AIG says, Let Them Eat Cake!

Marie Antoinette lost her head to excessive spending

Marie Antoinette lost her head to excessive spending

Legend has it that in the days leading to the French Revolution, upon hearing of peasant sufferings, Marie Antoinette, Queen of France, retorted, “Qu’ils mangent de la brioche,” or “Let them eat cake.”  Regardless of whether the Queen ever uttered these words she had a reputation for living and spending extravagantly while famine swept away the common folks who were paying for Royal extravagance.  (If you have ever toured Versailles you know what I am talking about.) The obvious point being that the French monarchy could not feel the sufferings of the peasants.  Today the management at AIG, a company living on the charity of the American people, feels detacted from the suffering of not only its stockholders but the American people as well.

The Best and the Brightest

This is not the first time I have written about AIG and I keep bringing up this poorly run company up because what is happening at AIG is an indicator of what is wrong in corporate America today.  (That and the fact that I am a stockholder in the company – two ways as a matter of fact, first there are the worthless shares I own personally and then there is my public ownership purchase with American tax money by our beloved government.) AIG, through its sale of CDS (Credit Default Swaps) has and continues to lose billions of dollars as businesses fail and investments tank, forcing huge payments.  In the face of poor management decisions that have resulted in the largest corporate losses in history ($62 billion in 2008 Q4 alone,) AIG insists on paying out $165 million in executive bonuses.  Why would a corporation reward poor performing managers?  According to AIG CEO Edward Liddy, “We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses, which are now being operated principally on behalf of the American taxpayers – if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”

Excuse me?  Do the best and brightest talents lose $62 billion in a single quarter?  However, this is beside the point, whether or not the losses are the result of managerial decisions, should anyone receive bonuses when the company loses money.  I had an inside connection at AIG and I know that in 2001, middle management bonuses were tied to corporate profits and non-managerial employees had their bonuses tied to their performance.  So why is it the norm that senior management receives their bonus based on a predetermined contract regardless of performance?  This is a leading indicator of what is wrong in corporate America.  The mindset seems to be that a company must retain senior managers regardless of performance and in a very irrational thought process; these managers are seen as “the best and brightest talent” even in the midst of extreme failure.

Why worry, it’s only a small portion of the losses

Last week a reader commented that Congressional Earmarks represented a meaningless 2% (he said 1% but his math was erroneous,) of the federal budget.  Logically, I would expect this person to draw the same conclusion about AIG bonuses.  After all, $165 million is only .3% of AIG’s 4th quarter losses and only .09% of the AIG bailout money.  So what is the big deal, right? The “deal” is, this is an indicator of how money is valued and how waste is viewed.  In response to AIG’s executive bonus plan, CNN reported that Treasury Secretary Timothy Geithner was “really upset.”  ABC’s This Week interviewed Obama’s economic adviser, Larry Summers where he expressed outrage at AIG.  Some members of Congress expressed similar anger.  Why? Where was this anger and outrage last week when Congress wasted nearly $8 billion in taxpayer money?

The hypocrisy oozed from Representative Barney Frank (D-MA) when he accused AIG of “abusing the system.”  Congress abuses the system every time it passes budget appropriation bills.  Frank used his position on the House Financial Services Committee to protect and profit from Freddie Mac. (Unknown to most voters, Frank’s long-time partner and lover was a Freddie Mac executive – a guaranteed scandal had Frank been a Republican.) Nevertheless, I digress.

Shareholders are not taxpayers — are they?

Summers explained that the Obama administration doesn’t care, “about the shareholders of AIG,” but is trying to safeguard the U.S. taxpayer.  (I’ll stifle the cough and eye rolling here.) Apparently, the administration is so buried in its own campaign rhetoric they have forgotten that stockholders ARE taxpayers and in fact AIG stockholders pay statistically more in taxes than most of the people Summers was trying to impress.  Regardless, the bonuses now being paid are the result of irresponsible executive contracts that did not hold management accountable for failure.  Now like any stockholder, the U.S. government must sit back and watch as the top brass get polished while it gets screwed, (and by it, I mean the rest of us.)

Do we have to take it?  The United States owns an 80% stake in AIG.  As a major stockholder, the federal government should vigorously pursue all means to pressure AIG to renegotiate executive contracts, tying bonuses to performance – no profit – no bonus – more profit – more bonus.  All corporations should operate this way but the government has no right to regulate such things unless it owns a significant number of shares, as is the case for AIG.  All stockholders should insist that top executive have an incentive to succeed and consequences for failure.

For now, I agree with Summers when he said, “We are a country of laws. There are contracts. The government cannot just abrogate contracts.”  Dictatorships and totalitarian regimes disregard contracts and private ownership; we do not.  However, as the company’s largest stockholder, the government can and should pressure the company to renegotiate those contracts in light of the current situation.  Boston University School of Law professor, Tamar Frankel, “Head you lose, tails I gain,” sums up the situation nicely.

UPDATE: Previously, in this blog I complained about lack of disclosure regarding AIG’s CDS counterparties.  After all, the bailout money was going to pay their losses.  Today, March 15, AIG released the list. It is interesting to note the companies (banks) cashing in CDS during the final quarter of last year.  My knee-jerk (and quite unresearched) reaction is that there might be a connection between government financial interests and the survival of these financial institutions.

  1. Nothing wrong with bonuses if their earned. Something really smells!

  2. Exactly, when they are earned.

  3. interesting post. but as soon as the government decided to intervene and keep AIG afloat, it made clear that the free market wasn’t our top priority. this focus on the sanctity of contracts is asinine. those employee contracts – as well the trillions of CDS contracts – would be worth nada if our government hadn’t stepped in with our tax dollars.

    if it ends up being this tough to renegotiate some simple employment contracts with an entity that is 80% owned by the US government, I shudder to think how we are going to get the real negotiation that really needs to get done (with all those CDS holders).

    btw, why has no one discussed getting AIG to agree to alter its bonuses to even larger dollar amounts, but only payable in AIG shares. If these employees are so bright and committed, then that should be the perfect solution. company succeeds, executives get rewarded handsomely. of course, you and i both know AIG common stock aint worth shit, and eventually the company will just be sold off piece by piece until there’s nothing left, but it would at least prove how little these executives really care about the success of the company.

    also, Im going to add you to my blogroll if you dont mind. I don’t agree with everything you write but you make a lot of interesting points.

    • I like your idea of converting the bonuses to AIG stock. A company I worked for did this in the 80s when the company was struggling. They didn’t realize they were at the beginning of a boom and 10 years later most of the senior management went from being underpaid to being millionaires. On of the VPs told me he was insulted by the stock at the time and joked about wallpapering his office with his bonus. He also said everyone worked to increase the value of their bonuses. They succeeded.

      Deadman, if we agreed on even 90% of things one of us would not be thinking. I expect people to disagree and respect that. Every point of view is welcome here as long as it is not hateful. I am also not afraid to change my opinions IF sufficient evidence compels me to do so. Opinions rarely change my opinion, though because Americans, all-to-often base opinion on their emotional reactions. That is why my essays sometimes run long – I’m supporting my opinions with as many facts and compelling arguments as I can muster.

      I’m adding you to my blogroll as well. Great to have you as a friend.

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