thoughts on the bonuses

[jdonn]

I think you are framing the question deceptively as well.

I didn't think about it long enough to be deceptive.

I didn't mean to seem like you were doing anything shady or intentional, just that it was an unfair way to frame the question. But....

 

You are implying that people believe AIG deserves millions in bonuses

I am implying that Madoff went to prison while AIG execs are getting bonuses, nothing more.

Then I would like to know what you meant by referring to

what makes one a Ponzi Scheme with prison time and the other is a bailout with millions in bonuses?

as

a final frustrating question

[Winstonm]

Sorry, but I don't grock. I didn't sleep all that well last night and am pretty worn out today - so anything I wrote or will write may make less sense than normal, even.

 

I'll try to explain. Frustrating question - meaning simply the feeling of frustration over all the bailouts and what could be taken as shady dealings to protect the bankers, banking industry, and bondholders, while the US taxpayer gets to hold his nose.

[Al_U_Card]

Pay the bonuses in AIG stock, wtp? (Back-dated to the signing of the contract, of course :D )

[mike777]

In fact many companies are paying bonuses in the form of toxic assets and not cash.

 

The populist idea to retroactively tax a few people at 100% seems like a dangerous precedent.

 

I note that these guys did get the government to give them 170 Billion bucks. Paying them 170 million seems like too little in bonuses not too much.

 

I would guess alot of people would be willing to pay 170 million in a bonus to get 170 billion.

 

As others have noted it seems one small division placed a lot of bets with huge banks and other investors. First off I am not sure AIG lost these bets but would like to see reported more information on this issue. I assumed these bets were that massive amounts of loans would not go into technical default. However the counterparties to these bets demanded billions more in collateral as these loans declined. Again I think most of them did not default. In any event I would like to see more detailed information on what exactly is the problem and why the taxpayer is paying off these bets.

 

Why AIG could simply not hand over the cash and let the chips fall where they may needs to be made clear. Why the taxpayer should make these counterparties whole for trusting AIG is not clear.

 

 

Side note just as the commercial banking system has FDIC and the Fed to prevent bank runs, the heavily regulated insurance part of AIG is protected from "runs". These funds are segregated from the rest of AIG.

[Phil]

My outrage is that without the support AIG would be bankrupt and the contracts would be worth nothing, or that with total nationalization the contracts would be worthless, but with only 80% ownership somehow we have to make these dolts who stole us blind whole.

Exactly. Finally someone said it. No AIG = No Contracts.

 

I'm not a labor lawyer, but I rather doubt 'bonuses' get the same bankruptcy treatment as 'wages' anyway.

[kenberg]

I once read of a perhaps apocryphal incident where after one coutry intervened to save another, the ruler of the saved country commented "We will astound the world with our lack of gratitude". I forget the setting.

 

But fundamentally we are not saving these assholes because we like them but rather for our own good, at least our own perceived good. We did not do this for them, so don't expect gratitude.

 

Not only should we not expect gratitude, we should not trust them to work for the good of the company, or the nation, or to have any concern for anyone other than themselves. They are proven greedy bastards and we should accept that as fact and act accordingly. To my mind, that means we hold the bonuses until they perform the work that needs doing and that they claim only they can do. If they do it, give them their money and tell them to take a hike. They can co-operate with this plan or they can all see how it will go if we start looking closely for malfeasance. They can contemplate explaining the legality of each their actions to twelve honest citizens.

[helene_t]

I'm not a labor lawyer, but I rather doubt 'bonuses' get the same bankruptcy treatment as 'wages' anyway.

I have a vague memory from when we were taught bankruptcy law that the priorities of the creditors are

1) The lawyers who sort out the bankruptcy

2) Creditors with security in real estate

3) Wages

4) Government

5) All others, including employees' claims which are not wages, such as holiday extras.

 

(I may have it slightly wrong, it may also be different in US from Europe).

 

Then again my guess would be that "bonuses" are in category 5.

[kenberg]

The morning Post has the headline: White House Calls Bonuses a Late Surprise..

Yesterday i heard Larry Summers bragging about how rapidly the White House reacted.

 

 

This really is aggravating me. We are dealing with a company whose troubles are the result of their involvement with worthless trash. They attempted to conceal the true non-value of the junk they were peddling and the scheme fell apart. Have our leaders been assuming that we were dealing with honorable men? I hope we are not investing government money in helping Nigerians extract money from bank accounts.

 

All this being said, I think the imposition of a special tax on AIG bonuses is about the craziest damn idea I have heard. I seriously doubt it would stand up to a legal challenge, or at least I hope it wouldn't. Tomorrow the government might get pissed at me and decide to tax my income at 100%.

