But into every life a little rain must fall. Epstein continues:
With the collapse in 2008 of the debt AIG was insuring, came such massive losses that Cassano resigned, and AIG, unable to post collateral, faced bankruptcy. At this point in September 2008, the US government rescued AIG, pouring in $173 billion of tax payers’ money. Even so, there remained a $1.6 trillion in potential liabilities that could be triggered by thousands of the credit default swap contracts, many of which would not expire until 2012. To prevent hundreds of billions of losses, these custom-designed contracts had to be continually watched, and, if necessary hedged, by traders who understood each one’s particular vulnerability.
So what would you do if you were Obama, Maxine Waters, or some other moralistic scold? Deplore the bonuses? Easy to do, but at what cost?
All those complex contracts: who was going to deal with them?
To perform this critical task, the remaining 370 or so remaining traders in the group wanted the same sort of guaranteed compensation in the form of retention bonuses as had in their two year contracts. The situation for AIG, and the US government that now owned 80 percent of it, was not unlike the one in Mario Puzo’s Godfather in which an offer is made that cannot be refused. In this case, even without a bloody horse head under the blankets, AIG and its federal overseers could not risk falling into a $1.6 trillion black hole by turning down the demands of the traders in the financial product group. It was not that these traders had such unique skills in managing derivative contracts that they could not be replaced by other people but that they knew the business’ crucial secrets, including the identities of he counterparties to the credit default swaps and the vulnerabilities in their positions. The implicit threat: they could use the secrets to which they were privy to trade against AIG’s positions as it attempted to unload its $1.6 trillion dollar portfolio.
Maybe, all things considered, AIG did the right thing, the prudent thing, the fiscally responsible thing?
Under these circumstances, rather than risking immense losses from having their secret book compromised, AIG paid to keep its traders from defecting. Their compensation, when approved by the Fed and Treasury, would amount to about $500,000 a trader a year ( less than half what they had been getting in 2008.) The staff at the NY Fed, while Timothy Geithner was still its head, in fact helped negotiate the terms for these retention bonuses. When Geithner moved on to become Treasury Secretary in January 2009, he presumably understood how financially dangerous it could be to do otherwise, since he intervened with the Senate Banking Committee Chairman in February to get a provision dropped from a bill that would have prevented AIG (and other recipients of federal money) from paying such huge bonuses. In fairness to Geithner, the alternative to making these pay-offs might have proven a thousand times more costly to AIG, and its defacto owner, the US Government.
Moralistic outrage can be a delicious emotion. But it is worth making sure that you have the right target before going to town with it.
* * * UPDATE * * * Be sure to read this letter by Jack deSantis, an executive vice president of AIG financial products unit, resigning his position:
I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.
After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.
I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.
The New York Times publishes the entire letter here. As Glenn Reynolds notes — linking to a piece by Mark Steyn commenting on the letter — it might be a communication from John Galt.
“Moralistic outrage can be a delicious emotion. But it is worth making sure that you have the right target before going to town with it.” Do you think the sheep herded by the media, will take the time to find the proper enemy?
Roger doesn’t include the link to Epstein’s article. Does anyone have it?
Sorry for the broken link: now fixed.
The bigger question at work here is whether the “too big to fail” mantra was actually sound economic philosophy. If AIG had gone bankrupt it probably would have created total economic collapse. Yet people would have figured out a way out (necessity works wonders). Now we’re dealing with the same thing, but with a government completely out of money and options. We may never know the answer, but whether or not the reaction to the AIG bonuses is justified rage or ignorant populism is simply a sideshow to this concern.
Thx, Roger. You are a top choice each AM, along with M Steyn.
But in a liberal society, moral is a private matter, isn’t it? In the public affairs what is suposed to count is to fulfill the compromises or contracts.
Obama’s “all spending is stimulus” sure didn’t last long, did it?
“…one of its subsidiaries $165 in bonuses.”
Niggling point, but shouldn’t the above read $165 million in bonuses? I get the intent, but it’s just the teacher in me.
I do enjoy your work.
#9: Yes, $165 million: now fixed. Thanks.
The AIG Bonus Millionaires
————————-
The fact that many of the “AIGBonus Millionaires” have now returned their bonuses speaks volumes.
