Fire the AIG management
blogs.law.harvard.edu
blogs.law.harvard.edu
During 2008 my attitude towards paying federal taxes has changed dramatically. What I'm seeing now is pretty much a racketeering organization where healthcare, finance and law have semi-merged with the government and are pretty much holding the rest of the population as their personal slaves. Justice and health (legal and medical costs) are out of reach for nearly everybody and, frankly, what else is a government good for? Maybe for protection from Canadians or Mexicans?
I don't want to sound like a crazy conspiracy theorist or a libertarian, but paying taxes now looks pretty much like feeding these gangsters and I'm determined to find every single available legal loophole and exploit it in full. I also like to entertain myself with a thought that ultimately, over my entire lifespan, this decision will cost US government a significant sum of money, especially if I am not the only 30 year old aspiring entrepreneur with such attitude.
The injustices you've just discovered are the underlying sentiments that motivate most libertarians. The basic libertarian insight is that far from being new, these activities have been the fundamental business of government for millennia. In times like these, the curtain is pulled back a little bit farther than usual.
The problem with exec bonuses was exasperated in the final version of the American Recovery and Reinvestment Act of 2009. Here, Chris Dodd added the “Dodd amendment” http://www.google.com/search?q=dodd+amendment
It reads: ‘‘(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.” http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1:
That amendment guarantees all bonuses that were contracted before the date of the Act.
Of course, Dodd and Obama are “outraged”. But why did Dodd add that provision? Why did Obama sign it?
Not surprisingly Dodd, Obama, Bush, McCain, and Shumer are the largest benefactors of AIG’s massive lobbying. http://www.opensecrets.org/orgs/recips.php?id=D000000123&...
AIG isn’t taking our money. Our government is.
AIG "insured" debts it did not have enough holdings to back up. I quote the word insured because, insurance is barely what it used to be.
Traditionally, government demanded insurers have low-risk holdings to back up a sizable percent of their outstanding obligations. The regulations that handled this have been dismantled over the years. Additionally, the "insurance" has been broadened to include other type of investment vehicles instead of traditional insurance. AIG got greedy and was able to do so because they and others lobbied hard to allow them to be greedy. This was a multi-decade process.
I contend that the article focuses on one of the symptoms "right now" (bonuses to poor management still running a company); whereas the cause is government intervention. Without that intervention, the "right now" symptoms would not exist, i.e. AIG would not exist.
You bring up the long debacle that led to this situation. However, you fail to mention that our government and the Federal Reserve have been tightly tangled with AIG for a long time. Regarding "multi-decade process", there's plenty of government blame to go around. http://www.lewrockwell.com/rozeff/rozeff253.html
If you're contenting that AIG was insolvent and still issuing insurance, they should have been prosecuted under state fraud laws, not bailed out with billions of dollars.
The root of this problem is simply that insurance is supposed to be backed by securities that are significantly _less_ volatile than the security they are underwriting. If AIG doesn't have the assets to cover their bets, they clearly did not achieve this goal. The big question is why and which parties deserve blame. My money is on multiple parties.
As I pointed out in another thread, AIG's assets have not had losses and the relevant regulations have not been dismantled over the years. (In fact, AIG had to register as a bank because of new regulations.)
What happened to AIG is that the mark-to-market for those assets, which are behaving exactly as predicted, went away. (AIG's portfolios are not taking a foreclosure hit because they cherry-picked.) That took AIG's credit rating down and then the covenants kicked in, requiring AIG to pay money that it didn't have.
Mark-to-market is attractive, but does it necessarily make sense? Suppose that I have an apartment building that is throwing off enough cash to meet my obligations. Is it worth nothing on a day when no one offers to buy it? Is it worth nothing on a day when no one offers to buy "comparables"?
Suppose I offered you $10,000 worth of stock in AIG as collateral for a $10,000 loan. When the value of that collateral goes down, it's fair for you to call the loan, even if AIG is still making money and distributing dividends.
These is the way that a bank treats its own customers who put up property as collateral, but when banks themselves are putting up collateral, they want to operate under different rules.
The value of bank and insurance company assets are always an issue.
> Suppose I offered you $10,000 worth of stock in AIG as collateral for a $10,000 loan.
That's a different situation because (as I understand it), the "collateral" was performing loan portfolios.
I agree that the market price for those porfolios is relevant but does it really make sense to immediately declare an institution insolvent and all that implies when buyers take a holiday?
There was some stock involved in many of these cases, but it was the stock of Fannie Mae and Freddie Mac. The US govt gave tax and other preferences to regulated institutions that held Fannie and Freddie stock as assets. This pretty much guaranteed that a lot of them would take a huge hit when Fannie and Freddie went down.
