AIG

[il Padrino Ute]

Everyone — not just President Barack Obama — is outraged at the American Insurance Group.

I'm sure Obama wasn't mad at AIG when they gave him a nice wad of cash for his campaign.

[SeattleUte]

Even ignoring the hyperbolic "myriad", that's not exactly what the brief essays said. Rather, the ones I read state that there may be grounds for rescission, repudiation or modification. But since none of the authors have apparently even seen the contracts, and they appear not to have opined unequivocally that the contracts can be set aside. BTW, I would love for the contracts to be nullified, but only without doing violence to constitutional or contract law.

I've been telling you that in my professional judgment the contracts can be abrogated. Isn't that good enough for you?

What I find both painful and funny is the shrill outcry from Congress over the bonuses, with members trying to outdo each other in their righteous anger. And yet information regarding the bonuses was made available to Congress before they started bailing out AIG. Before lending even a couple of million dollars, responsible lenders do a thorough job of due diligence, and then impose a lengthy list of affirmative and negative covenants (including, e.g., limitations on compensation) before lending a nickel. Apparently Congress and the White House dumped many billions into AIG with nothing approaching the level of due diligence and lender protection your local bank would have imposed on a small business.

Congress bailed out AIG?

Federal Reserve bailout

On the evening of September 16, 2008, the Federal Reserve Bank's Board of Governors announced that the Federal Reserve Bank of New York had been authorized to create a 24-month credit-liquidity facility from which AIG may draw up to $85 billion. The loan is collateralized by the assets of AIG, including its non-regulated subsidiaries and the stock of "substantially all" its regulated subsidiaries, and has an interest rate of 850 basis points over the three-month London Interbank Offered Rate (LIBOR) (i.e., LIBOR plus 8.5%). In exchange for the credit facility, the U.S. government will receive warrants for a 79.9 percent equity stake in AIG, and has the right to suspend the payment of dividends to AIG common and preferred shareholders.[3][6] The credit facility was created under the auspices of Section 13(3) of the Federal Reserve Act.[6][21][22] AIG's board of directors announced approval of the loan transaction in a press release the same day. The announcement did not comment on the issuance of a warrant for 79.9% of AIG's equity, but the AIG 8-K filing of September 18, 2008, reporting the transaction to the Securities and Exchange Commission stated that a warrant for 79.9% of AIG shares had been issued to the Board of Governors of the Federal Reserve.[23][7][3] AIG drew down US$ 28 billion of the credit-liquidity facility on September 17, 2008.[24] On September 22, 2008, AIG was officially removed from the Dow Jones Industrial Average.[25] An additional $37.8 billion loan was extended in October. As of October 24, AIG has drawn a total of $90.3 billion from the emergency loan, of a total $122.8 billion.[26]

Maurice Greenberg, former CEO of AIG, on September 17, 2008, characterized the bailout as a nationalization of AIG. He also stated: he was “bewildered” by the situation and was at a loss over how the entire situation got out of control as it did.[27] On September 17, 2008, Federal Reserve Bank chair Ben Bernanke asked Treasury Secretary Henry Paulson join him, to call on members of Congress, to describe the need for case for a congressionally authorized bailout of the nation's banking system. Weeks later, Congress approved the Emergency Economic Stabilization Act of 2008.

Bernanke said to Paulson on September 17:[28]

We can’t keep doing this, both because we at the Fed don’t have the necessary resources and for reasons of democratic legitimacy, it’s important that the Congress come in and take control of the situation.

--Wikipedia

[PaloAltoCougar]

I've been telling you that in my professional judgment the contracts can be abrogated. Isn't that good enough for you?

Well, I've seen admiring comments from others when you've opined on books you've never read, so even though you haven't read the AIG contracts, I'm willing to take this on faith. Point, SU.

Congress bailed out AIG?

Yes, at least I think so. You don't think the Fed has been doing all this on its own motion, do you? My memory is hazy, and I won't go look it up for now, but in the midst of the October meltdown, Congress created a rescue fund (TARP) from which a substantial chunk was eventually given to AIG. The Fed's assistance in September was tweaked based on Congressional action, such as it was, in October. I'm pretty sure (but not certain) that the AIG preferred stock was purchased by the Treasury Department with TARP money ($40 Billion of it) authorized by Congress. I'm open to correction.

