Quest Means Business   « Back to Blog Main
March 18, 2009
Posted: 1427 GMT

The AIG bonus issue has me on the defensive – and all because I was silly enough to open my mouth in support of the rule of law. I opined out loud that it seemed very heavy handed for any government, let alone the US Federal Government to try and overturn existing contractual arrangements – a true slippery slope argument if ever I saw one.And then the flood gates opened. Most of you thought I was wrong. The malfeasance at AIG being so great that anything short of the Public Stocks of Victorian England would be too good for the executives who got retention bonuses.

So let me clarify – I agree that the way AIG was run into the ground is amongst the most heinous of corporate acts. I don't believe retention bonuses should be paid, or indeed any bonuses. But if you were lucky enough to get some sucker to agree to such a term in your contract then it has to be honoured.

I am pleased that the US government appears to have found a way out – by deducting the bonus amount , $160m, from bailout funds being paid to AIG. After all, it is the US government money keeping the company afloat and it is entitled to say what should be done with it. The old phrase He who Pays the Piper...comes to mind.

A simple solution that preserves the rule of law – decisions have consequences and the result of this one leaves the mess where it belongs: With AIG and its ill-deserving employees.

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Filed under: Banking •Business •Quest Means Business

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F. Huber   March 18th, 2009 2:39 pm ET

Americans are OUTRAGED by AIG bonuses. Where are ALL these outraged Americans? I don't see any film on CNN showing outraged Americans out on the streets in the USA.

Mike Wills   March 18th, 2009 4:29 pm ET

AIG employees being required to give back bonuses is the correct thing to do. But, I find it appalling to hear the media refer to the pay back of an extra 165 million as a fine. The money did come from the U.S. taxpayer .
Getting your own money back should not be described as a fine. Please put it in the proper perspective.

edward nwomeh   March 18th, 2009 6:32 pm ET

The reason for the public outrage is that there is no better reminder of the underlying cause subprime mortgage crisis that has now snowballed into this 'Great Recession". The shameless and insatiable greed of bankers and the gravely flawed reward structure of financial institutions all over the world. The creation of the exotic financial derivatives, the bandwagon and manner in which they were passed round the world to other financial institutions, was fuelled by this greed and the unconscionable reward system. The whole essence of capitalism is to ensure extraordinary reward for extraordinary performance, productivity, innovation, etc. To permit such reward to employees in the face of dismal performance is nothing such of insanity. The public are rightly outraged because AIG and its executives are trying to destroy the major pillar on which capitalism rests.

William Yuen   March 18th, 2009 8:57 pm ET

Is there a clause in the employment contract that you have to perform up to the company standard and that the company has the right to terminate the contract should you fail in your job performance. They should have been given the pink slips long before there was a whisper of bonus.

onno frowein   March 18th, 2009 10:24 pm ET

This is a typical media scam. Here we are talking about $ 165 million in bonuses while other Wall Street Banks paid out $ 18 billion to their bankers who also received TARP billions. So let's be clear about it and find out why AIG gets all this attention and Wall Street keeps on partying with taxpayer's bailout Billions.
I am very disappointed about the way the Obam Administration is handling this crisis and the ease at which they are wasting taxpayer's money.
Something else draws my attention is the GM-Opel affaire where the German goverment is worried that German money for Opel will go to GM. What about Deutsche Bank that received $ 2,5 Billion from American taxpayers. It sucks..America wake up and take care of your own problems and forget the problems of the rest of the world. It's like you'll be damned if you do and damned if you don't!

stephen   March 19th, 2009 3:29 am ET

what happen to the contract AIG have with its "priced" employees if there is no bailout money?

Why retent these people who in the first place created a monster that screw the world economy... I am sure there are more competent people who can untangle the mess these people created...

AIG might claimed it is "legally" bound but are they morally right?

Rick O'Campo   March 19th, 2009 5:27 am ET

No, you are still wrong. The money withheld from AIG's latest bailout is at best a stupid idea. This leads to some related implications as to your IQ. The Government is propping up AIG and withholding $165 million of that money does what? The answer is nothing. The undeserving still get the money and AIG if it later needs more money comes from where? Get it!

Mehmet Kurtkaya   March 19th, 2009 8:54 am ET

The rule of law was already broken when there was government involvement.

The legal groundwork for doling out public money into private entities was acted into law by the Congress. So a new law was written to bail out companies including AIG!

The only argument that you may have is that they didn't do anything about bonuses when writing the law for the bailout. In that case I suggest they make a new law for the bonuses.

As you can clearly see there is not much of a law left but a series of political decisions.

