American International Group, the insurer that has received more than $170 billion in taxpayer bailout money from the U.S. Treasury and Federal Reserve, plans to pay about $165 million in bonuses to executives in the same business unit that brought the company to the brink of collapse last year.
Word of the bonuses last week stirred such deep consternation inside the administration of President Barack Obama that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.
Lawrence H. Summers, director of the National Economic Council, on Sunday called the A.I.G. bonuses “outrageous.” Having said that, he quickly added on the ABC “This Week with George Stephanopoulos” program: “The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.”
Another top White House economic adviser, Austan D. Goolsbee, described a seemingly visceral reaction by Mr. Geithner to word of the bonuses. “He was really upset by the news. He stepped in and berated them, got them to reduce the bonuses.” Mr. Goolsbee, speaking on “Fox News Sunday,” added: “I don’t know why they would follow a policy that’s really not sensible, that’s obviously going to ignite the ire of millions of people.”
If this is so outrageous, why were no strings put on the money shoveled into AIG?
Everytime I hear a talking head say – bonuses are neccessary to keep the best – I think – so these guys should all leave, be fired, etc, NO BONUSES – they obviously aren’t the best – they brought the company to ruin.
Katie in Georgia
It’s interesting that none of those who are likely to benefit have simply stepped up and said they don’t deserve it and won’t accept it. Knowing that many of those investing in AIG have suffered heavily for their errors, what prevents those responsible from refusing the bonus (not a pay cut, even, just a declined bonus for the good of the order). There are clergy who, in the current round of budgeting, have refused to accept their cost-of-living increase, and the credit crisis is definitely not their fault.
I heard someone on the Sunday talk shows say that AIG had some very profitable divisions and that these bonuses may likely have been paid to some of the folks responsible for their good performance. Why don’t we resist rushing to judgment on this. It starts looking like mob mentality.
I have to second Alli here. We don’t know the full details, and further the story mentions that these are part of the employees’ contracts. From Summers’ quote it sounds like it would be illegal for the firm NOT to pay the bonus.
Breaking the contracts would cost AIG (read: US) more than paying them. Perhaps the lesson learned is to change corporate culture so as to not put guaranteed bonuses into contracts anymore as a matter of course.
It may just be the resentment of the part-time academic, but “guaranteed bonus” seems such a contradiction in terms. Unless there’s some subtle meaning to “bonus” other than the one I’ve always understood.
I have looked for a definition of these “bonuses.” I have not found one. I would like to think that bonus is a performance based payment–but like “signing bonuses” for sports athletes, it appears that “bonus” may be another way of saying “salary”–which is a huge PR fiasco. Even if these people did a poor job, it is reasonable that they get their salary. But don’t call a salary a bonus! If on the other hand, the bonus is performance based, this is embarrassing to say the least. Does anyone know what the word bonus means in this context?
Those AIG employes who engineered the credit default swaps which, resulted in the company’s near failure, should be given every penny to which they are contractually entitled. And then fired.
#7 is right, it isn’t the type of bonus I am used to. Where I come from bonuses are surprise little dividends, usually around Christmas, to show true appreciation for services provided.
When they become guaranteed the company is obligated to make the payment, assuming it is as long as the employee has met a certain standard of production. But, who is to say that the employees receiving the bonus actually made that level of sales or whatever the measure may be?
I don’t think AIG was up-front with the government on this issue in the first place. I also agree that those “eligible” should have had the decency to turn the bonus down, realizing how questionable the situation appears to the public. If you worked for AIG, at this point in time, would you be willing to admit it? I’d be embarassed.
One thing that’s been revealed (see http://www.nytimes.com/2009/03/16/business/16rescue.html?ref=business) is that Goldman Sachs received $12.9 billion from AIG. This was to make GS whole on its contracts with AIG.
Remember who the former CEO of Goldman was? Yup – it was Former Treasury Secretary Paulson. NOW do you see why the money was given with no strings attached? It was a way of making the Bushies’ friends’ firms whole.
I’m reminded of the following Scripture – http://www.biblegateway.com/passage/?search=Luke16:1-8. I think this is exactly what’s happened in the bailout; the unfaithful stweards are making friends by marking down the debts owed to their master. I’m not sure we’re going to commend these particular stewards.
