AIG Executive Quits in Style
Jake DeSantis, an executive in AIG’s much-derided financial products unit, has resigned in protest of what he believes shoddy and dishonorable treatment by his firm and his country’s political leadership. NYT has published an open letter to CEO Edward Liddy.
I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.
[…]
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.
[…]
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.
For his part, DeSantis says he’ll donate whatever is left of his bonus money after taxes to charity.
UPDATE: Andrew Sullivan makes a larger point.
The letter from Jake DeSantis in the NYT today is a very powerful reminder that bankers have human rights too. We are very used to understanding the idea that judging a person on the basis of unjust and untrue generalizations about the color of their skin is wrong. We call that racism. But when we make broad-brush accusations against all bankers, or even all bankers at a particular company, no such ethical restraint is required. Of course, this is not entirely nuts. The experience of bankers in human history is a little less oppressed, to put it mildly, than most African-Americans. But the core moral point is the same: we should always try to judge the individual, not the group.
The relatively privileged are often excused from this rule. And maybe this is fine most of the time, given their wealth and power. But it remains true that the individual obliterated by his fellows in this way is as human as anyone else. He or she is not worth less than someone in far less comfy circumstances.
I think there’s a problem with his line of reasoning that hinges on this sentence:
I have no idea what his compensation plan was during the period in question. However, no company with which I’ve ever been associated calculated the company’s profitability this way. It’s calculated based on the whole company, not just his desk.
If there’s a lesson that should have been learned over the last year, it’s that the compensation model for the financial sector was completely out of whack, based on air, and produced perverse incentives. An appeal to that model doesn’t carry a lot of weight with me.
As far as I’m concerned whether AIG personnel get their bonuses or not is a matter of law. Justice, on the other hand, demands that they get nothing at all.
An amazing letter… the arrogance and sense of entitlement just drips through. Poor, poor selfless Jack DeSantis. He’s a saint more than an executive.
The fact that AIG is, effectively, bankrupt and a ward of the state never comes up interestingly enough.
DS, I noticed that passage and had a similar reaction, but I don’t agree that it undermines the rest of his message. I think what he’s saying is that he shouldn’t be scapegoated for the elements of the company’s overall model which were unsustainable. I think that is a valid complaint, assuming that he really did work on traditional, rational investments. My understanding is that AIG had become a hybrid of both, and the people who weren’t doing the CDSs are rightfully upset that they are getting the fallout from those who were (most of whom have already fled, avoiding the responsibility for the mess.)
C Stanley:
Intelligent minds can differ on this. My experience has been that commissions are based on individual sales performance while bonuses are based, at least substantially, on company performance. Presumably, both are governed by contract which is a matter of law.
However, the core of his argument cited above, which as I take it is “don’t blame me”, is materially irrelevant from a standpoint of justice in a company that’s losing money. At least that’s the way I see it.
A reasonable response to Jack, an executive vice-president in the unit of AIG that helped bring down the world economy: “You can’t quit, you’re fired”.
Well, and why not? (And I don’t mean the public opproprium/condemnation–that’s an unfortunate byproduct of working for AIG; unfair, but in the words of a president, life is unfair). But Dave’s point, as I underestand it, is that if the whole company has tanked, the rain falls on the just and unjust. It certainly was that way in a company I worked for. My group was profitable, other groups, not so much. My compensation was curtailed because the company as a whole was not doing so well. I didn’t like, but that’s the way the compensation crumbled.
But maybe he actually is entitled? He’s put in the long hours, done what he was supposed to, and is now being vilified for something others did and the retention bonus that was effectively the entirety of his compensation is being targeted.
But he didn’t bankrupt the company. He’s not supposed to be paid what he’s contractually been promised for work he already did?
I think that’s right from the standpoint of a performance bonus. Not so much, though, for a retention bonus taken in lieu of salary.
The end of year bonuses are usually defined by management through a pool. The size of the pool is based on the firms complete earnings and profitability. If one side of the firm fails the ENTIRE firm suffers. That is what a team is about. Maybe if everyone at AIG were under the assumption of all for one and one for all then the CDS team would have been better watched. Sorry Mr. DeSantis, but your COMPANY screwed up and maybe you should help fix it for the rest of America and not just yourself. BTW I’ve been on Wall Street for 24 years and when the traders screwed up the support staff took the reductions in bonus, but we kept working for the team. So I’ve been taking the business losses for years in my bonuses while you guys got rewarded for screwing up. Grow Up!
done what he was supposed to
Permit me to doubt.
But he didn’t bankrupt the company. He’s not supposed to be paid what he’s contractually been promised for work he already did?
That’s the part of his argument that I’m particularly sympathetic to. It appears that he was one of the ones who agreed to stay on at a $1 annual salary, with the retention bonus coming in March, in order to work through some of the fixes to get the company back to profitability. He agreed to this, apparently, in lieu of finding other employment. I don’t believe that justice would be served by reneging on such a contract. I think the American taxpayers would be shooting ourselves in the collective foot if we seek to exact justice from the people who are attempting to stabilize the company so it can pay back it’s public debt.
Just because your experience with bonuses doesn’t fit with how Mr DeSantis’s was structured doesn’t mean it’s out of the ordinary or unjustified. The world is bigger than your own experience.
Talk about arrogance.
If he spent 11 years of honest and dedicated service to AIG, perhaps he could show us how hard he tried to stop the shenanigans going on in the division of AIG that brought down our economy?
Oh, he didn’t try? Well, then. Don’t let the door hit you.
I think it is a fundamental of capitalism that it is about the firm, and not mental accounts.
You know, it’s interesting because this gentleman’s letter would be honorable if this was simply creative destruction. He’d be writing it as the firm went under. He’d be an officer on the bridge perhaps, managing the disaster the best he could.
But that’s not what happened. The firm only survives because of bailouts, and that is not a small detail.
Finally, I think it’s interesting that James is taking what is essentially a non-capitalist and non-market “fairness” position. Not something you usually see from that side of the aisle …
and I’m not sure this is the best time or the best place to make it about fairness. I think “fair” would be something else entirely.
