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Will AIG have its revenge?


Gabe Sherman's look at the tussle over whether AIG's traders should get fat salaries seems to come down to this:

The company is scheduled to pay another $198 million in retention payments to some 240 remaining FP employees in March 2010. Right now, according to AIG executives and Treasury sources close to the talks, the issue is that Feinberg wants FP’s traders to return the rest of the retention money that was pledged to be returned in March of this year under pressure from Cuomo. FP executives say the contracts are outside Feinberg’s jurisdiction. Feinberg counters that he could use the contracts as a factor when determining a trader’s base salary for next year as indicated in the statute set by Congress. In theory, if an FP employee is due to receive $1 million on March 15, 2010, Feinberg has the authority to compensate by cutting their salary to $1. Of course then, the employee could simply quit.

Senior AIG executives contend that an exodus of traders over punitively reduced contracts risks blowing up the $1.1 trillion derivatives portfolio still left to be unwound, destroying the taxpayers’ $180 billion investment in the company and potentially dragging the fragile economic recovery back into the abyss. “I’m trying desperately to prevent an uncontrolled collapse of that business,” then-CEO Ed Liddy testified last March. “The financial downside for taxpayers is potentially very large and it’s very real.” The AIG executives see Feinberg’s efforts to save a few million in retention payments, given the billions at stake, as a terrible business decision. “I just don’t understand why you would treat people this way,” one AIG executive says. “It’s economic and financial terrorism on the government’s own investment, by the government.”

So do you need these guys? Their contention is that you do. The $1.1 trillion that their unit has left on the books could blow up if the guy watching it doesn't know which wire to cut. Folks I talk to say you probably don't, but it would be a problem to have them all walk out of the office on the same day (which they're threatening to do). And it's not clear that you can replace them with people who are cheaper. But anyone else have an informed take on this?

Photo credit: By Daniel Acker/Bloomberg

By Ezra Klein  |  December 4, 2009; 6:37 PM ET
Categories:  Financial Crisis  
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I don't have an "informed" take. However, I do believe that the potential win for larger salaries/bonuses give these executives a LOT of incentive to blow smoke about how important they are and how they will walk away from 6 and 7 figure jobs during a recession TO DO WHO-KNOWS-WHAT.

While I haven't studied derivatives to the extent that these crooks have, I do know that they basically amount to mathematical formulas whose values are determined by the underlying assets. I have no difficulty believing that a team of contract lawyers and computer programmers paid equal or less money could arrive at more accurate, more honest results with the additional benefit that the current batch of jerks would get walking papers.

Posted by: bcbulger | December 4, 2009 7:01 PM | Report abuse

Ethical question--in some abstract sense would it be justified in using the full resources of the state, within the law, to threaten to hound them with round the clock surveillance and full punishment by the terms of the law for every minor transgression, every mile per hour over the speed limit, every minor tax mistake, everything? Is it wrong for the state to invoke its legally grounded power to nonetheless make your life a living hell to accomplish some morally just outcome?

Posted by: notoriouslightning82 | December 4, 2009 7:08 PM | Report abuse

Unwinding a business is very different from running it as a going concern. Yeah, I think you do need people who understand the contracts to manage them through a run-off and unwind process. But not nearly as many as to rebuild the business. AIGFP is just one part of AIG - the one that killed it. Presumably that business is in runoff mode. Paying $200m a year for grossly overpaid traders is grossly excessive and almost certainly unnecessary. Keep a handful of them, pay them what's needed to keep them around with a promise of a bonus when everything is wrapped up, and fire the rest.

Posted by: FosterBoondoggle | December 4, 2009 9:05 PM | Report abuse

Will that nonsense never end? These traders, crooks or whatever you call them do not have special powers that make them irreplaceable. Treat them just like other employees. If multiple times your and my salary isn't enough compensation for them, fire them. If they try to blackmail their employer (us) by threatening sabotage, they are criminals and should be treated as such.

Posted by: carbonneutral | December 4, 2009 9:09 PM | Report abuse

My mostly uninformed opinion is that if Reagan could replace the flight controllers to break their strike, Obama can and should replace the AIG traders to break their threats (or more precisely the threats of their management).

It would do a world of good to have the traders make threats, and then have the trading floor occupied by federal marshals, and have the traders escorted out. Of course probably AIG would blink well before that. But maybe some savvy posturing could produce a similar effect. Just copy Reagan's script.

