These payments at AIG are rather unusual, in that the contract grants the beneficiary (employee) a bonus whatever their performance and whatever the firm's results. There is a flat-out acknowledgment by management in the agreement that these commitments are the result of a deterioration in their Super Senior Credit Default Swap portfolio. In other words, by 2007, AIG knew they had a serious problem with their book that was going to eat into profitability.

AIG could argue that these bonuses were for retention purposes, except for one thing. There was already an established history at AIG Financial of guaranteeing bonuses, regardless of performance. New employees signed these contracts upon entering the firm. From at least one deposition we have learned that Joe Cassano used these bonuses as threats if employees did not toe the line, which often meant keeping anyone outside of Financial from seeing too deep into the firm's book. He was a classic bully, screaming at auditors and lawyers and anyone from head office who questioned anything at all in his realm. This behavior, more than anything else, should have alerted Greenberg and others to a serious problem and potential fraud (at a minimum a disastrous blow-up). We've seen it time and again, especially in derivatives.

By the time Cassano left, guaranteed bonuses were so much part of the culture that it didn't surprise anyone that management negotiated these contracts again in 2008. They weren't interested so much in retention as doing what they had always done - transfer shareholder wealth to the employees even if the firm lost money.

The only reason it is a scandal today is because it is taxpayer wealth being transferred.

Bush launches $700bn rescue plan and confesses he didn't realise how severe problems were

This weekend, a plan is being put together that attempts – at a huge cost – to deal with the underlying causes of the financial crisis. Details are now starting to leak. David Randall reports

Sunday, 21 September 2008

President Bush defended the government's financial rescue plan on Saturday, saying the cost to taxpayers of shoring up shaky markets was better than the alternatives. In his weekly radio address, he said: "Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars and college tuitions."

Mr Bush said he initially thought the government could deal with the trouble on Wall Street "one issue at time." But the financial "house of cards ... started to stretch beyond just Wall Street in the sense of the effects of failure. So when one card started to go, we were worried about the whole deck coming down."

The move ended a week in which financial markets faced their most serious confluence of crises since the 1930s Great Depression and threatened national economies and the worldwide banking system. US investment bank Lehman Brothers and the UK's Halifax Bank of Scotland went under as independent concerns, and there was a considerable risk that US insurance giant AIG could follow.

In Britain, there was no formal response to the Bush plan by the Brown government, but the Conservative former chancellor Ken Clarke, speaking to the BBC, said he believed the financial markets would learn the lessons of the present crisis. Asked if there was a risk that bailouts could encourage recklessness, he told Radio 4's Today programme: "That's a serious danger: 'The bonus is now saved, let's go back to making some money in the way we did before'." But, he went on, "fortunately I do think that in the financial markets there are endless sensible people who will know that we can never return to what occurred. We do need more regulation."

This is a about financial "experts" that crashed the system with credit default swaps they wrote and sold that they could not back up. If you or I did something like this, like kite a check, we'd be in the pokey.

When you have a giant Casino with unlimited leverage you get this fiasco.
Wall Street needs regulations and oversight when it comes to these instruments. You can't call insurance a Credit Default Swap and side step reserve requirements. Somebody needs to answer for that. Also Paulson pushing the leverage limits on balance sheet for investment banks was criminal.

consider him as a member of any "ilk." The position he held when I knew him was very performance based and very cuthroat and he managed to be one of the good guys, as I said before, in a very tough business. And he was frequently held to account by myself and my clients. I think it is also important to remember that the folks who created this mess were the Cassano unit, not every employee of AIG. It's good to thump--but let's not tar someone by association, when they really aren't associated at all.

^{“Is not our first thought to go on the road? The road is our source, our vault of treasures, our wealth. Only on the road does the ‘traveller’ feel like himself, at home.”
Ryszard Kapuscinski}

I am absolutely certain you are right about brooklynn SP and no doubt he is a great guy. Unfortunately for him, it is not althogether unfair to consider him part of that "ilk". As I see it and likely many others, his "industry", finance, has lead us into this economic mess we find ourselves in. With every revelation of new bonuses, bailouts, and office upgrades, that industry continues to look worse and worse, a bunch of greedy scoundrels who got mega-rich and now are getting mega-bailouts. Brooklynn and many many others are going to getting tarred with the brush and there is no way for most of us to separate the good from the bad. Maybe more in that industry should have earlier or could even do that now. Are most of those at AIG great folks? Good, then please point out the crooks to us please.

