AIG

[Hallelujah]

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.

Weird and very childish is all I can figure out.

[SeattleUte]

Some salient points:

The potential windfalls were so large that executives and bankers had an incentive to create rules that would reward them no matter what. The country is now living with the consequences.

Nothing highlights the fiction of performance-based pay quite so well as retention bonuses. It turns out that, at least for chief executives, retention bonuses are almost entirely unnecessary. . . .The benefits of the job — the pay, the perks, the gratification that comes from running a company well — are too good to leave, even for a similar job.

The nub of Mr. Liddy’s argument is that these departures would be a terrible thing. But there are several weaknesses with this argument.

The first is that the original explanation for these bonuses was rather different. When they were devised in early 2008, months before the first bailout, as Mr. Liddy’s letter to the government on Saturday explained, “A.I.G. Financial Products was expected to have a significant, ongoing role at A.I.G.” The idea, he said, was to guarantee “a minimum level of pay for both 2008 and 2009.” So the rationale for A.I.G.’s retention bonuses is as malleable as the rationale for chief executives’ bonuses.

Most amazingly, the A.I.G. bonuses haven’t even accomplished their stated goal. Andrew Cuomo, New York’s attorney general, said Tuesday that 52 employees who received bonuses had since left A.I.G.

The second problem with Mr. Liddy’s argument has to do with Mr. Liddy himself. His defenders have noted that the government brought him out of retirement to fix A.I.G. and that he presumably puts a higher priority on doing a good job than pleasing A.I.G.’s employees.

And he probably does. But he is also a product of the current, broken executive pay system. As the chairman of Allstate from 1999 to 2007, when the company’s stock underperformed those of its rivals, he made $137 million. Almost $14 million of that, according to the Corporate Library, came in the form of stock that the company called a “a tool for retaining executive talent.” Which means Mr. Liddy may not be entirely objective about retention bonuses.

Finally, there is the question of how hard replacing those A.I.G. employees would be. Certainly, some of them must have particular insight into unwinding the toxic portfolio they built. But I doubt that anywhere near all 418 financial products employees — who have received bonuses worth $395,000 on average — are indispensable.

Simon Johnson, a former chief economist at the International Monetary Fund, has pointed out that in financial crises, bankers often exaggerate the difficulty of cleaning up their mess. They do so partly to justify their own continued importance and also to fight off calls for a government takeover of banks. In reality, Mr. Johnson says, the mechanics of cleaning up hobbled banks turned out to be fairly straightforward during other recent crises, like the Asian one in the ’90s.

Throughout this crisis, policy makers, starting with President George Bush and Ben Bernanke and now including President Obama, have been a bit too deferential to Wall Street. That deference has fed populist anger, which threatens the political viability of the necessary continuing bailout of the credit markets.

http://www.nytimes.com/2009/03/18/bu...leonhardt.html

Greed of a scale in any dimension orders of magnitude beyond what the world has evern known is at the root of the current crisis. This bonus dispute is a microsm of the very problem that necessitated the bail out. It's not just about a few hundred million dollars. It's about mending our values.

As it has from the beginning the the NY Times is doing a good job of covering all this. Yes, I'd rather lose the government than a free press.

[PaloAltoCougar]

Greed of a scale in any dimension orders of magnitude beyond what the world has evern known is at the root of the current crisis. This bonus dispute is a microsm of the very problem that necessitated the bail out. It's not just about a few hundred million dollars. It's about mending our values.

I don't disagree, but short of a genuine economic cataclysm (still possible, I suppose), I'm not sure our values, or the absence thereof, will change much on a society-wide scale.

One of the most interesting discussions we had in B School focused on "maximizing the wealth of the shareholders." That's the prime directive of management. We discussed whether "maximize" should be changed to "optimize", in that the highest dollar return, if accompanied by damage to the lives or property of others, may not be such a good thing, and managers need to consider far more than the corporate or personal bottom line. The problem with "optimize" is that is leads to a hazy feel good approach that lacks focus and tends to minimize the wealth of the shareholders.

I have high hopes Barack Obama will be a true philosopher king and lead us from this valley of despair.

[Okay, that last sentence was a little too obvious--I'll take my pole out of the water now; I meant the previous paragraph, though]

[Color Me Badd Fan]

There's an incestuous relationship between the boards at these companies and the executives. Presumably the boards are to provide oversight, including compensation, of the executive compensation. But then just look at the boards of these companies, low and behold they're made up of executives from other companies. Scratch my back and I'll scratch yours.

The compensation structures contained both generous payouts regardless of performance and any merit based bonuses provided incentives to pump up short term profits at the detriment of the long term interests of the company.

Low and behold, the compensation skyrocketed and these financial firms were pushing mortgage brokers from across the country to extend crappy loans to unworthy recipients so they could push through massive volume. A few hedge funds figured out that none of these firms knew what the hell they were doing and they literally made billions shorting their crazy debt instruments. Look at the Michael Lewis article from a few months back, it's amazing.

[Mormon Red Death]

Hey, I don't think they're justified either. These geniuses set up a risk management scheme that was an utter failure. But with little exception, the bonuses aren't true merit awards, they are contracts. And abrogating contracts because we determine, after the fact, the recipient was unworthy would create far greater problems than paying the unworthy bums. Of course, if we can turn centuries of contract law on its head, I say we start with Barry Zito's $120 Million contract. Talk about unjustified.

Boards of directors and compensation committees need to be held to greater accountability for stupid compensation decisions.

The UAW and other White Collar Auto workers have been required to renegotiate their contracts so their company can receive government funds. AIG employees and every other bank that received TARP money should be required to do the same.

On a similar topic Management pay baffles me. Someone pays a CEO 19 million a year on the premise that they couldn't find someone to do the job as well for cheaper. what a bunch a horseshit.