Fire the AIG management

http://blogs.law.harvard.edu/philg/2009/03/18/fire-the-aig-management/

by sanj • 17 years ago

24 47 17 years ago

blogs.law.harvard.edu

CWuestefeld4• 17 years ago

These bonuses were a contractual obligation. If the problem had been allowed to run its course, a bankruptcy judge would have determined how to discharge all of the company's debts.

But that time is past. The US government has elected to keep AIG afloat, and to do so without allowing the company to reorganize its debts. Thus, it still owes 100% of its debts to all of its creditors.

The company cannot now go picking and choosing which debts to pay. To do so would do far more damage than failing to retain the executives in question now. While the US government has been trying to shore up confidence in AIG, an action like this would cause ALL of its creditors to question whether the debts that it is owed would be the next to be ignored. Thus, failing to pay these debts would set expectations that future debt might not be paid. This risk would at best increase all costs to AIG, and at worst completely prevent it from doing any business in the future when they can't be trusted.

In short, welching on these debts would likely lead to exactly the problem that the government has decided must be avoided.

sanj• 17 years ago

I was under the impression that "bonuses" are discretionary, and not contractual.

Every company I've worked with has a baseline bonus based on how the company did and (sometimes) a spiff on top of that due to individual contributions and/or your team's contributions.

All discretionary.

jacoblyles4• 17 years ago

It really depends on the employment contract.

CWuestefeld4• 17 years ago

There seems to be little debate over the facts, including that these were, in fact contractual. The debate is only over whether AIG is somehow not bound by those contracts, and if not, whether they should break them. See, for example, http://roomfordebate.blogs.nytimes.com/2009/03/17/when-bonus...

FWIW, I have a small contractual bonus in my own compensation (not from AIG)

gojomo• 17 years ago

That a 'bonus' is discretionary or conditional is the common usage -- but the condition set in these contracts, staying through certain dates (even if the recipients are not there now) was apparently met.

It also seems the case that in certain fields, 'bonus' is essentially a part of contractually or traditionally guaranteed compensation. They've stretched the term -- but that's become the new meaning, in that field, for years if not decades. So a lot of this hullabaloo is caused by terminological confusion.

colins_pride• 17 years ago

This is why all of the recent fury against bonuses is so mis-guided. People literally don't understand what they're angry about.

The irony is that bonuses are how people everywhere should get paid. Can you imagine how much better our schools would be if there was a mechanism to pay good teachers more than bad teachers?

madmanslitany• 17 years ago

"In short, welching on these debts would likely lead to exactly the problem that the government has decided must be avoided."

I think this is true of the payments made to AIG's counterparties, not so much of the bonuses being paid to the financial services division. Pretty much everyone on Wall Street's compensation has gotten hosed so I don't think trading partners are going to flinch about seeing employees go bonus-less.

There's a bit of irony in me saying this (think about who I might be doing technology for[and it's not AIG] that would make my words the most ironic...), but bonuses only work as a positive motivator up to a point. Past that, you end up getting people doing the wrong things for the wrong reasons--there were a few good HN posts about this concerning case studies conducted on bonuses and why companies should pay above the market average but not be at the top percentile.

anthonyrubin• 17 years ago

"This shows a worrisome lack of basic business knowledge."

"The manager of your local McDonald’s is smarter than the AIG executives."

These types of remarks seem common when discussing this and similar situations related to the current economic situation. Perhaps the intentions of these executives was not to save the company, but to take care of themselves. I don't see this as stupidity. Greedy and unethical? Most definitely. These people are not stupid.

old-gregg• 17 years ago

I used to despise tax evaders and considered my taxpaying obligations to be an essential part of living in a civilized society. While I didn't really think in terms of "getting something back" but I've been assuming that, in general, my own well being, especially later in life, is kind of guaranteed simply because I've been a good citizen of law obeying society.

During 2008 my attitude towards paying federal taxes has changed dramatically. What I'm seeing now is pretty much a racketeering organization where healthcare, finance and law have semi-merged with the government and are pretty much holding the rest of the population as their personal slaves. Justice and health (legal and medical costs) are out of reach for nearly everybody and, frankly, what else is a government good for? Maybe for protection from Canadians or Mexicans?

