AIG's Bonuses Are an Absolute Joke

You've probably heard by now: AIG (NYSE: AIG  ) -- fresh off of $170 billion of bailouts -- will be paying $450 million in bonuses to certain employees. Lucky them.

We've been here before, and we typically get nowhere. Bonus brouhaha has stumbled over the notion that those not involved in a firm's undoing -- such as a municipal bond underwriter at Goldman Sachs (NYSE: GS  ) or a wealth advisor at Bank of America (NYSE: BAC  ) -- shouldn't be penalized for their wayward coworkers' adventures.

Well, these bonuses are an entirely different story. They're going to members of the financial products division that's almost solely responsible for Big A's demise. For the most part, these are not people who earned their pay by any stretch of the imagination. In the words of President Obama this afternoon: “Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses ... How do they justify this outrage to the taxpayers who are keeping the company afloat?"

And the money must be paid, story goes, because they're legal, contractual obligations that have to be met, lest lawsuits argue otherwise. Larry Summers -- President Obama's top economic advisor -- chimed in, saying, "We are a country of law. There are contracts. The government cannot just abrogate contracts."

Fair enough. But I can't be the only one fascinated that the same people with the authority to commit $10.16 trillion of taxpayer funds don't have the authority to alter an employment contract. The Treasury can flip a company's capital structure on its head, ring-fence guarantee any asset it wants, and give a blank check to whomever it deems fit. But holding back bonuses at a company it owns 80% of? Whoa … way out of its pay grade.  

And, no, that doesn't make me a berserk Socialist who wants the Fed to control businesses with an iron first. It makes me someone who sees AIG for what it is -- a bankrupt company on life support that should be treated like all bankrupt companies, where contracts are often null and void. Just like convicted felons, some rights get revoked when you misbehave. That's how life works. No, that's how capitalism works.

Besides, ever since taxpayers became the de facto owner of all things unsuccessful, we've been light-years away from what's normal, moral, and probably even legal. You can say reneging employment contracts is breaking the rules, but let's be real here: We haven't been playing by anyone's definition of "the rules" since last September. AIG bulldozed every normal procedure of how capitalism works, but insists we revert to business as usual when it comes to paying bonuses to employees who single-handedly buried taxpayers in a black hole. I find that quite hypocritical.

But, hey, AIG is still a shareholder-owned company that deserves to be run by its owners. Since 80% of its owners are you, the taxpayers, I thought we should take a poll to see how you feel about the $450 million of bonuses allotted to the brilliance of its financial products division.

We'll call this an informal proxy vote. Take a minute to vote in the poll below. You can also share your thoughts in the comments section farther down this page.

This story has been updated to reflect President Obama’s comments.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Motley Fool is investors writing for investors.


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  • Report this Comment On March 16, 2009, at 10:21 AM, JeanDavid wrote:

    Where I worked, upper management supposedly got bonuses for good performance. Well, the division I worked in lost something like $2billion one year, yet upper management got bonuses. Employees, for the most part, did not get raises. That company is now out of business.

    Is it different at Bank of America? Do they get bonuses even if they destroyed the company? That is not paying for performance. That is not aligning management's interest with the shareholders. What kind of a contract is it that rewards failure?

  • Report this Comment On March 16, 2009, at 10:33 AM, ILbuck wrote:

    Watch now, some ass is going to write a great book about this collapse. The Government/Taxpayers should at least get the book & movie rights to this story.

  • Report this Comment On March 16, 2009, at 10:37 AM, gdw001 wrote:

    I feel your story is incomplete and your poll is one sided. I thought a bonus was something that an employer and an employee agreed upon at the first of the year and if you meant those agrees you received the bonus as stated in the agreement. I haven't read anything that has said what the bonus was for and how much they were to received if the deal was meant. Please do your reporting before you report things to just make people upset. You have no idea what deal was made.

  • Report this Comment On March 16, 2009, at 10:48 AM, kgeechee wrote:

    AIG is borrowing OUR (US Taxpayers) money to pay retention bonuses to THEIR execs who obviously CANNOT do their jobs well. When it all hits the fan, as it has in this economy, all previous 'bets' or agreements are OFF the table. The new mandate is "no bonus & severe cut in pay = you may have a job tomorrow."

    "No bonus anyway & 100% cut in pay = go hire an attorney, we'll see you in court." Count on 5 years of appeals, if necessary, and we (the TAXPAYERS) want a jury trial.

    Your choices, PUT UP & SHUT UP! Choose Two.

    That's the new management technique.

  • Report this Comment On March 16, 2009, at 10:49 AM, kgeechee wrote:

    AIG is borrowing OUR (US Taxpayers) money to pay retention bonuses to THEIR execs who obviously CANNOT do their jobs well. When it all hits the fan, as it has in this economy, all previous 'bets' or agreements are OFF the table. The new mandate is "no bonus & severe cut in pay = you may have a job tomorrow."

    "No bonus anyway & 100% cut in pay = go hire an attorney, we'll see you in court." Count on 5 years of appeals, if necessary, and we (the TAXPAYERS) want a jury trial.

    Your choices, PUT UP & SHUT UP! Choose Two.

    That's the new management technique.

  • Report this Comment On March 16, 2009, at 10:50 AM, zefff wrote:

    Regardless of what "deals" where made up front, if these are the people who are responsible for the demise of AIG they should not receive the bonuses but should in fact be fired outright and charged with breach of contract and any other trumped up charges we can find.

    I'd like to rad about them being driven to bankruptcy in a few years from now and hounded across the planet with no country allowing them entry, being labeled as pariah.

  • Report this Comment On March 16, 2009, at 10:51 AM, ET114 wrote:

    $450 million = ~.5% of the $170 billion bailout... what happened to 99.5% of the money... kinda easy, AIG, Gold Sacks, JP Morgansa all want to continue the massive ponzi scheme with their worthless mortgage hedge funds.... Bernie M. is actually a minor player when compared to the biggies...

    Someone tell us taxpayers what's happing to our bailout $$$???