There is a huge rage building toward all of them and from what I can see, they deserve it. That is harsh and unfortunate, but plently of common folks out here who never got so much as a $1,000 bonus are hurting too.

of the other contributors here at The Agonist too. And that's the key: at what point do people who were in the industry, who left or are retired or are still in the industry lumped in with all the rotten ones? Is Barry Ritholz in that category? How about some of the other prominent econ-bloggers? Again, this is guilt by association we're talking about here. And at what point does my word--when I personally vouch for a person carry any weight? Would you not want me to take you at your word if you vouched for someone? See, it does matter. There were a lot of honest people in the business who left out of disgust like myself and Brooklyn because we were trying to do the right thing for our clients only in the end to have the nitwits upstairs undo all the hard work we ever did. So, if you are going to lump Brooklyn in there with the worst at AIG, might as well lump me in there too!

^{“Is not our first thought to go on the road? The road is our source, our vault of treasures, our wealth. Only on the road does the ‘traveller’ feel like himself, at home.”
Ryszard Kapuscinski}

there's a lot i'm tempted to comment on here -or was before i scrolled down and gratefully saw your so much better responses -but now i'll just say welcome brooklyn91941.

It was not my intent to try to actually say that brooklynn IS a bad guy. I am saying that anyone who worked in the industry through say the summer of 2008 is absolutely going to get tarred from simply being in that industry. And you cannot really expect the common man to try to differentiate the good from the bad.

Now if you and brooklyn left earlier out of disgust, then my hat is off to you. Those who stayed despite knowing what was up, took their salaries and bonuses, were enablers and will pay some price for that.

hi Zman1527,

yup, it's a manifold moral morass all around, touching many industries and communities.

i'd deleted a lot, and simply welcomed brooklyn, but will paste here what i'd typed and cut, for the little snapshot that it paints of a tiny little far away and obscure corner of the morass:

no, actually, i will add a little more:
as i've mentioned before elsewhere on the Agonist, i hawked Countrywide Home Loans for Sitel [telemarketing] in caribou, maine (limestone, actually) in spring of '07. after a few months, i came back to oklahoma city. 300 people worked at Sitel, out of a population of 9,000. quite a chunk. based on the old Loring AFB, the location was a reminder of the financial hurt to the community when the base was closed some 9 years prior. the people i worked for and with were some of the loveliest i'd ever met. even nicer and more down to earth than here in OKC. earnest, conscientious people. like the guy who trained me, fred sullivan. he didn't wear his faith on his sleeve or preach it, he lived it, and he was typical of the caribou community. i have to wonder now, with all this scandal, of how all they up there were affected in their consciences, and how they responded if at all. i would hope they weren't faced with a moral dilemma, and that Sitel itself had problems with the contract and didn't wish to continue pushing the adjustable rate mortgages after some point. i can imagine the dawning came slowly at any rate on every level (as it did for financially ignorant me). like frogs being boiled.

i'm glad i had that experience. i'm glad for this thread.

we're in such manifold crisis(es), with many related issues and all having their many unknown details, that it's hard not to use a broad brush, but the devil's in the details.

In any industry or company there are good and bad practices. I worked in Financial services for 47 years. During those years I met and worked with many great people. I also worked with many people that were jerks and thieves. I tried to help investors meet their goals and objectives, but was thwarted by an industry that still sells pipe dreams. In 1999 speaking at national forums I warned of the excesses in the markets, and had large institutional investors tell me that this time it was different. Wrong! Through the early part of this decade more of the same.

Unfortunately, we live in a country where everybody is entitled to everything at anytime. And by the way for free. I don't expect the common man to be able to differentiate between the good guys and the bad guys, but the rhetoric on capital hill is asinine and dangerous.

These jerks at AIG are not the issue anymore. If we want to unwind this mess, we have to have people in place that can do it. Bitching and moaning about the term bonuses get us no where. Where was all the anger when we doubled the national debt over the past eight years. Where was the anger when we had no accountability for the trillion we spent in Iraq. Where was the anger when Alan Greenspan advised people to take out ARM's when financing their mortgages. As usual no where because most people were doing okay and didn't realize they were standing on a house of cards. Who do people think pay for the uninsured when it comes to health care etc.

