Fannie Mae Retention Bonuses A-Okay

(Note: the title is sarcastic.)

Flying rather low on the radar, somewhat surprisingly, are the retention bonuses for Fannie Mae.

Fannie Mae, which suffered $59 billion in losses last year, has requested $15 billion in taxpayer assistance and has said it expects to need plenty more.

Chief Operating Officer Michael Williams is in line for a $1.3 million bonus. Deputy Chief Financial Officer David Hisey is slated for $1.1 million, while executive vice presidents Thomas Lund, responsible for the mortgage business, and Kenneth Bacon, responsible for housing and community development, are each in line for $1 million.

I suppose one could argue the amounts involved with Fannie Mae are small, but the counter is that the AIG bonuses are also small, less than a tenth of one percent of the bailout. Oh, and a quick question for the Democrat readers, supposing the special AIG tax goes through how do anticipate the Republicans will use it when they get back in charge of things?

And AIG needs to take a page out of Fannie Mae’s play book on how to sell these bonuses,

When it took over Fannie Mae, the government instituted a retention program. Under the program, employees deemed crucial to the company’s efforts to carry out government housing plans are eligible to receive retention payments, but some may not receive any.

“Many employees have received significant pay reductions, with no bonuses for 2008 performance and all past stock grants are virtually worthless. This retention program is pay for specific efforts underway now to meet national goals,” Federal Housing Finance Agency director James B. Lockhart III said in a statement.

The retention program is pay for specific efforts underway now to meet national goals in accordance with the government efforts to reinvigorate the financial sector. See, now then the President can get behind the bonuses and say it is all part of the Grand Master Plan.

Update: Commenter PD Shaw drew my attention to this article on AIG (which having difficulty load for me). And there is this quote,

The handful of souls who championed the firm’s now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president.

Guess we can all these people to those Obama has so far thrown under the Bus.

Update II: This take on the WaPo story by emptywheel is amusing at this point,

Yet in the middle of this big sob story about how maligned these poor quants and their secretaries are, they return to the threats they issued in the white paper demanding the bonuses.

“Nobody is going to give it back and then stay,” said one of the firm’s employees. “If they give back the money, then they will walk. And they will walk into the arms of AIG’s counterparties.”

Let’s see, aside from the fact that these guys’ contracts undoubtedly have confidentiality agreements–making such cooperation with counterparties a gross breach of contract–assuming their counterparties actually did anything with this information, they’d all be breaking the law.

Let me see, we’ll void one contract because it upsets emptywheel, but then those people adversely impacted (and upset) have to abide by another contract that emptywheel likes. That’s a mighty consistent position there.

Oh, and what if the confidentiality agreement is part of the same contract with the retention bonus?

FILED UNDER: Economics and Business, Government, , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.

Comments

  1. Dave Schuler says:

    I think that a splendid opportunity is being missed both in the case of AIG and Fannie Mae. The bonuses should be paid out in the form of some of the “toxic assets” that are weighing down these institutions’ books. That will have two beneficial effects. First, it will get the instruments off the institutions’ books and, second, the compensation they represent will be both fair and just.

  2. Floyd says:

    I agree , but they should pay out at pre-collapse values!

  3. I am in the wrong business, apparently.

    Back in the day… running your business into the ground meant, scandal, unemployment, loss of status, ruination…. Even if you kept some money, you’d be shunned. No one would invite you to dinner, you’d get kicked out of your country club. It drove people to suicide.

    Now… la la la… just cut me another 7 figure check.

  4. Dave Schuler says:

    I agree , but they should pay out at pre-collapse values!

    Absolutely. Face value.

  5. PD Shaw says:

    Bernard, I believe your ire is misplaced. Your pissing on the clean-up crew in the rush to attack the fire. From today’s Washington Post:

    The handful of souls who championed the firm’s now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president.

  6. PD Shaw says:

    And for the record, my position on AIG and Fannie is the same. If Fannie is legally obligated to pay the bonuses, they should be paid. We don’t need to start building bonfires with the Constitution to keep up the heat.

    (AIG has provided the factual and legal underpinnings of its bonus plan; I’ve seen no such documentation from Fannie)

  7. Steve Verdon says:

    PD,

    Got a link to that. Its a good point and I’ll add it to the main post in an update.

  8. sam says:

    Let’s see if you guys can expend as much energy getting pissed off over this:

    In a First, Bankruptcy Judge Rules Calif. City Can Void Union Contracts

    Oh, wait…it’s only union contracts, sorry.