If he spent 11 years of honest and dedicated service to AIG, perhaps he could show us how hard he tried to stop the shenanigans going on in the division of AIG that brought down our economy?
Oh, he didn’t try? Well, then. Don’t let the door hit you.
That appears to put way too much responsibility on an individual working in one compartment of a huge firm. Should the admin assistants be tossed out on the street as well, for failing to raise concerns with the CEOs?
Screw him and his poor-poor-pitiful-me attitude. I put a lot of work into my job too and for 5 of the 9 years I worked at my company, (I was RIF’d in January along with 4000 others), I didn’t even get a cost of living raise, let alone a bonus. Now, I’m out of work, my savings is shot and it is all thanks to greedy, not a smart as they thing they are, bastards like Mr. DeSantis and the AIG Financial Products Unit.
If finding people to replace them wasn’t going to be a problem before, it sure as hell will be now.
This mob mentality is going to cost us a great deal more money than just honoring the contracts we entered into with these people in the first place.
On the plus side, we get to act morally superior. Great business acumen being displayed here.
Richard Jacobs unintentionally illustrates my point well. It’s due to “bastards like Mr. DeSantis” – not Mr. DeSantis himself, mind you, just people like him – so let’s lynch him and other people like him while we’re at it.
It’d be hilarious if it wasn’t so highly likely to have a hugely deleterious effect on our current investment in AIG.
Actually Phil, I think you misunderstand the nature of the bad bets. They all pay off most of the time, say 95%. They blow up periodically.
We don’t know if Mr. DeSantis made bets that were genuinely safe, or bets that just hadn’t blown up yet.
He speaks of an 11 year run of profit, well that’s what MBS and CDS had, right?
Did you get your salary? Because that’s more than Mr. DeSantis got.
I’ve said it before and I’ll say it again – those braying for the blood of the overpaid executives have no idea what a “retention bonus” is. At least it appears that the unconstitutional tax doesn’t have the senatorial support to override Obama’s veto, but this whole fiasco is mob-mentality stupidity at its worst.
BTW, I understand that one of the things coming out of the AIG investigations is that the “good” side of AIG (traditional insurance) invested in the “bad” side (FP division). So they ate their own dog food …
Billy, the thing I don’t get is that some on the right first had the position “let the firms fail” but now that they’ve been thrown a lifeline say “pay them as if they were a success.”
Is that really a non-emotional position itself?
It doesn’t make sense to me. The fact that these are failed firms seems the bottom line.
odograph, to me the thing is that once we make the decision to not let the firms fail, we ought not to create conditions under which they will fail to be able to pay back their debt to us. I didn’t agree with the bailouts to begin with (though I understood the rationale) but it makes no sense to throw someone a life preserver and then attempt to drown them instead of pulling them aboard the ship.
Any decisions of punitive actions should have been made in the initial conditions of the bailout. Since that didn’t happen, it makes no sense to now try to exact punishment in this way.
OK, we differ on “fairness” CS, what about moral hazard?
I’m saying, if you don’t want government messing with your compensation don’t fail.
That’s pretty simple, isn’t it?
(and of course AIG was the Epic Fail of the crisis so far.)
@Billy:
Just let me repeat something I previously quoted from Kevin Drum:
I’m on record here as opposing the tax on the bonuses. But that’s not the issue (certainly not in Dave’s post). From my point of view, the issue is, following Kevin, compensation cum bonuses seems to be structured in such a way that no matter what happens, the compensation doesn’t suffer. That strikes me as problematic.
I’m glad I don’t own 80% of that company.
I think that’s an example of closing the barn door after the horse has escaped, odo.
It’s my view that we need to concentrate on rounding up the horses while rebuilding the barns to be more escape proof.
The compensation has little to do with it except for the populist sentiment of ‘fairness’. We ought to put our efforts mainly into recreating companies that won’t ever become ‘too big to let fail’ in the future (ie, trust busting and rewriting rules on mergers and acquisitions.)
That said, though, I think there’s something to the idea of having shareholder oversight of top CEO compensation.
But on the issue of whether or not we’re sending the message that you describe (don’t fail if you don’t want the govt messing with your comp structure) I question that too. The devil will be in the details, but in the current admin request for greater authority to intervene in companies in the future I don’t see what will restrict them from intervening in companies that they feel are unfairly compensating top execs, and not just for companies that are in need of a bailout.
” I didn’t even get a cost of living raise, let alone a bonus.”
If you had a contract to be paid x and you were riffed, they would have to pay out your contract.
Just curious, how many of the commentors here have actually held executive positions in corporate America? Or even middle management positions in corporate America?
That’s what I thought. There is so much bad information here as to make this discussion an utter waste of time.
I am afraid that Jake DeSantis is protesting too much. When you work for an organization, you cannot claim immunity for yourself against the faults of one division or another even if you were not associated with those divisions and you were not directly responsible for any mishaps that happened over there. You stood together or fell together, especially if you were occupying some senior-level executive position in the organizational hierarchy.
Executives who were responsible for the CDS debacle and left the organization in the lurch were deserving of as much condemnation as the senior officers on a ship on fire jumping into the first lifeboat lowered from the deck.
Let us remember in this context that thousands of innocent employees of Enron who had nothing to do with the shenanigans orchestrated by Ken Lay, Jeff Skilling and their co-conspirators lost their jobs and all their life savings for no fault of theirs.
But that’s not the issue (certainly not in Dave’s post). From my point of view, the issue is, following Kevin, compensation cum bonuses seems to be structured in such a way that no matter what happens, the compensation doesn’t suffer. That strikes me as problematic.
I somewhat agree with that, except that I feel that the execs have understandably attempted to use these kinds of contracts to protect themselves against the systemic risks which were beyond their control. In some cases, the people involved shouldn’t have been able to insure against that systemic risk because they were directly involved in creating it. In other cases, people were insuring themselves against the potential damages caused by others.