This country has serious issues, lets focus our anger and strength to cleaning up the mess of the last thirty years.

Your anger is warranted. We need some adult to get on TV and explain this mess in simple terms so that anybody can understand it. I have yet to hear anybody explain it. And I know the jargon. When the geniuses on Wall Street came up with the great 401k idea, my comment was the average American is incapable of managing their own money. Last year Vanguard said that the median 401k fund that they administer was valued at $54k. Do you know anybody that can retire on $54k. We need to bring back the defined benefit plan with strict rules on investing.

Every major so-called bailout in the past resulted in profits for the taxpayers. This is only a few months. We need good regulations, and good enforcement. We need to do away with cliche's and grandstanding.

Sure I saw it coming. Your right about predatory lending and loan shark ridden credit card companies. Where was the anger when the bankruptcy act passed in 2005. This was a bill authored by the banking and credit card industry, and screwed the average citizen. We all have a responsibility for the governing of this country and we have to take it back from the crooks and scoundrels. It took 30 years to get here, lets hope it doesn't take 30 years to get out.

and I appreciate your candor.

So having been on the inside of this industry, what do you see as the steps the govt can take to:

* Get us out of the current mess while doling out the sacrifice (and future gain) fairly?

* Enact what sort of regulation to keep this from happening again? Reinstate some of the regulations we repealed over the last 20 years, or is there something better?

The infuriating part I think is that the sense we get from Wall Street is that after a year or so off, we'll be right back where we were in the 90s. But really, isn't that world dead, and would we want to bring it back (to do this all over again?)

Thanks again.

edit: if you want to exapnd a response, it would make an excellent follow-up posting to your initial one here.

Thanks. I will put together another post on this subject and put it out in the next day or so. While I'm not a lawyer it would seem to me that some common sense regulations would prevent this. I'll elaborate more on the post. Whether it could be done fairly, I'm skeptical. If the right regulations are put in place this should never happen again. We had the Glass Steagall act in place for over 60 years, and that worked.

There is hope if those morons in congress stop grandstanding and let the process play out. We are in uncharted waters and many of the proposals initiated (not the initial TARP joke) are starting to work.

More later.

if politicians were ever not grandstanding or completely clueless (as a whole), but we just notice it more during a crisis.

Look forward to that post, thanks B.

The truth is when democracy is finished, corrupted and hamstrung... the only recourse for the people is to become a mob and take it back. Except be warned, if parliaments are Bad at making the Right decisions, mobs are even worse, much worse.

Moral of the Story: Don't corrupt democracy. Things get rather nasty afterwards, but it was the act of destroying democracy that was the evil.

I'm not advocating mob behaviour, I'm merely observing that historically it is the inevitable result of destroying democracy.

There is only ever one enemy, and that is the military. It doesn't matter which side they purport to be on.

:D

this is a knee-slapper:

This is a company that built a giant fortune across more than a century by betting on safety-conscious policyholders — people who wear seat belts and build houses on high ground — and then blew it all in a year or two by turning their entire balance sheet over to a guy who acted like making huge bets with other people's money would make his dick bigger.

and to define ilk:

The bonuses are a nice comic touch highlighting one of the more outrageous tangents of the bailout age, namely the fact that, even with the planet in flames, some members of the Wall Street class can't even get used to the tragedy of having to fly coach. "These people need their trips to Baja, their spa treatments, their hand jobs," says an official involved in the AIG bailout, a serious look on his face, apparently not even half-kidding. "They don't function well without them."

