Wednesday, March 18, 2009

Who is to blame for AIG bonuses?

Actually had this conversation (or a variation on it) with both Naperville Greg and Joisey Ken recently. AIG, as just about everyone knows by now, is one of the largest insurance companies in the world and they were bailed out to the tune of $170 billion. And everyone knows that they paid bonuses to execs to the tune of $165 million. And we have all seen that both Republicans and Democrats were outraged in addition to President O'Bama.

Most of what I just wrote, which the media has shoved down your throat, is wrong or at the very least misleading.

First, use of the term bailout is misleading. The implication is that the company was given money to save them from going under. The reality is that AIG essential sold a good chunk of their company to our government. Back in September, yes under the previous administration, the Fed lent $85 billion to AIG in the form of a two year note in return for 80% stake in AIG in the form of warrants and secured by their profitable insurance business (note that their financing arm is what caused the losses, not their insurance arm). Since then we've injected another $85 billion into AIG. So did we bailout AIG? No, we BOUGHT AIG, unless their business turns around. If that happens, then we just loaned money to AIG and they paid us handsomely for it (LIBOR plus 8.5% on the over 10%).

AIG paid bonuses to execs. Well, what they did was fulfill their CONTRACTUAL OBLIGATIONS to employees. Unfortunately, those employees' bonus metrics were NOT tied to the solvency of the company. Those contracts were put in place by Robert Willumstad, a two year AIG vet who was previously with Citigroup as their #2 guy and who was fired after the first intervention mention above. Liddy came in but could do nothing about the contracts. Renig on the contracts and the employees can not only sue AIG, but they could now sue the government. How much MORE than $165 million do you think that would have cost? Everybody's hands were tied.

Republicans and Democrats were outraged when the bonuses became public. Really? That implies that the members of Congress who are irate didn't read any of the documentation on the $85 billion action provided by the Fed, except possibly the dollar amount. What's the threshold in dollars to get them to read? Maybe it's $100 billion.

At least it looks like today that Obama is saying, "Hey, my bad. I should have known about this." Yes, he should have been briefed on it by someone, but truthfully they have a lot of shit going on right now and missing this point is an excusable error. Not saying "the buck stops here" would have been, which was his stance until today.

So if you look at the whole picture you'll see AIG took a loan from the Fed which they have to pay back or turn the company over to the U.S. Government. AIG owed money to employees which were supporte by contracts. Should they stop paying rent or their utility bills? Same concept. And finally, this should not have been a surprise to anyone. If you're going on tv and complaining now, it just means you weren't doing your job before. And the chief jack-ass in Congress? Senator Grassley from Iowa who wanted the AIG execs to resign or commit suicide, ala the Japanese. Unbelieveable. Instead of going out for blood Grassley, try doing your job for a change.


stef said...

Thanks for the full scoop Joe! i haven't been as in on the story as I would normally be so this is good to know.

de said...

True, Joe, but how is it different than the UAW workers, who are also under contract yet are being asked to renegotiate with the auto companies?

Lakeview Coffee Joe said...

The difference would be that these bonuses are for work already performed (albeit obviously not well!). The auto workers are renegotiating their wages for the future.

el supremo de nm said...

While agree with and acknowledge your facts, I don't agree with your conclusions. When a company is going insolvent, all bets are off. If AIG just tanked, there would be no bonuses paid. The US loan kept AIG solvent no ifs ands or buts. When companies are insolvent and trying to work their way out of insolvency, all stakeholders have to sacrifice. This is what we do everyday when we work on a crisis management client. I see no reason for not putting the hammer to the executives of a division that blew it irregardless of contracts.

Lakeview Coffee Joe said...

You mean other than the inevitable lawsuits against both AIG and the government?

You're right, AIG was kept around because of the loan (a loan Buffet wanted to make by the way), but if it was Pepsi, the government would have let them go under. We NEEDED AIG solvent, so it's not the same as any old company in bankruptcy. If they went under, it would cost us and the rest of the world, trillions of dollars more.....not to mention the additional loss of jobs from other companies going under. Given that AIG was going to continue to exist, they HAD to honor their employee contracts.

deJesusFreak said...

The real mistake was in giving them the bailout without requiring that these contracts be renegotiated.

As for the UAW, your reasoning isn't quite sound, Joe. The union alrerady has contracts in place with the auto companies; they are volunteering to rework the contract in order to make things easier on the auto companies (and keep their jobs). It's something the AIG folks could do as well.

In that way, I agree with el supremo.

Billy said...

Just a couple fact-checks Joe:
Last Friday Buffett told Bloomberg News that he chose not to loan money to AIG. He only "wanted to" in the sense that I want to date Catherine Zeta-Jones.
Also, not all of congress were shocked that the bonuses existed; they were shocked that they were paid out. Specifically, Rep. Paul Kanjorski stated that three months ago he told Liddy to find a way to get out of the contracts, and he offered the resources of the U.S. Congress to help him do it. It's not that Liddy couldn't do anything about it; Liddy made no effort. Instead he worked with the Fed to move forward on the bonuses.

Billy said...

Sorry Joe,
Either I'm hallucinating again, or you took out your comment about buffett.

Lakeview Coffee Joe said...

True Billy, Buffett didn't have enough money to do it, but he would have because it was a sound deal. That was my point. The comment is still there....must have been a computer glitch.

And I still disagree djf: apples and oranges. The AIG contracts were for work PERFORMED as in past tense. The UAW is for future work to be performed. You can renegotiate any contract as long as someone hasn't delivered on there sideof it. Once a party has completely their end of the bargain, then there's no onus on the them to renegotiate and certainly no moral obligation. I don't blame them at all. If Billy is right, then it seems to me that the blame falls on Congress for not forcing the issue. If Congress left the bonus terms in there, then shouldn't be publicly outraged that they got paid. They should be publicly outraged in their own incompetence.

el supremo de nm said...

Fear of lawsuits is a poor reason for paying out bonuses to incompetents whose performance essentially caused the company to become insolvent. Talking to some corporate lawyers, I suspect there are plenty of ground for the company to sue some of those employees for negligence. In a jury trial who would you want to be defending - the taxpayers in the form of the US Government or those receiving the bonuses for losing billions and billions of dollars?

Billy said...

Buffett actually said that there were a lot of factors including the degree of uncertainty. Either way, there was no money for AIG. The only organization that could help was US. That's a bail out man, whether there's collateral or not.
I think we're all losing track a little. This is .01% of the total money going to AIG. It might just be the cost of doing business.
There's a lot of other things to be pissed about.