AIG Employee Resigns

Jake DeSantis, an executive vice president for AIG's notorious financial products unit, has resigned. His resignation letter was sent to CEO Edward Liddy and the New York Times. Some highlights:

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.

If true, he's hardly a greedy, taxpayer-bilking con artist. He's not getting rich from any of this, and killing himself in the process. I'd quit, too.

I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

Hmmm... you mean AIG employees are taxpayers, too? Unlike Geithner, Dodd, and many others who are calling foul over this man's bonus. They're allowed to "forget" to pay their taxes.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

Ouch. That's just poor leadership. Leaders shield their people from the crap that rolls downhill toward them. Liddy's not alone. Many, many people who knew the truth of the situation sat on the sidelines last week and let good people get beaten up. It's disgusting, really.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise... You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

They kept their part of the deal and are not being fed to the wolves for their efforts. And the wolves are people who should be upholding the law, not giving in to posturing vigilantism. I've held that this whole "outrage" is counterproductive, but after reading this I can't help but be ashamed of my government. This is just plain ridiculous. The pompous jerks who are screaming the loudest are the ones who knew all along what was going on. Despicable.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

He's voluntarily providing more visibility and accountability than our foolish government ever thought to ask for. This man shouldn't be punished by our government. He should be running it.

If outrage where monetizable our government would have fumed us out of the recession already. It's ironic that the king--I mean president of outrage last week is asking us all this week to calm down. You stoked this fire, Mr. President. We hired you to fix this mess, not to spend one week working on fixing it and the next week trying to widen it. Get your head in the game and stop grandstanding to get your socialist agenda passed before we come to our senses.

Some of us already have, and we're telling you to stop. Enough of this irresponsible behavior. Good and decent people are paying the price for your arrogance, hubris, and manipulation. No one can be this clueless by accident. Just stop.

Some Hope After All

It appears that President Obama is having second thoughts about the bill working through Congress to tax executive bonuses at AIG and other companies nearly out of existance. From MSNBC.com, reporting on a 60-Minutes interview:

President Barack Obama wagered significant political capital Sunday, signaling opposition to a highly popular congressional drive to slap a punitive 90 percent tax on bonuses to big earners at financial institutions already deeply in hock to taxpayers.

Obama defended his stance by saying the tax would be unconstitutional and that he would not "govern out of anger." He declared his determination, nevertheless, to make Wall Street understand it must shed "the old way of doing business."

Of course he's still baffled about the economy's sharp decline, which isn't good:

"I don't think that we anticipated how steep the decline would be," he said in the interview on CBS' "60 Minutes." "That slope is a lot steeper than anything that we've said — we've seen before."

I think he needs to take some responsibility for the effect his programs (and various gaffs from his administration) have had on the economy. But he always seems to stop short of that.

The AIG Mess

Outrage is all the rage in Washington this week. The only real question is whose outrage isn't faked. At the heart of the matter is around $450 million that AIG has paid or is contracted to pay to top executives in retention bonuses. $165 million of that went out last week.

According to the Washington Post, these bonuses were known about for months:

Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments. Administration officials said over the weekend that they agreed with that assessment.

These bonuses were announced nearly a year ago:

Beginning in the first quarter of 2008, AIG disclosed the plan to offer retention awards at Financial Products. The unit had already begun to hemorrhage money, a problem that would later grow exponentially. The unit's executives, fearing they might lose valuable employees in the tumultuous months to come, successfully negotiated more than $400 million for their workers, to be paid this month and again next year.

At the Federal Reserve Bank of New York, which has directly overseen AIG since its federal takeover in September, officials have studied the possibility of rescinding or delaying the bonuses. They even brought in outside lawyers for advice. The conclusion: If the bonuses weren't paid, the AIG staffers would be able to sue the company and probably would win, not just what they were owed but also punitive damages that would make the ultimate cost perhaps two to three times as high as the bonuses themselves.

Moreover, Fed officials also hope to keep current employees with the company. The senior executives whose decisions caused the company's collapse are long gone. Most of those left behind are trying to unwind complicated derivative contracts. Completing that process correctly is essential to preserving as much value as possible for taxpayers, officials at both the government and AIG have argued. If it is mishandled, it could expose taxpayers to billions of dollars in additional losses.

The article even goes on to speculate that the current government outrage was designed to pressure the execs into giving back their bonuses.

At any rate, it's pretty clear that these bonuses were known about well in advance and were deemed either critical to keeping key people in place, or at least more dangerous to attack than to leave in place. Had this all been explained up front to the American people I doubt we'd be having this big fuss.

But then we hit the big "teeter" (not quite a crash) of 2008. AIG received bailout money, along with quite a few banks. Only a few of those banks actually needed the money--the rest were pressured into taking it to help the needy banks maintain anonymity and prevent runs on those banks.

Then along comes the Stimulus Bill. Knowing about AIG's bonus program, and knowing there were many banks holding government money who didn't need it, lawmakers stepped in to remove an amendment from the bill that would have restricted bonuses to any company receiving bailout funds. It's claimed that Senator Chris Dodd inserted language that limited executive compensation, but exempted bonuses.

Dodd claims to know nothing about this "Dodd Amendment". In fact, no one seems to know how it got into the bill. The only thing we know for sure is that it wasn't the Republicans, as they were specifically kept from helping draft the bill. And we can't blame anyone who voted for the bill, because no one had time to read it.

The usual arguments over what Dodd knew and when he knew it are ensuing. And Dodd himself is trying to combat the provision he supposedly added--and undoubtedly hoping no one remembers the $103,100 campaign donations he received from AIG in 2008. This is the same Dodd who vigorously defended Fannie Mae and Freddie Mac when the Republicans tried to investigate alleged wrong-doings there, and one of the recipients of a sweet mortgage deal from Countrywide Mortgage.