[wuapinmon]

Why should ANY of the managers at AIG get one dime of bonus? Do you get paid for poor performance? I guess that's why they changed the name of the bonus' to 'retention bonus' from being tied to performance?

Do any of the posters here get paid a bonus for poor performance?

Just goes to show that the friggin government doesn't know anything about conducting business. They are all attorneys with no business experience.

I can't wait to see what other areas of the bailout/stimulus join the cluster.

What's a bonus? I teach. There's no incentive for me to work harder other than my own initiative, altruism, and deeply-held sense of duty.

Attorneys have tons of business experience. Just because you don't labor in the actual vineyard doesn't mean you don't know anything about harvesting, making, bottling, selling, or serving wine.

I'd love to see a teacher bonus.....how about, "Hey, we know that you work for shit pay and sacrifice long hours of your life for which you receive nothing tangible in order to educate our nation's children and make our country a better place.....how about we give teachers an insurance subsidy as an occupational reward for a 'national defense' industry?" Noooooooo, I don't work for a living because I "can't."

Attorneys deserve every dime they earn because when you need an attorney, no fee is too high if it helps you. Lawyers, well, now that's another story. When James Ogelthorpe founded the colony of Georgia, he wouldn't allow any lawyers to settle.....but then again, things didn't work out as well as he'd planned, so maybe 'lawyers' and attorneys are a good thing, not just a necessary evil.

[wuapinmon]

PAC,

Shirtless Patrick Duffy is making me feel things I don't understand.

[LA Ute]

What I find both painful and funny is the shrill outcry from Congress over the bonuses, with members trying to outdo each other in their righteous anger. And yet information regarding the bonuses was made available to Congress before they started bailing out AIG. Before lending even a couple of million dollars, responsible lenders do a thorough job of due diligence, and then impose a lengthy list of affirmative and negative covenants (including, e.g., limitations on compensation) before lending a nickel. Apparently Congress and the White House dumped many billions into AIG with nothing approaching the level of due diligence and lender protection your local bank would have imposed on a small business.

I agree. Still, I also agree with Seattle's characterization of the AIG executives as reptilian. Although I think reptiles may be smarter in some ways.

[SeattleUte]

This thread presents an interesting social dynamic. The board's most despised poster starts a thread that happens to be long overdue and (for once) making a point that is essentially correct. But the board's most beloved poster (who also happens to be a prominent securities lawyer) decides to play devil's advocate, probably partly because of the original poster's reputation. Then for a while the board decides that because of who's saying what the second poster must be presenting the view that represents the hard headed, sensible, albeit not easily understood or embraced (from a common sense or fairness perspective) position. It takes someone with some gumption to test the second poster's immediately accepted at face value position. That's often my role here.

[SeattleUte]

NY Times op-ed piece by a GW professor:

If the government is serious about finding a legitimate basis for abrogating these payments, officials must look to basic legal principles. And if A.I.G. is serious that it is legally bound to pay these bonuses, it must do more than say nonpayment would expose it to damages or penalties. Nor is it enough to invoke the sanctity of contracts, because our legal and business system recognizes plenty of valid excuses from contractual duty and even justification for breaching.

http://www.nytimes.com/2009/03/18/op...unningham.html

He brings up fraudulent conveyance law as a potetial basis for voiding these bonuses, given AIG's "functional insolvency." That seems obvious; why not? We need to get two utes over here to get his opinion on this point.

[YOhio]

This thread presents an interesting social dynamic. The board's most despised poster starts a thread that happens to be long overdue and (for once) making a point that is essentially correct. But the board's most beloved poster (who also happens to be a prominent securities lawyer) decides to play devil's advocate, probably partly because of the original poster's reputation. Then for a while the board decides that because of who's saying what the second poster must be presenting the view that represents the hard headed, sensible, albeit not easily understood or embraced (from a common sense or fairness perspective) position. It takes someone with some gumption to test the second poster's immediately accepted at face value position. That's often my role here.

