Part of the furor deals with most Americans misunderstanding the concept of bonuses in the context of financial services and, in particular, retention bonuses, and politicians, e.g., the Demagogue-in-Chief, that Pied Piper of Failed Liberalism notably using the provocative, misleading term "extra pay", treating the bonuses as "found money", rewarding the same people responsible for bringing a world-class company to the brink of bankruptcy, furthermore paying out those bonuses on the taxpayer dime. The analogy is really more like a salesperson working on commission or a waitress depending on tips. This is so well-known a compensation paradigm that certain financial services firms have advertised over the past few years to boast that their account agents are paid straight salary (and hence have no vested interest in pointing the client to a particular investment). I have experience with these approaches, even within the IT industry. After my first year performance review at a Japanese chip tester facility, my boss structured half of my compensation increase in the form of a retention bonus to be paid out evenly over 6 months. In another case, an employer would not meet my market-based salary requirements but promised compensatory bonuses and emphasized its no-layoff policy. In these cases, bonuses were not really add-ons but an integral part of my compensation; the nature of the bonus had more to do with my sharing the employer's risk of business conditions, e.g., a cancelled bonus serving as the equivalent of a salary cut.
We don't know enough about the nature and structure of the bonuses, but we do know that AIG entered into these legal obligatons to its employees in the spring of 2008, several months before federal intervention. The target $165M in bonuses were basically part of AIG's attempt to keep the conglomerate with profitable operations beyond the embattled target financial services unit. This is important as Edward Liddy, the federal-approved AIG chief, with a reputation of spinning off units from Sears (e.g., Allstate, Discover Card, Dean Witter, etc.) looks to possibly uncoupling business units and hence reduce the government's risk. He is not going to be able to sell off units if the best and brightest, even in the financial services unit, jump ship.
Douglas Poling
This is not to say I don't have my own reservations about some of the bonuses that I've heard about. In particular, there was news this week that the receiver of the top ($6.4M) bonus, Douglas Poling, has returned his bonus. At first, Douglas Poling, a current executive vice president of energy and infrastructure, seems, by title, to be as removed from the derivatives scandal as anyone. But in fact, according to the Wall Street Journal, Poling was the former counsel and chief administrative officer under former financial services chief Joseph Cassano. A former Wall Street law who joined in the 1990's, he oversaw the terms of the steady-fee-producing swaps/derivatives contracts. INCLUDING TERMS REQUIRING AIG TO PUT UP OVER $100B IN COLLATERAL last year due to collapsing real estate prices.
According to an investor transcript, Poling made the following statement during sunnier times: "We are very careful and disciplined and rigorous in the way in which we structure and document these transactions, and are very sensitive to ensuring that we have early termination rights so that if the rules change, we're able to unwind those transactions and move on to other segments of the business that are more attractive."
You did a heck of a job, Dougie. How in the world did you stand by silently, allowing the company to assume catastrophic risk? Was the math too hard? Are you going to scapegoat some geeky actuary? Those calls for over $100B in collateral is the fruit of your legal expertise and due diligence? I am at a loss to understand why AIG did not force Poling to fall on his own sword along with Cassano, never mind give him a bonus!
On top of that, serious questions have been raised by a former AIG in-house auditor, Joseph St. Denis, when he raised questions over a now-defunct joint venture with Tenaska Energy that was Poling's baby. St. Denis alleges that his reporting ties to the parent company were cut after he raised accounting questions over the venture. This sort of alleged behavior reeks of Enron-Arthur Andersen like stench.
Irresponsible Politician Behavior
It would seem that being out of power, the Republicans should be the major beneficiary of this scandal. Obama's blast against the raises follows his own administration's report that the bonus contracts were legally enforceable. The fact that Obama felt compelled to do so reflects the administration's failure to anticipate the explosive nature of the issue although certainly Geithner and others had known about it for weeks. The problem is--inflammatory rhetoric by Obama and his cronies are making Edward Liddy's job more difficult to maintain a viable insurance company, in whole or part, and drawdown the American people's exposure. The American consumer and business concerns will not be better served by fewer comparable competitors in domestic and global markets.
Harsh rhetoric by politicians like GOP Senator Chuck Grassley (who suggested that AIG executives take an example from the Japanese tradition of honor suicides from the Samurai life and Bushido code) have fired up an outraged public on the verge of lynch mob mentality. A visibly shaken Edward Liddy was pleading before Congress, noting that some of his employees are receiving death threats.
This whole obsession over bonuses amounting to literally a penny on the federal bailout dollar is particularly egregious. Money is fungible. You would think from listening to the national press and the fools on Capitol Hill that AIG sold nothing but customized derivatives. It serves as a general warning to companies (as if they needed one!) over the dangers of doing business with the government. Why are we stopping with bonuses? What about salaries? Why not pick sides by essentially letting the competition know internal/privileged information so they can poach key AIG personnel? I certainly do understand that the federal government has a vested interest in cost containment in firms being bailed out, but I do not believe that the federal government is capable of running an insurance company, and this whole scandal is little more than a textbook example of why companies should not get in bed with the federal government.
Democrats, in particular, are easily distracted by surface-level details that fit their class warfare agenda. "Greedy" American employees sharing $165M in "bonuses" (from operational cash flow generated by its own business) get more negative press attention than, for example, foreign banks Societe Generale and Deutsche Bank, which received $4.1 billion and $2.6 billion in actual federal taxpayer bailout money.
Furthermore, the Democratic-controlled Congress seems to be giving far more scrutiny and due diligence to $165M in AIG bonuses than over a trillion dollars in the so-called stimulus and omnibus budget bills.
I think it's time for President Obama "to put aside childish things" and exercise due diligence and leadership. He sternly warned us we had no time to scrutinize over a trillion dollars in new federal spending, an obligation to be paid by our children and grandchildren, but he directs the US Treasury to do whatever it takes to find a way of setting aside employee contracts (but not union contracts with the autoworkers) while Geithner hasn't delivered a concrete plan to deal with toxic assets held by banks, which is really the bottom line of what we've been dealing with since last September.
Why are the American people not demanding more of a President whom puts a higher priority on signing nearly 9000 earmarks than a concrete plan for toxic assets, which is behind sinking bank assets, home values and loan availability?