Fannie Mae, by the way, is also giving its top execs retention bonuses of between $470,000 and $61,000 this year. Freddie Mac, not to be outdone, is planning similar bonuses. These companies received $15.2 billion and $13.8 billion in federal funds last year, and Freddie Mac has requested $31 billion more this year.

Meanwhile lawmakers are up in arms, and turning their ire on the Obama administration for being asleep at the wheel. The White House is expressing full confidence in secretary of Treasury Tim Geithner's oversight.

So let me explain...no, it will take too long. Let me sum up. Bonuses we knew were coming are being paid to AIG executives deemed necessary the company's recovery. These bonuses were protected by language placed in the Stimulus bill, though no one knows how it got there. But now that the money is being paid out everyone is suddenly surprised and angry and vowing to undo what they allowed to be done--while at the same time ignoring the exact same thing being done at two government-supported companies with an even more corrupt past. The result:

Hired guards stood watch outside the suburban Connecticut offices of AIG Financial Products, the division whose exotic derivatives brought the insurance giant to the brink of collapse last year. Inside, death threats and angry letters flooded e-mail inboxes. Irate callers lit up the phone lines. Senior managers submitted their resignations. Some employees didn't show up at all.

"It's a mob effect," one senior executive said. "It's putting people's lives in danger."

Politicians and the public spent yesterday demanding that AIG rescind payouts that they said rewarded recklessness and greed at a company being bailed out with $170 billion in taxpayer funds. But company officials contend that the uproar is scaring away the very employees who understand AIG Financial Products' complex trades and who are trying to dismantle the division before it further endangers the world's economy.

"It's going to blow up," said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. "I have a horrible, horrible, horrible feeling that this is going to end badly."

I'm not sure what to be more concerned about, our tax dollars being spent to save the economy, or our tax dollars being spent to destroy it. At best we can hope the two cancel each other out without doing any lasting damage.

But then what can we expect when we put the party that hates big business and decries capitalism in charge of saving both. It's like asking Gen. Patton to perform life-saving surgery on Hitler. Why should we be surprised when the patient inexplicably dies on the operating table?

Oh, and now it's also coming out that AIG has send out over $100 billion--over half of what's been given them so far--to other institutions and city governments, including some foreign businesses. The Wall Street Journal has suggested the government is using AIG to launder foreign aid funding, and that Washington is making such a fuss over the AIG bonuses to draw attention away from its own inability to supervise AIG and other bailed-out companies.

Jim Rickards, quoted in the Washington Times, suggests there is a "straightforward economic reason" for the rerouting of funds, though it does present a huge political problem for the administration:

AIG, Rickards said in an e-mail, "had trades with counterparties (Goldman, Deutsche Bank and many others) which, over time, produced paper profits for the counterparties and paper losses for AIG as market prices moved against AIG. In that situation, it is customary (and contractually required) for the losing side (AIG) to pay the winning side (Goldman, others) the amount of the paper profits in cash."

"This protects the counterparty against the possibility that AIG might not be around to perform when the trade is finally closed out at maturity. The name for this is a 'margin call' with margin being the name for AIG's paper losses which have to be made good," Rickards said. "So, when the U.S. gave AIG money, the money went right out the door to meet margin calls."

"AIG was not much more that a conduit for government money which really went to the counterparties. So, in effect, the U.S. was not just bailing out AIG, it was bailing out the counterparties. Many were foreign banks which is part of the outrage," he said.

I think basically what we have is an administration that is deathly afraid of the public while being simultaneously condescending toward them. They don't think we're smart enough to understand business. I, for one, having read all the above articles feel the real problem is Washington's response, not AIG's activities--at least lately. There's no denying they did some very, very stupid--and perhaps greedy--things and got themselves into serious trouble. But they're not going to be able to get themselves out of trouble without doing some things that are not going to be immediately understood by the public.

Rather than try to explain it to us and risk taking the heat for supporting this, the administration prefers to keep things quiet unless they become public and then howl with rage and feign ignorance. In short, these people are afraid to make the tough call. They want to have their cake and eat it too. They want to make villains of big business while working quietly to try and save them. They claim that some companies are just too big to allow to fail, yet do everything they can to undermine the company's attempts to not fail.

Is $165 million a lot of money? Obviously. Is it money well spent if the people it was supposed to help retain really can salvage the company and stabilize the economy? I think so. If that's what it takes to make the right people willing to stick it out and put up with the crap they're having to wade through right now then it's a small price to pay.

Meanwhile, Congress has voted themselves a pay raise. Just what have they done to save the economy? They seem actively bent on destroying it with their selective amnesia and poll-fueled outrage.

Does anyone have the guts to stand up and say "Hey, we don't have to like it, but this is what it's going to take"? I can think of one senator that might have. In fact I voted for him for preseident. I'm becoming increasingly proud of that vote.

AIG Bonuses - What's the Alternative?

Andrew Ross Sorkin of the New York Times (via Yahoo.finance) suggests that attempts to get back the $165 million in executive bonuses at AIG may result in worse consequences than just letting it go and learning from it:

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

It's an interesting take, and I'm not sure it's not a valid one, considering the current "competance deficit" the current administration is increasingly accused of. When every other day one of them is doing or saying things to send the stock market into another slide, what would saying "the government will decide which of your contracts you will keep or break" do to the system?

I understand America's irritation, and I understand Obama's need to be seen doing something about it, but quite frankly, we have over $1 Trillion out there for the purpose of stimulating the economy. I'd rather me make sure that is used wisely and supervised. Don't step over a dollar to pick up a dime. Since he's not able to focus on everything happening right now, focus on the economy as a whole and let someone else worry about getting back that %.0001 that AIG potentially misused.

Focus, Barry!