The individuals who create contracts which involve mark-to-market values might not care about these contract's potential to set off systemic collapse. The state or the regulators or "the people" jolly-well ought to care.
But that time is past. The US government has elected to keep AIG afloat, and to do so without allowing the company to reorganize its debts. Thus, it still owes 100% of its debts to all of its creditors.
The company cannot now go picking and choosing which debts to pay. To do so would do far more damage than failing to retain the executives in question now. While the US government has been trying to shore up confidence in AIG, an action like this would cause ALL of its creditors to question whether the debts that it is owed would be the next to be ignored. Thus, failing to pay these debts would set expectations that future debt might not be paid. This risk would at best increase all costs to AIG, and at worst completely prevent it from doing any business in the future when they can't be trusted.
In short, welching on these debts would likely lead to exactly the problem that the government has decided must be avoided.
Every company I've worked with has a baseline bonus based on how the company did and (sometimes) a spiff on top of that due to individual contributions and/or your team's contributions.
All discretionary.
FWIW, I have a small contractual bonus in my own compensation (not from AIG)
But that's really academic, because the AIG employees did not commit fraud.
And we're talking about investment bankers. Their job is to take calculated risks. These are very finely calculated. In the case of AIG, the problem isn't that their gambles went south. The problem is that somebody changed the rules on them, so the paper value of the investments (said values not having been realized yet) was changed, changing the calculations going into AIG's credit rating and thus making lenders wary.
As was noted elsewhere in this thread (http://news.ycombinator.com/item?id=522777 ), these executives weren't committing fraud, nor were they even losing actual money.
The real problem is AIG is an INSURANCE COMPANY, not an INVESTMENT BANK. At least the part that the gov is bailing out is about its insurances. An insurance company is only supposed to invest its moneys in very low risk investments. The reason is they are supposed to constantly monitor the costs of covering their underwriting and keep enough funds on hand to cover their bets. They have not done so. This is the root of the problem.
Is it fraud for an insurance company to not have enough to cover its underwritings and to continue to take on more? I think so...and that's the core of this problem.
It also seems the case that in certain fields, 'bonus' is essentially a part of contractually or traditionally guaranteed compensation. They've stretched the term -- but that's become the new meaning, in that field, for years if not decades. So a lot of this hullabaloo is caused by terminological confusion.
The irony is that bonuses are how people everywhere should get paid. Can you imagine how much better our schools would be if there was a mechanism to pay good teachers more than bad teachers?
Last year, back when AIG knew things were hitting the fan, they decided to offer a carrot to employees who would stay through the storm. Turns out, AIG is "too big to fail" so those that decided to stay with AIG through our current adventure appear to be getting rewarded for incompetence.
I think this is true of the payments made to AIG's counterparties, not so much of the bonuses being paid to the financial services division. Pretty much everyone on Wall Street's compensation has gotten hosed so I don't think trading partners are going to flinch about seeing employees go bonus-less.
There's a bit of irony in me saying this (think about who I might be doing technology for[and it's not AIG] that would make my words the most ironic...), but bonuses only work as a positive motivator up to a point. Past that, you end up getting people doing the wrong things for the wrong reasons--there were a few good HN posts about this concerning case studies conducted on bonuses and why companies should pay above the market average but not be at the top percentile.
"The manager of your local McDonald’s is smarter than the AIG executives."
These types of remarks seem common when discussing this and similar situations related to the current economic situation. Perhaps the intentions of these executives was not to save the company, but to take care of themselves. I don't see this as stupidity. Greedy and unethical? Most definitely. These people are not stupid.
I would beg to differ. The manager at my local McDonald's hasn't convinced an entire country to pay him $6.5 mil for doing a horrible job.
>"McDonald’s doesn’t say 'We had a bad year last year and you might be discouraged, so we’re writing you a fat check unconditionally in hopes that you will like us and stick around this year.'"
Broken analogy; it's the government who wrote the fat check, not AIG.
The government is not in the business of meeting any objective goals. It simply appropriates funds, does things with them, and then tells you about what it did with the best spin possible. As long as nothing too bad happens and the people in charge are serious-looking and wear suits, nobody complains. The government could be run by a ferret, as long as it had a good press secretary.
Private companies, on the other hand, have an objective performance standard to meet. They must make money, or eventually die. The pressure of an objective performance standard makes them much harder to run. The ability to achieve results is much more important, and the ability to look good on camera is much less. There is punishment for incompetence.