Taibbi's on a roll:

The people who have spent their lives cloistered in this Wall Street community aren't much for sharing information with the great unwashed. Because all of this shit is complicated, because most of us mortals don't know what the hell LIBOR is or how a REIT works or how to use the word "zero coupon bond" in a sentence without sounding stupid — well, then, the people who do speak this idiotic language cannot under any circumstances be bothered to explain it to us and instead spend a lot of time rolling their eyes and asking us to trust them.

yano, I think Matt's actually pissed off:

The most galling thing about this financial crisis is that so many Wall Street types think they actually deserve not only their huge bonuses and lavish lifestyles but the awesome political power their own mistakes have left them in possession of. When challenged, they talk about how hard they work, the 90-hour weeks, the stress, the failed marriages, the hemorrhoids and gallstones they all get before they hit 40.
"But wait a minute," you say to them. "No one ever asked you to stay up all night eight days a week trying to get filthy rich shorting what's left of the American auto industry or selling $600 billion in toxic, irredeemable mortgages to ex-strippers on work release and Taco Bell clerks. Actually, come to think of it, why are we even giving taxpayer money to you people? Why are we not throwing your ass in jail instead?"

good for him!

Another culprit was Goldman Sachs, which also had the good fortune, around then, to see its CEO, a bald-headed Frankensteinian goon named Hank Paulson (who received an estimated $200 million tax deferral by joining the government), ascend to Treasury secretary.

Matt Taibbi's new Rolling Stone article perfectly summarizes what the AIG scandal reveals about our political and economic system, and should be read in full. In sum: financial elites own the Government and both political parties. Their money drowns Washington and their lobbyists control it. They used that ownership of Government to abolish decades-old legal and regulatory protections which previously constrained what they could do. In the lawless environment which they literally purchased from our political leaders, they were able to pillage and pilfer and steal without limit. And even now that everything has come crashing down, they continue to dictate what the Government's response is, to ensure that they -- the prime authors of the disaster -- are the prime beneficiaries, at the public's expense, of the "solutions," solutions which preserve their ill-gotten gains and heighten even further their power and influence.

Salon.com, By Glenn Greenwald, March 21

With lightning speed and lockstep unanimity, opinion-making elites jointly embraced and are now delivering the same message about the public rage triggered this week by the AIG bonus scandal: This scandal is insignificant. It's just a distraction. And, most important of all, public anger is unhelpful and must be contained or, failing that, ignored.

This anti-anger consensus among our political elites is exactly wrong. The public rage we're finally seeing is long, long overdue, and appears to be the only force with both the ability and will to impose meaningful checks on continued kleptocratic pillaging and deep-seated corruption in virtually every branch of our establishment institutions. The worst possible thing that could happen now is for this collective rage to subside and for the public to return to its long-standing state of blissful ignorance over what the establishment is actually doing.

It makes perfect sense that those who are satisfied with the prevailing order -- because it rewards them in numerous ways -- are desperate to pacify public fury. Thus we find unanimous decrees that public calm (i.e., quiet) be restored. It's a universal dynamic that elites want to keep the masses in a state of silent, disengaged submission, all the better if the masses stay convinced that the elites have their best interests at heart and their welfare is therefore advanced by allowing elites -- the Experts -- to work in peace on our pressing problems, undisrupted and "undistracted" by the need to placate primitive public sentiments.

While I don't disagree with Greenwald's assertion about anger, there are better issues to take on. Sure I'm pissed about AIG, but these payments are not bonuses as perceived by the masses. If you wanted to keep key people in any business and they could walk across the street and get more money, what would you do? Would you pay them to keep them or let them walk.

Liddy AIG's current chairman came out of retirement and is getting $1 a year as compensation, and continues to get battered by idiots on capital hill that couldn't find their way to the bathroom, to run one of the most complex businesses in the world. What incentive does anyone at AIG have to stay and clean up this mess? I ask all critics to answer my last question.

from the larger issues, whatever their business purposes.

The anger needs to grow against the government funneling of trillions of dollars to AIG counterparties, against the legal ability to write CDS contracts against insufficient (er, no) reserves, against a corrupt government that has betrayed its citizens at seemingly every turn.

If you wanted to keep key people in any business and they could walk across the street and get more money, what would you do?

Reality: I no more want to keep the "key people" who did this than I would want a surgeon who bungled a series of operations over 10 years to carry out reconstructive surgery on the victims. There are what, 19,000 financial institutions in the U.S. and fewer than 20 perpetrated these shenanigans. It is the worst of elite thinking to believe that only the people who clawed their way to the top of a corrupt institution have the brains to understand the institution. By worst of elite thinking, I mean that it conforms to self-aggrandizing ideology, rather than reality. Rather like arguments for the wonders of deregulation that we've endured for 30 years. That didn't work out so well.