  • Report this Comment On March 16, 2009, at 10:51 AM, JTH48 wrote:

    Is there any information about why these bonuses were awarded? In my business (physician) I could only award myself a bonus if there was a profit at the end of the year (though I suppose I could have borrowed money to pay myself a bonus). I gave employees a bonus with profits at the end of the year. Were the AIG bonuses based on any type of performance, or were they "guaranteed", essentially salaries added to a base salary? Were they "retention" bonuses, used to guarantee that an employee would stay on with the company? If so, it seems there would be no legal obligation to pay them, since the employee could exercise his right to depart if the bonus was not paid (and perhaps this would be an especially good idea). I don't understand how any company can be legally required to bonus incompetence!

  • Report this Comment On March 16, 2009, at 10:52 AM, Shaun2453 wrote:

    bonus - a payment made as a reward for doing well and exceeding agreed goals/ stanfdards. bonuses, when typically NOT paid are because they are "discretionary".

    Where is the discretion here? What part of this debacle can be seen to be exceeding agreed goals/ standards?

    I made no deals, lost no money, had a great year supporting the business and am unlikely (so I'm told) to receive a bonus or pay rise because our company is in trouble - Makes me think I should have bet on a bad thing, lost a fortune of the company's money, caused it to collapse and been rewarded for the privilige.

    Bonuses MUST be paid for legal reasons - Yeah right, only when the 'Management' decides it after all they have no problem hedging their bets about mine! - the same Management who led the company on its rocky road to ruin, the same management who, by and large, are in place today ... what's that old adage - you can't change the results without changing the method of getting there. more fuel to the argument that the old ones are always the best ones

  • Report this Comment On March 16, 2009, at 10:54 AM, PAT3111 wrote:

    A merit bonus is designed to reward an employee for performing a certain metric(s) in order to qualify for the bonus. The agreed upon metric should be something that requires above normal performance, In my view, AIG probably had some employees that met their bonus metrics but not $450b. AIG is gaming the system while the USG stands by with their finger up their nose. It will only be after the citizens of this country go to the ballot box that justness can be ascertained. vote the incumbents out of office and let's start enforcing the rules that we establish.

  • Report this Comment On March 16, 2009, at 11:03 AM, catoismymotor wrote:

    This sounds like a time for torches and pitchforks.

  • Report this Comment On March 16, 2009, at 11:21 AM, TMFDiogenes wrote:

    JTH48,

    My understanding is that they were paid as bonuses for the volume of credit default swap contracts these folks signed. Turns out those insurance contracts were under-priced -- surprise, surprise for people paid based on how much volume they sell -- and basically destroyed the company.

  • Report this Comment On March 16, 2009, at 11:32 AM, rwmjr wrote:

    Give them the bonuses. Then tax them at 110% as they are a special income on a 1040 form, easy to find on a W2, pathed by the employer ID...even easier to find. Oh, and make it retroactive back to 2007. Give them 4 years to pay off the 10% they owe. All legal. No contract issues. And who is going to lobby in their favor? And do this for any company who received Stimulus dollars and gave management bonuses.

  • Report this Comment On March 16, 2009, at 11:38 AM, Pseudonym1 wrote:

    So, now we the people and Barney Frank, etal are going to be dictating to a US corporation what they can and cannot do? Just because said corporation (AIG) was the recipient of a loan? The availability of TARP money to AIG should not mean that they do not have contractual obligations that need to be fulfilled. What is next? They should not pay their office supplier because some of the paper and pens were used to create the bad 'paper'? Besides, only the attorneys and to some degree the litigants will win if AIG welshes on the deal. The people that would be getting the bonuses did what they were asked to do; sell, create, etc. The real blame lies higher up and ultimately on the shoulders of the CEO that was summarily removed. The board of directors, too, is culpable.

  • Report this Comment On March 16, 2009, at 11:41 AM, MPov wrote:

    Were these really "bonuses" or commission or retention payments that are now being characterized as bonuses because it makes for a good story? Don't know, just asking.

    Another point is that, if AIG is contractually required to pay them, then they should be paid, whether we like it or not. Otherwise AIG will have to pay its lawyers to defend a losing case, on top of the bonus amounts and maybe other damages. There may be some particular cases where, because of a given set of circumstances (e.g. misconduct on the part of the employee) where AIG would be able to back out of the contract, but that is likely to be a small number of cases.

    And I don't think that the government should be able to retroactively invalidate a contract that was legally entered into. That would set a very bad precedent, let alone raise some serious constitutional issues.

  • Report this Comment On March 16, 2009, at 11:53 AM, JibJabs wrote:

    What do you think would happen to the overall market - already convinced if you want to judge by CNBC that Obama is a socialist - if the perception set in that the sanctity of the contract is null and void? I agree that people deserve to be locked up. The difference is, my pitchfork is hankering for the government buffoons that enabled this culture is the first place.

  • Report this Comment On March 16, 2009, at 12:22 PM, TMFKris wrote:

    Dallas Morning News posted this story today with info on breakdown of bonuses: http://www.dallasnews.com/sharedcontent/dws/bus/stories/DN-A...

  • Report this Comment On March 16, 2009, at 1:03 PM, RHaganC wrote:

    this is crap. this is keeping the insurance market a mess. AIG needs to get flushed like they deserve and have the insurance policies go to other companies in the market who will price it right and aren't fools with premium.

    They are dragging down themselves, the gov't, the tax payer and the market (the insurance market).

    this crap has got to stop.

  • Report this Comment On March 16, 2009, at 1:03 PM, Dafluffernut2 wrote:

    I am sure someone already said this (I haven't finished reading the comments yet) but I continue to be floored by the fact that our government basically handed this money over with no checks or balances in place. A contract with AIG is one thing, but there was no contract in place with the US Government, and a proper representative of that entity, had one been appointed, could have made that argument. Instead, well, we handed the funds over to a group of people, and those people had already clearly demonstrated, even before the fall, their fiscal irresponsibility.