So it must be a joke that you speak about the rule of law.

melannie   March 19th, 2009 9:38 am ET

I am not American but I work in the Investment Banking sector (if you can still call it that). I just wanted to say that I totally agree with your statement of preserving the law. Justice is blind for a reason, to weigh facts and not emotion. It is my opinion that that the gov't should have read the fine print as we always advise people to do before they purchase anything. I am not saying that these bonuses were deserved as the dept made a heavy loss, what I am saying is that a contract was made and unfortunately must be upheld. A business that starts breaking legally binding contracts loses employees as well as clients and the trust is gone. The best thing is to move forward and for the gov't to word contratcs in their favour.

wilfred   March 19th, 2009 10:43 am ET

A.I.G sense at last ha ha! they should had that sense long time ago. The US gov bailed them out and they have the guts to give themselves bonus shame on them!

Craig Eyles   March 19th, 2009 1:06 pm ET

Which leaves us with another question. The political "golden handshake".
Why should any politician that goes about changing contracts & making new laws not be in the same boat??
I'm talking about the "gravy train" that any politician gets when they are voted out of office. Worse if you're the President/Prime Minister.
Would you be happy giving Gordon Brown said handshake if, hypothetically, he ran England into the ground??

Ramsi Hashash   March 20th, 2009 7:09 pm ET

I can only agree. The solution is a good one. I am tired of congress and Senate trying to gain some points with the public by acting like they will go after AIG for the good of the tax payers.

Tax payer should also start to understand that there are laws, rules and contracts and they have to be met. Future contract can have different performance agreements in relation to bonuses, but the current one stand and they have been drafted according to existing laws.

Us tax payers and politicians need to grow up and stop trying to go after the current administration and Time Geithner.

stephen   March 21st, 2009 2:59 am ET

what part of "These employees are the ones responsible for the economic crisis" these morons don't understand?

DerGraf   March 21st, 2009 4:53 pm ET

The US government has become a major shareholder of what once was the premier group in insurance and, ignoring the London diversion, still is a major profit generator. The derivative swaps triggered the huge capital needs due the introduction of "mark-to-market" and subsequent change in ratings. The 100B$ claims payments do not look so large in relation to 600B$-1T$ annual premium income. If your auto gets dinged don't you expect to recover something. AIG's 100 year history and 120000 great employees have been betrayed and now tarred with the brush of 300 insane and overpaid ego-trippers and MRGreenberg who moved seriously away from the core about 5-7 years ago. If you believe the houses exist under the mortgages then why should they be marked to zero? Many of the payments to banks could well reverse in the future. If the group management has decided it needs key employees (even the idiots) to control the unwinding and recovery and lead to future profitability for all shareholders, including the US taxpayer, then stand back and stop second-guessing.

farazkhalid   March 22nd, 2009 4:45 pm ET

In principle I agree with your point of view here. Contracts have to be honored; while bad business practices – contract notwithstanding – must be discouraged. So deducting the bonus amount from bailout funds makes good sense – symbolically at least.

I say symbolically, because the problem with ailing institutions is much more deep rooted. Current bucket of bailout funds is not going to be enough forever; and institutions needing more money to survive, will get just that, i.e. more money from the government in future. Rendering the $160m deduction as of now, just a symbolic gesture!

However I do believe that the events unfolding in last one and a half year will lead to more sanity (and caution) in business practices in future. The only thing I worry about is – are we trying too damn hard in terms of bailing everything out? What's your opinion on the "sugar high" concern of World bank's president? Are we heading for more trouble?

Stone Frederick   March 22nd, 2009 5:02 pm ET

Richard, The government should have set up it's own fund to guarantee claims that had transactions attached to it, not spurious gambling claims. A similar fund to provide credit to clients doing business, not speculators. However, nobody knows what is the scale of the problem? Ask the question from any official. How can you budget if you do not know what you are budgeting for?!
Consider, In 2000 the derivatives exposure was $39 Trillion.The JPMorgan exposure (as an example of bank exposure) was 800% of it's net assets! In 2007 the derivatives exposure was $680 trillion! This is ten times the GNP of all the countries in the world. What was the bank exposure in the USA? Clearly there is not enough money in the world to bale out these bankrupt banks? You (the USA) are just wasting time and money. STONE

Stone Frederick   March 22nd, 2009 5:10 pm ET

Richard, the cat is out of the bag. Obama is just one more political con artist, condemmed by his own actions and words.His own staff insisted on the wording that would allow AIG to pay the bonusses, then he claims that he is outraged? At who? At AIG for paying the bonusses or at staff for making it happen? Stone

Dahlia   March 22nd, 2009 5:41 pm ET

Well, being an AIG employee, i assure you that there are thousands of devoted and well deserved employees who are working very hard to meet targets and truly deserve performance bonuses. We thank God and US Federal Reserve that company still alive and we still receive our salaries. With current circumestances, i fully agree that Executives who caused AIG problems should not receive retension bonuses.

John Franks   March 23rd, 2009 7:34 pm ET

There are better ways to deal with the critical issue of AIG bonuses, it just requires thinking instead of emotional reaction and diatribe. Try it sometime. Here is an excellent example of some of that....