When you work for an organization, you cannot claim immunity for yourself against the faults of one division or another even if you were not associated with those divisions and you were not directly responsible for any mishaps that happened over there.
He can’t claim that immunity for himself, but the fact is he was granted immunity by the terms of the bailout deal and the subsequent exemption in the exec compensation rider to the stimulus bill. Once the govt grants immunity, it can’t take it back.
James is right in this matter and I am shocked at the rest who post here believing DeSantis is somehow at fault. He contracted to do work, did the work based upon what the contract said. He was under compensated in lieu of a retention bonus. For any to violate the contract is actionable. However, a tax after the fact is unconstitutional. This whole matter can be laid at the feet of the Democrats. Frank and Dodd specifically. Many here are just not willing to look at the big picture. Obama signed the bill that allowed the payment of the bonuses. Obama feints anger at something he signed in to law. One would think more people would be concerned with the basic dishonesty of the Administration rather than the keeping of a contract. Had AIG been allowed to go bankrupt, those contracts would have been null and void. Had bankruptcy been allowed however, the Administration would not have gotten to give money to foreign banks through AIG. Follow the money.
Odo, I can’t figure out how your comment to me is responsive in any way to what I posted. I’m talking about the likely future ramifications of unilaterally abrogating contracts. If you want to disagree with me on those ramifications, please do, but don’t put words in my mouth. For instance, I haven’t seen one single person anywhere say that we should act as though AIG is a success. We’re saying “honor the contract”. There’s nothing inherently emotional about that statement. That line of argument is a red herring at best.
As far as understanding the nature of the bets – I carried many investment licenses at one time, and I would wager I understand the underlying issues better than nearly anyone here. Well enough, at least, that I knew enough to stay away from mortgage-backed securities without having to be told.
My position CS is that the world is messy, and effectively anything that makes a bailout painful to the bailees is a lesson. I’m fine with that, and saying “if you don’t like it, don’t fail.”
I also think when you said “it makes no sense to throw someone a life preserver and then attempt to drown” you forgot who we were throwing the life preserver to. AIG was not rescued for its management, it was rescued for its counterparties.
I agree that going forward the best result would be to make companies small enough to fail, but also disconnected enough to fail. If 10 companies or 100 companies that all make wrong-sided CDS bets, you’ll still have trouble.
An entire segment of small players going down at once is equivalent to one large player.
When the bonus is the entirety of one’s compensation, how, exactly, is this problematic? A retention bonus is, by definition, a bonus for staying with the company. That is not a “no matter what happens” situation, it is expressly conditional upon the employee not leaving until the contract period has expired. There are lots of circumstances under which the employee could fail to meet this condition.
The issue here is that many these employees agreed to take these bonuses (which are taxed at a higher rate than ordinary income) in lieu of salary, and in some cases, in lieu of long-term opportunities at other firms. The issue of entitlement is simply not that complicated, but people hear or read “bonus” and think it’s in addition to an already disproportionate amount of compensation. In the case of many of these individuals, it is not, and that is why this has been such a travesty.
I’ve been with a few that calcculated bonuses based on the indivdual unit’s profitability, though… a kind of a group meritocracy. A show I was assocaited with a a producer years ago did quite well, and was bonused accorindgly, even though the station wasn’t doing all that well and was eventually sold.
be careful that what you argue against isn’t the idea of financial meritocracy itself. By the time we get done here the only people left at any company getting federal funding (Which given the moves we’ve seen from the WH of late means any damned one of them getting bailout funding or no…) will be people who aren’t worth a bonus. And they’ll perform like it. A surefire way to collapse the business.
Phil, the gov did not break into Microsoft or IBM to play with their contracts.
AIG failed. They should have gone through bankruptcy, and it was a government fail that they did not.
Arriving where we are now, we should do some logical equivalent of bankruptcy, or as close as this sloppy political process can get.
By the way, James; They took down that signage in the pic, last weekend.
Thank you Rajan, for the clearest statement yet that the people in favor of super-taxing or otherwise attaching these bonuses have the time-honored principle of “Guilt by Association” as the bedrock of their position.
“”Some of the donations to lawmakers include Sen. Chris Dodd (D-Conn.), $103,100;then-Senator, now President Barack Obama(D-Ill.), $101,332;””
Any talk of returning the millions received from AIG in just 2008 by the very people who were culpable in the “collapse”…. our congress?
The above are just two examples,and this money went toward reelecting the problem.
Well, one thing we now know is that AIG is no longer to big to fail. Congress and Obama have killed it. After using it as a conduit to pay off foreign banks and Goldman Sachs and others, they have now doomed AIG by driving away talent.
If you stayed at AIG after the bailout, you were suckered. Now those that can will move to other firms as they can. Each will have to be replaced making a return to a functioning enterprise more difficult. Oh, and those that come to work there will be wanting the money up front or at least as earned. No annual bonus/deferred earning scheme for them.
In the end, except for paying off the counterparties, AIG would have been better off in a legitimate bankruptcy run by a judge rather than this bastardized setup of Treasury’s creation.
So what are you saying Phil, that there should be a government program to step in and cover bonuses in every failed company in the US?
Is that the new Capitalism?
I mean geez louise, the criticism has been “private profit, socialized losses” and here you are standing up for exactly that!
I disagree with Dave Schuler and other’s take here. The argument is in response to the pitchfork mob’s inability to distinguish AIG from the people who work for it.
If we are mad at AIG, then AIG should be punished; the government can withdraw its financial support or force AIG to sell off or destroy one of its lucrative businesses.
But we are not doing any of that. Instead, we have a mob appearing at the homes of people they know nothing about, shouting for forfeiture of personal assets. If we were concerned about individual malfeasance, we would be making individual determinations.
In the context of social desire to punish AIG through its employees, it makes sense to point out that the reason people are upset with AIG have nothing to do with any given individual.
Most of you seem to have missed the point that these are not performance bonuses. They are retention bonuses. You need to learn the difference.