I suggest that firing the current crop of executives and making it clear to new potential hires that they will be underpaid and under intense public scrutiny is a good way to run what is left of the company into the ground. Given the other options available, this might be a good thing, but it could be done more directly.
That's an absurd statement. We don't send officials to congress without them running a campaign specifying their goals. You might not like the process, or trust the process, or think private companies (dictatorships) do it better, but don't say they have no goals. Every single one of them has goals for their districts/states and they get fired (not reelected) if they fail more than the public likes.
If government seems so inefficient and difficult to get things done, it's often because members of congress have conflicting goals so getting anything done is difficult. This isn't an accident, it's how the system is supposed to work.
> There is punishment for incompetence.
Usually, but as we're clearly seeing now government and business are so tightly interwoven in the modern world that execs knowingly abuse the government and do things that would be bad if they didn't know they'd be bailed out by their buddies in government who they paid to have elected.
> I suggest that firing the current crop of executives
Not going to happen and you know it.
Perhaps you have a different concept of "goals". Political candidates spew platitudes, but when have you ever heard they cite a specific, measurable goal? The few instances I've heard always specify a timeframe that's conveniently just beyond the next election, e.g. a presidential candidate promising that something will happen in 5 years, so that their next election can't be held up by it.
> execs knowingly abuse the government ... their buddies in government who they paid to have elected
It works both ways. Don't just focus on business, also look at the government officials who are so willing to prostitute themselves.
The only potential discipline for politicians is made by voters who mostly don't understand the issues that well and don't spend a lot of time following their representatives in office. Thus, the job of a politician is largely PR.
This, again, is in stark contrast to the creditors of a corporation, who are very interested in its actions, follow it very closely, have very clear expectations, and who have deep knowledge of its activities.
I know I am not going to convince you, but I think my point is good and my logic is sound.
>"Not going to happen and you know it."
My sentence had a fairly large phrase in the middle. If it is removed, it reads "I suggest that firing the current crop of executives...is a good way to run the company into the ground". Although, I suspect it is likely that AIG is already beyond salvage.
Apologies, I misread what you wrote, my bad.
As for the rest of it, you're presuming that no one votes with any understanding of the issues. I disagree, though many don't understand them deeply, or possibly misunderstand, people don't vote unless they care about some of the issues. That's why most people don't even vote. So those who do are certainly doing it because they want some objectives met or some ideology upheld.
I've worked at many companies and I've been an employee of the federal government and quite frankly, the federal government is vastly more efficient than most private companies as far as I can tell.
Sure, if you look at the fortune 500 the government might look incompetent, but that's not a fair comparison, those are the top companies in the market. If you look at the fortune 5 million, i.e. the vast majority of the rest of the market, the federal government comes out looking quite efficient.
Having been in the military, there's just a certain difference in the way you look at your job when you've worked in a place where you completely divorce pay and work. Pay... that's the finance department on the other side of base, it has nothing to do with your job or your performance, only with your rank.
At work, you just don't think about pay at all, you think only about your job and being good at what you do out of pride for what you do rather than how much money you can make. Every one knows exactly what everyone else makes, it's printed in the stripes on your arm and a standard pay scale. This allows a commradare that generally doesn't exist in the private sector because jealousy over pay interferes with it.
It's totally different than the civilian world where most keep their salaries secret, or lie about them, and everyone is stepping all over each other trying to make more money than the next guy, by any means necessary, quality of the work be damned because manipulating people seems to work better when climbing the ladder.
The last thing I want in a president is a guy who thinks the seeking of profit trumps all else, because it doesn't. This idea that seeking profit automatically results in the most good I just find absurd. Frankly, the idea that being a great CEO somehow prepares you to be a great president I also find silly.
Great CEO's != great person, in fact more often than not being a great CEO requires being ruthless. That's not what I want in a president, I want a great person as president, someone who I can morally look up to, someone who takes responsibility for his actions, is honest with the public, someone who leads by example, not by privilege of power. Someone I can point to and tell my kids, that's how to be a man.
I'm starting to read more thorough explanations of the bonuses - they were approved 1Q 2008 to encourage retention during the 2008 year, with payment at the end of the year. As such they're probably legal, but the proposal to tax them 100% - or better yet, scrutinize the actions of the bonus recipients during the last year and hold them to a high standard of responsibilty - seems appropriate to me. Holding highly-compensated executives to high standards is what we should be doing anyway. With rewards come responsibilities.