 

I still think that if they wish to wave the bonus clause of their contracts in our faces the best response is to look very carefully at the entire contract. Who knows, maybe there is another clause that says that if they engage in a scam that runs the company into the ground then the bonuses are canceled.

[hrothgar]

The Diane Rehm Show devoted an hour to this topic yesterday morning.

 

The show is titled "Bonuses and Disclosures at AIG". I found it balanced and informative.

 

You can listen to a recorded version at

 

http://wamu.org/programs/dr/09/03/17.php#24623

[ASkolnick]

Just for the record, unless you change the law, the highest rate you are allowed to tax at is 90%, not 100%.

[kenberg]

Just for the record, unless you change the law, the highest rate you are allowed to tax at is 90%, not 100%.

Should 10% appear to small

Be thankful I don't take it all

 

 

But 90 or 100, I don't like it. Way to gimmicky for me.

 

 

I'll survive if these guys rip us off for a bit more. The key is that they get the job done. I don't trust them at all, I don't have faith in their competence or in their integrity, and I get immensely frustrated when it appears that our leaders are in a perpetual state of surprise.

 

I really hope to hell this flight lands on at least a couple of wheels.

[barmar]

I think of this similarly to criminals getting off on a technicality. Yes, you're outraged when a person who is obviously guilty doesn't get punished, but the laws that allow this are there for a good reason. The same thing goes with the laws that require contracts like this to be honored.

 

Here's another difference with the auto industry: we haven't yet given the automakers their bailouts (or not all of it). When they went to Congress, we sent them away saying "Come back on March 31 with a plan to get back in shape, and if we like it we'll bail you out." This contingency pretty much requires them to renegotiate with the UAW. On the other hand, we gave AIG their money months ago, without similar strings attached.

 

BTW, to put this in perspective, the bonuses are only 0.1% of the bailout money.

[Winstonm]

Fresh from Yahoo News.

 

Sen. Chris Dodd (D-Conn.) looks like he may be facing a fresh political firestorm.

 

Dodd just admitted on CNN that he inserted a loophole in the stimulus legislation that allowed million-dollar bonuses to insurance giant AIG to go forward – after previously denying any involvement in writing the controversial provision. .

 

“We wrote the language in the bill, the deal with bonuses, golden parachutes, excessive executive compensation that was adopted unanimously by the United States Senate in the stimulus bill,” Dodd told CNN’s Wolf Blitzer this afternoon.

 

Oops. I wonder what lobby groups give the most money to Sen. Dodd - gee, could it be banking? Ya think?

 

Just more wood for my fire that there isn't any real difference between Republicans and Democrats, they are all simply puppets who look out for the special interests groups who sponsor them, their own reelection efforts, and not much else.

[macaw]

The one thing I've never seen in any of the reports is exactly when these bonuses were paid. Was it at the end of the year which is usually when those things happen? Or just now. Anybody know?

[jdonn]

Fresh from Yahoo News.

 

Sen. Chris Dodd (D-Conn.) looks like he may be facing a fresh political firestorm.

 

Dodd just admitted on CNN that he inserted a loophole in the stimulus legislation that allowed million-dollar bonuses to insurance giant AIG to go forward – after previously denying any involvement in writing the controversial provision. .

 

“We wrote the language in the bill, the deal with bonuses, golden parachutes, excessive executive compensation that was adopted unanimously by the United States Senate in the stimulus bill,” Dodd told CNN’s Wolf Blitzer this afternoon.

 

Oops. I wonder what lobby groups give the most money to Sen. Dodd - gee, could it be banking? Ya think?

 

Just more wood for my fire that there isn't any real difference between Republicans and Democrats, they are all simply puppets who look out for the special interests groups who sponsor them, their own reelection efforts, and not much else.

I agree.

 

It might sound corny, but what bothers me most is that he lied about it. Even more than that he included the provision.

 

In fact what bothers me second most if that it's so easy to insert loopholes into legislation without anyone knowing.

[onoway]

On the radio this afternoon it was reported that the person who is running AIG now ( I don't remember the name) has asked the people who got the bonuses to return at least part of the money. He was quoted as saying some had offered to return 100% of theirs. Can it be true? If so, how refreshing!

