Monday, March 16, 2009

The AIG Public Relations Fiasco Continues: Bonuses and Backdoor Bailouts

This Saturday, Marketwatch reported:

In a letter to Treasury Secretary Timothy Geithner, AIG Chief Executive Edward Liddy said that AIG had committed to paying the bonuses to employees of the financial-products unit and that the payments were "binding obligations," the Journal reported.

The $450 million in bonuses are over and above $121.5 million of incentive payments for 2008 that AIG will make to about 6,400 of its employees. And AIG is laying out another $600 million in retention payments to more than 4,000 employees, the Journal reported.

Liddy told Geithner that he did not like the $450 million bonus arrangement but that outside counsel had advised the company that it must go through with it, the Journal reported.
More specifically, the $450 Billion in bonuses were focused on employees in the unit that lost $40.5 Billion in 2008. Not sure what is in place that guarantees these bonuses, but why not withhold these bonuses and make AIG fight tooth and nail through the legal system for the money?

The sad thing is... the above is nothing compared to the latest and greatest PR fiasco from AIG. As a little background, last weekend the WSJ detailed bailout funds were being diverted "backdoor to the banks":
The beneficiaries of the government’s bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany’s Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.

More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.
Forget $50 Billion... late last night AIG has released the following (the FT reports):
AIG paid out $22.4bn of collateral related to credit default swaps, $27.1bn to help cancel swaps and another $43.7bn to satisfy the obligations of its securities lending operation. The payments were made between September 16 and the end of last year.

Goldman Sachs, which has also accepted US government support, received payments worth $12.9bn. Three European banks – France’s Société Générale, Germany’s Deutsche Bank and the UK’s Barclays – were paid the next-largest amounts. SocGen received $11.9bn; Deutsche $11.8bn; and Barclays $7.9bn.
Please note that Felix at Market Movers makes the case that it may not be exactly as bad as first thought... I'll follow up with details if they come out.

Look... I understand the importance of preventing systemic failure (i.e. a Lehman fiasco), but clearly communicating where the money is going (in real-time), why it is going there, and doling it out in a fair and objective manner is the only way the people of the United States will accept (without force) the injection of trillions of dollars back into the financial system. I concede that fair is relative, but when you try to secretly move $80+ Billion into the financial system in a backdoor manner, you lose trust which is REQUIRED in this environment.

Specifically, I have the following problems with the above mentioned backdoor bailout (drum roll please).....
  1. We were told AIG was bailed out due their importance to the system. Not to bail out supposed "solvent" institutions (with taxpayer money indeed going directly towards "solvent" institutions, why isn't the taxpayer receiving at least an additional equity stake)

  2. The moral hazard associated with bailing out "counter-party risk" (i.e. IT WAS PRICED TOO LOW) only makes it more likely that counter-party risk will once again be under-priced AGAIN in the future (hell, if the government is willing to step in, why do the credit work?)

  3. As Yves from Naked Capitalism pointed out, Goldman Sachs was bailed out to the tune of $12 billion (via AIG), but Goldman "had a seat at the table during the AIG rescue talks". How is this possible? That would be like a homeowner, that has failed to make their home payments, joining the board of a mortgage servicer and cramming down his own loan. Would that possibly ever happen?

  4. U.S. taxpayer money was used to bailout non-US institutions! Again, in return for a 0% equity stake in any of these firms!
In fact, three of the top four AND eight of the top eleven beneficiaries by amount received above, were non-US institutions.

Source: AIG


  1. AIG is a demonstration of game strategy during tragedy of the commons- when everything goes down the toilet, grab what you can.

    They make me want to storm the Bastille and start a Reign of Terror- it's no different than the French Aristocracy.

    I'm sure all of the "too big to fail" institutions will be able to extract much more wealth off the backs of the people in the near future, and keep doing so as long as they don't foment a violent uprising.

  2. I don't understand why people blame AIG. Instead of letting it fail and getting rid of all the executives, bonuses, and most employees, the government saved AIG and now it is a continuing business. Paying bonuses is what businesses have to do to retain their workers.

  3. 4 words... where would they go?

  4. In an environment where unemployment is rising to record levels, I don't think many employees would quit simply because they hadn't received their bonuses.

  5. the bailout of AIG was a bailout of the US credibility.

    AIG was able to to close these contracts under US oversight.

    unfortunately besides the FIREs, tech and defense equipment there´s not much left for the US to lead the world.

    so if you want to remain the center of the financial world you make sure that your biggest insurer makes good on its obligations.

  6. "so if you want to remain the center of the financial world you make sure that your biggest insurer makes good on its obligations."

    Then why let Lehman go literally the same week?

  7. Easy, Paulson had beef with Dick Fuld. Moral Hazard was just an excuse.

  8. Lehman was just another i-bank (no. 3?).
    i´m sure they wouldn´t have goldman let fail.

    and then there´s the elevated role AIG plays in the CDS space.

    the bigger you´re involved this area the higher the chance you will get bailed out (see even smaller Bear Sterns).

    a failure to make good on contracts would automatically send shockwaves through the banking sector because many european banks were only able to lever themselves up by buying credit protection from a AAA insurance (AIG).
    take away the protection and their capital ratios would plummet overnight cuasing all kinds of turmoil.