I don't want to sound like a crazy conspiracy theorist or a libertarian, but paying taxes now looks pretty much like feeding these gangsters and I'm determined to find every single available legal loophole and exploit it in full. I also like to entertain myself with a thought that ultimately, over my entire lifespan, this decision will cost US government a significant sum of money, especially if I am not the only 30 year old aspiring entrepreneur with such attitude.

dkokelley• 17 years ago

I don't remember where I saw this, but someone said that it is the duty of the citizens to pay the legal minimum amount of taxes they are obligated to pay, and no more. You seem to represent this strategy now. I think it's important for more people to adopt this attitude.

tc• 17 years ago

Don't be so sure you won't end up a libertarian if you keep your eyes open.

The injustices you've just discovered are the underlying sentiments that motivate most libertarians. The basic libertarian insight is that far from being new, these activities have been the fundamental business of government for millennia. In times like these, the curtain is pulled back a little bit farther than usual.

jacoblyles4• 17 years ago

>"We voters do it every 4-8 years for the U.S. government, a vastly more complex operation than AIG."

The government is not in the business of meeting any objective goals. It simply appropriates funds, does things with them, and then tells you about what it did with the best spin possible. As long as nothing too bad happens and the people in charge are serious-looking and wear suits, nobody complains. The government could be run by a ferret, as long as it had a good press secretary.

Private companies, on the other hand, have an objective performance standard to meet. They must make money, or eventually die. The pressure of an objective performance standard makes them much harder to run. The ability to achieve results is much more important, and the ability to look good on camera is much less. There is punishment for incompetence.

I suggest that firing the current crop of executives and making it clear to new potential hires that they will be underpaid and under intense public scrutiny is a good way to run what is left of the company into the ground. Given the other options available, this might be a good thing, but it could be done more directly.

gnaritas3• 17 years ago

> The government is not in the business of meeting any objective goals.

That's an absurd statement. We don't send officials to congress without them running a campaign specifying their goals. You might not like the process, or trust the process, or think private companies (dictatorships) do it better, but don't say they have no goals. Every single one of them has goals for their districts/states and they get fired (not reelected) if they fail more than the public likes.

If government seems so inefficient and difficult to get things done, it's often because members of congress have conflicting goals so getting anything done is difficult. This isn't an accident, it's how the system is supposed to work.

> There is punishment for incompetence.

Usually, but as we're clearly seeing now government and business are so tightly interwoven in the modern world that execs knowingly abuse the government and do things that would be bad if they didn't know they'd be bailed out by their buddies in government who they paid to have elected.

> I suggest that firing the current crop of executives

Not going to happen and you know it.

CWuestefeld4• 17 years ago

> We don't send officials to congress without them running a campaign specifying their goals.

Perhaps you have a different concept of "goals". Political candidates spew platitudes, but when have you ever heard they cite a specific, measurable goal? The few instances I've heard always specify a timeframe that's conveniently just beyond the next election, e.g. a presidential candidate promising that something will happen in 5 years, so that their next election can't be held up by it.

> execs knowingly abuse the government ... their buddies in government who they paid to have elected

It works both ways. Don't just focus on business, also look at the government officials who are so willing to prostitute themselves.

jacoblyles4• 17 years ago

There is a qualitative difference between the vague and often contradictory corpus of promises that a politician makes on the campaign stump and the clear contractual obligations that a corporation owes to its creditors. That difference is captured with the notion of "objectivity", which is why I said that corporate executives face an objective performance standard while politicians do not.

The only potential discipline for politicians is made by voters who mostly don't understand the issues that well and don't spend a lot of time following their representatives in office. Thus, the job of a politician is largely PR.

This, again, is in stark contrast to the creditors of a corporation, who are very interested in its actions, follow it very closely, have very clear expectations, and who have deep knowledge of its activities.

I know I am not going to convince you, but I think my point is good and my logic is sound.

>"Not going to happen and you know it."