[Winstonm]

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

[luke warm]

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

i think you're being way too picky and pessimistic... once the green jobs get up and running and the tax rates are tweaked, we'll be ok... we won't even miss this bail out money

[kenberg]

On the radio this afternoon it was reported that the person who is running AIG now ( I don't remember the name) has asked the people who got the bonuses to return at least part of the money. He was quoted as saying some had offered to return 100% of theirs. Can it be true? If so, how refreshing!

Edward Liddy, no relation I hope to G Gordon, gives every appearance of being a very good guy to have around. He reports his salary as $1 per year. In testimony to Congress, he said that the main screw-ups are no longer employed by AIG and the folks getting the bonuses are those who are actually doing the hard work of straightening it all out. Perhaps so.

 

I would be delighted to find that my disgust with the whole operation is out of date and that Liddy has brought the operation back into the light of day. I am by nature an optimistic sort and perhaps this will all work out. Optimism is compatible with a certain amount of skepticism so we will wait and see. We may all end up owing Liddy a huge vote of thanks. This would be very nice.

[mike777]

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

This whole thing can get pretty confusing. As I understand the problem was:

 

1) It seems that AIG made a bet that these loans would not default. BTW it turns out that AIGFP division that made these bets were regulated by the Office of Thrift and by an SEC monitor and perhaps by the Brits London Office and more......this was not an unregulated hedge fund/division as reported in the press.

 

2) It appears that none or almost none did default. So in that sense they did not lose the bet.

 

3) The counterparties, example Goldman, got to set the price of the loans, not AIG. BIG mistake in creating the contract.

 

4) If the value goes down AIG has to put up more collateral in the form of cash. In this case in a few days Goldman and others drastically set the mark very low , say from 98cents on the dollar to 50cents. In a few days AIG had to come up with 80 billion bucks or more in Cash. Big Mistake in creating the contract.

 

5) AIG could have just said no, we will only give you a little more in collateral or pay you in assets not in Cash or you guys can force us into bankruptcy....counterparties you choose.

 

6) Instead without a court order or a shareholder vote the Government sent over billions....170 billion so far in exchange for 80% of the company.

 

7) This part is a pretty confusing, it seems the Government then basically made AIG payoff these bets at 100 cents on the dollar rather then negotiate a new price.

That means the governent cannot make a profit on this stuff, it just breaks even at best.

 

8) Note all or almost of these bets are still not in default in March of 2009.

 

9) Now the government seems to want to force AIG to sell itself off in parts at fireale prices rather than keep going as a concern .

 

 

10) This is a pretty confusing story, hopefully more facts will come out.

 

http://www.charlierose.com/view/interview/10153

[Winstonm]

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

This whole think can get pretty confusing. As I understand the problem was:

 

1) It seems that AIG made a bet that these loans would not default. BTW it turns out that AIGFP division that made these bets were regulated by the Office of Thrift and by an SEC monitor and perhaps by the Brits London Office and more......this was not an unregulated hedge fund/division as reported in the press.

 

2) It appears that none or almost none did default. So in that sense they did not lose the bet.

 

3) The counterparties, example Goldman, got to set the price of the loans, not AIG. BIG mistake in creating the contract.

 

4) If the value goes down AIG has to put up more collateral in the form of cash. In this case in a few days Goldman and others drastically set the mark very low , say from 98cents on the dollar to 50cents. In a few days AIG had to come up with 80 billion bucks or more in Cash. Big Mistake in creating the contract.

 

5) AIG could have just said no, we will only give you a little more in collateral or pay you in assets not in Cash or you guys can force us into bankruptcy....counterparties you choose.

 

6) Instead without a court order or a shareholder vote the Government sent over billions....170 billion so far in exchange for 80% of the company.

 

7) This part is a pretty confusing, it seems the Government then basically made AIG payoff these bets at 100 cents on the dollar rather then negotiate a new price.

That means the governent cannot make a profit on this stuff, it just breaks even at best.

 

8) Note all or almost of these bets are still not in default in March of 2009.

 

9) Now the government seems to want to force AIG to sell itself off in parts at fireale prices rather than keep going as a concern .

 

 

10) These is a pretty confusing story, hopefully more facts will come out.

That actually makes some sense to me, now. So it seems GS, CS, and others were using AIG to insure against capital loss on the MBS and such that they held, and AIG - most likely using a faulty mathematical model - assumed the risk, believing in a flawed model that said that what did happen could not happen.

[mike777]

What is even more irksome to me is the payoffs to the counterparties - why should institutions like Goldman Sachs get taxpayer money because AIG couldn't pay its gambling losses?