  • Report this Comment On March 16, 2009, at 1:20 PM, RaulChapin wrote:

    Hello Morgan, I usually agree with you, but on this one i would beg to disagree.

    The law should prevail. However there are two parts to this thing and the law should be equally applied. If there is a contract for the bonus, and the employees met the requirements to earn that bonus, the bonus should be paid. REGARDLESS of how stupid the bonus conditions were. Now, before i get killed here, comes the other part, the one that should have come before the bonus. The executives, board of directors and anyone with control over the company (probably the same people demanding their bonuses) also has a duty of care. There needs to be a trial where the damages are assesed, and these people are made accountable. They would be on the hook, not just for the bonus they have received, but for any asset they have in order to pay for the damages assessed from their gross negligence, breaking the duty of care etc etc.

    The above is a better outcome in two ways

    a) the law gets respected, both contractual law and tort law.

    b) the ammount of money that could be recovered from the wrongdoers is more, is not just a matter of i don't pay you your bonus, it is a matter of you pay for what you did, and if you do not have enough then you go bankrupt.

    (Even if the executives are not working as a person but as a corporation etc, the veil of the corporate construct has been lifted before to actually go after the person operating)

    If, as it is probably the case, these executives have all their money hiding out of the USA... have the CIA/FBI track it, and then paste a nice Money Laundering CRIMINAL suit on top of the civil ones... It can't be done... just ask them how they do it with the Drug Cartels, Weapons traffic etc. They can find out where the money is and where it came from, it is just a matter of giving them the green light. PLUS the same way the USA got bullied into bailing some of these corporations (the word being that China was a little upset about their investment going puff when Lehman Bros. was allowed to fail, and that AIG would have been too much) The USA can bully around the tax and money laundry heavens so that they might coolaborate on the investigation.

  • Report this Comment On March 16, 2009, at 1:24 PM, MyDearFools wrote:

    I’m shocked people could even read this to vote. I figured their eyes were still welled up with tears from the inauguration and how change and hope were going to finally stick it to the wealthy.

  • Report this Comment On March 16, 2009, at 1:26 PM, clanza875 wrote:

    The law is the law. When you refuse to let this company die and head into bk protection, you took on all of its obligations. Case closed. We can thank our wonderful politicians for saving us!

  • Report this Comment On March 16, 2009, at 1:35 PM, mikecart1 wrote:

    I make up my tax-money donation to AIG by using the volatile stock price of AIG which is a whopping $0.50 +/- $0.25 every other day. Today for example is good. $0.50 open and it peaked at $1.00. :D

  • Report this Comment On March 16, 2009, at 1:38 PM, clanza875 wrote:

    Really, they just shouldnt pay and take the chance on lawsuits. Anyone filing a lawsuit would just get villainized by the press.

  • Report this Comment On March 16, 2009, at 1:57 PM, bsantini wrote:

    Why does everyone expect the auto unions to renegotiate their contracts for workers whenever the big three are in trouble, but the idea of an executive's contract being renegotiated when their company is failing (and it is their fault) is somehow unthinkable?

  • Report this Comment On March 16, 2009, at 2:34 PM, AlphaGoat wrote:

    More to the point... WHY are these execs even eligible for bonuses. What could their contracts possibly be tied to to warrant a bonus? One would think that clause #1 of any bonus contract would be "The baseline for any compensation above base salary, including any and all bonus are subject to this company making a profit (or at least not going belly-up)for the time frame overwhich it is based."

    I'd like a bonus just for showing up at work even if the quality of my work directly contributed to the demise of my employer. Sign me up!

  • Report this Comment On March 16, 2009, at 2:57 PM, afleetfeet wrote:

    Where does I get one of them thar contracts that pays me bonus whether or not I bankrupt the outfit?

  • Report this Comment On March 16, 2009, at 3:11 PM, Pseudonym1 wrote:

    Presume you work for an upstanding insurance company selling life insurance. You sell 4 policies to guys who passed the physical and have been paying the premiums for several months. They all drop dead from a massive heart attack. Should that life insurance sales person get their commission an bonus? It just cost the company several millions in pay-outs to the heirs.

  • Report this Comment On March 16, 2009, at 3:26 PM, smarish wrote:

    What most people are overlooking is the fact that most of these 'executives' could care less about whatever company they currently work for. They are only interested in the money. There is no longer any sort of loyalty to a company. It used to be that people started companies, progressed up the ladder and devoted their entire lives to the company. Nowadays, the guys at the top only care about their 'bonus'. That is why they are always saying now that they have to pay a lot to keep these guys. Because there is no loyalty except to the dollar. There isn't even any concern for shareholders, because they would certainly take their cut before the shareholders get theirs. I think, considering the troubles this method of operation has caused, we need to create legal ways to avoid this in the future. And especially now that the taxpayers own the better part of AIG, we should certainly be able to control the money, contracts or no contracts.

  • Report this Comment On March 16, 2009, at 3:29 PM, mlaursen wrote:

    re: "But I can't be the only one fascinated that the same people with the authority to commit $10.16 trillion of taxpayer funds don't have the authority to alter an employment contract."

    Contracts schontracts, eh? What have contracts and the rule of law ever done to help the economy, right?

  • Report this Comment On March 16, 2009, at 4:00 PM, chali2na wrote:

    BO pardons the CEO and is furious over the bonuses? Shouldn't the CEO be in jail and the bonus money be used for basic payroll? The company is now owned by the taxpayers who obviously feel this is morally and ethically wrong? What happened to morals and ethics? Are you kidding me?

  • Report this Comment On March 16, 2009, at 4:13 PM, chali2na wrote:

    I also just heard that 80% or more of the bailout money this company received is now parked in overseas banks? Again, are you kidding me? Why is the company still functioning? From what I can see, these are straight crooks and should be made an example of. AIG fails, guess what? More jobs created picking up the thounsands of unisured. Start over, learn from these drastic mistakes, and build a better model. I was almost convinced bailouts were the best option, but now I know government needs to get out and let the market work it out. Government is just a crooked as the rich execs who are retreating to their fortunes while the rest of the country saves its pennies to try and stay afloat after the collapse of these companies.

