A twice-told tale of AIG

Of course the AIG bonuses should go back!  They were paid to people in the very group that lost money!  They were paid to people who have already left the firm, putting the lie to the idea of retention bonuses!  Also, they couldn't get jobs anywhere else anyway, so retention bonuses are unnecessary!  And it's all just unmitigated greed!  They're lucky to have jobs at all!  They should be volunteering to work for free, wearing sackcloth and ashes, and grovelling on the ground in front of every taxpayer they can find, begging for forgiveness!

The information now emerging from AIG tells a different story.

For one thing, the people who actually lost the money have, from most accounts, either been sacked, or left on their own.  The people who got the bonuses were not involved with the dangerous trades, other than to help wind them down.  The congressmen who called for Liddy's resignation, apparently unaware that they had just hired him for $1 a year to help save the company from his predecessors' decisions, have been the most egregious embarassments, but few commentators, including me, have covered themselves in glory on this angle.

Also, apparently, these payments were neither retention bonuses in the conventional sense, nor performance bonuses.  They were guaranteed payments used to persuade employees from other parts of the Financial Products division to stay and wind down the FP's books, according to Liddy's testimony.  


The Washington Post elaborates:

The very handsome retention payments they received over the past week were set in motion early last year when the firm's former president, Joe Cassano, was on his way out the door. Financial Products was already running into trouble on its risky credit bets, and the year ahead looked grim. People were weighing offers from other firms, and AIG executives feared that too many departures could lead to disaster. 

So AIG stepped in with an offer to employees of Financial Products. Work through all of 2008, and you'd get a lump payment in March 2009. Stick around through 2009, and you'll get paid through 2010. Almost all other forms of compensation -- bonuses, deferred payments and the like -- have vanished.

The structure is common in other industries, like construction, where work is episodic and has a definite end-point.  But it increasingly seems that many of these fellows aren't lucky to keep their jobs.  They're not keeping their jobs: they're closing up a failed shop.  That's why "bonus" payments went out to people who had already left the firm.  Which also seems to belie the notion that they're lucky to keep their jobs because no one else would hire them anyway.

This Op-Ed in this morning's New York Times makes the point at eloquent, angry length:

DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in -- or responsible for -- the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

. . . 

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.'s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable -- in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.'s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity -- directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country's call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn't defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut. . . .

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It's now apparent that you either misunderstood the agreements that you had made -- tacit or otherwise -- with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You've now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.'s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.'s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to "name and shame," and his counterpart in Connecticut, Richard Blumenthal, has made similar threats -- even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There's no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn't disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.'s or the federal government's budget.

Are we better off because a skilled trader has left, and his book will now be wound down by someone who doesn't know it, or the markets, as well?  What trader with any alternative job opportunities would voluntarily walk into the mess at AIG Financial Products?  Normally you would attract outside talent into the disaster zone by promising to pay them better than normal--but of course, AIG can't do that any more.

Moreover, presuming these accounts are basically accurate--and I've no doubt that AIG is painting itself in the best possible light--could we really expect him to do otherwise?  I've heard a lot of complaints along the lines that the AIG people who didn't immediately volunteer to work overtime and be paid in cigar bands are not merely immoral, but unpatriotic.  

I know and like some of those commentators, and I do believe in their fervent love of their country.  I do not, however, believe that this love would actually keep them working long hours for little-to-no pay at a company that was failing because people in another department, people long since given the sack, had screwed up royally.  Not when there was no possibility of saving their job, but only of salvaging some shreds of value for remote and hostile shareholders.

Nor do I think that they would feel that they were shirking their moral obligations if they accepted a job at another firm rather than lashing themselves more firmly to the deck of the Titanic.  Perhaps there was some long lost period in American history where people identified so thoroughly with the corporations who employed them that they treated their employer's ethical obligations, its best interest, as identical with their own, willingly incinerated their careers on the altar of failing firms.  But if so, thank God it's over.  That's not patriotic, it's creepy.