Incentives: what are we providing incentives for? Will these bonuses make the recipients do the best job they can for the taxpayer and the real economy? Believing that only they can clean up the mess they've made, you say they'll still walk out for more money for themselves. And we'll just have to trust them, because they're the "key people" (see "Reality" above), who understand these things. But one thing we'll know for sure -- the prime motive is self-enrichment.

As I've commented elsewhere, In any corrupt dealings, the amount of money actually devoted to corrupt payoffs is quite small. Take the third world corruption that the right wing says makes aid ineffective. The crumbling wasted infrastructure on which billions are thrown away is built because the country's leaders have taken a few million in "finder's fees" or "consulting" contracts to advance the project. The relatively small payoffs result in big waste. That's the issue with these bonuses. The millions in fees and bonuses may be small, set against the trillions in financial trash, but they're still millions to the individual, and that drives them to make corrupt decisions.

Something else we can disagree on -- the notion that anger at the malfeasances of the rich and powerful is the most pressing threat to democracy.

It can't be too hard to time the bonuses to percentage reductions in the portfolio or risk (though I gather a year ago when new management came in there were no risk metrics at AIGFM). The level of the bonuses should be based on market factors, and apparently AIG not only paid well above the market, they guaranteed bonuses regardless of performance.

One bit of proof is that not once has AIG justified the $165 million as connected to performance. It has always been described as some contractual obligation that, sadly in Mr. Liddy's view, must be paid. Such an arrangement doesn't serve AIG's private shareholders much less the government.

As to these people being indispensable, I don't buy it. The more we read about AIG Financial the more incompetent it seems. No risk management to speak of, no accounting standards, no regulatory reporting, no reporting to head office other than the most superficial information, no claim to any proprietary product or property rights. They just cranked out these CDSs by the hundreds every month, blithely assuming only a tiny fraction of the underlying mortgages or corporate bonds would ever default.

I think I also read there are 17,000 bankers redundant in London in the past year. There are bound to be 380 among them to replace the entire AIG staff if need be. My concern would be disruption to the process, but not a loss of irreplaceable knowledge.

The incentive they have to stay there is they have a job. Judging from the fear that exists among my friends in the derivatives world, that should be enough.

I would also like to see Mr. Liddy's employment contract before accepting his $1/pay story. Perhaps he is doing the Lord's work completely altruistically, but something tells me otherwise. He was put there for a purpose, and that is to wind down AIG Financial as expeditiously as possible without resorting to the bankruptcy courts. If a bankruptcy judge were in charge of the process, Goldman Sachs and the other big guys would not be getting 100 cents/dollar on their contracts. All of the AIG employment contracts would be automatically null and void.

This way, he works for the Treasury, who quietly find a way to pay off in full all the counterparties, for hundreds of billions of dollars. He has tools like guaranteed bonuses to tie his employees down (though for 11 of the managers who have left, it failed to do so). He is an ex executive of Goldman Sachs (who are apparently the only competent people on Wall Street with the ability to work for the government on these problems). If he does his job well, he will have saved Goldman Sachs billions of dollars of write-downs in their L3 portfolio. I think in some manner Goldman Sachs is going to find a way to make his retirement even more comfortable than it already is.

Personally, what I think should have been done a long time ago, and which should be done now, is to throw AIG into bankruptcy. That is the only way to get an independent arbiter to act on behalf of all creditors, not just the largest banks. The way it is being done now is tainted by all the Goldman Sachs managers running the show, with a refusal on their part to reveal anything to Congress or the public, and with an ability to commit taxpayer resources for incredible amounts of money. A handful of people have exploited this process and doled out over $1 trillion to their colleagues in the banking business. That's equivalent to the entire income tax take of this country for one year. It's equal to the entire cost of the Iraq war. I can't imagine any historian looking back at this process will not react with incredulity that the country could make such a long term commitment with no discussion, no approval, no oversight or public information, and nothing but fear being used to motivate acquiescence.

And tomorrow, we will embark on paying the hedge funds to overpay for Goldman's L3 assets, as well as those at JPM Chase and Citi and BOA and a few dozen foreign banks. The hedge funds will retain all the upside of this arrangement, and we the taxpayers bear all the cost and the risk. This is capitalism at work? Would you be at all surprised to discover, much later on, that Goldman has found a way to create for itself a hedge fund to join in this looting?

