and free that they don't need anyone looking out for them in government. In my opinion, that's a big mistake, but this is a functioning democracy and I don't have a lot of sympathy for people who choose delusion over a hard look at reality.

[Sebastian]

"The taxpayer money blown in that enterprise makes the excess compensation look relatively minor."

Now that I'll completly give you! :)

[chamblee54]

I recycled my comment above into a post at my blog about nuclear energy.
The issues are similar. When you have a multi billion loan guarantee/bailout from Uncle Sugar, you can afford a few PR agents to make you look good.

[xanax]

Retention bonuses?

What, are these bozos
really that irreplaceable?

Hell, don't retain 'em.
Replace 'em.

And fnck 'em.

[novakant]

hmm, I remember a lot of really scared middle class people arguing for the bailout - well, this is what you get when you give in to your fears... for all I care, they should have let the sh=t hit the fan, let the whole corrupt banking system collapse and start afresh after restructuring major building blocks of capitalism

[RepubAnon]

Put them in bankruptcy and void all the bonus contracts?

Nobody's lending, anyway - so what's the harm?

[Eric Martin]

Yeah, that's what they should have done from the beginning - or some variation thereof.

Basically, made provision of billions of taxpayer dollars contingent on counterparties like Goldman taking a hit, and compensation packages being reeled in during the period of payback.

Since it looks like we might get a round two, we might want to make these humble suggestions again. Because Tim Geithner's got our backs.

[Ugh]

I think corporate america was (and is) addicted to the commercial paper market, where they think they will be able to roll over 90 day CP in perpetuity at low interest rates (since its only 90 day debt). Never thinking they might be called upon to repay the principal, and definitely not repaying it in 90 days. And what happened in the fall of 2008 was that the holders of that CP decided they didn't want to roll it over anymore (or couldn't find buyers that were willing to do so), and the sh!t hit the fan not only amongst the banks, but the whole of big corporate america. Plus the AAA rated longer term bonds were not properly rated. If that's the case, it probably was a legitimate (though likely avoidable) crisis and should not be repeated.

Nothing I've seen indicates that the proper reforms have been implemented to avoid a repeat, however.

[Jacob Davies]

Because Tim Geithner's got our backs.

I can only assume this is extreme, bitter sarcasm.

[Hartmut]

Pay the money!
In gold!
Liquid!
Through a funnel!
Down their throats!
or
In small coinage
In bags
Tied to their legs
On a boating tour
In a minefield
(sharks optional)

[Eric Martin]

JD: yup

[russell]

chop the biggest financial companies into much smaller pieces that can fail without crashing the economy, and then let them fail - bail out depositors, but fire the employees, zero out the shareholders and creditors, and sell the smoking wreckage to the highest bidder.

What JD said.

Nothing I've seen indicates that the proper reforms have been implemented to avoid a repeat, however.

What Ugh said.

IMO these guys should be in jail for fraud, because they sold the promise to pay money they didn't have if conditions occurred that were not unlikely.

Unfortunately, nothing they did was actually wrong from a legal point of view. There's no basis for not paying their bonuses other than it makes lots of folks want to puke and then go kick the dog.

But it does actually make a lot of folks want to puke and then go kick the dog. Or somebody.

Just because this crap is legally justifiable doesn't mean the folks involved aren't greedy pr!cks.

They got theirs and if what they did to get theirs means you lost your house, it's tough sh*t for you. You shoulda been a banker, @sshole.

These people are anti-social leeches on the economy and on the body politic. If you think that's excessive, explain how so. It better be a good argument, because all of the salient evidence is on my side.

They got theirs and the rest of us can go screw.

Let's all remember that next time they want our money, and next time we vote.

[Jacob Davies]

Ugh: I think corporate america was (and is) addicted to the commercial paper market, where they think they will be able to roll over 90 day CP in perpetuity at low interest rates.

It's not just corporate America, but it's everyone. ARMs are exactly the same idea - they are effectively the same as a continuously-rolled-over loan at the prevailing interest rate, although there isn't the same chance that you might need to repay the principal at any moment. But it's the same idea of shaving off a percentage point or two from the interest rate now at the risk of paying a much higher rate in the future. The fact that Greenspan and Bernanke thought they were a pretty great idea really indicates the degree to which they identify with the financial industry over individual citizens.

The 30-year fixed-rate mortgage is no favorite of the industry, because it needs long-term borrowing to back it. (Basically if the bank is going to lend you money for 30 years at 7%, they need to be borrowing money for 30 years at somewhere under 7%.) But for citizens it's a good idea - it locks in current interest rates for most of their lifetime and protects them against rate spikes, they retain the option to refinance at a lower rate, and the fixed payment makes long-term financial planning much simpler and more predictable.

The decision to make everything as short-term as possible fundamentally involves increasing instability and increasing the chance of catastrophic failures, and the only upside is a slightly higher return in the short term.

Of course, if you work for a bank and you're paid yearly based on last year's results, and at worst you'll get fired if you blow it all up (but you won't have to give any money back), there's no reason not to go as short-term as possible. If I go to the casino with someone else's money, and I get to keep half of any winnings, I might as well bet it all on black. If I lose, who gives a damn? If I win, $$$!

[nous]

And this is why I can't take the Republican talk about HSAs seriously. We have a problem with health care affordability (not access to health insurance)and they are telling me to just put away more money for it and not to worry because whatever I don't give to our medical establishment I can invest with our banks.

Gee, thanks.

[Jon H]

According to his LinkedIn profile, after DeSantis left AIG, he started a non-profit microlender.

[wj]

Ugh (2/26, 12:39) -- the auto worker union contracts got modified as part of the bankruptcy process, which is not unheard of. So if that is going to be used as a comparison the first question is: Did AIG go thru a bankruptcy process? Or did they just get bailed out somehow? (I confess I don't recall the details.)

[Jon H]

"Did AIG go thru a bankruptcy process? Or did they just get bailed out somehow? (I confess I don't recall the details.)"

Nope, if they went through bankruptcy that would have been a default and all hell would have broken out. Supposedly. So we just gave them money to pay on the CDS they'd sold.

[Jamie]

well, this goes to show why you shouldn't negotiate with terrorists