So does the fact that AIG offices world-wide have now removed the AIG logo displayed on their buildings.
Was it fear of the mobs demonstrating in their neighborhoods that prompted the bonus millionaires to return this ill-earned cash? I don’t think so. After all, with all that money, they could simply have shut the house down and gone to the Bahamas for a couple of months till everything blew over . So why didn’t they do that?
What prompted them to return the cash was good old remorse and guilt. The same thing happened to Maddof. Maddor wasn’t “caught”…..his conscience simply got the better of him and he confessed.
No one is worth $5,000,000 in “compensation” including financial traders, people who hit a ball with a stick, hurl a ball into a basket or catch a ball and run with it past a chalk line on the ground. Ditto with the Hollywood crowd and the massive compensation packages available depending on the size and public exposure of one’s mammary glands and so on.
The fact that these things do happen every day shows the moral decay of the nation.
It is a sure formula for civil disturbances and insurrections and it’s a sure formula for attracting tens of millions of young Americans into the bosom of Socialism and similar anti-capitalist causes world-wide.
A large and important chunk of the philosophical undermpinnings of Al-Qaeda and similar organizatioins is based on the moral outrage they feel towards what they perceive as the moral depravity, the outlandish social disequilibrium and the massive gaps between the haves and the have nots in American society and America’s export of these “principals” overseas into their territories.
A lot of young Americans are now too beginning to perceive things differently.
It is an ominous sign.
So the argument is that if they weren’t bribed by substantial bonuses, the traders would’ve used their inside information to trade against AIG’s positions in order to bring down the financial system?
We should’ve let the financial system collapse in that case, regardless of the damage. Never give in to blackmail.
I think I heard this explained a bit more clearly, and with less technical stuff, over the weekend. Basically, these derivatives (as you say) need to be watched. The same people who created the mess are the only ones who know where all the bodies are buried, the ins and outs of the problems they’ve created. Essentially, they put a bomb under the bus we’re all on, an if we don’t pay them the money they demand, they’ll down tools on the bus and we’ll all be blown sky-high. Is it legal to pay them these bonuses? Thanks to that idiot Chris Dodd, yes. Is it wise? Perhaps. Is it moral or ethical for them to take the bonuses? You be the judge. I wouldn’t cross the street to piss on one of these guys if he was on fire. Some of them don’t even work for the company any more, and more than a few are overseas…try justifying giving a retention bonus to someone who wasn’t retained, Roger!
Dear AIG… I Quit.
http://www.nytimes.com/2009/03/25/opinion/25desantis.html?_r=1&em
For those friends of mine that stayed and got pissed on by DumBambi and CongresIdiots.
Here’s hoping the bureaucrats federal retirements go to hell in a hand basket like ours did.
Epstein: “It was not that these traders had such unique skills in managing derivative contracts that they could not be replaced by other people but that they knew the business’ crucial secrets, including the identities of he counterparties to the credit default swaps and the vulnerabilities in their positions. The implicit threat: they could use the secrets to which they were privy to trade against AIG’s positions as it attempted to unload its $1.6 trillion dollar portfolio.”
deSantis: “I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.”
So, per Epstein and Kimball, AIG Management did the prudent thing by giving in to the “implicit” blackmail and paying it’s AIGFP traders not to leave and take proprietary information to their competitors; and, per deSantis, those people left anyway before the bonuses were paid.
Kimball normally makes a lot of sense, but in this case, it looks more and more like he and many others of a conservative or libertarian bent have been taken in by the swindlers at AIG. The traders at AIGFP had to know that they were taking on irresponsible degrees of risk. They had to know that the business cycle would eventually turn and their absurd levels of leverage would create havoc. They did it for outlandish compensation knowing they could walk away when the bills came due. I’ll avoid the blind pig and acorn analogy since it might be misinterpreted, but Maxine is on the right side of the issue. Outrage is the appropriate response.
I knew I’d heard Pbama talk about these bonusses before. I found the answer in the transcripts of the 2nd Prez debate. It was the first question! Obama went first, and he specified that we must not let these CEO’s get the bonuses.
http://www.debates.org/pages/trans2008c.html
corrections: Obama; bonuses. Oops. Tired.
Anyway, looks like another broken campaign promise at the very least. He simply can’t plead ignorance after this! Someone needs to nail him with this!
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