[kenberg]

Apparently the folks handling the bailouts are shocked to discover that AIG is giving bonuses. "Gee whiz, I never thought that would happen" is a recurrent theme in this whole economic meltdown. Whether it is Bush or Obama, Paulson or Geithner, they seem to be repeatedly blindsided by reality. I am getting a little fed up.

Reading the Post today, the argument is given that the Division of Toxic Assets, or whatever it is called at AIG, has to be dismantled and, like in a James Bond movie, only the people that built it know how to dismantle it without it exploding in our faces.

Perhaps this is true, perhaps we are stuck. We need then to treat this as a hostage situation. We may have to pay off, but we want the hostages back when they get the cash. In the case at hand, it would seem that the bonuses could be put in escrow. When the thugs complete the dismantling of the ticking bomb, they get the dough. Not before. These guys are not hurting for cash to pay the grocer, and they can wait until the job is done, and done satisfactorily, to get their swag.

Like most people, I greatly resent watching people flying high making far more money than I do and then bailing them out and even paying them bonuses when they crash. If I were to help my kids in a financial pinch I would not like to get the thank you note posted from a hotel on the French Riviera.

This whole mess is going to cost me and others a lot of money. It sucks, but we gotta do what we gotta do. So far the guys running the bailout show are looking like chumps. This is not acceptable.


OK, I'm feeling a little better now.

[luke warm]

i don't mind them making as much money as the market bears, but i do *not* like bailing them out

[RichMor]

A few talkers on the radio mention that the bonuses are contractual obligations and the bonus recievers could sue if the bonuses were not paid.

OK, I guess that makes a little sense.

Since AIG is essentially bankrupt and 80% owned by the federal government, is it possible to cancel the bonus contracts ?

Maybe one of our lawyers could comment.

[Al_U_Card]

Where the hell is the fine print when you need it!?!?

[ASkolnick]

Well, here is one of the issues.

If the "bonus compensation" is considered wages (I don't know if it is or isn't), the one thing I do know is the first thing that gets paid out in a bankrupcy court is the wages. Therefore, one could say that that is money they are supposed to get.

Let's say they sue. Who are they going to sue? AIG. The company has no money left anyway.

[hrothgar]

RichMor, on Mar 17 2009, 05:54 PM, said:

A few talkers on the radio mention that the bonuses are contractual obligations and the bonus recievers could sue if the bonuses were not paid.

OK, I guess that makes a little sense.

Since AIG is essentially bankrupt and 80% owned by the federal government, is it possible to cancel the bonus contracts ?

Maybe one of our lawyers could comment.

I am not a lawyer

I do find it interesting that how differently different types of contracts are treated during these proceedings:

For example, consider the difference between the contracts that the UAW has with the Big Three automotive companies and the contracts that this group of traders had with AIG.

In one case, the bailout is being used to mandate renegotiating contracts.
In the other, these bonuses are sancrosant.

Personally, I think that trying to void this set of contracts is going to be more trouble than its worth. It strikes me as political theater rather than substantive reform.

What this does suggest is that the system used to award bonuses is badly flawed. In particular, compensation models probably need to be tied to long term performance metrics.

I think that this is probably something best handled via corporate governance rather than administrative fiat.

[Al_U_Card]

hrothgar, on Mar 17 2009, 10:07 AM, said:

I think that this is probably soemthing best handled via corporate governance rather than administrative fiat.

Foxes and henhouses, Richard?

Maybe reform is more appropriate than looking the other way...

[jdonn]

hrothgar, on Mar 17 2009, 10:07 AM, said:

Personally, I think that trying to void this set of contracts is going to be more trouble than its worth. It strikes me as political theater rather than substantive reform.

I'll take the opportunity to shock Winston and Lukewarm and mention I completely disagree with Obama here. You can require them to not pay any bonuses that aren't contractually obligated, but they have to fulfil their legal obligations. The government should not be getting involved here. It may be politically expedient to be outraged, but announcing to the world you are going to try to find a legal loophole around these contracts is not governments business.

[kenberg]

I support the honoring of contracts although I want to come back to that in a minute.

It seems to me that referring to a legally obligated salary as a bonus is a very strange use of the English language.

Here are the first two definitions in the online dictionary.

1. Something given or paid in addition to what is usual or expected.

2a. A sum of money or an equivalent given to an employee in addition to the employee's usual compensation.