EDIT - It wasn't threat of murder - the court ruled that Shylock couldn't take any of Antonio's blood on pain of forfeiture of all of his (Shylock's) assets. http://en.wikipedia.org/wiki/The_Merchant_of_Venice
First, for all of the people who think that AIG should have gone bankrupt: go look at www.aig.com under "individuals and families" to see what lines of business AIG is in, then check out the "insurance holdings by state" section of the wikipedia page. AIG owns two dozen insurance companies in California and controls 4.7% of the life insurance and 2.7% of the property and casualty market in West Virginia, among other things. IANAL, but I have to assume that policy holders would revert to general creditors in the event that they had a loss and the insurer was bankrupt. Would you want to go to bankruptcy court and stand in line with Goldman Sachs, Societe Generale, etc. to try to get your payout if your house had burned down or your spouse had died and you needed the money to pay your bills? It may be the case that state governments stand behind insurers that do business in their state (insurers are regulated at the state level so this may vary by state) but this converts the problem into one that is much more complicated and expensive to sort out than just giving money to the parent company. I expect that this is why the parent company was bailed out instead of going bankrupt.
As for bonuses paid to executives, these people are employed in units that basically trade derivatives, and they know what positions AIG has on its books. It is thus possible that the guy who earned $6.4 million in bonus could earn a lot more than that if he started a hedge fund and bet specifically against the positions that he knows AIG has. If this is the case, then AIG is actually saving money by paying this guy to stick around and help them unwind the book. Confidentiality provisions will not protect a company from a former employee betting against their positions, only from having them disclose information.
If the executive in question can be bought so easily I don't think they'd stick around when they know they can make more money elsewhere. Case in point: NYT reported today that according to Andrew Cuomo 52 of the executives that were given bonuses have already left the company.
These people took the money and ran.
They got pre-agreed bonuses for what they did. They saw that things were changing for the worse and left.
What part of that do you have a problem with?
Thanks to the handwringing, started by people who knew about the bonus months ago, AIG is going to have trouble hiring people. Since we're hoping to get tax money back, it's unclear why that's a good thing.
Are you saying AIG is only now going to have trouble hiring people, since they won't be handing out lavish bonuses to people who don't deserve them? I'd have thought they'd be having trouble hiring people for other reasons.
AIG was and is going to have trouble hiring good people. We're telling folks that AIG won't live up to its agreements. Who is that going to help?
Apart from shoveling money to Goldman Sachs, AIG is in the process of unwinding a lot of transactions.
AIG is going to lose money and go under no matter what. However, that doesn't imply that good people aren't needed. The amount of money lost depends on how well the unwinding is done.
Me - I'd like the unwinding to be done so as to lose as little money as possible. If you agree, how do you propose to do that without hiring good people?
Of course, you may think that good people can be had for less than AIG thinks. Do you have evidence for that theory beyond "you can't do any worse" and "AIG went into the toilet"?
As I pointed out elsewhere, AIG's mortgage portfolios have performed as advertised....
Interesting how in the financial industry, there is a working assumption that skilled financial people require a lot of money to hire and maintain. Yet the financial industry is quite happy to save money by hiring H1-b's for their lower costs while arguing that they can provide equivalent quality.
Yes, one would certainly like AIG's unwinding to be done competently. Does that mean that it has be done by the same class of people-seekers who seem to have gotten us into this mess and who expect their every profitable or unprofitable action to be "bonused" to the hilt?
Possibly not.
The Federal government, for example, has a large and highly competent workforce that it pays much less than the financial industry pays its "whiz kids".
Maybe he's stupid, incompetent, and/or corrupt. But, surely you've got some actual evidence that a significantly better or at least cheaper job can be done.
http://www.washingtonpost.com/wp-dyn/content/article/2009/03...
"The handful of souls who championed the firm’s now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president."
"If they did walk out the door, who would volunteer to work at the Chernobyl of the financial world? And what would become of the mammoth portfolio that remains?"
"'It would become the biggest naked position on Wall Street,' one longtime Financial Products executive said, 'and everybody would exploit it.'"
I sincerely doubt that the sum total of all burned down houses, deaths, auto accidents, and so on that are handled by AIG-backed companies is within two orders of magnitude of the bailout. So let AIG crumble, have the federal government handle the insurance payout to the insured as an emergency measure, and for the people who lost their policies, they can go to another insurance company.
I would argue that many allow emotion to cloud their judgement. Of course that taxpayers are not happy to see their money being wasted on bonuses, but shouldn't we analyze the situation in objective terms? Your analysis was one of the most balanced I have read in recent times. Sometimes one must choose between two evils. Things are seldom black & white.
I liked your take on the need to compensate and keep AIG's traders, in order to avoid them going elsewhere and start predatory practises against their former employer. Makes sense. I wonder why no one had mentioned it before.
Right. Like current AIG employees aren't already helping others do this right this second. Great post otherwise.