  • Report this Comment On March 16, 2009, at 4:45 PM, catfishstock wrote:

    I have been working in a capitalist society since I was knee high to a grasshopper, working in shops, large corporations and even running a few businesses of my own. In every instance I have discovered that if I did a great job, I would eventually get paid for it and if I did an outstanding job, I would get paid and possibly get a bonus. Never in my wildest dreams would I have ever threatened a law suite if I did not receive my bonus after doing a horrible job. Apparently I was deceived by my parents when they told me I should do right. Boy was I a dope!

  • Report this Comment On March 16, 2009, at 4:54 PM, dyadco wrote:

    IF the bonus was a Retention bonus, then you have to wonder why anyone in their right mind would want to retain employees that have basically ruined the company?

    IF the bonus was for Performance, well, one doesn't have to be Einstein to realise that the management should be paying back money.

    The fact is that its all smoke and mirrors. Boys games. If you're on the inside you're looked after....if you're not, bad luck.

    As far as I am concerned, I'm voting with my pocket: I am actively looking for NON-AIG companies or associates and putting my business with them.

  • Report this Comment On March 16, 2009, at 5:06 PM, theHedgehog wrote:

    dyadco: IF the bonus was for Performance, well, one doesn't have to be Einstein to realise that the management should be paying back money.

    Exactly what I was thinking. "We've decided we don't want to retain you, any of you, after all. Good-bye and good luck."

  • Report this Comment On March 16, 2009, at 5:13 PM, awallejr wrote:

    This comment that they MUST be paid because they are legal contractual obligations is nothing more than an EXCUSE to pay them. NOTHING is ultimately a forced contractual obligation unless a court of last resort says so. Contracts are renegotiated on a daily basis (you think banks enforce every term in their mortgage when foreclosing?). These contracts should have been at least challenged.

    And if the whole fear of people leaving their positions in droves if it wasn't for the bonus sytem, well, go. Bye bye. There are tons of people behind you begging for work.

    This payout was nothing more than corporate raiding, and the taxpayer and the average Joe are nothing but suckers to let it happen. At least kudos to Andrew Cuomo for looking into these issues.

  • Report this Comment On March 16, 2009, at 5:18 PM, stan8331 wrote:

    It strikes me that a great many of the folks who are saying "a contract is sacred" regarding AIG are the same exact people who are stamping their feet saying "you'd better not waste any of my tax money to help out deadbeat homeowners, Mr. Obama" and piously insisting that all union contracts must be torn up in order for GM to get a few billion dollars of government money.

    We're giving AIG lord knows how many hundreds of billion dollars, but messing with the contracts of the people who helped CAUSE this whole crisis in the first place, well that's just beyond the pale.

    The rules of the game, according to Wall Street: tearing up the contracts of union workers who've done nothing wrong is good basic capitalism, while tearing up the contracts of derivitative traders who brought us to the brink of another Great Depression is scurrilous socialism. I'm so thankful we have the Rick Santellis of the world to help us understand this stuff...

  • Report this Comment On March 16, 2009, at 5:40 PM, markosaur wrote:

    The best advice I have heard is if there is indeed a binding contract to pay bonuses, AIG can legally require that anyone who collects their bonus be let go and consider it their severance pay.

  • Report this Comment On March 16, 2009, at 6:00 PM, bleedcubbieblue wrote:

    Even using the term 'bonus' in this case is absurd. I've been selling for 30 years and there's only one way to earn bonuses. Help the company grow by exceeding goals...LEGALLY.

    I guess this is what BO meant by saying he's going to create jobs? By allowing these schmucks to KEEP their jobs?

    We own 80% of AIG, so I think we should all be on the compensation committees of all of these bailout recipients, and torch 'em all, let 'em walk, shut the thing down.

    Capitalism must rule again.

  • Report this Comment On March 16, 2009, at 6:47 PM, jazzkitty3 wrote:

    I can't believe that anyone would use that excuse!

    When things aren't going well our bonus just go away and they are written into our contract. You mess up a company you should go to jail Period. You steal peoples money you should go to Jail period!

    No bonuses, no extra pay, no Job!

    If you want to stop this write letters lots of them.

    Then stop doing business with that company and any company that does business with that company.

    I have sold all stock that is involved with AIG and I sent letters. To all pertinent parties.

    When the idiots are neck deep in letters maybe they will notice we are upset. Stop complaining people write letters! get every one you know to write letters.

  • Report this Comment On March 16, 2009, at 7:01 PM, paleolith wrote:

    AIG is now OUR company. It's US, not THEM. Why are we having so much trouble getting OUR employees to give US operational information about OUR company? Seems a lot of arrogance survives at AIG.

    Proposal: let them have their contractual bonuses. But let's sweeten the pot! Every accepted bonus comes with a pink slip in the same envelope! After all, those still arrogant enough to accept a bonus are exactly the ones WE need to get rid of.

    In addition, future infusions of funds should come with a requirement to operate on the Morgan Ratio: J P Morgan's opinion from a century ago that the highest compensated employee should never make more than 20 times the lowest.

  • Report this Comment On March 16, 2009, at 9:16 PM, CAPTAINWACK wrote:

    A little FYI. Nobody working for AIG Financial Products is under contract. Only a few auditors are outside contractors. As for our Washington pinheads whom pound their feet and shake their fists in the air and cry foul. Believe me that's all a smoke and mirror show and here's why. A bonus pay is taxed at the federal level between 30% to 40%. So if you take into consideration that $450M in bonus monies at a rounded out 35% tax, that equals to $157,500,000 in tax revenue generated at the federal level not to mention that numerous people working at AIG work in States that have income taxes also. This is a giant windfall for generating taxes. So there isn't one politician in Washington that is going to turn his or her back on this $157.5m tax generator even though they say there mad as hell. This is how the government is going to recoup the billions that were lent to AIG.