If a bonus is neither usual nor expected then I do not see how it can be a legal obligation.

Of course these are the guys who used "sub-prime mortgage" as a euphemism for "total piece of *****" so I suppose we should not expect much care in their use of the word "bonus".


Still, my first point is that I am getting really tired of hearing our leaders, of whatever stripe, tell us that they are once again surprised, shocked, dismayed, whatever by reality. Whether the bonuses are a legal obligation or not, it is extremely disturbing to think that the administration has paid no advance attention to the issue.

Now about the contracts. I have not read them. The Department of Justice could look into them with an eye toward seeing if the obligations have been fully met on all sides. A few subpoenas investigating fraud might provoke some rethinking on how pushy they wish to be about those bonuses.


As I see it, the folks at AIG are playing serious hardball. They are milking this for everything they can get, trusting that we will not call them on it because of the impact on the national and global economy. Hardball requires hardball, the time for treating these guys as just folks who made an honest error is past.

[awm]

There is perhaps a problem that AIG is a very big company. Some parts of AIG are actually doing quite well, but the part that insures mortgages has become this huge black hole where government money goes to die.

The issue is, should AIG stop paying bonuses to employees who work in parts of the company which are legitimately doing well? Should bonuses be paid based on personal performance (or performance of the employing division) or cancelled based on the dire straits of the company? If they stop paying bonuses to the employees in competitive divisions, then the profitable parts of their operation will collapse (the talent will leave for other, smaller companies with less exposure to the mortgage crisis) and the chances of their ever repaying the government loan will disappear.

Now, I agree that the "bonus culture" on Wall street is somewhat ridiculous, in that the "bonus" is very much an expected part of the employee compensation and often seems to bear little relation to performance of the employee or the company. Some sort of reform is necessary there, but it may be that shareholders can enforce this sort of reform (given the current level of outrage) without government intervention.

[mikeh]

The use of bonuses as a contractual term of remuneration is commonplace. Some bonus plans really do relate to discretionary rewards payable at the whim of the employer, but it is far more common to find that bonus schemes are set up with identifiable, measurable metrics, which may but do not have to include, as a paramount terms, that the company or division be profitable. Such bonus schemes, at least in the jurisdiction in which I occasionally practice employment law, are enforceable.

The analogy to the UAW is flawed. The UAW was not required, by law, to roll back any of their contractual rights. What happened was that the union was faced with a reality check. It could insist on the existing contracts, and face bankruptcy of the empoyer(s) which would nullify the contracts anyway, and probably cost many thousands of jobs and perhaps the union's very existence, or it could try to salvage what it could.

The traders whose bonuses are, as I understand the news reports, at issue are not unionized, and I suspect that some of them, at least, are going to be without employment shortly anyway... or are or will be facing significantly reduced remuneration. Don't get me wrong: in my view the remuneration structure on Wall Street and in similar entities dealing with this toxic mess, was always seriously out of whack, and had the entirely forseeable effect of sacrificing long term stability and growth for the short-term benefit of those in charge... a system enabled by a cross-linked network of compensation committees, in large corporations as well as Wall Street, in which it became tacitly understood that a vote to pay someone else a lot of money led to their voting for you to get a lot of money, and screw the 'little people'. Since the Republican party was led by people who could honestly claim that being rich required at least 5 million a year in income (not wealth... income!), it is no surprise that we are where we are.

So I don't like the culture that generated these contractual obligations, and if there is a legal way to roll them back, I am all for it. But not if it means legislating retroactively (which has been done in my jurisdiction... a free-enterprise government passed a law nullifying several public-sector collective agreements negotiated by a left wing government with unions from which it derived financial and political support. I agreed that the agreements were horrific and a betrayal of public trust, but I disagreed with the legislation... the solution was, in my view, political.. never let the idiots back in, unless and until the new idiots proved to be even more harmful).

So here too, my view is that if possible there should be a change in corporate culture and some change in the American view that gaining enormous wealth is proof that one is a superior human being. But retroactive action is simply grandstanding, and stooping to populist pandering. Of course, how can any politician resist the temptation?

