Monday, March 16, 2009

AIG has to pay those bonuses because there is a contract? That's a crock!

This post has gotten to complex to follow easily, so I want to add some structure. What we have is a fait accompli by the executives in the financial products division of AIG in which they are holding both AIG top management and the US government (representing the taxpayers) out of somewhere between $100 million and $450 million dollars in so-called retention bonuses.

Whoever these executives are, they somehow convince Chairman Liddy of AIG that he had no choice except to pay the bonuses, then manipulated him to convince Treasury Secretary Gaither and Director of the White House National Economic Council, Larry Summers that there was no viable way to stop from paying those bonuses because they are fixed in preexisting employment contracts. All of these people were as of earlier today convinced of the inevitability of paying those bonuses, as distasteful as such payments to the exact same individuals who destroyed AIG as an independent financial organization. The discussion here has four different parts.

In Part I, Glenn Greenwald provides the ways an experienced contract lawyer would poke holes in a so-called bullet-proof contract.

In Part II, Josh Marshall at Talking Points Memo posts weaknesses in the argument used by AIG Chairman to convince Treasury Secretary Geithner and Director of the White House Council of Economic Advisers Larry Summers that the payment of the bonuses was the least expensive of the various possible options for the government to (grudgingly) accept.

In Part III, I offer my opinion that the entire story is a massive scam, being run by executives from AIGFP, who it seems to me have few if any job prospects after leaving AIG because anyone who knows just how they destroyed the company AIG would (in my opinion) be a fool to hire them and give them any significant responsibility somewhere else.

In Part IV, the just published statement by Cal. Rep. Brad Sherman indicates that the TARP Law passed last October already contains a provision that gives the Treasury Department final control over all executive compensation at AIG. That provision supersedes all preexisting employment contracts. The so-called inevitability of paying the outrageous extortion demanded by the AIGFP executives appears to be a total figment. This would confirm my suspicion that the whole damned thing is a scam being attempted by the unethical AIGFP executives just to rip the taxpayers off for significant walking away money as those executives leave the company.

[Header added at 11:48 pm CDT.]

Part I

Constitutional lawyer and writer Glenn Greenwald has weighed in on those unnecessary and excessive payoffs to the financial products crooks. Those crooks are, in fact, the very executives who sold the disastrous CD's that have required the federal government to step in and give the company $180 billion dollars (so far) to keep the overall banking system from collapsing.
there are almost certainly viable claims to be asserted that the contracts were induced via fraud or that the bonus-demanding executives themselves violated their contracts. Independently, it’s inconceivable that there aren’t substantial counterclaims that AIG could assert against any executives suing to obtain these bonuses, a threat which, by itself, provides substantial leverage to compel meaningful concessions. Many of these executives were, after all, the very ones responsible for the cataclysmic losses.

The only way a company like AIG throws up its hands from the start and announces that there is simply nothing to be done is if they are eager to make these payments. One might expect AIG to do so -- they haven't exactly proven themselves to be paragons of business ethics -- but the fact that Obama officials are also insisting that nothing can be done (even while symbolically and pointlessly pretending to join in the populist outrage over these publicly-funded "retention payments") is what is most notable here.

Legal strategies aside, just as a business matter, one of the first steps taken by every company in severe distress is go to its creditors, explain that it cannot make the required payments, and force re-negotiations of the terms. That’s as basic as it gets. To see how that works, just look at what GM and other automakers did with their union contracts – what they were forced by the Government to do as a condition for their bailout. Obviously, if a company goes into bankruptcy, then contracts to pay executive bonuses are immediately nullified, but the threat of bankruptcy or serious financial distress is, for obvious reasons, very compelling leverage to force substantial concessions. And the idea that, in this economy, AIG executives (of all people) will be able simply to leave and go seek employment elsewhere unless they receive their "retention bonuses" (even assuming that’s an undesirable outcome) is nothing short of ludicrous.