We are deeply, deeply under-estimating the depth and breadth of rage and distrust generated by the current kid glove treatment of the financial institutions by the federal government. Strong measures would be enormously popular and would hugely increase confidence in the administration.

Posted by: jedharris | December 5, 2009 12:29 AM | Report abuse

Why, what a pretty little piece of blackmail they're attempting there.

Let 'em walk, the selfish, greedy, evil, excruciatingly clueless bastards. Last I heard, we had many, many intelligent people out of work, and I have no doubt they could take over without a blip.

And where exactly do you think these people are going to go, should they leave their jobs? No one's hiring, and I have no doubt they know that. It's not even a good bluff.

The idea that these people, who caused this problem, are supergeniuses who need to be kept on to solve it (when they don't even seem to understand what they did) is hilarious.

I wish I could use the language I actually feel when I read about this, but my comment would be banned. I think it's best summed up by that photo taken of a protester during the early days of the financial crisis: "JUMP YOU &^%$#@ERS!"

Posted by: tracy2 | December 5, 2009 12:30 AM | Report abuse

Sometimes you just have to let the kidnappers kill the hostages, or it'll never end.

Posted by: vagueofgodalming | December 5, 2009 4:59 AM | Report abuse

Let them go.

Posted by: Athena_news | December 5, 2009 10:32 AM | Report abuse

If the derivatives portfolio is toxic, let it collapse. We should pay the price for financialization and deregulation of our economy. Maybe that will get serious re-regulation going in Congress.

This is not 'financial terrorism'; it is a business decision. Financial terrorism is seeing 50 years of Wachovia stock disappearing.

And by the way, there is not much call for out of work traders so they may not be as eager to leave as they say they are.

Posted by: reynolds1 | December 5, 2009 12:30 PM | Report abuse

In contract bridge, especially duplicate, there is a saying that when an opponent leads out of turn it is probably right to accept the mistake, because a bridge player who doesn't know who's turn it is to lead probably doesn't know which card to lead either.

People who can foul up the economy with securities INTENDED to be so complex that normal accountants can't figure them out probably haven't a clue about those securities, either.

So set their pay at a dollar a year with no severance package and dare them to leave. The odds are actually in your favor that you will hire a more competent administrator at much more normal compensation when you replace them.
Since they can't tell you, in terms you can understand, what the .. they are doing, it is very likely that THEY don't actually know what they are doing anyway.

They've had a year to clean up their mess and they STILL can't tell us what is what, then they just don't know.

Fire them for incompetence and move on. If competent accountants can't sort out the mess it is probably a trillion dollar garbage dump, and ought to be buried.

Letting idiots hold us for ransom just makes it worse.

Oh!, While we are at it, since AIG's top level people are that incompetent, that they let these idiots hold THEM for ransom, fire them too.

Posted by: ceflynline | December 5, 2009 3:21 PM | Report abuse

i don't think it is a surprise that these guys are willing to kick, scream, cry, stomp, and threaten to get me another million $

shucks, that might even be easier than what they did to get their last million $

Posted by: jamesoneill | December 5, 2009 5:22 PM | Report abuse

there's seems to be a fundamental unwillingness to think about incentives here. If the traders get paid nothing they will walk. That's fine. Who are the experienced and willing traders who will step in and take their place? After the gov't takes your bonus once, why will new traders trust the gov't again? In fact here's what i think will happen if the AIG traders walk. They will be hired by other banks and use their knowledge of AIG's portfolio to help their new employers make a profit taking the other side of AIG trades.

Posted by: MBP2 | December 5, 2009 7:32 PM | Report abuse

In favor of the traders: the point is not that there are no other "smart" people out there. The point is that they claim to have specialized knowledge developed on the job, and that it would take newcomers--even highly intelligent newcomvers--too long to learn the ropes before all of finance went to hell in a handbasket. Are they right to claim that? We'll probably never know.

Against the traders: draft them. Institute a draft, authorizing the military to call up economic specialists to help fight the "war against financial blackmail." They become privates in the Army (heck, make them Marines so their grandkids will think them all the braver) earning base military pay (with benefits!) and put them to work solving the problems they created in the first place. Have others sitting side by side with them learning the ropes so that after their, say, 2-year stint and before they get dishonorably discharged, someone else with less of a chip on their shoulder can take over the job without holding the world ransom.