Arriving where we are now, we should do some logical equivalent of bankruptcy, or as close as this sloppy political process can get.
Perhaps we should have, but no one enters bankruptcy without knowing what the terms and conditions are going to be in advance.
AIG was not rescued for its management, it was rescued for its counterparties.Implicit in the govt’s decision to bail out AIG instead of individually bailing out the counterparties directly is that idea that AIG needs to survive in some form. And at this point, one of the principle reasons it needs to survive is to pay back its loan to the taxpayers.
Counterparties who were quite complicit in the CDS debacle. Do you support reneging on those contracts as well? Why not? Aren’t you equally pissed at them? You should be; maybe you aren’t because nobody has yet demagogued you into the parallel unreasoning position!
Let’s assume that is absolutely correct. I’m inclined to agree, although I know just enough to realize that neither I nor your nor probably anyone knows what the actual fallout of that would have been. The reality of the situation is that we didn’t. What you are advocating is to compound one mistake with another. We’re on the hook to the tune of $180B. Let’s try to make decisions and enter into arrangements that are more likely to get us out of this mess. Establishing that we are unreliable, untrustworthy, dishonorable business partners is not the way to do that.
It’s not just that these are retention bonuses. The AIG white paper points out that these people are working on “winding down” the portfolios. These people are working on ending their jobs profitably.
I previously used the construction business as an analogy (you have to back end compensation on construction jobs or they won’t ever get finished). You have to pay extra to pay people to do things like this because the natural tendency is to find the next job.
Straw man. For the second time of asking, don’t put words in my mouth. I have argued all along that once our government explicitly agreed to pay these bonuses – and they did – they have to stand by that. I don’t want to pay any company’s bonuses, salaries, or debts, failed or not. Unfortunately, this was rushed through when I and others were counseling taking a few days to produce a slightly more well-thought out plan instead, and we’re stuck with the consequences. Don’t want to pay the legal obligations of XYZ Corp? Don’t buy it then. This isn’t at all complicated.
Finally to quote another blogger:
“Look at me, I’m such a good guy that I’m willing to accept a $1 salary! I truly care about this country and this company!”
“What? I’m not getting my guaranteed bonus? F you, F this company, and F this country!”
Need we say more.
I see it as completing your thought Phil, not making a straw man.
This is the famous midnight paragraph insertion?
I don’t think we particularly have to honor that. It was a sneak, not an example of democracy in action.
No, actually that’s not the way democracy works. It doesn’t (unfortunately) get everything right the first time. It works (to the extent that it does) by successive approximation.
The Left typically defines “fair” as something the government has to do in order to correct the outcomes of natural competition. In this case, I’m simply defining “fair” in terms of honoring a man’s contract and paying him for work he’s already done. Tangentially, I’m also arguing that it’s not fair to assign collective guilt to the largely blameless people in the class.
FWIW, I the centrist, am most fascinated by the monkey fairness studies. It cuts not just across parties, but across species.
(I don’t think you addressed why your argument “in terms of honoring a man’s contract and paying him for work he’s already done” does not apply then to all failed firms. I mean, you can’t really argue that as a principle unless you are willing to apply it across the board.)
((The defense that the government should follow through and pursue all bad laws forever is also an interesting principle. Will that apply to everything this Democratic Congress succeeds in passing?))
Egad, odograph, you are not a centrist, you are an anarchist. Can you imagine how many laws would be rescinded on the grounds that the legislature didn’t read it?
You see it wrong. My position, being based on explicit contractual agreements, in no way entails hijacking the taxpayer to bail out other firms. In fact, it quite obviously argues against it. Now, I went to the trouble to correct your misapprehension; please be honest enough to simply admit your mistake and move on.
You aren’t thinking it through. Let’s go ahead and assume as an example that the bill to tax these bonuses is constitutional. One consequence of enacting that bill into law is that it will become more difficult and more costly to find people to do the necessary job of fixing AIG’s problems (and the problems of any as-yet undiscovered companies). It’s not just a do-over. So, yes, we are in fact stuck with the consequences. Our actions moving forward can mediate those consequences for good or ill. We need to think through what the likely consequences of our actions moving forward will be. I just don’t think that you and others who are advocating this action have done that.
I don’t think we particularly have to honor that. It was a sneak, not an example of democracy in action.
Excuse me??
So how does this process work where we decide which parts of signed Congressional legislation is to be honored and which is thrown out because of sneakiness?
I bet Mr. DeSantis will be looking for a job with AIG’s counter parties. Since the contract for employment has been broken, he may not legally prohibited in using his specialized knowledge to benefit the counterparty who hired him. If others in AIG who have returned the bonuses feel the same way I wouldn’t be surprised to see more of them walk right into the arms of other counterparties.
It doesn’t apply to all failed firms because we didn’t buy all the failed firms. We bought this one. Are you genuinely incapable of comprehending that distinction?
And thus the law of unintended consequences begins to rear its ugly misshapen head.
With 55 posts its hard to know where to start. IMHO the basic points worth making(and which some have made) are:
1. The government should never have bailed them out.
1a. But once they did, they embarked on the slippery slope to other decisions govt feels it has the right to force.
1b. All this talk about “effectively insolvent” is pure BS. For better or worse, the government decided to step in and saved them. The fact of the matter is they aren’t bankrupt.
2. This executive has every right to expect the contractual stay bonus arrangements be honored.
3. This executive (any executive, really) who has a portion of his comp tied to specific unit performance should expect to be paid accordingly. (It is fairly typical to have compensation components split between unit and overall company performance.)
4. This executive, for the portion of his compensation tied to overall company performance -options or stock – has no right to payment or performance. I’m sure he understands this.
All this other sniping is just so juvenile.
Wow. Again, nobody has contended that. We’re merely pointing out that the consequences of bad legislation cannot be simply wished away, and that more bad legislation is probably not a good answer.
Sorry to continue in the sniping, Drew; but this is a fairly egregious example of bad logic, and I feel that such examples should be pointed out for what they are.
