AIG Bonuses--March 27, 2009

The $200 million in bonuses paid to AIG officers, many of them in the FP unit which originated the credit default swaps which have cost the company so much, is the focus of most headlines for the last few days.  Ed Liddy, who works for $1 and his reputation, has been called to task for honoring these bonus contracts, which were indeed permitted under the terms of the TARP investments in AIG.  Americans, in search of specific people to blame, have written their congressmen demanding recovery of the bonuses, and unfortunately, some have written threatening letters to executives and suspected recipients, promising “piano wire” executions.

 It’s all a sad commentary on America.  Here we are, 2009, the richest and most successful, most educated, most enlightened, most diverse and open country in the world, at least in the image of many (setting aside our many faults for a moment).  And, here we are, indulging in searching for the guilty, blaming, threatening, and focusing on the wrong issues.  While $200 million might normally be a material amount, in this unique time, it’s miniscule in comparison to the truly significant issues and amounts, which warrant our attention.  Is it that we simply cannot grasp the issues and magnitudes of complex economics we are now into, so we revert to that which we can at least grasp?  Is it that we’re confused about the bailouts and the massive fiscal and monetary actions underway, so we focus on bonuses, which is something we all understand? 

 And, is it that we simply cannot rise up and swallow hard to accept the reality that most of this entire circumstance we find ourselves in is not to the blame of a small group of criminals, cheaters, con-men, or greedy corporate executives, but rather a logical outcome to the way we have been living for the last decade or longer?  Oh, sure, there are certainly some bad guys in action in recent years, and they should be prosecuted.  And, there are others who benefited in what now seems excess.  But, in regard to these, is it really so different from what happens in bonusing in “normal times?”  Aren’t there hundreds of situations every year, in which later performance problems of the company or the unit reveal that the bonus contracts were faulty and result in the wish for the right to claw back (usually not part of the deal)?

 And, isn’t it true that we were all enjoying living high on the hog, enjoying buying more on credit (often a great deal more) than we really could afford if there were any kind of dip in the trajectory of steep appreciation in home values, incomes, and stock market indices?  Can we honestly claim that we had no responsibility as a citizenry to appreciate that this pattern of behaviors had risk associated with it?  If we’re individually down 50% in wealth now, can’t we at least recognize that much of the loss simply is an adjustment to give up the excess gain we all enjoyed for a few years?  The economy is just clawing back some of our unjust bonuses.  

Why do we seem to think that we should be guaranteed continued heady and steady prosperity, and if it is interrupted, then there must be someone to blame, other than ourselves?  Right now, my car has a problem, but it served me well for some time in the past. I knew when the warranty expired, and I decided to not buy an extension to the warranty. When I bought it, I knew it had higher reliability risk than normal, but I liked some of the positive features and I took it anyway.  I can feel irritated that I have to now pay the price in time and money, but I really have no one to blame but myself.  Next time around, I can do better research and make other decisions, but I’m stuck with the consequences of my choices just now.  I guess I could write threatening letters to the CEO of the manufacturer, but that wouldn’t really be fair.

 I had the good fortune to be an officer of AIG for a few years in the 90’s.  I feel I know the company rather well.  It was/is a very fine company, well managed (under the direction of Hank Greenberg), setting aside FP for a moment.  It had a unique entrepreneurial spirit in its many divisions and subsidiaries, one of which I had the privilege of managing.  The entrepreneurial spirit was balanced against a demanding ethic of performance and low tolerance for mistakes, which was bluntly and harshly administered by our CEO, whose capacity for comprehending and challenging was truly amazing.  For one, I rather doubt the company would be in the current situation, had Elliot Spitzer not succeeded in ousting one of Americas best and longest tenured CEO’s.  Everyone knew that succession at AIG would be a problem, and the culture would have to change.  It’s really the timing of the unnecessarily early and hasty transition, and the succession of economic events that led to the demise of this fine company.

 What changed in the FP unit after Greenberg, Did the unit under Sullivan and Cassano (FP manager) begin writing more risky derivative swaps?  I don’t know.  This was not the area in which I served in the 90’s, so I’m not able to judge the relative risk taken even in those earlier times.  I’m simply extending a personal gut feeling that such a meltdown wouldn’t have occurred under Greenberg.  It’s fair to look at the current circumstance and say that someone erred in allowing the magnitude (and perhaps the degree) of the CDS risk to reach levels which would threaten the very existence of the company if a broad market meltdown should occur (as we suddenly experienced in housing finance).  But, let’s remember that AIG had lots of company in financial institution who took on excessive risk in housing, CDS, and/or in other ways—names include Lehman, Merrill, WAMU, Citibank, and others.  And many of those who took little and are safe today will be criticized another time for failing to produce sufficient returns—they only look like hero’s now for a short time.

 As one American, I don’t really care about the bonuses now. Pay them or don't pay them--it's not the major issue of the day.  It’s totally understandable to me that (a) they were typical corporate bonuses and were contractual; (b) undoubtedly many of them are to people who had no responsibility to determine risk or did a good job of doing so in their specific departments; and (c) where faulty bonus structure rewards the few who made bad decisions, that happens all over America every year. 

 America, let’s just move on.  Let’s write our congressmen, but let’s try to understand the issues and write about what’s important.  How about focusing on the pork barrel as a good start—and if you really have courage, get the list of pork for your state and have the courage to examine and challenge as much of that as you can?  If you’re a Californian, it’s easy to criticize the bridge in Alaska, but how about the project planned for Nancy Pelosi's constituents in the San Francisco area—is it really necessary and is it really stimulative, is it for the benefit of one well lobbied company, or for the greater good?

AIG was a great company, well and honestly managed--at least up to the forced departure of Hank Greenberg.  For one, I wouldn't be surpised in, in the end, to see the US Government recover most of the capital invested in the bailout of this historic company.