My sentence had a fairly large phrase in the middle. If it is removed, it reads "I suggest that firing the current crop of executives...is a good way to run the company into the ground". Although, I suspect it is likely that AIG is already beyond salvage.

davetufts2• 17 years ago

Directing anger at AIG is misguided. Our government is the wrongdoer here. Failing to let state bankruptcy court and natural liquidation happen - as we did with Enron - started the problem.

The problem with exec bonuses was exasperated in the final version of the American Recovery and Reinvestment Act of 2009. Here, Chris Dodd added the “Dodd amendment” http://www.google.com/search?q=dodd+amendment

It reads: ‘‘(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.” http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1:

That amendment guarantees all bonuses that were contracted before the date of the Act.

Of course, Dodd and Obama are “outraged”. But why did Dodd add that provision? Why did Obama sign it?

Not surprisingly Dodd, Obama, Bush, McCain, and Shumer are the largest benefactors of AIG’s massive lobbying. http://www.opensecrets.org/orgs/recips.php?id=D000000123&...

AIG isn’t taking our money. Our government is.

jhancock4• 17 years ago

you are correct in what is happening "right now". But that is not what got AIG and many others into this mess.

AIG "insured" debts it did not have enough holdings to back up. I quote the word insured because, insurance is barely what it used to be.

Traditionally, government demanded insurers have low-risk holdings to back up a sizable percent of their outstanding obligations. The regulations that handled this have been dismantled over the years. Additionally, the "insurance" has been broadened to include other type of investment vehicles instead of traditional insurance. AIG got greedy and was able to do so because they and others lobbied hard to allow them to be greedy. This was a multi-decade process.

davetufts2• 17 years ago

Right, my comments are about "right now", because they reference the article which deals with the situation right now -- specifically firing AIG's management because they are "sucking down" big bonuses.

I contend that the article focuses on one of the symptoms "right now" (bonuses to poor management still running a company); whereas the cause is government intervention. Without that intervention, the "right now" symptoms would not exist, i.e. AIG would not exist.

You bring up the long debacle that led to this situation. However, you fail to mention that our government and the Federal Reserve have been tightly tangled with AIG for a long time. Regarding "multi-decade process", there's plenty of government blame to go around. http://www.lewrockwell.com/rozeff/rozeff253.html

If you're contenting that AIG was insolvent and still issuing insurance, they should have been prosecuted under state fraud laws, not bailed out with billions of dollars.

anamax7• 17 years ago

> Traditionally, government demanded insurers have low-risk holdings to back up a sizable percent of their outstanding obligations. The regulations that handled this have been dismantled over the years.

As I pointed out in another thread, AIG's assets have not had losses and the relevant regulations have not been dismantled over the years. (In fact, AIG had to register as a bank because of new regulations.)

What happened to AIG is that the mark-to-market for those assets, which are behaving exactly as predicted, went away. (AIG's portfolios are not taking a foreclosure hit because they cherry-picked.) That took AIG's credit rating down and then the covenants kicked in, requiring AIG to pay money that it didn't have.

condor• 17 years ago

I love it, everybody has an opinion because in theory everybody is a part owner . . . AIG will be a great case study on why companies are best managed as dictatorships and constrained by a marketplace. It'll be interesting to see what happens when neither of those is in place.

ironsam• 17 years ago

This is quite a poor article, for reasons others have already mentioned here. Ultimately, any government "solution" that involves the bailout of companies is flawed and immoral.

bwd2• 17 years ago

A couple of points to consider here.

First, for all of the people who think that AIG should have gone bankrupt: go look at www.aig.com under "individuals and families" to see what lines of business AIG is in, then check out the "insurance holdings by state" section of the wikipedia page. AIG owns two dozen insurance companies in California and controls 4.7% of the life insurance and 2.7% of the property and casualty market in West Virginia, among other things. IANAL, but I have to assume that policy holders would revert to general creditors in the event that they had a loss and the insurer was bankrupt. Would you want to go to bankruptcy court and stand in line with Goldman Sachs, Societe Generale, etc. to try to get your payout if your house had burned down or your spouse had died and you needed the money to pay your bills? It may be the case that state governments stand behind insurers that do business in their state (insurers are regulated at the state level so this may vary by state) but this converts the problem into one that is much more complicated and expensive to sort out than just giving money to the parent company. I expect that this is why the parent company was bailed out instead of going bankrupt.