I think I’m a cynic holding the Capitalist line on this. I think in a strange reversal, the Right’s position is “now that we are Socialists, we have to be good Socialists.”
I don’t expect government to be perfect, I expect it to be a mess. I would just rather see the mess move in the right direction.
Any punishment for systemic risk-takers is a move in the right direction, even if that punishment is not beautifully designed.
Don’t endorse “private profit, socialized losses”
Yep. I hear that AIG has something like a $1.6 trillion dollar book to unwind. If executives start walking off to counterparties and with no legally binding confidentiality agreement, then I wish all those who have been smuggly superior with their moral outrage well.
Quite right. This is how it works where I work. If the company were to go bankrupt I imagine that aspect would dominate and the performance bonus would be small at best, but most likely zero. Problem is AIG is not bankrupt as Drew points out. They now have the full backing of the American taxpayer. Aren’t bailouts grand?
Obama’s stimulus package?
He was an executive in another part of the company. That carries a lot more responsibility, along with the potential rewards.
Of course, like most of our Titans of Industry, he assumed he could have all the rewards with none of the responsibilities.
The employees of AIG entered into a Employee Retention Plan contract with AIG prior to government involvement in the firm.
The plan has a Guaranteed Retention Award of up to their 2007 Total Economic Award for the 2008 and 2009 compensation years.
Should the 30% of distributable income of AIG-FP for the bonus pool not cover the guaranteed retention awards, AIG agreed to cover the shortfall.
Should the bonus pool exceed the guaranteed retention awards, the excess would be distributed on a discretionary basis.
Congress uses tax dollars to infuse capital into AIG to keep AIG-FP from collapsing bringing ruin to counterparties.
The legislation does not make the cash infusion dependent on abrogating AIG contracts with employees or outside parties.
The Obama Administration through Sen. Chris Dodd, specifically affirms the AIG Employee Retention Plan in the legislation, which includes the obligation to pay at a minimum the amount of the 2007 total economic awards for covered employees.
Upon being found out, and after the awards have been distributed, Congress and the Obama Administration seek to abrogate the Employee Retention Plan contracts even though employees met their contractual terms during the 2008 compensation year.
Failing to find a legal way to deny the employees their earned compensation, the administration seeks to bully the employees into returning the funds
For those who resist the bullying for the President and Treasury, Congress seeks to impose a confiscatory tax to recover the contractually earned compensation.
And this somehow is suppose to bring confidence into the market when the government seeks to abrogate contracts after the fact or to confiscate the lawfully earned proceeds of those contracts when abrogation would not withstand judicial review.
Obviously, any contract in which this Administration has an interest is not secure or enforceable but rather is subject to the imperial whim of the President?
link to the AIG Employee Retention Plan
Sarcasm and hyperbole tags are needed. I was stretching it to make a point, M1EK. If you honestly think that executives in one department of these types of corporations know anything about what is going on in another division (let alone know enough to have an oversight role) then I presume you don’t work for a big corporation.
Exactly. Ideally by the end of the year a new law would strike the worst ideas in it.
Ding ding ding!!
Winner.
Have any of you seen The Road Warrior? Great movie. Several interesting discussions of contracts actually — Max with the man he rescues, Max when he bring back the truck to haul the fuel, Max and the gyro pilot.
Anyway, Max makes a deal with a man to bring him back to the fortress, and when they arrive, the man dies. Max tries to collect on his contract and is told, “your deal died with him.” From my perspective, all these guys deals died with AIG.
Now, yes, AIG didn’t die. It was propped up by the government. But I am not a lawyer, I don’t fully understand all the implications of the laws related to government rescues and so on. Indeed, I haven’t seen anyone of this board really do a lawyerly analysis of the issue. It is all pretty simplistic stuff — side (a) they are crooks, screw ’em; side (b) a contract is a contract.
In reality, I am quite sure a smart lawyer could find any number of plausible reasons to call the contracts invalid — possible fraud in the division, violation of self-dealing provisions, securities fraud issues, all the issues related to takeover/buyouts — and that the result would be many, many years of complex litigation. So I think we should all stop the nonsense about how we have any answers about the specific legal status of the contracts. We don’t.
The issue that we should all be focusing on is the public policy implications of the decisions.
From my perspective, if in the future people like Jack DeSantis were asking a few more questions about the dubious activities of their co-workers we’d be better off. Promoting a corporate culture that turns a blind eye to quasi-criminality benefits no one. Some people may think that wringing a few extra billion out of the AIG unwinding is worth it. I don’t. I think insulating corporate officers from the wrongdoing of their fellow executives is such a tremendous moral hazard that the suboptimal unwinding of AIG is a small price to pay for stemming it.
Bernard, that’s just another argument for smaller corporate structures IMO. There’s simply no way to encourage the kind of stewardship you recommend in companies that are as big, complex, and compartmentalized as these behemoths are.
That one gets my “ding ding”
CS, of course we shouldn’t be in this situation, but we can’t use the idea “never again” to say that everybody now gets “socialized losses”
Well, some of us aren’t recommending that everyone get socialized losses- we’re strictly talking about the people who were guaranteed that by contracts which the government endorsed and insured with the bailout deal. You don’t want this to be an example for future expectations (perpetuating moral hazard), but the solution to that is to either stop doing bailouts altogether or else do them under the same construct as bankruptcies (with contingencies agreed upon before the funding is turned over.) And the only way we get to that is by holding the politicians responsible for the foolish deals they cut.
LOL. Of course they are not worth less, they are worth much, much more, which is what justified all this emotionally driven, populist, eat-the-rich bullshit in many people’s eyes in the first place — aided and abetted by The One.
No no… I am not trying to make any particular recommendation on that score. Ultimately, people will need to make choices — do I want to work for a big anonymous entity that makes gobs of money but puts me at the mercy of all sorts of units that I know nothing about? Or do I want to be in a firm where I have a good sense of what is going on, but where we leave some money on the table because of risk?