It’s fairly common for bonuses to be structured on a sliding scale based on performance. For example, if you bring in X dollars of revenue, you get Y dollars in bonus. If you keep your department under budget by A percentage, you get B percentage of the savings. This is a simple example, but I know some of the folks I work with have fairly complex formulae for determining their bonus, with factors such as overall revenue, revenue for specific clients, client retention (saving clients we were in danger of losing), client expansion (where existing clients give us more of their money to invest), new clients and more all go into the determination. Alas, I have minimal participation: I once got $300 for helping land $150 million.
The entire purpose of giving the money to AIG was to enable it to pay the counterparties on Credit Dafault Swaps it had sold, in order to try and prevent an even grated collapse of the CDS market. It isn’t just Goldman, dozens of banks (at least) from around the world are getting money.
Is anyone here enthusiastic about the federal government stepping into a contractual agreement, demanding its abrogation? Second question: At what point do we stop being a nation of laws and become a nation of arbitrary rule?
Jeffersonian, your question is fair but misses the point that many folks are asking. If the company is going under, then presumably the employees are not doing their jobs well enough. (No one doubts that they are trying hard, but the fact of the matter is their company is sinking.) If they are not doing their jobs well enough, then how is it that they are getting huge bonuses presumably for a job well done?
Many of us have reservations about the government intervening in the marketplace in the first place. After all capitalism generally suggests competition will encourage business to improve so as not to fail. Likewise, employees are generally told pay increases in response to a job well done, and on the flip side, if you can not perform your job, you will be reassigned or even fired.
These bonuses raise questions on both issues–corporate accountability and employee performance. The government should not abrogate contracts–but likewise a company that can not manage its own employees’ salaries should not be kept afloat at taxpayers expense. Remember that the bailout dollars match the bonus dollars.
Kinda makes me wonder what the AIG definition of “bonus” is. Keep in mind that these “bonuses” are being paid to executives in the Financials Division, the very people [b]who were in charge of the credit default swaps that torpedoed AIG to begin with.[/b] That is ridiculous in extremis.
the snarksterâ„¢
[blockquote]Jeffersonian, your question is fair but misses the point that many folks are asking. If the company is going under, then presumably the employees are not doing their jobs well enough. (No one doubts that they are trying hard, but the fact of the matter is their company is sinking.) If they are not doing their jobs well enough, then how is it that they are getting huge bonuses presumably for a job well done? [/blockquote]
Given that these bonuses are contractual in nature, it’s a cinch that the governing language in the contracts is more concrete than a simple “if you’re doing well.” There will be unequivocal language having to do with sales figures, expected and realized profit margins, etc. If these employees met these conditions, is there some reason that they should not be paid what they contracted for besides it might prove embarrassing for our Teleprompter Savior at this time?
Jeffersonian, I deduce then that you assume that the individuals did see positive numbers in their “sales figures, expected and realized margins, etc”–even though the same company lost huge amounts of money. If those employees saw such positive numbers, then certainly they are entitled to their contracted bonuses. But if the employees saw such positive numbers, then how did the company lose so much money? This is a case–at least to outsiders–where the numbers do not add up. AIG will do themselves a world of good when they can explain how they do their math.
[blockquote]But if the employees saw such positive numbers, then how did the company lose so much money?[/blockquote]
Just an offhand guess…others who didn’t do so well or made poor decisions?
Why does AIG have to “explain their math?”
11, How about: “Initiatives to regulate financial derivatives were beaten back during the administrations of Presidents Bill Clinton and George W. Bush.”
I know you people want to blame Bush for everything, including original sin, but maybe there is something else going on and maybe even Democrats are involved.
AIG was very conservatively run, until Indian nationals purchased 26% of the company, which happened when AIG sought to go into the Indian market. Suddenly AIG was spending vast sums of money in India, despite the fact that there isn’t a big market for insurance in India. AIG had decided to spend just over 260 million to purchase a big stake in a British football team last year, and only changed it’s mind when it was found that it had the massive debt last fall. It’s been lead around like a bull with a ring through it’s nose by it’s Indian interests.
