One year ago AIG announced its $135 million in retention bonuses, payable March 15, 2009. The bonuses, ranging from $1,000 to $6.5 million, were actually paid out last Friday. $55 billion had peviously been distributed in December without a peep. The Treasury Department and Federal Reserve Bank were aware of the bonuses last fall. These bonuses though ignited a firestorm in Washington, editorial pages, commentators, and blogs.
The outrage; the outrage; but not as will see the real outrage.
The normal suspects showed up, including the President, Senators Dodd, Reid and Schumer, Representatives Nancy Pelosi, Barney Frank and Elijah Cummings, and New York Attorney General Andrew Cuomo. For once, this Congress acted bipartisan in expressing its outrage. Indeed, Senator Mitch McConnell called the AIG situation an “outrage.” That was a temperate remark!
Senator Charles Grassley jumped on board saying the AIG people should follow the Japanese example and come before the American people, take that deep bow, apologize and then either resign or go commit suicide.
Senator Grassley may have been engaged in Senatorial hyperbole, but Senator Schumer of New York, in his inimical style, told the employees to give back the bonuses or “We will do it for you.” Is he from New York or Chicago?
Senator Snowe called the bonuses a “staggering insult to the American people,” although her vote for the Stimulus Bill apparently was not.
Congressman Frank was somewhat more creative. He would let the beneficiaries keep their bonuses, but at the cost of losing their jobs.
President Obama said these bonuses are an affront to the taxpayers, reckless and greedy. Yet, the $787 billion Stimulus Bill, packed with pork, is not an affront to the taxpayers. Nor is the $410 billion budget bill with roughly 9.000 earmarks.
Senator Dodd proposes taxing these bonuses at 98%. Senator Dodd, the same Senator Dodd who received the largest campaign contributions by AIG in 2008, in his Dodd Amendment to the Stimulus Bill, exempted bonuses contracted before February 11, 2009.
Ah, the hypocrisy and demagoguery. These threats, punitive taxation, and confiscation are the acts of third world dictators, such as Hugo Chavez, who do not believe in the rule of law.
President Obama instructed his Administration to “pursue every single legal avenue to block” the bonuses. His economic advisor, Lawrence Summers, an economist, and Treasury Secretary Geithner, know something the President, a constitutional law professor, apparently does not know. The United States Constitution protects the sanctity of contracts. They concluded over the weekend that AIG was legally obligated to pay the bonuses, as did outside counsel to AIG.
Summers stated on Face the Nation: “The government cannot just abrogate contracts.” We are “not a nation where contracts just get abrogated willy nilly.” He added “But you have to think of the consequences of breaking contracts for the overall system of law.”
The purpose of the retention bonuses was to keep the employees around for the upcoming year. Once you realize your position may be eliminated, you need an incentive to stay around. AIG needed these experts to clean up and unravel the complex financial instruments that essentially bankrupted AIG. $2.7 trillion in derivatives alone had to be unraveled. Andrew Cuomo reported that the contracts written in March 20008 guaranteed the employees 100% of their 2007 salary for 2008. Individual performance was not a factor in the contracts.
The financial instruments involved were 1) collateral to back up credit default swaps; 2) the purchase of collateralized debt instruments; and 3) payments to counterparties of a securities lending program.
The simple question is: How many members of Congress understand any of this?
Paying the bonuses is part of the cost of the bailout in lieu of bankruptcy, in which many of these employees would have been laid off without bonuses. The cost to the global financial system might have been greater than we are currently experiencing though.
AIG has received $173.3 billion in bailout funds from the United States – that is an outrage to the taxpayers. Even more outrageous is where these funds went, mostly foreign banks. They did not bail out AIG; through December 31, 2008 they bailed out:
Societe Generale 11.9 Billion
Goldman Sachs 12.9 Billion
Deutsche Bank 11.8 Billion
Barclays 8.5 Billion
Merrill Lynch 6.8 Billion
Bank of America 5.2 Billion
UBS 5.0 Billion
BNP Paribas 4.9 Billion
HSBC 3.5 Billion
Calyon 2.3 Billion
CitiGroup 2.3 Billion
Dresdner Kleinwort 2.2 Billion
Wachovia 1.5 Billion
ING 1.5 Billion
Morgan Stanley 1.2 Billion
Bank of Montreal 1.1 Billion
Deutsche Zentral-Genossenschaftsbank 1.0 Billion
Rabobank .8 Billion
DZ Bank .7 Billion
The Royal Bank of Scotland .7 Billion
AIG International .6 Billion
KFW .5 Billion
Credit Suisse .4 Billion
JP Morgan .4 Billion
Dresdner Bank AG .4 Billion
Banco Santander .3 Billion
Citadel .2 Billion
Danske .2 Billion
Paloma Securities .2 Billion
Reconstruction Finance Corp. .2 Billion
Landesbank Baden-Wuerttemberg .1 Billion
In other words, as soon as AIG received the government funds, it turned around and paid out $120 billion. 20 European banks received $58.8 billion.
Senator Snowe’s remarks that “I think it looks like we are simply laundering this money through AIG” seems right on.
Punitive steps by Congress and the President send a message to private investors in the financial industry – Stay Out! Do not get involved with the untrustworthy government in a bailout because it will neither respect contracts nor its own legislation. So much for any public-private partnership!
It also sends a message that the rule of law does not matter in America.
Indeed, Senator Robert Melendez has gotten into the act by asking Morgan Stanley to scrap $3 billion in retention bonuses for 6,500 brokers who might otherwise leave when the brokerage operations of Morgan Stanley and Citigroup are combined. The Senator in a letter to Treasury Secretary Geithner asked the Secretary to use “every legal means available” to stop the payouts.
Another outrage is that the current disgust with AIG can be traced back to March 15, 2005. That is the day when the then Attorney General of New York, Eliot Spitzer, forced Hank Greenberg out as Chair of AIG in an "accounting scandal,' which ultimately turned out to be much ado about nothing. Greenberg was the entrepreneur who, over 4 1/2 decades, built a tiny insurance company into one of the world's greatest. He kept tight control on risk. That ended with his departure.
The final, and most worrisome, outrage is how quickly the American public has been manipulated into a mob frenzy, which diverts attention from the roughly $100 billion paid out to banks and, as I write this piece, apparently to hedge funds.
The AIG disclosure of its transfers was made on Sunday. The employee bonuses were known many days sooner, but suddenly became the issue. Most of us were diverted from looking deeper at the bailout.
It can happen again.