  9. Bithead says:

    You don’t give us enough info to go on, Sam.

  10. Phil Smith says:

    The house just passed a 90% tax on these bonuses with 328 votes. They voted for the bailout in a rush; they agreed to the bonus in the bailout in a rush; they sunk us another trillion in debt in a rush; and now they’re being vindictive to the people that they explicitly asked to help un-snarl this farrago – in a rush. God forbid they should put any thought into anything.

  11. sam says:

    You don’t give us enough info to go on, Sam.

    You can’t follow the link, Bit?

  12. PD Shaw says:

    sam,

    The City of Vallejo is in bankruptcy; AIG/Fannie are not. The City is not in a position to honor its obligations, so the Bankruptcy Judge may modify contract terms going forward to allow the City to continue. If you (or the public unions) want to bail out the City, you can do that.

    And nothing the Bankruptcy Judge did impaired past wages; the contracts are modified going forward.

  13. The handful of souls who championed the firm’s now-infamous credit-default swaps are, by nearly every account, long since departed.

    Well, wait, I thought we had to pay these specific guys because they were the only ones with the expertise to unwind the positions.

    So it turns out that people who didn’t write the contracts can, in fact, unwind the positions… and they are doing so now.

    So… they don’t need to be paid retention bonuses since any number of people could indeed do the job, no just a specific set of AIG-specific quants. QED.

    What is going on at these firms has NOTHING to do with paying market rates for a specific set of services. It has everything to do with well-positioned insiders looting what has become the public till.

    I am all for John Galt and other men of genius receiving every penny they are due. I am not for giving millions to 28-y/o traders who happened to get into HBS and then won the lottery to get hired as bond traders. Fact is… and here I am happy to be accused of insulting the skill or knowledge of people if Steve wants to do so… CDS contract writers at places like AIG are nothing special. They are a dime a dozen.

  14. Steve Verdon says:

    sam,

    Is AIG in bankruptcy? No. Why not? Because the government has been bailing them out since the middle of September. Note by the way, I initially opposed such a bailout in favor of bankruptcy.

    So, I don’t see any relevancy. But feel free to try and come up with something.

    The house just passed a 90% tax on these bonuses with 328 votes. They voted for the bailout in a rush; they agreed to the bonus in the bailout in a rush; they sunk us another trillion in debt in a rush; and now they’re being vindictive to the people that they explicitly asked to help un-snarl this farrago – in a rush. God forbid they should put any thought into anything.

    Funny, when I’ve written that I think politicians are generally venal and cowardly I get a strong reaction that I’m wrong. Then we have the above comment (not attacking you Phil, just using this comment to illustrate a point) that describes the current situation and I can’t help but feel that my view is the correct one.

  15. sam says:

    Is AIG in bankruptcy? No. Why not? Because the government has been bailing them out since the middle of September. Note by the way, I initially opposed such a bailout in favor of bankruptcy.

    So, I don’t see any relevancy. But feel free to try and come up with something.

    Absolutely true, Steve. I guess my point, such as it is, is that contracts don’t have the absolute sacrosanctity that I gathered, perhaps incorrectly, some were asserting. I guess if you’re too big to fail, then your contracts are to hard to break.

  16. Bithead says:

    You can’t follow the link, Bit?

    Of course, but what neither you, nor the article you link report to is what, if any, coercion was used in the establishment of the union dominance in the first place. You may not think so, but to my mind this would address a large moral issue attendant on all the rest of this.

    Then, too, is the issue of bankruptcy, which Steve brings up nicely. In the event of a bankruptcy, the union is like any other creditor, to begin with. Is the union contract so sacrosanct that they get paid off, while the remaining creditors to the city do not? Why? Because they’re a union?

    As an aside, I wonder, now, if the city would even be banrupt, absent the union and it’s wage demands, bennies and work rules.

  17. Phil Smith says:

    Well, you see, Steve, MY politicians are pure of heart. It’s just the OTHER guy’s politicians that are venal and cowardly.

    But you know what? It ain’t the politicians. It’s the electorate. We have multiple examples of people who are eager to have their elected representatives vacate lawful contracts that those same elected representatives explicitly agreed to. I personally find it repulsive that so many people think confiscating one man’s goods for no other reason than that “I’m mad as hell” is a good idea.

  18. Steve Verdon says:

    Absolutely true, Steve. I guess my point, such as it is, is that contracts don’t have the absolute sacrosanctity that I gathered, perhaps incorrectly, some were asserting. I guess if you’re too big to fail, then your contracts are to hard to break.