  • Report this Comment On March 16, 2009, at 9:16 PM, CAPTAINWACK wrote:

    A little FYI. Nobody working for AIG Financial Products is under contract. Only a few auditors are outside contractors. As for our Washington pinheads whom pound their feet and shake their fists in the air and cry foul. Believe me that's all a smoke and mirror show and here's why. A bonus pay is taxed at the federal level between 30% to 40%. So if you take into consideration that $450M in bonus monies at a rounded out 35% tax, that equals to $157,500,000 in tax revenue generated at the federal level not to mention that numerous people working at AIG work in States that have income taxes also. This is a giant windfall for generating taxes. So there isn't one politician in Washington that is going to turn his or her back on this $157.5m tax generator even though they say there mad as hell. This is how the government is going to recoup the billions that were lent to AIG.

  • Report this Comment On March 16, 2009, at 9:49 PM, Rasbold wrote:

    Shame on our Government.

    Shame.

    Can't they read?

    We all should have bought on Friday!!

  • Report this Comment On March 16, 2009, at 10:35 PM, nuke3pb wrote:

    Let the company fail! Don't pay the bonuses. Let the greedy bastards go to brankrupcy court and get pennies on the dollar in return if the is any money left to pay them.

    Take the bail out money and start a new company.

  • Report this Comment On March 16, 2009, at 10:57 PM, ukari wrote:

    This thing about contracts in baloney. This should be really easy. Step 1 would be to bring a class action members of the incompetent/criminal derivatives division of AIG. Step 2 would be to settle out of court with individuals on terms that include that they walk away from the bonuses in question. I would limit these to the senior executives though, and leave the small fry making $1000 bonus alone.

  • Report this Comment On March 16, 2009, at 11:09 PM, ukari wrote:

    That said, I DO think AIG is the patsy of Wall Street. They insured risky investment packaged by the real culprits namely Goldman Sachs et al who are actually raking in taxpayer billions and also paying big bucks to their executives while letting AIG take the fall - guess which company Bush's treasury secretary worked for before coming to work for the government?

  • Report this Comment On March 16, 2009, at 11:28 PM, OneLegged wrote:

    Here's how it needs to work:

    Tell Liddy to go ahead and pay the bonuses. Pat the cute little executives darlings on the back. Then inform these failures that if they cash the checks there WILL BE NO MORE BAILOUT MONEY iN THE FUTURE. "You clowns get to pick your fate."

    Make no mistake AIG will be back with its tin cup in hand. Without more "bailout" money AIG will go buh bye.

  • Report this Comment On March 16, 2009, at 11:42 PM, whereaminow wrote:

    Socialize losses and privatize gains? Sounds a lot like the FDIC, fractional reserve banking, and The Federal Reserve System. Little surprise it continues in federal bailouts.

    David in Qatar

  • Report this Comment On March 17, 2009, at 12:12 AM, endofcapitalism wrote:

    call it. this is the end of capitalism.

    folks at AIG proved it. they will be more to come to solidify it.

    capitalism=paving way for thieves to stole public's hard earned income while they are laughing at how easy they got the job done

    I cannot find words to explain the anger I have over what has been happening.

    the whole financial system in north america is a big joke. Where is accountability? why do those senior executives at AIG still have their jobs while this whole meltdown was supposed to turn into a criminal investigation of negligence, fraud and misguidance.

    how do they still have the balls to even attempt to pay themselves bonuses while they were supposed to resign with dignity?

  • Report this Comment On March 17, 2009, at 12:15 AM, mlaursen wrote:

    re: "Nobody working for AIG Financial Products is under contract."

    Then why did Larry Summers say that they are?

    There's a time-tested way that these contracts could have been renegotiated. We could have refrained from bailing out AIG and let it go through normal bankruptcy procedures.

  • Report this Comment On March 17, 2009, at 12:15 AM, mlaursen wrote:

    re: "Proposal: let them have their contractual bonuses. But let's sweeten the pot! Every accepted bonus comes with a pink slip in the same envelope! After all, those still arrogant enough to accept a bonus are exactly the ones WE need to get rid of."

    I agree!

  • Report this Comment On March 17, 2009, at 12:18 AM, whereaminow wrote:

    endofcapitalism,

    Before you assign blame on our current system on unfettered capitalism, please take a minute to read my recent article. It may open up some new thoughts on our current situation.

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=164132&t=0...

    David in Qatar

  • Report this Comment On March 17, 2009, at 12:24 AM, mlaursen wrote:

    re: It strikes me that a great many of the folks who are saying "a contract is sacred" regarding AIG are the same exact people who are stamping their feet saying "you'd better not waste any of my tax money to help out deadbeat homeowners, Mr. Obama" and piously insisting that all union contracts must be torn up in order for GM to get a few billion dollars of government money.

    I sort of say all those things, although you warp what a free marketer like me would say. If you want any kind of healthy economy then contracts do indeed need to be honored, or the ability to do business will fall apart.

    I don't say that those defaulting mortgage shouldn't be helped or that they are all deadbeats, but it definitely should not be done by changing the terms of the mortgages by fiat. If mortgage companies can't have the expectation that the terms will be honored, then the mortgage industry will fall apart.

    Finally, unions contracts shouldn't be changed by fiat, either. However, it would be in the auto unions' best interest to renegotiate voluntarily, to save avoid killing off the American auto makers.

  • Report this Comment On March 17, 2009, at 1:10 AM, lotus1964 wrote:

    The joke is on the gvernment for giving AIG the bloody money with no strings attached. What else is new.

  • Report this Comment On March 17, 2009, at 3:51 AM, Xciteddon wrote:

    Government makes the rules, government can pass new ones to prevent this. They could have insisted that all managers be fired before contract bonus were due for lack of performance. What good are they anyway? Would anyone (other companies) want to hire them when they put on their resumes that they worked for AIG ? Who's fault would it be? Maybe they should have looked into contracts and company policies before they gave them the money. Then decided if the benefits outweighed the effect. Paying someone to cheat everyone is criminal at best. Maybe they should be looking closer into the company, sounds like some type of fraud was afoot somewhere.