It is not that weird a concept. Partnerships — law firms for instance — make this sort of tradeoff decision all the time. The bigger and more diverse you get, the more potential money comes through the door, but the more you expose yourself to risks generated by others.
The point is that it is mistake the insulate people from the consequences of their choices. DeSantis may not have known all the details of the CDS business, but I am sure he knew that the CDS traders were a risk-acceptant bunch. People may not know all the details of every division, but there are enough rumors and backchannel discussion that folks are aware generally of business risks.
Maybe the financial world is different… but at least in the law firm, consulting, and defense industry realms folks are constantly talking about other divisions/practice areas that they consider to be risky, overly aggressive, dangerously overcommitted, of poor quality, etc. Divisions/practice areas fight constantly over things like budgets, personnel, space, advertizing, etc. that they have intel about each other.
I really don’t know what level of corporate America the rest of you live in… but the notion that there are impervious barriers between different divisions (and in this case between people in the same division) is not my experience.
If DeSantis did not know that the CDS people were playing a very risky game it was because he didn’t want to know.
I think there’s a big difference between knowing that an investment vehicle is ‘risky’ or even ‘highly risky’ and knowing that it poses an existential threat to the company or the national or global economy, Bernard. I’m not sure why an investment broker or manager in a separate division should have been any more aware of that then anyone else including everyone who’s investments were touched by this in any way.
I mean you’re right about the individual choices to work in an environment where there is systemic risk, but since this situation was unprecedented I don’t know how anyone could have foreseen it in the way it went down. Conventional wisdom would have said that big firms are more stable and that risk would be managed appropriately, and it’s unfortunate that this turned out to be an inaccurate base assumption.
No, not even close. A top executive should be aware of what the other divisions are up to.
And I worked at IBM for quite some time. Pretty damn big.
As usual, you Republicans want responsibility for others, but not yourselves.
Jack DeSantis isn’t Mad Max. A better analogy is that he’s a surgeon brought in to remove a brain-dead patient’s vital organs for transplant. The patient reached this unfortunate state through the actions of a completely different, drunken surgeon. Midway through the surgery, he’s told that he’s not going to be paid, and walks. In addition, every surgeon who might replace him is told – loudly – that the first surgeon isn’t going to get paid. To add insult to injury, he’s threatened with legal action and harrassment. Otherwise intelligent people stand on the sidelines claiming that “Well, we don’t know that this surgeon isn’t a drunk, too.” Results? The patient dies, the organs go un-harvested, and the prospective recipients also die. At best, the next surgeon demands payment up front, and probably in a greater amount; or perhaps a less skilled surgeon takes over to get the experience, and does a poor job. The kicker is that the surgeon’s fee is one-tenth of one percent of the total cost of the surgery, which is a sunk cost anyway.
Which is precisely the argument I’ve been making. The policy implications of welshing on a deal – especially in such a public fashion – are pretty bad.
I guess some people are more worried about the private profits. I’m more worried that these actions are going to result in a great deal more socialized loss. I suspect that this is going to cost the American taxpayer a great deal more than the cost of the bonus.
One last thing. I can live with “now that we’re socialists, let’s be good socialists”. If the alternative was “let’s just not be socialist”, I would sure prefer that; unfortunately, the reality is that the alternative is “let’s be capricious and arbitrary socialists”. And that is bad policy.
From each, according to his ability; to each, according to whatever way the winds blow this week.
REALLY bad analogy. DeSantis was the equivalent of the chief doctor in another practice working in the same hospital where rumors were flying around about this one practice bringing the whole hospital down […]
I’ve held management positions at two different defense contractors and had next to the throne roles on some rather large procurement proposals. With all due respect, I’d say it was more often than you would imagine easier to find out what our competitors where up to and work with them than it was to get full cooperation from other divisions within my own company. Why, some management styles would even actively pit their direct reports against each other. Hard to believe there isn’t one monolithic management method that fits all corporate cultures, isn’t it?
Of course this is anecdotal, as is any experience you may have, which is why I would discourage you from drawing too strong a generalization from your specific experiences. Meanwhile, apparently some people have trouble distinguishing between knowing about something, being able to influence it, and being able to control it. But hey, perhaps that is understandable with the echo chamber being so warm and self-reinforcing because, gosh darn it, you’re a good person and they’re not.
That’s some real sour grapes for DeSantis. From my experience with executives, they live in a world of summary. Their judgements are based on their past experiences which are very unique. They know when to ask questions to get the important details past the summary in order to make those judgements. They also look at how divisions are performing and make decisions about salaries/ bonuses, manpower, education, and equipment. They definitely don’t know any special details in those CDS contracts that would make us worried.
Apart from that, they did circumvent the stimulus salary caps, by holding onto contract language that was written well before any of this financial mess came up. So why isn’t the outcry justified? All his job is to do is make sure that all the contracts that AIG wrote to counterparties are honored in the proper legal fashion and to the dollar. Really, he isn’t all that special, we’d probably be better off putting a lawyer in his position anyway.
It was these executives who didn’t properly capitalize the company and also the same who proceeded to emphasis the business direction that got us here. Based on what guys were saying who attempted to understand this business prior to all this nonsense, no one exactly knew what was going on, all they knew was that they were making more and more money every year. So really, tell me why DeSantis needs to stay on and are we really making any kind of precedent? From everything I can see, that retention bonus would’ve been ripped up about the time AIG got those billions, except for that little bit of language in the bill.
I’d also note that all the senior executives I worked with and for were far too busy trying to take care of their responsibilities to spend much time and energy trying to solve everyone else’s problems, especially when any such help would not be welcome or appreciated. It’s funny, but I never recall my performance appraisals criticizing me for not spending more time worrying about those for whom I had neither the responsibility nor the authority for.
Running a bilion dollar organization is a lot harder than it looks. A lot of commentors here seem to think anyone can do it. They are, of course, wrong.
Well, M1EK, I would counter that your analogy and mine are in no way exclusive. The reason I chose my analogy is that DeSantis was, in fact, carving out pieces of the company and selling them. That my analogy doesn’t address your assertion doesn’t invalidate it.