This whole thing can get pretty confusing. As I understand the problem was:

 

1) It seems that AIG made a bet that these loans would not default. BTW it turns out that AIGFP division that made these bets were regulated by the Office of Thrift and by an SEC monitor and perhaps by the Brits London Office and more......this was not an unregulated hedge fund/division as reported in the press.

 

2) It appears that none or almost none did default. So in that sense they did not lose the bet.

 

3) The counterparties, example Goldman, got to set the price of the loans, not AIG. BIG mistake in creating the contract.

 

4) If the value goes down AIG has to put up more collateral in the form of cash. In this case in a few days Goldman and others drastically set the mark very low , say from 98cents on the dollar to 50cents. In a few days AIG had to come up with 80 billion bucks or more in Cash. Big Mistake in creating the contract.

 

5) AIG could have just said no, we will only give you a little more in collateral or pay you in assets not in Cash or you guys can force us into bankruptcy....counterparties you choose.

 

6) Instead without a court order or a shareholder vote the Government sent over billions....170 billion so far in exchange for 80% of the company.

 

7) This part is a pretty confusing, it seems the Government then basically made AIG payoff these bets at 100 cents on the dollar rather then negotiate a new price.

That means the government cannot make a profit on this stuff, it just breaks even at best.

 

8) Note all or almost of these bets are still not in default in March of 2009.

 

9) Now the government seems to want to force AIG to sell itself off in parts at fireale prices rather than keep going as a concern .

 

 

10) This is a pretty confusing story, hopefully more facts will come out.

That actually makes some sense to me, now. So it seems GS, CS, and others were using AIG to insure against capital loss on the MBS and such that they held, and AIG - most likely using a faulty mathematical model - assumed the risk, believing in a flawed model that said that what did happen could not happen.

Winston I actually read a very long piece about the model used. It is pretty famous in the finance world. The model seems to work very very well. Note the model is all about default risk. These bets did not default.

 

 

 

"Gary Gorton, a 57-year-old finance professor and jazz buff, is emerging as an unlikely central figure in the near-collapse of American International Group Inc.

 

 

Gary Gorton

Mr. Gorton, who teaches at Yale School of Management, is best known for his influential academic papers, which have been cited in speeches by Federal Reserve Chairman Ben Bernanke. But he also has a lucrative part-time gig: devising computer models used by the giant insurer to gauge risk in more than $400 billion of devilishly complicated deals called credit-default swaps."

http://online.wsj.com/article/SB122538449722784635.html

 

 

 

 

 

However there was collateral risk and liquidity risk and other risks that the model, and this was known, did not model.

 

Think of it as if we own a house, we have default risk, fire risk etc. However what most of us do not insure against are Floods, running water risk. If our house is in a 100 year flood plain most of us do not insure against that risk.

 

In this analogy AIG bought hundreds of billions of houses and no flood insurance.

[hrothgar]

However there was collateral risk and liquidity risk and other risks that the model, and this was known, did not model.

 

Think of it as if we own a house, we have default risk, fire risk etc. However what most of us do not insure against are Floods, running water risk.  If our house is in a 100 year flood plain most of us do not insure against that risk.

 

In this analogy AIG bought hundreds of billions of houses and no flood insurance.

Your formulation makes it sound as if AIG got unlucky.

This is wrong. VERY VERY wrong.

 

AIG went down because the basic risk models used by their Financial Products group were fundamentally flawed.

 

At the most basic level, the risk models that they used when issuing Credit Default Swaps assumed that that foreclosure risk is Indendent and Identically Distributed (IID). Foreclosure risk was typically modelled as a normal distribution.

 

As we have now discovered, there is a great deal of correlation across foreclosures and the tails are a lot fatter than they thought.

 

The following piece is very "fluffy", but it provides a decent layman's discussion about what took place:

 

http://www.wired.com/techbiz/it/magazine/1...currentPage=all

[mike777]

AIG did not get unlucky, they were incompetent risk managers. I made that very clear. I said they knew there were other risks and did nothing about them. At at the very least not limiting collateral and liquidity risk was poor. My guess is they mispriced these risks. Keep in mind these contracts did not default.

 

 

 

As a side note I think the whole discussion of whether this was a Nassim Taleb Black Swan event(fat tail) or a Benoit Mandelbrot's Gray Swan of a flawed model that does not forsee disaster or whether this was a Black Bart(risk was fully knowable, fully discoverable in the course of competent work) per Janet Tavakoli is an interesting issue. Black Bart is said to have robbed California stagecoaches without ever firing a shot and the mortgage meltdown involved some bloodless robbery.

 

edit.

[y66]

That Charlie Rose segment that mike777 posted was good stuff.