Alan   March 23rd, 2009 11:21 pm ET

Always enjoy your show, although down here in New Zealand its on at an inconvenient time and I miss more shows than I see. AIG is all the networks seem to talk about and government stimulus plans. Your thorough analysis and unique presentation are educational as well as entertaining. I'm an entrepreneur and opened a small luxury boutique hotel in Taupo, NZ last year amid the financial melt down. The business is doing very well, from discount pricing on a luxury product and extensive internet marketing. Would be interested to see a show from you about small businesses that are prospering, their keys to success and how to be profitable in these challenging times.

Michael   March 24th, 2009 2:49 am ET

Richard, the administration's idea of holding back from AIG the same amount paid out on the AIG bonuses makes no sense at all.

The original intention of providing bailout money to AIG was to help AIG manage its bad assets and business obligations with the intention of mitigating any further damage to the world economy as a result of capital shortfalls at AIG.

So AIG pays the $165 million ($218 million) in bonuses. The money's gone, not used to buttress AIG operations. That's bad enough.

Now the government wants to take away another $165 million from the bailout funds. So that makes $430 million of bailout money removed from the original purpose of stabilizing AIG's business and downside effects on the world economy.

Please tell me how that delivers justice and how that helps AIG at all. Why is the government shooting itself in the left foot after blowing off its right foot by allowing the bonuses?

This is too stupid to believe. What kind of people are running the US government?

Mr Manoj MAHTANI   March 24th, 2009 10:16 am ET

Dear Mr Quest,

Everyone is angry about the AIG bonus. But instead of President Obama asking for the return of the money or taxing them, he should have just asked these people to spend the entire 165 million within three months. This will not only boost the local economy but it's a win-win situation for all. I am sure you will be able to appreciate the repercussions.



Peter Dough   March 24th, 2009 12:46 pm ET

Well Richard, glad to write to you again! even if no one else will, at least on your blog here. And today- 24 March- you would have thought it? AIG executives who received top bonuses have agreed to return them! And who said a bit of intimidation doesn't hurt anyone? and will President Obama pay Fred Goodwin's pension?

On a slightly different tack, the mortgage-backed securities (so much nicer and more accurate than 'toxic assets') that are at the root of the financial crisis are still working against the recovery and banks are still having to hold back on providing credit because of them. The kind of Public-Private Programme announced by the US Treasury Secretary to purchase these securities is just what the doctor ordered. It's about six months late, and untold damage could have been avoided if it had been enacted with the first couple of months, but it will help to raise banks' lending capacity and reduce uncertainty about the scale of the problem on bank balance sheets.

I'm in the minority that looks at the plan not as just a big ineffective giveaway to banks and private investors, it's actually more about getting private investors to take a risk on buying the trash assets, so the taxpayer who will fund most of the purchase price won't get screwed.

It isn't really about defending the plan, it's more about being objective. And what really is the objective in all this? It's actually quite modest, yet at the same time it is terribly important. It is to raise banks' lending capacity and reduce uncertainty about the scale of the problem on their balance sheets. The easing that success on that score will bring is worth every treasury dollar or pound.

The more risk Treasury requires investors to take, the less likely its plan is to work. Giving a number of funds non-recourse finance to purchase the securities is the carrot. Banks are non recourse, so they either require adequate capital or they should be confiscated. The devil in the detail is the quantum of capital and how to measure it and what the confiscation process should be.

Though this is a significant carrot. New capital put in banking will also be levered up non-recourse, and importantly this will be private capital. The devil is about the numbers and possibly the confiscation rules (the stick). It's not whether the idea is good or bad, it's whether Treasury demands enough private capital to be a reasonable outcome for taxpayers.

If the government requires enough capital then it is real capital and it reduces risk to the taxpayer. If they require too much capital then the returns won't be attractive enough. The issue is how much new capital for how much taxpayer risk.

John Hempton at Bronte Capital gives a detailed defence of the Geithner plan – spelt out in some detail in the "long post" – – and tells which banks to nationalise-

"The problem at the moment is that there are plenty of assets you will not buy because you cannot fund:

(a) Set up the funds ? maybe 10 of them ? with enough capital that the risk to the treasury is not large.

(b) Send in the regulators to the bank and say YOU MUST SELL A BIT OF THIS ASSET WHERE THE MARK DOWN IS QUESTIONABLE.

(c) Having tested the capital THEN use that tested price to mark the bank?s book.

(d) Confiscate the banks that fail the test using the new market."

All the best matey!

stephen   March 31st, 2009 2:28 am ET

questions for "rule of law"

1. what happen to the contract if there were no bailout fund?

2. is a contract that awards bonuses for henious performance which resulted in the world economy in crisis "enforcable"?

rule of law is important but I think 'DECENCY" differentiate us from animals.

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