  • Report this Comment On March 17, 2009, at 4:17 AM, dividendgrowth wrote:

    They should be hung from gibbets.

  • Report this Comment On March 17, 2009, at 4:26 AM, Pharaohflex wrote:

    I think the bonuses are probably commissions for sales...analagous to the example below, with one exception...what if the insurance policies were granted to guys who didnt pass (or even take) the physical? That is what happened, they either didn't do the due dilligence or knowingly sold fraudulent 'policies'.

    On March 16, 2009, at 3:11 PM, Pseudonym1 wrote:

    "Presume you work for an upstanding insurance company selling life insurance. You sell 4 policies to guys who passed the physical and have been paying the premiums for several months. They all drop dead from a massive heart attack. Should that life insurance sales person get their commission an bonus? It just cost the company several millions in pay-outs to the heirs."

  • Report this Comment On March 17, 2009, at 7:35 AM, kabeno59 wrote:

    Sorry I think some form of criminal action should be taken against AIG or any bailout company that has wrongfully used our taxpayer funds. The bailout money was meant to keep the company solvent not line the pockets of the fat cats. This is just another sad example of companies sucking the life out of a business so they can bail rich and the smaller guy gets screwed. Keep it up "corupt corporate america:! "We the People" will have a revolution to weed you out!

  • Report this Comment On March 17, 2009, at 9:43 AM, krumb31 wrote:

    We should pay them in stock and base it on the price of two years ago.

  • Report this Comment On March 17, 2009, at 10:01 AM, iagullig wrote:

    The point that's missed in all of the discussion on contract's and "don't hurt the small guy's bonus" is that any good bonus program should be based on the fact that the company must make money first, before any bonus is paid out, next the business unit should meet it's objectives, third the individual should meet their objectives. I don't believe any of these hurdles were cleared, in fact, laws may have been broken by some of these people.

  • Report this Comment On March 17, 2009, at 11:09 AM, CAPTAINWACK wrote:

    Contracts....I'd like to see them. So since all of us American taxpayers are now shareholders in AIG we should have access to these contracts. Have the Washington party boys post them on the Tarp funds website for all of us to see. What? you can't find them?

  • Report this Comment On March 17, 2009, at 11:21 AM, UltraContrarian wrote:

    One thing I would like to point out: There are tens of thousands of AIG employees who did their jobs competently and whose divisions were profitable or slightly unprofitable in 2008. The Financial Products division about to receive these bonuses, less than 200 people strong, has lost well over $100B. This is the most incompetent group of employees in history.

  • Report this Comment On March 17, 2009, at 1:43 PM, sfrookie wrote:

    Well, I guess TMF has multiple goals: "To educate, amuse, and enrich." I think this article must fall into the "amuse" category, because it certainly doesn't educate, and will most certainly not enrich anyone.

    To self-righteously feign outrage over these bonuses while ignoring the root problem, being government interference in the first place, is the work of politicians and cheeleaders for politicians, not investment analysts. And to continue by blaming AIG for "bulldozing" capitalism is really an interesting way to look at it. They simply took what our government foolishly agreed to give them.

    I really wish you guys would stop writing articles like this.

  • Report this Comment On March 17, 2009, at 1:56 PM, cope2001 wrote:

    The bonuses should not be paid. It would be interesting to see who has the cajones to sue for the money. At least then, we would know who the worst of the bunch is. The fear of being public enemy #1 for a while would probably be enough to keep people from sueing, but it probably won't.

  • Report this Comment On March 17, 2009, at 5:40 PM, tomfromgolden wrote:

    AIG may be legally obligated to pay the bonuses, but the government isn't a party to that contract and should be able to stipulate that no government funds may be used to pay bonuses. AIG can pay the bonuses with IOU's. The recipients would be unsecured creditors and would have to wait until the government is paid back first.

    Why do we have clueless morons serving as directors of AIG and many other major companies? It's inconceivable that these idiots could have approved binding contracts that award bonuses for failure. We need Warren Buffet to teach a class on how to structure executive compensation and make it mandatory for directors of any company receiving federal aid.

  • Report this Comment On March 17, 2009, at 9:36 PM, AIGRIP wrote:

    Let AIG pay all the bonuses. BUT state it in the conditions that borrowed taxpayer money WILL NOT BE USED TO PAY FU*K'N BONUSES! (gov'tn may feel free to use these exact words in THEIR contracts!) Where are they going to get the money for the bonuses then? That'll take care of all the FU*K'N contracts and FU*K'N leaches that got the bonuses! Let them leave over not getting the bonuses. Maybe they can ask "DO you want fries with that?" at their next job. As for the stupid argument that you need these bonuse to retain the only people that understand the complex contracts to unwind, WHO FU*K'N cares! After these retards get the bonuses, do you really think they'll stick around? They go back to the FU*K'N SH*T HOLE they came from! They're already starting to jump ship like the FU*K'N rats they are!

  • Report this Comment On March 17, 2009, at 10:21 PM, VinnyDavi wrote:

    The concept is simple. AIG is the pile of leaves covering a very deep rabbit hole. All kinds of rabbits down there, executives and politcians alike. Congress decided to bail out AIG. AIG gets labeled for the the whole bailout amount, but the money didn't stop flowing there. It gets cleaned, rinsed, I believe 'laundered' is a more appropriate term and makes it's way to several other subsidiaries.

    Politicians stand in an uproar against AIG after hearing about bonuses. In reality, they knew about the bonuses back when they arranged the bailout agreement. After all, how is Senator Dodd planning to tax 90% of the bonuses, unless there was a provision for it in the bailout terms? The reality is, our beloved Congress, made the worst investment in history, with our (taxpayer) money. And they did it to protect themselves and assign blame to others.

    And what about the awesome suggestion of one Iowa senator earlier today that the executives should either resign or kill themselves? Imagine, if politicians were held to the same suggestion after blowing away countless taxpayer dollars?