As for bonuses paid to executives, these people are employed in units that basically trade derivatives, and they know what positions AIG has on its books. It is thus possible that the guy who earned $6.4 million in bonus could earn a lot more than that if he started a hedge fund and bet specifically against the positions that he knows AIG has. If this is the case, then AIG is actually saving money by paying this guy to stick around and help them unwind the book. Confidentiality provisions will not protect a company from a former employee betting against their positions, only from having them disclose information.

erso2• 17 years ago

I don't agree with your position that AIG was in the right by paying bonuses.

If the executive in question can be bought so easily I don't think they'd stick around when they know they can make more money elsewhere. Case in point: NYT reported today that according to Andrew Cuomo 52 of the executives that were given bonuses have already left the company.

These people took the money and ran.

anamax7• 17 years ago

> These people took the money and ran.

They got pre-agreed bonuses for what they did. They saw that things were changing for the worse and left.

What part of that do you have a problem with?

Thanks to the handwringing, started by people who knew about the bonus months ago, AIG is going to have trouble hiring people. Since we're hoping to get tax money back, it's unclear why that's a good thing.

donw• 17 years ago

Good, then let them leave and invest their (and their friends' money) as they see fit. Don't hand them my tax dollars so they can then leave and do as they see fit.

I sincerely doubt that the sum total of all burned down houses, deaths, auto accidents, and so on that are handled by AIG-backed companies is within two orders of magnitude of the bailout. So let AIG crumble, have the federal government handle the insurance payout to the insured as an emergency measure, and for the people who lost their policies, they can go to another insurance company.

Rod• 17 years ago

Thank you for an insightful analysis. It's somewhat interesting that HN'ers believe they are super smart but downvote anything that goes against the mainstream dogma. Finance is complex. Even a smart guy like Philip Greenspun made a fool of himself in this article. Better not make strong statements when one is treading outside one's area of expertise...

I would argue that many allow emotion to cloud their judgement. Of course that taxpayers are not happy to see their money being wasted on bonuses, but shouldn't we analyze the situation in objective terms? Your analysis was one of the most balanced I have read in recent times. Sometimes one must choose between two evils. Things are seldom black & white.

I liked your take on the need to compensate and keep AIG's traders, in order to avoid them going elsewhere and start predatory practises against their former employer. Makes sense. I wonder why no one had mentioned it before.

rrhyne• 17 years ago

>Confidentiality provisions will not protect a company from a former employee betting against their positions, only from having them disclose information.

Right. Like current AIG employees aren't already helping others do this right this second. Great post otherwise.

jobeirne• 17 years ago

>"The manager of your local McDonald’s is smarter than the AIG executives."

I would beg to differ. The manager at my local McDonald's hasn't convinced an entire country to pay him $6.5 mil for doing a horrible job.

>"McDonald’s doesn’t say 'We had a bad year last year and you might be discouraged, so we’re writing you a fat check unconditionally in hopes that you will like us and stick around this year.'"

Broken analogy; it's the government who wrote the fat check, not AIG.

ratsbane• 17 years ago

It's very Merchant-of-Venice-ish - Antonio owed Shylock money via a legally valid contract which permitted Shylock to claim a pound of flesh in case of default. The court ruled in Shylock's favor - he could claim the pound of flesh - but said that if Antonio died that Shylock would be tried for murder.

I'm starting to read more thorough explanations of the bonuses - they were approved 1Q 2008 to encourage retention during the 2008 year, with payment at the end of the year. As such they're probably legal, but the proposal to tax them 100% - or better yet, scrutinize the actions of the bonus recipients during the last year and hold them to a high standard of responsibilty - seems appropriate to me. Holding highly-compensated executives to high standards is what we should be doing anyway. With rewards come responsibilities.

EDIT - It wasn't threat of murder - the court ruled that Shylock couldn't take any of Antonio's blood on pain of forfeiture of all of his (Shylock's) assets. http://en.wikipedia.org/wiki/The_Merchant_of_Venice

Fire the AIG management

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