[hrothgar]

awm, on Mar 17 2009, 10:07 PM, said:

The issue is, should AIG stop paying bonuses to employees who work in parts of the company which are legitimately doing well? Should bonuses be paid based on personal performance (or performance of the employing division) or cancelled based on the dire straits of the company? If they stop paying bonuses to the employees in competitive divisions, then the profitable parts of their operation will collapse (the talent will leave for other, smaller companies with less exposure to the mortgage crisis) and the chances of their ever repaying the government loan will disappear.

Just to be clear:

Much of the "outrage" involves the fact that the division of AIG that was responsible for the CDOs is drawing large bonuses...

[PassedOut]

kenberg, on Mar 17 2009, 01:41 PM, said:

As I see it, the folks at AIG are playing serious hardball. They are milking this for everything they can get, trusting that we will not call them on it because of the impact on the national and global economy. Hardball requires hardball, the time for treating these guys as just folks who made an honest error is past.

Exactly. They are playing the "too big to fail" card for all it is worth. I think that Obama's never having worked in a large corporation hurt him here, as he has no experience with the rapacity required to be successful. I guess he's getting some on-the-job training, but wish he hadn't been so naive.

[kenberg]

I see two possibilities:
1. The folks in toxic assets agree to put the bonuses in escrow, payable when/if they accomplish the objective of cleaning all the horseshit out of the stable.
2. They insist we honor their bonus contracts now, as written. In that case I am sure that their contracts contain clauses other than their bonus clause and I suggest a thorough investigation of the adherence by the employee to each and every clause. At the completion of the process they will have the most thoroughly honored contracts in the entire history of contract honoring.

[PassedOut]

They should be paid with the actual toxic assets they bought instead of cash.

[Winstonm]

The simple solution is to pass and make it retroactive legislation that states any bonuses paid to employees of institutions that received government bailout money is subject to a 100% federal tax.

[Winstonm]

My outrage is that without the support AIG would be bankrupt and the contracts would be worth nothing, or that with total nationalization the contracts would be worthless, but with only 80% ownership somehow we have to make these dolts who stole us blind whole.

Screw em. Let it fail. Pick up the pieces. Start over.

Quote

Still, my first point is that I am getting really tired of hearing our leaders, of whatever stripe, tell us that they are once again surprised, shocked, dismayed, whatever by reality. Whether the bonuses are a legal obligation or not, it is extremely disturbing to think that the administration has paid no advance attention to the issue.

My quibble is with Bernanke, Paulson, Summers, Geithner, Obama, et al who all subscribe to the belief that the banking sector must be made whole first and then the real economy will follow and recover. I believe that may have been true 40-50 years ago, but since the advent of supply-side economic policies tied with a Greenspan-led fed that created the enormous productivity-wage gap we now suffer that banks cannot begin to lend again until either prices have fallen to match wages or wages rise to match prices - the days of heedless credit expansion are dead and will not return.

Edit: For more on the productivity-wage gap see "Greenspan's Fraud" by Ravi Batra

[Winstonm]

And a final frustrating question: Bernie Madoff sold shares of investements that he never made; AIG sold insurance on risks that they did not have the money to pay; what makes one a Ponzi Scheme with prison time and the other is a bailout with millions in bonuses?

[jdonn]

Winstonm, on Mar 17 2009, 05:01 PM, said:

And a final frustrating question:  Bernie Madoff sold shares of investements that he never made; AIG sold insurance on risks that they did not have the money to pay; what makes one a Ponzi Scheme with prison time and the other is a bailout with millions in bonuses?

It's inherent in insurance that if everyone (or even just very very many) needs a claim around the same time then you won't have the money to pay, because obviously any claimant will need more money than they pay into the insurance or else there wouldn't be a need for insurance.

But to answer the more general question, my feeling about the bailouts is we bail out companies if it's in our (the general tax-paying public's) interest, and we don't if it's not. We don't bail out anyone because we feel bad or for their own sake. So of course we can discuss and debate in which if any instances it's in our best interests to bail out these companies, and of course we won't agree at the end of the day, but that is the deciding factor.

That the distaste we may feel toward AIG is perhaps as strong as toward Madoff (in my case it's not though I'm no fan of AIG) is not relevant.

I think you are framing the question deceptively as well. You are implying that people believe AIG deserves millions in bonuses. As far as I can tell no one is arguing that, not even them. The only main argument about them getting the bonuses is that of a legal obligation. In other words, the answer to your question is "obviously nothing".

[luke warm]

what do you think of the idea floated today that any bonus over $100,000 will be taxed at 100%?