    Imagine if policians lived up to the same standards they expect from those they regulate? Well, it's kind of hard to, when Congress gets to live above law, considering they make the laws (and in recent years assist interpreting them as well)

    I see a growing number of fellow americans trusting their government less, as they should, after countless acts of incompetence over the past several years (perhaps the last few decades?). The finger pointing, sorry Washington, we're not buying it anymore. We're point the finger now. We're pointing it at you.

  • Report this Comment On March 17, 2009, at 11:55 PM, gggallag7 wrote:

    Mismanaged companies often have one thing in common. The executive team takes care of themselves, on their entry and exit of the company. Executive Office rounds out their team by who they know. I scratch your back, you look out for me and scratch mine.

    If Bonuses are legally required to be paid, do they have to be paid upfront. Or can they be spread out 33% each year for 3 years. That way those responsible for the mistakes are incented to stick around long enough to fix their messes. Too often, it's grab the cash and run.

  • Report this Comment On March 19, 2009, at 1:01 AM, javnnf wrote:

    I just would like to know-- would this debate have had any place if the Fed would have let AIG go bankrupt?

    Those excecs should be paying part of their pay-check for being rescued from standing in the Unemployment benefits line!

    It is still time the US govt should pull all the money back and let them go bankrupt!!

  • Report this Comment On March 19, 2009, at 9:11 PM, GYSGTUSMC wrote:

    I thought bonuses were "awarded" for outstanding work and those bonus monies came from company profits. AIG has no profits only taxpayer money. The billions of dollars was not "earned" but given because they couldn't manage their own company. How about taking that "bonus" money and hiring back the employees that lost their jobs!!

    By the way, everyone who lost money in their 401k or other retirement plans, did anyone bail you out???

    I didn't think so.

  • Report this Comment On March 19, 2009, at 11:54 PM, sparkyjunk wrote:

    I have a stupid question: What exactly did these "Contracts" say?

    If they specified that those A-holes would get paid regardless, then we aren't really talking about "Bonuses". Most people call that "Salary".

    If the contracts specified that the payment was based on their performance, then well, we all know the answer to that too.

    So which is it?

    But in either case, how is this situation any different than bankruptcy? Company goes under, taxpayers eat the bill, the risk-takers are rewarded. Welcome to the Land of the Free (handout).

  • Report this Comment On March 20, 2009, at 12:05 PM, shadowhana12 wrote:

    Douglas L. Poling, an AIG exec is not taking his 6 million bonus. That leaves an average of 345,000 for the other 462 recipients. Don't NFL players do better than that? Bill Clinton gets more than that just for a speech!

  • Report this Comment On March 20, 2009, at 4:29 PM, farmnut1985 wrote:

    Shouldn't have ever given them the money in the first place, last time I knew we were "supposed" to be a capitalist country, let them go bankrupt just like every other corrupt business.

  • Report this Comment On March 20, 2009, at 5:20 PM, 19414hqueen wrote:

    YESS - tax them 110% and make it retroactive two or three years - Special Income on their 1040's.

    the IRS has the authority, no excuses.

  • Report this Comment On March 20, 2009, at 7:55 PM, beth1992 wrote:

    Those were retention bonuses, contingent upon the employee not leaving before a specific date. The reason that AIG is giving for these contracts was to keep the rats from leaving the ship before all the rat-holes could be documented.

    I thought this was public information as of a few days ago. Why are folks still arguing performance bonuses? Why did it take this long for the information to become public?

  • Report this Comment On March 21, 2009, at 8:08 AM, NightTaxi wrote:

    just a thought,

    I am in Kuwait and heard alot of talks about AIG. Apparently, normal american people, i.e. the taxpayers are upset because of the bonus deal. I think each and everyone if he is in title of receiving bonus, he or she would be more upset if they don't.

    I have bought AIG at $0.50 and sold 85% of my shares letting the free shares in case if AIG continues the up movement.

    If you want my opinion, if i was in charge of the house i would have let all the banks/financial institues/ensurance companies go bankkrupt, and i would have bailed out the normal people who are paying their morgages and lost their jobs instead of paying all that money to banks and other companies.

    they have manipulated their balance sheets, showing more losses because they knew there is a bailout program, and they have pushed the government to do that?!

    if you have seen the millions of shares traded in AIG you would be easily telling there is something fishy going on. The stock was shorted on $40's levels and now bottomed at $0.33, and it might bounce to the 200ma which is $10.

    I am not an expert but there is something not right and the previous Gov. is deeply invovled in this matter or why wait all this time to declare financial crises just before Obama enter the white house!!!!!!!!

    go figure it out, or maybe mr. bush should be investigated and mr. dick chinny too.

  • Report this Comment On March 21, 2009, at 9:44 PM, cliffyworld wrote:

    Please read the related article posted titled "The Government Thinks You're Stupid" posted at http://www.cliffyworld.com

  • Report this Comment On March 22, 2009, at 5:59 PM, simplicius wrote:

    The best short analysis I have seen that explains how the AIG bonuses came to be was one written by Nate Silver of fivethirtyeight.com. Nate is the pollster who who predicted the results of the November elections with startling accuracy.

    Anyway, this is basically what happened:

    Why AIG Paid the "Bonuses"

    by Nate Silver - fivethirtyeight.com

    The company's 2007 10-K filing (annual report), released on 2/28/08, is the key to unraveling the mystery:

    During the fourth quarter of 2007, certain of AIGFP’s available for sale investments in super senior and AAA-rated bonds issued by multi-sector CDOs experienced severe declines in their fair value. As a result, AIGFP recorded an other-than-temporary impairment charge in other income of $643 million. Notwithstanding AIG’s intent and ability to hold such securities until they recover in value, and despite structures which indicate that a substantial amount of the securities should continue to perform in accordance with their original terms, AIG concluded that it could not reasonably assert that the recovery period would be temporary.[...]