But I’m curious about something. Dealing as he did with huge equity and commodity portfolios, precisely how much of his time do you think he should have taken away from that responsibility to exercise oversight of other divisions and portfolios? Should he also have taken the time away from that job to address AIG’s actuarial assumptions? Or just maybe his job was important enough to deserve his full attention?
I once worked for a global megacorp, although not at a high level. I was a mid-level manager for a competitor of AIG. As comparatively minor as my responsibilities were, I didn’t even have time to know what my counterparts accross town were doing, much less in completely different divisions. I would agree that it would be nice if a better system of checks and balances had obtained at AIG, but the reality is that it doesn’t work that way.
Reading some of the tortured logic on this thread I can only be thankful that many are not owners and senior operators of real businesses.
Actually, maybe that’s incorrect. Maybe that’s WHY they aren’t.
The Mad Max metaphor only underlines that Bernard and others think we have entered a world without rules.
If anybody on this thread were to buy 80% of a company, you would be buying both assets and liabilities. You would be buying debt, as well as receivables. You would be buying an existing workforce, which can be good or bad, but its certainly cheaper and quicker than recreating a new workforce.
The notion that there are no more rules now that the common good is revealed is extremely repellent.
No, that isn’t the point at all. The point is, I would be SHOCKED if DeSantis had never been involved in discussion like, “Person A: Damn, those CDS guys are getting huge bonuses. Person B: Yeah, but it’s a house of cards. You couldn’t pay me to get into that business.”
People have conversations like that all the time. It isn’t about being intimately acquainted with all the details, it is at the level of informal discussion. But the point is, in most corporations as I understand it, there is very little incentive to do anything about that sort of stuff.
Saying that as a matter of public policy it should be the government’s role to ensure that executives are shielded from the misbehavior of their fellow executives is very problematic. But that is what is happening here.
Yes, that, among other things, is exactly what the bailout did – shield executives. Let’s agree that it was bad policy, for that and other reasons. That sorry state of affairs in no way excuses further bad policy decisions. You are advocating compounding bad policy with more bad policy.
I fail to see how anyone, least of all the taxpayer, benefits from this. If any of you would bother to even attempt to explain how not paying these retention bonuses is going to make the AIG unwinding go smoother, or how it will improve the overall economy in any way, I would sure appreciate the education.
Phil and Bernard –
Suppostions have been made that any number of people could have successfully unwound the AIG trades. This is a narrow technical view. The very fact that stay bonuses were put in place tells you the AIG insiders talent was needed.
Why is maximizing the result important? As I have posted previously, the counterside to the trades involved taxpayer subsidized entities. The implication is obvious. Further, if the taxpayers truley own AIG, is it not in their interest to maximize AIG’s prospects?
Could others have done it? Perhaps, maybe not. But just how do you suggest AIG attract those alternative people? Can you say “signing bonuses??!!” So what’s the diff? Further, now that people see how bird brained politicians behave, what are the prospects for inducing talented people to move to govt bailed out entities?? Think of a whole number less than 1.
This is nothing but lynch mob mentality.
Last two points.
1. This executive (many of these executives) took a risk on the prospects of the entire enterprise through their stock or option plans. They lost that bet. Tough shit.
But they no doubt negotiated the other portions of their comp – unit performance or stay performance – based upon more controllable circumstances. This is rational thinking, and common business practice. They deserve the benefit of their bargain. That’s what contract law is about. Lynch mobs should not now prevail.
And we can see the empirical result, your inconsequential musings aside. If subjected to mob rule……….talented guys can and do walk.
2. This notion that executives in Unit A should know everything about Unit B is ludicrous. It is an impossible task. That risk is dealt with in the corporate world by these partitioned comp arrangements. You couldn’t govern a large corporation based upon uniform and perfect knowledge by everyone about everything. That would look and be as effective as a business as an academic think tank……….oh, wait…
Yep.
But you Apologists for the Poor MisTreated Titans of Industry want to claim that executives in Unit A shouldn’t have to know anything about Unit B.
That’s ludicrous-er.
HTH.
How much bonus money did AIGFP execs make over the past decade based on CDSs? My guess is that DeSantis and others at his level made far more in bonuses based on this dubious business than he stands to lose even if this stupid tax were to pass.
Since regulators were unable to even notice that the people whose job it was to oversee operations and risk management at these companies were doing their jobs, M1EK, I’d like to know exactly what regulation you’d propose (and who will enforce it, and how) to make sure that employee A has any kind of fiduciary responsibility over the management or staff of divisions in which he doesn’t work.
Since you made a broad brush accusation earlier about ‘us Republicans’, I’ll return the favor- you liberals always want to create a new regulation instead of enforcing the ones that we already have, because bureaucrats do such a lousy job of enforcement and then they look for the nearest scapegoat and find the next step in the chain of asking for more authority to do what they had the authority to do all along but neglected.
I’m willing to bet it wasn’t as a top executive.
Bernard,
Maybe you remember the third Mad Max movie, Beyond Thunderdome. Not that great a movie, IMO, but there is one part: Bust a Deal and Face the Wheel. I’m hoping for all our sakes you do better against the wheel.
Really, who had such conversations? Up until a few months ago this was all thought to be hunky dory. Greenspan thought things were great. Bernanke is surprised by this. And even if DeSantis had such a conversation and he goes to the CEO or whomever and voices his concerns…then what? If the CEO and those involved say, “Its okay we have a handle on it.” Then what? Your view of things is that
1. The rules don’t matter anymore.
2. AIG executives should have known alot more about a big company than they did.
The obvious counter argument is that, 1. weakens the market by increasing uncertainty and fear, while 2. maybe an overly stringent requirement that can’t be fulfilled. If policy is going to be based on these two things and the objections are true…you’ll lose when you face the wheel.
But it has been known for months those contracts were part of the bailout deals. Sorry, not buying it. If the government really, really didn’t want them in there it should have removed them upfront not after the fact.
