I haven’t written that much on this blog about the financial crisis writ large but given the public furor over the AIG situation I want to weigh in with my thoughts.
I don’t believe AIG execs should get $165 million in bonuses for their performance in 2008. Here’s why:
1. It’s just not right. I don’t think of myself as a moralistic or sanctimonious person but c’mon people! This is just too much to swallow. AIG is one of three companies that the U.S. government had to take over because their collapse threatened the integrity of the global financial system. We, the U.S. taxpayers, own 80% of the AIG, after spending $170 BILLION to save it from collapse (and we’ll probably have to give it even more money). Now, the company wants to pay out hundreds of millions in bonuses to executives who ran a company that helped to drive our economy into a deep recession. I think not.
2. The executives don’t deserve it and they don’t need to be retained. These payments have been called bonuses and retention payments, depending upon who you talk to. Either way you look at it, the company can not justify these payments. Bonuses are supposed to reward performance. Clearly, AIG’s performance was horrific. It’s like a baseball player getting a bonus for taking steroids or striking out every time he was at bat with runners in scoring position.
NY attorney general Andrew Cuomo produced evidence today showing that many AIG employees in the infamous financial products group received bonuses. This is the group that created all these exotic derivatives that caused AIG’s near collapse. That is unconscionable. But even the employees that had nothing to do with the financial products group that ruined AIG should not be paid bonuses since the entire company lost lots of money and had to be taken over by the government.
The second argument, which was actually made by AIG’s CEO, is even more galling. “We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” wrote AIG CEO Edward Liddy to Treasury Sec. Timothy Geithner on Saturday.
Really? Many of these executives were supposed to manage the risk of the firm. Clearly, they did an awful job and should not be seen as stars that need to be retained. Get rid of ’em I say. Moreover, last time I checked Wall Street was filled with tens of thousands of highly qualified and unemployed people. Many of them would be happy to take those jobs at AIG in a heartbeat.
3. Contracts are malleable. This week, New York Times columnist Andrew Ross Sorkin audaciously put forward the best argument for paying out the bonuses: that the government should not break a contract. Sorkin is a great reporter but I have to say he’s wrong about this one.
As one law professor put it, “contracts get repudiated, renegotiated, modified, delayed, worked out, managed — pick the euphemism — all the time.” I know this from personal experience too having covered the tech bust. Giant multi-billion outsourcing contracts were renegotiated many times during that period because both sides knew the contracts did not make sense with business volumes falling off so much.
That’s why I applaud President Obama’s efforts to stop the bonuses. He is using the bully pulpit to pressure and shame these executives to give up their bonuses. I agree the government should not unilaterally break the contracts but it has every right to use its power to get the executives to give up what they don’t deserve. I think he’s going to get his way, and that’s a good thing for Obama and America.
Then we should focus on the bigger issues. Like, why did AIG pay out more than $100 billion of the money the government gave it to counter-parties. Goldman Sachs got $13 billion, Société Générale received $12 billion, and $12 billion went to Deutsche Bank, nearly 100% of what they were owed.
That strikes some financial professionals as egregious. If AIG had filed for Chapter 11 bankruptcy in September, those same firms would have gotten in line with other creditors and received pennies on the dollar. There’s no reason AIG–or the U.S. government–couldn’t have negotiated better terms.