    I don’t think that is it, I think PD Shaw has outlined the basic retort. That the voiding of contracts is on a forward-going basis, not retro-active. Usually voiding already existing contracts is bad in that it increases uncertainty and undermines this whole notion that we are a nation of laws. It becomes we are a nation of laws…so long as they are convenient, and when inconvenient the gov’t will do what ever the majority wants. Not usually a good policy for a stable government, but hey maybe having a government like those in most banana republics will be a good thing!

    Phil,

    Well said, I agree.

  19. lawful contracts

    I think that is in question, frankly. We’ll see, but I would be shocked if it turned out that what happened at AIG did not ultimately involve massive fraud. Contracts can be voided for violating public policy — for instance a contract for prostitution is unenforceable.

    I agree that in the absence of charges, the contracts ought to be followed, but I think we should all be thinking of these contracts as “allegedly lawful.”

  20. sam says:

    @Bit:

    Then, too, is the issue of bankruptcy, which Steve brings up nicely. In the event of a bankruptcy, the union is like any other creditor, to begin with. Is the union contract so sacrosanct that they get paid off, while the remaining creditors to the city do not? Why? Because they’re a union?

    Uh, just in the interests of technical accuracy:

    Municipal bankruptcy is so rare that no judge had yet ruled on whether Congressional reforms in the 1990s that required companies to provide worker protections before attempting to dissolve union contracts also applied to public workers’ union contracts

    U.S. Bankruptcy Judge Michael McManus held March 13 that when Congress enacted 11 U.S.C. sec. 1113 to limit companies from outright rejection of union contracts it limited it to Chapter 11 bankruptcies. By failing to extend the limits to Chapter 9, which covers municipal bankruptcy, McManus said cities have broader latitude to break existing union pacts.

    Unions associated with private companies have protection from their contracts being summarily broken; the judge ruled that municipal unions do not.

  21. Phil Smith says:

    Sam, it’s been said here – repeatedly – that a contract in a bankruptcy is treated very differently than one that isn’t. That’s the whole point of bankruptcy, in fact. You’re either restructuring contractual obligations in a Chapter 11, or liquidating assets to partially pay them off in a Chapter 7. If you aren’t bankrupt, failing to meet contractual obligations is a matter for civil lawsuit.

  22. Phil Smith says:

    Bernard, you have exactly ZERO evidence that any of the individuals who are under fire for the crime of “getting paid what they were promised” have committed any wrongdoing. In fact, if Liddy’s testimony is truthful, none of them did anything wrong at all.

    Who’s next, Bernard? You’re arguing for punitive taxation for “folks whose income source and amount I happen to be angry about”. Not “folks who committed a crime”; not even “folks accused of a crime”. Just folks at whom you have misdirected your anger.

    What you’re advocating isn’t liberalism by any definition – other than that usually reserved to talk radio caricatures.

  23. Drew says:

    Weak argument, Bernard –

    “So it turns out that people who didn’t write the contracts can, in fact, unwind the positions… and they are doing so now.”

    These people have the best knowledge of the AIG book. Yes, there are people in the industry who have similar expertise, but they are not familiar with the book, and more importantly they would have no incentive to come over to AIG to do it unless they were paid big bonuses to do so……wait.

  24. MichaelW says:

    Oh, and what if the confidentiality agreement is part of the same contract with the retention bonus?

    Can’t say for sure, but it would be awfully strange to have a confidentiality agreement (or a non-disclosure/non-compete) when the whole point of their jobs is to wind down the AIG FP business. Why would they sign such a thing?

    If there were such agreements, however, I think your point is valid, but there’s even more. Such confidentiality/non-com/non-disc agreements have to be supported by consideration, which often comes in the form of continued wages. If the wages aren’t paid, then the agreements can’t be supported. Ergo, the maligned employees can freely go to the counterparties, much to the dismay of AIG.

  25. We are a nation of laws mob rule. What is so hard to understand about that?

  26. MichaelW says:

    Absolutely true, Steve. I guess my point, such as it is, is that contracts don’t have the absolute sacrosanctity that I gathered, perhaps incorrectly, some were asserting. I guess if you’re too big to fail, then your contracts are to hard to break.

    Sam, aside from the differences already pointed out, I think you ask the wrong question. As you pointed out yourself:

    Unions associated with private companies have protection from their contracts being summarily broken; the judge ruled that municipal unions do not.