I like to think of it more as a sacrificial ritual.
Oh and Bernard your Road Warrior reference…I think your memory might be a bit fuzzy. IIRC, the deal was made between Max and the wounded man, not the leader of the group. In the AIG case, Max gets the body back to the group alive and they put him on life support…then the leader says, “Oh, you had not deal with me, even though technically you did.” Maybe I’ll rent the movie this weekend just for fun.
I agree that “bankruptcy rules” would be ideal.
That’s pretty easy do ;-), right? Just wait until AIG wants another $50B and say no.
That’s what I wanted to do last time. Unfortunately, I think we’re pretty much “pot committed” at this point. At any rate, Obama and Geithner are, which amounts to the same thing.
Funny months ago I was against the bailout. Now, how many here were in favor of the bailout and are outraged over the bonuses? C’mon be honest.
My second rule of gambling is never throw good money after bad. My first is don’t bet anything you can’t afford to lose. Perhaps these rules are easily ignored when you’re playing with other people’s money.
Man, I’d like to play poker with the leadership of the current administration.
I don’t think I was in favor of the bailout. I think I accepted, with reluctance, the need to stop a systemic crash. Mr. Paulson didn’t give me many options. Did he even give me options?
Did any of us little folk have a chance to say “bankruptcy” at that point?
(I’m trying to remember, was AIG announced as a done-deal?)
More here
Not reading the comments here, but all I can say is “Bye, take your millions and go elsewhere. what did you do to stop this mess?”
No no… Again… my point is just that this didn’t come out of nowhere. The WHOLE POINT of the contracts we’re talking about is that they were negotiated once the s__t had begun to hit the fan. It was once the AIGFP folks realized that the whole thing was coming unglued that they switched from performance to guaranteed contracts. In short, they knew they were playing a game with the shareholders at that point, and really they can’t be surprised when it comes up snake eyes.
What I like, though, is the notion that the Treasury Dept should have known all the details about compensation in every division in AIG, but that it is wholly unreasonable to for executives in the same division to have any idea what other parts of that division are up to. Yes, the government should have exercised better due dilligence when it bailed out AIG… but AIG executives should have done the same when the signed up to remain at a company that was about to implode.
There are no angels in this. And again… I am not suggesting in any way that any and every contract should be voided at the whim of whomever. I am simply suggesting that in the virtually unprecedented case of a government offer of life-support to a firm that perhaps the rules need to be adjusted to the circumstances. I don’t see how that introduces uncertainty into the market, unless your business plan somehow assumes bankruptcy and government rescue.
Just one last note… and I don’t want to get into details for privacy reason. But I have a friend who left a dot com firm at a time when remaining would have been very lucrative because he realized that (a) some of his colleagues were engaged in shady practices, (b) there was a good chance that the company as a result would not be able to meet its commitments, and (c) there was a very slight risk he might end up in jail (or at least face some legal jeopardy) if he stayed there. He left a pot of money on the table because he didn’t want to take those risks. And it was not that he had strong evidence of wrongdoing… it was just that he got a sense over time that people were increasingly pushing the envelop in a way that was unprofessional.
DeSantis made the opposite gamble. Fair enough, but let’s not turn him into a martyr.
Don’t need it. Treat AIG as if it went bankrupt, because it did. Give these contracts the same haircut that you free marketeers wanted the unions to get with the auto bailouts.
Bernard, whether Treasury should have known is entirely beside the point, because it is a documented fact that in this instance they did know. That’s a pretty significant lacuna there, sport.
And your other point is blind to Treasury’s actual business plan, which is to enter into partnerships with private enterprise. I assure you that this behavior has created a risk premium with those prospective partners. Actions have consequences, and the taxpayer is going to have to pay in actual dollars for this.
It’s bad policy, Bernard. I strongly suspect that you actually recognize that. The fact that you and others are forced to assume without evidence that the actual recipients of the bonuses are personally guilty of bad behavior, instead of addressing the facts that are known, makes that a fairly strong inference.
Oh, and M1EK? I agree with you. And in fact, this is essentially being treated as a Chapter 11. In that case, he’d have gotten paid if the receiver agreed to pay it – which is exactly what Treasury did. That little fact – Treasury (and Chris Dodd, for that matter) knew about this and agreed to it prior to the bailout – destroys your UAW analogy.
And we’re arguing about whether they SHOULD have. I say no. They listened to ridiculous arguments like yours when they decided they had to keep paying these bonuses.
Uh, no, we’re not. I don’t think they should have bailed out AIG in the first place. Are you seriously saying that it’s a “ridiculous argument” that once the Federal Government enters into an agreement with one of its citizens that it had damn sure ought to stand by that agreement? If so, wow.
It’s no more valid than calling it ridiculous that the UAW’s contracts shouldn’t be broken in their government bail-out, yet I saw an awful lot of people on your side of the fence making that argument.
It’s absurd to claim that a union-worker bears a greater share of responsibility for GM’s collapse than an executive in another division does for AIG’s, yet that’s basically what you guys have done.
No, M1EK, the parallel hypothetical would be for Congress to attempt, after the fact of the bailout, and having agreed to honor a pre-existing agreement, to attempt to impose a super-tax on all the UAW workers, rescinding 100% of the compensation that they had received for an entire year. And that absolutely would be ludicrous.
But it would still continue to utterly miss the point. I contend that for Congress to renege on explicit obligations that it made prior to handing over the cash is bad policy – forget the moral side of the equation. I believe that Treasury, as a direct result of these actions, will find fewer private partners to work with; and that those that they do find will exact a higher price than they would have previously. I suspect that they will demand money up front, and public negotiation. I suspect that a larger number of CDS will default instead of being unwound. I could go on and on.
Look. Up until this point, every response you’ve directed at me has been completely tangential (at best) to anything I’ve actually said. If you would like to discuss the arguments I’m actually making, instead of what “an awful lot of people” said in another context, fine. If you’re going to continue to argue with some other guy and just direct it at me, I’m going to have to pass.