There may be other reasons why the Treasury Department decided it wanted AIG to pay these bonuses (Marcy Wheeler considers some of those reasons here), but this claim from Larry Summers that the sanctity of contracts precludes any alternatives is not just false, but insultingly so.
Glenn has more to say, but I want to add his addendum.
UPDATE: Jane Hamsher has more here on AIG's insultingly frivolous claims as to why these contract obligations are unavoidable, and here FDL has a petition, to be delivered to the House Financial Services Committee during Wednesday's hearing on the AIG payments, demanding full disclosure before any more payments are made.
This bank bailout is already much too damned expensive - and would have been unnecessary had Wall Street banks acted like prudent bankers instead of long-shot playing riverboat gamblers playing with someone else's money. Unfortunately, allowing the economy to go into a 1930's style Depression because of bank misdeeds is even more expensive. That's why the taxpayers are being dunned to save the crooks on Wall Street.

Still, the Wall Street Extortioners should not be allowed to gather even more misbegotten personal wealth directly from the taxpayers pockets, taxed by law. They must be stopped, as much of that wealth as possible should be extracted from the Wall Street bankers who do not and did not deserve it, and the entire Wall Street banking system has to be tightly regulated and restrained so that this cannot happen again.

It's not just the extortionate bonuses that's bad. In addition, Wall street is already spending large sums on lobbyists to get to Congress and prevent new regulatory bills being enacted.

Addendum I at 7:34 pm CDT

Part II

There are some seemingly very important issues about whether or not failing to pay the bonuses allegedly due under employment contracts would be considered a default by AIG on its CD contracts. That's what the link above to Marcy Wheeler was explaining. Apparently that was the argument that AIG used to convince Larry Summers that those employment contracts had to be paid no matter how bad they are. You may notice that I am emphasizing the fact that the contracts that (allegedly) require payment of the bonuses are employment contracts, NOT finance contracts of the type purchased by the CD counter parties. Keep that in mind as you read the discussion .

The discussion can be found at Josh Marshall. He quotes a few people who seem to know what they are talking about. It is highly illuminating.

Part III

My suspicion is that a very few AIG lawyers who have reputations for understanding CDS contracts have essentially pulled the wool over a number of non-lawyers like Larry Summers (PhD. Economics), AIG Chairman Edward Liddy and the current Secretary of Treasury, Timothy F. Geithner (M.A. in international economics and East Asian studies from Johns Hopkins University's School of Advanced International Studies in 1985 and studies in Chinese and Japanese.)

I am guessing that this is a scam being pulled by the same unethical individuals in AIG's financial products Division who killed AIG as a viable financial organization in the first place. First they snowed their own Chairman, Liddy, and then manipulated him to snow the government officials. If, as I suspect, the US Treasury Department and the Federal Reserve have no high-ranking attorneys who know the law governing the CD contracts inside and out, that would not be all that difficult.

I'm not saying that the scam I postulate DID occur, but all the evidence I see in the media, as well as the discussions at Greenwald and TPM I have referenced above, makes me extremely suspicious that it is quite likely. The behavior of the AIGFP individuals demonstrates the very kind of unethical behavior that should make them targets of suspicion.

Addendum 2 at 9:57 pm CDT

Part IV

According to California Democratic Congressman Brad Sherman, the Treasury Department already has all the authority it needed to stop those outrageous AIG bonuses. Rep. Sherman knows, because he specifically placed the provision into the TARP legislation before it passed, and it still has it in there. Here's what he says about it:
We had a provision in there that said Treasury was supposed to establish, by regulation, standards for executive compensation. We required that to be done -- had it been done, it would have been binding, whether [or not] these contracts had been signed earlier. It's entirely within the power of the federal government to have contracts modified [at companies receiving public aid]. Nixon had contracts modified by the federal government. We gave a similar power to Treasury.
Henry Paulson, Treasury Secretary until Obama was sworn in, clearly did not believe that it was within the proper jurisdiction of the federal government to use the powers given by this provision.

Since the TARP law was already being administered, it seems likely to me that the new Secretary of Treasury, Geithner, did not bother to go back and reopen such previously established decision. Beside, Geithner is also a Wall Street banker, and probably has the same view of the proper role of government. It also seems likely to me that Geithner never bothered to give Obama the option that provision of TARP offered. It was a previously settled decision, and seems unlikely to have caused anyone who read it to consider that those higher in government were not aware of it and how it could be used. That would particularly be true since Obama was so damned non-committal on the subject of those bonuses until the last day or two.

It will be interesting to see if California Rep. Sherman can change that and get Obama to act on the powers he has already been given by law.

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