    And that’s because:

    Municipal bankruptcy is so rare that no judge had yet ruled on whether Congressional reforms in the 1990s that required companies to provide worker protections before attempting to dissolve union contracts also applied to public workers’ union contracts

    U.S. Bankruptcy Judge Michael McManus held March 13 that when Congress enacted 11 U.S.C. sec. 1113 to limit companies from outright rejection of union contracts it limited it to Chapter 11 bankruptcies. By failing to extend the limits to Chapter 9, which covers municipal bankruptcy, McManus said cities have broader latitude to break existing union pacts.

    Why is it that union contracts were treated completely differently from every other contract in bankruptcy which can be voided?

  27. odograph says:

    I don’t think the bonuses are A-Okay, it’s just that there is less clamor for a number of reasons.

    (Sometimes a problem we know about bothers us less than a new problem on top of it all.)

  28. Michael says:

    h, and a quick question for the Democrat readers, supposing the special AIG tax goes through how do anticipate the Republicans will use it when they get back in charge of things?

    Not all your Democratic readers like the idea of taxing the AIG bonuses. I happen to disagree with it for reasons other than fear or retribution.

  29. sam says:

    Well, maybe we can round off this discussion with this. We’ve all gone on about the “Contract,” but here it is: A.I.G.’s Employee Retention Plan. Since I’ve mentioned a performance clause, I should say that the contract does not contain one; indeed, quite the contrary. As Kevin Drum says:

    What happened at AIGFP is standard practice throughout corporate America. America’s corporate titans like to talk endlessly about performance-based pay and how capitalism rewards risk, but in real life compensation packages are almost always constructed to avoid as much risk as possible. If you work in a growing industry, your bonus depends on raw growth rates. If you work in a declining industry, your bonus is linked to relative growth rates. If the market is up, your bonus is paid in stock. If it’s not, suddenly deferred comp and increased pension contributions are the order of the day. Heads you win, tails you win.

    The AIG traders who got this sweetheart deal are nothing special. Management probably didn’t even think twice about it. Of course you switch from performance bonuses to retention bonuses when the market looks stormy. What else would you do?

    And see this, Dissecting the A.I.G. Bonus Contract, for another discussion of the contract itself.

    And now, like Iago, I will say: “Demand me nothing; what you know, you know”.

  30. Bernard, you have exactly ZERO evidence that any of the individuals who are under fire for the crime of “getting paid what they were promised” have committed any wrongdoing. In fact, if Liddy’s testimony is truthful, none of them did anything wrong at all.

    Au contraire my combative interlocutor… there is a ton of suggestive evidence… moreso than at a similar point in the Worldcom or Enron unraveling.

    It turns out these were not retention contracts at all. They were just converting incentive pay into guaranteed pay… and why? Because by late 2007 AIGFP could see the whole scheme beginning to collapse. Was that in the public disclosures? Securities fraud. Also, beginning in 2007, AIGFP began limiting the access of internal auditors to their trades. They were trying to cover up what was turning into a Ponzi scheme. We don’t have clear evidence of wrongdoing… but we do have very strong prime facie evidence of it.

    I’ll be you $100 that criminal charges come out of this.

  31. Drew:

    These people have the best knowledge of the AIG book.

    Maybe… but they apparently got up to speed pretty quick if all the people who actually wrote the contracts are gone. My point is… these people are replaceable. And they should not, as a consequence, be receiving outsized compensation as if they were irreplaceable.

    Look, either this is a well-run business, in which case any number of competent people can look at well-maintained records and unravel the positions. Or it is a crime scene and should be sealed.

    We’re talking about, what, $165 million in bonuses to AIGFP. You really want me to believe that this is the best bargain we can drive to hire competent people to close down the division?

    With all due respect, there is a unfortunate presumption among many people that if someone makes a ton of dough, they must, somehow, have earned it. Some do, but a lot don’t. And there is a ton… a ton… of luck in ending up at the right place at the right time with the right bosses and right economic conditions. Don’t mistake the fact that a lot of these AIG guys made big bucks for the claim that they are indeed the best and the brightest.

  32. Phil Smith says:

    Bernard, you’re pointing to general institutional issues. You don’t even know who the people who got the bonuses are, much less that they are personally culpable. I reiterate my previous statement. You are not in possession of any facts.

    As for your bet, I won’t take it. It’s phrased too broadly. And frankly, with Congress demonstrating their willingness to completely hose these guys for electoral safety vice sound policy, it’s a bad bet. An AG can, after all, indict a ham sandwich.

    Finally, it has nothing to do with whether the money is “earned”. It is strictly about meeting obligations in general, and more importantly, our elected government honoring its freely engaged obligations in specific.