Consider what’s been happening due to Indian ownership and contracts in the US. The office where Obama’s CIO appointee Kundra worked up ’til a few week’s back in DC, is raided by the fed, and it’s got accounts with the federal and DC governments, it’s also found that Kundra is an H1B worker, and is not legally entitled to become CIO of an administration office for our government, yet the MSM isn’t reporting it, and Obama hasn’t decided to select someone else. Satyam, an Indian IT shop, and contractor has accounts with municipalities and states around the country and Price Waterhouse, has been found to have been fudging accounts, and there has been misappropriation of funds. Satyam is also a subsidiary of the Indian mega corporation, Tati, the outsourcing, H1B visa worker importer, which is attempting to buy out US corporations and infrastructure.
Our congress has a “friends of India” caucus, which should be illegal, because it’s only function is to cozy up to the Indian government and corporate interests there. The senate members of the caucus hide their membership. They wrote the bailout and stimulus, and know full well that AIG and all the other foreign banks that helped create this mess, will bleed the money out of the country. They knew that the toxic assets would be dumped on us, and those same foreign interests would be able to walk away from them, without losing money. They have sold us out.
If the government just allowed firms to fail, there would be nothing to get outraged over in the first place. A firm like AIG would go bankrupt and they would not have to pay these stupid bonuses. The company could be liquidated and the pieces sold off, and the market would recover and be better off with leaner, more efficient firms.
This is a small glimpse as to why governments should referee the market, not a manipulator of it. This whole bailout business was a stupid mistake that will make this economic determine last longer.
The $165 million dollars in bonuses (to people who had valid contracts, whether we like it or not) is a drop in the bucket compared to the $8 billion dollars in pork barrel projects (that go to people with good political connections). Where is the outrage there?
There is so much economic idiocy in this country right now, it is hard to know where to start.
The government has no right to dictate reneging on a contract after bailing them out. However, it does make sense that if we are bailing out the rich, we have every right to tax them.
[blockquote]The government has no right to dictate reneging on a contract after bailing them out. However, it does make sense that if we are bailing out the rich, we have every right to tax them. [/blockquote]
So how’s that working out in California, Johnny?
I think that the bonuses should be paid…then I think that congress should pass a “Stupid Bonus Windfall Tax” on all executives of bankrupt companies that accepted government bailouts. The tax should be retroactive to the previous two years of bonuses (Clinton set the precedent of retroactive taxation) and for 100% of the bonus value.
The executives get the bonuses they “earned” and the taxpayer gets his money back plus the prior year’s obscene payola to these corporate warlords. Then we will see how clever they are and how proud they are about ripping us all off!
By the way…AIG posted a record loss of $61 Billion, yet they received $170 Billion in government (taxpayer) money. I may not be the sharpest tool in the shed, but isn’t the bailout nearly 3 times the actual loss? Why did they get so much more than they lost? Why are we paying for bonuses for these idiots?
Wow, bills of attainder, rule by decree, ex post facto, punitive taxation…. Is there any principle of liberty you all aren’t willing to mow down to punish the unpopular? You don’t even know that those getting paid these bonuses had anything to do with AIG getting into financial trouble, yet you’re panting like rabid dogs to despoil them. Have you all become liberals all of a sudden?
Very ugly.
It’s not like the bonus issue came out of the blue. Investment houses have been paying out massive bonuses for many, mant years.
#25 That $61 billion loss was just for a quarter. At that rate, they’re going to burn through $170 billion quickly.
—————
I wonder if the ‘contractual’ agreements for bonuses include statements like ‘if the company makes x dollars profit, you get your bonus,’ and the bailout money is included in ‘profit.’ If so, the baliout money may have forced the bonuses to be given!
Jeffersonian,
I thought it had been recognized for a while now that the economic views of reasserters on this blog are all over the map. Do you expect all theological conservatives to be free marketeers without reservation?
I think there’s a big difference between being a “free marketer with some reservations” and being an out-and-out authoritarian who springs the length of his chain to use the power of the State to strip those who suffer under a temporary political unpopularity of that to which they are contractually entitled.