I could go on and on with my screed, because every time I learn something new, the situation is more appalling than imaginable. I guess where we agree is that Congress is a real problem here. But it is the abdication of responsibility that is the problem I see. Congress should kill the Treasury's hedge fund plan. It should refuse any more money to the Treasury until it investigates what has happened. It should approve Ron Paul's bill that demands the right to audit the Fed (can you believe it is not legal for anyone to audit the Fed?). It should print out the details of every derivatives contract at Goldman, Citi and elsewhere, so that the market can make a determination just how bad things are. These are all insolvent institutions and if they were in receivership, as they should be, a court would make this information available to all bidders. We should get that underway now, because it is going to happen inevitably.

and we have a winner, folks!
good catch Raja

In other news, if you swallow your bubble gum, it doesn't actually stay in your stomach for seven years. Please stay tuned for more propaganda-shattering news as it passes ICC quarantine.

There was a 48-hour window about a million years ago where AIG bonuses were interesting, for those who've just come out of a coma. We're deep into Jon-Benet Ramsey territory now. It's classic failure-to-cope monkey doodoo: nobody can fit the collapse of the USD into their heads so they microanalyze something comprehensible and emotionally volatile until the situation levels off at the status quo ante. (Good luck with that.)

And -- again, people act a certain way in a crisis -- this is probably the wrong time to whip out the old "ya know, those 94%-ers are buttheads, granted, but they're sure making the other 6% of us look bad" routine. Sorry about that. Urinating directly into a gale force wind almost never works. I'm personally willing to believe the original poster didn't reap obscene profits from punching a hole in the fabric of the universe, but I also don't care very much, and I'm dead certain there's no medal involved.

can also bring more light to what is going on. People are pissed, rightfully so and what I see around me are people asking more questions and wanting to know where all the money went(and these are not people who normally pay that much attention to Wall Street except to say they are all crooks and that was before September.) They may not understand the fine print but they do know they and their kids and grandchildren are being hosed and that the crooks have taken it to a new level. For Obama to keep them quiet he should start arresting or sending out subpoenas. They want heads on a stick and frog walking. Now it maybe convenient for Wall Street and the administration to focus on the bonuses but they are selling Americans short if they think America is not paying attention. The backlash has only begun.

What if bankruptcy is the only option? What if the longer we wait to do so, the worse things will get?

Why try to even save these so-called "assets"? They aren't assets, but worthless gambling debts in the form of derivatives. Instead of pouring our money into a black hole, write off these bets, and put these institutions into bankruptcy reorganization. Perhaps the cascade suffered after Lehman was due largely because we were still treating these contracts as valid, when they should be nullified, and the system as a whole basically written off and started over with a clean slate. Put it all into an orderly reorganization, put the crooks in jail, and sort out the messy details after the economy is moving again.

But I'm sure this is overly simplistic. I just get sick to my stomach at the thought of our money pumped into this thing with no oversight by a private central bank with questionable motives. These "instruments" called derivatives aren't productive inputs to the economy. We got along fine without them for decades. They should be made illegal, retroactively even. Else we are forced to repeat history.

I say all of this acknowledging this is from my own limited viewpoint. I've never worked in the financial sector, nor is my educational background steeped in economics. I'm very much on the outside looking in, but all I see are crazy people unwilling to let a broken system go.

according to the interview last week with David Viniar, Goldman Sachs' CFO, the bankruptcy of AIG would not have cost them anything material, since they were almost completely hedged. GS is said to be the firm with the most exposure to AIG.

So based on what GS is saying, there was and is no systemic risk from an AIG bankruptcy. It is time to fined out why they were quietly and without approval put under Treasury control, who decided this, and it is time to shut them down now. Put them in front of a bankruptcy judge who can sell the healthy parts and sort through the claims involving losses.

It's amazing to me that Goldman now says it didn't matter to them (regarding AIG). Paulson made the decision to save AIG and let Lehman go. I was told that Goldman would have taken a huge hit to their capital and it might have put them under, and Paulson saved his friends.

We need a new world other than the World of Goldman Sachs.