    The change in fair value of AIGFP’s credit default swaps that reference CDOs and the decline in fair value of its investments in CDOs were caused by the significant widening in spreads in the fourth quarter on asset-backed securities, principally those related to U.S. residential mortgages, the severe liquidity crisis affecting the structured finance markets and the effects of rating agency downgrades on those securities. AIG continues to believe that these unrealized market valuation losses are not indicative of the losses AIGFP may realize over time on this portfolio. Based upon its most current analyses, AIG believes that any credit impairment losses realized over time by AIGFP will not be material to AIG’s consolidated financial condition, although it is possible that such realized losses could be material to AIG’s consolidated results of operations for an individual reporting period.[...]

    The most significant component of Capital Markets operating expenses is compensation, which was approximately $423 million, $544 million and $481 million in 2007, 2006 and 2005, respectively. [...] In light of the unrealized market valuation loss related to the AIGFP super senior credit default swap portfolio, to retain and motivate the affected AIGFP employees, a special incentive plan relating to 2007 was established. Under this plan, certain AIGFP employees were granted cash awards vesting over two years and payable in 2013. The expense related to these awards will be recognized ratably over the vesting period, beginning in 2008.

    Emphasis added. In conjunction with the disclosure of the terms of the "bonus" contracts (I'll explain in a moment why I'm using the scare quotes), we can piece together pretty good idea about what happened.

    The employees in AIG's Financial Products division (AIGFP) were compensated heavily -- perhaps almost exclusively -- via incentive-based compensation. That is, the employees got a profit share -- a rather generous 30 percent share -- of the earnings their division made by trading credit default options (CDOs) and related assets.

    In the fourth quarter of 2007, the market for CDOs went completely to hell, an early casualty of the mortgage crisis. AIG, to that point, had already accumulated about $643 million in bad assets on its books. (Note AIG's use of the euphemism "other-than-temporary" to describe the writing off of these assets; that's a bit like calling Louie Anderson "other-than-skinny"). AIG must have anticipated that it was going to spend most of 2008, and perhaps most of 2009, merely climbing out of its hole rather than turning any sort of profit.

    This must have posed something of a problem for the employees in the Financial Products division, since their compensation relied on these trades being profitable. So AIG struck a deal with these employees. It guaranteed them, for 2008 and 2009, the same level of incentive-based compensation that they received in 2007 (except for senior executives, who took a 25 percent haircut), regardless of how the division actually performed. The only requirements were that the employees couldn't quit and couldn't be fired for cause (a much stricter standard than the usual conditions of at-will employment.)

    This turned out to be an other-than-good deal for AIG. But at the time, AIG must have believed that its hand was forced. At that point in early 2008, the market for sorts of assets that AIGFP dealt in had crashed, but the broader asset markets hadn't yet. Many of these employees were highly skilled, and could plausibly find employment at another company that traded in other, relatively healthier types of commodities. But AIG evidently felt it needed them in order to minimize its losses and unwind its positions.

    The thing about these "bonuses", however is that they're not really bonuses, which we usually think of as incentive-based compensation. On the contrary, they are something the opposite of bonuses: they took compensation that had been incentive-based and guaranteed it. It's precisely because that compensation was guaranteed -- not incentive-based -- that it is difficult to undo.

    The fundamental issue here what I call asymmetrical agency bias. We as human beings tend to attribute our results to skill when we are performing well, but (bad) luck when we are performing poorly. Thus, AIG was willing to pay its Financial Products employees plenty when their trades were going well (assigning them agency for their profits), but was willing to make plenty of excuses for them ("the severe liquidity crisis", "the effects of rating agency downgrades") once things began to unravel. The employees, likewise, may have felt entitled to some large fraction of the incomes that they had "earned" before, and probably didn't regard themselves as culpable for the losses their trades had begun to take.

    As someone who is alert to asymmetrical agency bias -- it is an extremely common phenomenon in both poker and baseball, two fields with which I am intimately acquainted -- I tend to be unusually sympathetic to the position that the individual traders at AIG were not especially responsible for the fact that their deals had begun to lose money. Even the most skilled and honest trader probably could not have done better than to limit his losses once the CDO market began to collapse in 2007. By the same token, however, I tend to be unusually unsympathetic in my assessment of how much alpha these traders were responsible for on the upside; any idiot could have made money trading credit default swaps in 2005 or 2006.

    For this reason, I'm just not all that excited about confiscating the "bonuses" paid to the AIGFP employees. Rather, I'm interested in compensation and incentivization structures in general. Aggregate compensation throughout the financial services industry, I would guess, is much higher than is economically optimal (there is a lot of evidence that this is true of CEO pay). A lot of people are getting paid for what is thought to be skill but is really just luck (or economic rent).

    If, as at most hedge funds, the employees are buying in with their own capital and bearing a lot of the downside risk, that is one thing. At a publicly-traded company, however, those employees are taking profits out of the shareholders' hands. And at a publicly-traded company that happens to be owned by the taxpayers, they're taking money out of the taxpayers' hands.

    The compensation paid to AIG's employees, however, is less a moral failure than a market failure. We don't like to admit to market failures because they indict our collective judgment; instead we scapegoat and move on. But there are some ways to address these market failures; the more time we spend focusing on those, and the less on AIG, the more money we the taxpayers will save ourselves in the end.

  • Report this Comment On March 28, 2009, at 12:48 PM, SENKOSAM wrote:

    Negative earnings = zero bonuses.

    A failed company kept afloat by the US government temporarily, needs to suspend employee perks until it can afford them. Most companies would fire the top management that put it company at risk of bankruptcy or closure and not pay them retention bonuses. That's absurd in the 'real' world. The fact that no strings were attached last Sept by Paulson in a rush to hand over billions, just demonstrates the fact that corporations have bought and paid for politicians an been allowed to run the country into the ground.

  • Report this Comment On March 29, 2009, at 1:43 AM, bhl4lindsay wrote:

    We've created a pro/con article on Debatepedia on the AIG bonuses. It may be worth a look.

    http://wiki.idebate.org/index.php/Debate:_AIG_bonuses#Con

  • Report this Comment On April 06, 2009, at 12:49 PM, farmnut1985 wrote:

    If the CEO's gotta give back the bonuses, why not make all of our politicians give back their campaign donations?

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