Whenever PAC plays the Pied Piper, I wear earplugs.

[PaloAltoCougar]

This thread presents an interesting social dynamic. The board's most despised poster starts a thread that happens to be long overdue and (for once) making a point that is essentially correct. But the board's most beloved poster (who also happens to be a prominent securities lawyer) decides to play devil's advocate, probably partly because of the original poster's reputation. Then for a while the board decides that because of who's saying what the second poster must be presenting the view that represents the hard headed, sensible, albeit not easily understood or embraced (from a common sense or fairness perspective) position. It takes someone with some gumption to test the second poster's immediately accepted at face value position. That's often my role here.

"Most beloved"? Don't make me go Sally Field here. As I've noted since the dawn of CB, I benefit from the board-equivalent of the General Authority Humor Discount, by which the intensity of an audience's laughter and admiration is a direct function of the GA's age and office.

Despite the fun we're having here, I don't think we're very far apart on the overall issue. I do think this is an example of greed and self-dealing. I've always been bothered by the amount of time many execs devote to enhancing their own compensation. But my biggest concern is what appears to be an inordinate amount of attention on a relatively small issue, given the far greater problems that vex the financial industry and the economy generally. And the fact that the government pumped billions of dollars into AIG without having addressed this problem in advance gives one little optimism for wise management of the additional hundreds of billions that are currently sitting in the tank over the commode, waiting for the next flush.

[SteelBlue]

I thought this was a nice summary of what we've learned from the AIG saga to this point:

http://baselinescenario.com/2009/03/...tipping-point/

The failure of the Treasury Department and the Federal Reserve to review and renegotiate the bonus plans as a condition of federal assistance last fall - despite the fact that the plans had been public knowledge since May - reflects the rushed, ad hoc nature of the deals that were struck. Or it reflects the understanding in Washington that the ways of Wall Street had to be respected. Or, again, both. And the failure to even say anything about the bonus plans since the initial bailout - even just to get ahead of the obvious public relations fiasco - reflects an overall strategy that amounts to hoping that problems will go away

[Guest]

I've always been bothered by the amount of time many execs devote to enhancing their own compensation.

Where have you gone David Packard? A nation turn its lonely eyes to you...

He never wanted to be part of the CEO club; he belonged to the Hewlett-Packard club. In an era when bosses dwelt in mahogany-paneled sanctums, Packard took an open-door workspace among his engineers. He practiced what would become famous as "management by walking around." Most radical of all for the time, he shared equity and profits with all employees.

[Guest]

Congress bailed out AIG?

I think President Obama's team has been doing a good job in the last week or so with its communications on the administration's plan. However I find the president's comments that Tim Geitner didn't make these initial deals with AIG to be somewhat disingenuous. As head of the New York Fed, Geitner has been in the knee deep in this from the get go.

[SeattleUte]

Weak sauce. They should tell him hell no we want it all back.

http://www.nytimes.com/2009/03/19/bu...19web-aig.html

[Color Me Badd Fan]

I think the comments mentioning that the Gov't rushed into this with firms like AIG are correct. The Gov't should have either pushed AIG into some kind of Chapter 11 bankruptcy and guaranteed their debts to outside firms or AIG should have been brought into some kind of receivership.

I admittedly have limited knowledge on the role AIG played in everything, but from what I've heard from economic opinions that I respect, AIG was the one entity that really couldn't fail because it was so connected to so many financial institutions and backed up so many instruments that were peddled to pension funds and foreign countries.

The $165 million is a drop in the bucket, but given the fact that the executives feel that it's perfectly approriate to still take the full measure of what they feel they're entitled to under contract, there's no guarantee that they're not blowing a helluva lot of money elsewhere. After outrage has already been expressed by politicians, the public, opinion leaders, etc., you'd figure that they'd tone down the bonuses/salaries a bit to not bring even greater scrutiny onto the company. I've also heard that a significant portion of the bonuses being paid out of over $1 million are going to people that aren't even working for AIG anymore.

Plus, it's morally repugnant that an entity/group of people could fail so miserably yet still come out smelling like roses and it also raises the potential for moral hazard (yes, I know this term has been overused).