Oh, and good luck to our more rapacious posters who are even now scheming about how to claw back those bonus checks (they went out last Friday):
[blockquote]Second, from CNBC: “Many of the employees who received bonuses are not American and may not care that American taxpayers are outraged over the incident.”[/blockquote]
Jeffersonian…it’s our tax money they are taking those bonuses from, not “their” profits. They don’t have any profits. Guys that ran a company into bankruptcy are now getting bonuses paid for by U.S. taxpayers. I do not think that has anything to do with the “free market”. I do not favor the government doing any of these bailouts. I think AIG should have been allowed to fail. That is the free market. Right now, it is socialism for the rich and it makes me very angry! By what conceiveable stretch are AIG executives due a bonus from my tax dollars? Real wages declined for a decade while these guys were making millions…then, when their profligate actions destroyed their company…we have to bail them out? And, insult to injury…they get a bonus from my taxes?
No. That is not free market capitalism. Again, if the bonuses were being paid for out of legitimate profits rather than money extracted from the public at the barrel of a gun, I would have no problem with them earning whatever bonus they are entitled to, but don’t let’s call what they are doing now capitalism. It isn’t. As it stands now, the “out-and-out authoritarian who springs the length of his chain to use the power of the State” is the one that is useing the State to rob me (and my kids, and my grandkids) through taxation and give that money to the folks that rode AIG into the ground.
I’ve been an unwavering foe of these bailouts, but if you’re going to do it, do it right. Congress got stampeded, then Obama threatened a veto if Congress restricted the use of TARP funds. So they made their own beds, now they’re trying to weasel out of them with actions that trample the rule of law. Well, tough.
These guys contracted with AIG for their bonuses and they met their obligations. When the US government acquired 80% of AIG, they acquired those contracts, too. So pay them.
Here is an excellent article on the subject, entitled “Congress played major role in AIG bonus mess”:
[blockquote]“Before Congress got involved we used to give them a $2 million salary and a corporate jet,†said Lynn Stout, a UCLA professor who specializes in corporate governance and securities regulation. “And it was much cheaper and safer.â€
Congress played an even bigger role in the mess that forced the government into a taxpayer-funded bailout of AIG to stem a potential global financial meltdown.[/blockquote]
http://www.msnbc.msn.com/id/29724816
# 11 Doug Stain. Please don’t be so quick to bash President Bush. 60% of AIG’s contributions went to Democrates and Chris Dood received the most!
Dave C #33. Thank you for the link. It was a helpful article to read. It answered my earlier question: were these bonuses bonuses or a fancy name for salary. The answer is apparently salary–an inflated salary, but none the less salary. A huge PR problem and still a real management problem.
As painful as it might be, it is time to put AIG into recievership. It is clearly insolvent and we have no idea as to the depth of the hole.
#23 – Jefferson, what of taxes in California? California has been busy building prisons, paying huge salaries to prison guards, and then there’s proposition 13. California simply reflects the problem: people don’t like taxes. But then they want government services.
There is no such thing as a free lunch.
FYI: “While the Senate was constructing the $787 billion stimulus last month, Dodd added an executive-compensation restriction to the bill. That amendment provides an “exception for contractually obligated bonuses agreed on before Feb. 11, 2009†— which exempts the very AIG bonuses Dodd and others are now seeking to tax.” See http://www.foxbusiness.com/story/markets/industries/finance/dodd-cracks-aig—time/
[blockquote]#23 – Jefferson, what of taxes in California? California has been busy building prisons, paying huge salaries to prison guards, and then there’s proposition 13. California simply reflects the problem: people don’t like taxes. But then they want government services.
There is no such thing as a free lunch. [/blockquote]
True enough, John, and the goal of so many in the legislature seems to be getting as many mouths on the government teat as possible so as to increase their political clout. Yet we see California today with some of, if not the highest taxes in the nation, Prop 13 notwithstanding, and you all still can’t come close to balancing a budget.
Maybe folks in Sacramento managed to sneak a few things past your gimlet eye that didn’t have anything to do with prisons. Think?
Thank you for that, Br. Michael, #38. It’s hard not to laugh.