No, I'm not serious.

Posted by: JonathanTE | December 6, 2009 11:37 AM | Report abuse

What do these people do/what have they EVER done that would justify bonuses in 7 figures? What could Richard Fuld (did I get his name right?) EVER do that was worth $500M in one year?

Let these people be paid handsomely if they make their stockholders rich, and let them (and their stockholders) absorb losses they are responsible for. That said, nobody EVER asks where the "enough is enough!" line is when it comes to profits and compensation and seriously expects an answer. . . And if you think I'm some kind of soak-the-rich commie, I'll have to disappoint you. I'm just a disgusted centrist.

Posted by: post_reader_in_wv | December 6, 2009 4:40 PM | Report abuse

it is over... they need the money to fund a stolen lifestyle. They are money changers and they need to be removed from the Temple.

Posted by: angriestdogintheworld | December 7, 2009 12:56 AM | Report abuse

We are back to the issue of multi million dollar salaries/bonuses
A sensible person in a high stress job if given a few million dollars will pocket the money and retire to watch birds or something.

Only those that are insatiable will continue
(and those that love their jobs - in which case why pay them so much?)

Insatiability is a psychopathic condition, someone who is insatiable is mad, a lunatic.

Why do we expect loonies to make good decisions?

Posted by: duncancairncross | December 7, 2009 4:51 AM | Report abuse

Go read Liars Poker. They tried this in the 80's, and Michael Lewis very reasonably tells us that anytime wall street threatens you with a likely recession, they are lying! The system in which they work is far to complex for them to realistically make this kind of call. We need to call their bluff.

Posted by: slevs | December 7, 2009 10:13 AM | Report abuse

It sucks but I say pay the money, wind down the portfolio and then give these guys pink slips.

Yeah, we 'might' be able to get away with firing the lot of 'em right now and finding new people (who will probably want pay at similar levels, and will take half a year to find, hire and train). Let's recall that the unit has 240 people, and AIG didn't just employ (very expensive) labor for the sake of it - this operation required 240 bright people who need the market, product and their own portfolio intimately. But let's say that there is a 95% chance of this working out as planned, and if things don't work out as planned, only a 20% chance that the failure is catastrophic. All in, 99% chance of getting away with replacing everyone wholesale. I think those are very generous odds for the replacements.

At a cost of $198 million, you would have to think the cost of catastrophe would max out at $19.8 billion in order to want to risk firing everyone and replacing them. I think even given a very low chance of error, that it is still a good use of money to pay these guys who know this portfolio and product the best to wind it down, and from there get rid of them and create safeguards against this situation from occuring again.

Firing these guys and hoping everything works out is an emotional decision, not a rational one. It is what the saying penny wise / pound foolish was invented for.

*full disclosure - I've worked for an acquired bank and seen new traders mismanage the acquired portfolio and create millions of losses for shareholders. It's really not as easy as it sounds. Also, I don't even get paid six figures so it's not as if I'm worried about a ridiculous payout of my own.

Posted by: justin84 | December 7, 2009 10:48 AM | Report abuse

Do what they would do. Call their bluff. And strengthen your own hand.

Crawl through unionbusting laws to find some way to slam them if they all walk out at once, and sue them for any harm that comes to the company or whatever. Go after anything they own that's still connected to the company (401ks, stock options, etc).

And more importantly, don't think anyone is indispensable. If we could find guys to pinch hit for freaking flight controllers, I fully expect we can find guys to fill in for traders.

Posted by: theorajones1 | December 7, 2009 1:24 PM | Report abuse

At least some of these people have fiduciary responsibilities to the firm. Encouraging others to take actions that would substantially damage the value of AIG, or taking such actions (including speech) themselves while employed by AIG is a tort, and could lead to liability for any losses suffered by AIG as a result. All the details of the deals that these people are trying to unwind are no doubt subject to trade secrets law, so any attempt to trade on that knowledge (as opposed to general knowledge of the derivatives business) upon departure would also subject them to liability for any losses suffered by AIG. All of them are no doubt witnesses to one another's actions, and all would have to be deposed at length in any litigation regarding breach of fiduciary duty or misappropriation of trade secrets. And could be subject to prosecution for perjury if they made material misstatements of fact during those depositions.

Just saying.

Posted by: paul314 | December 7, 2009 2:01 PM | Report abuse

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