I’m as big a fan of honoring contractual obligations as the next guy. Maybe even more so. As it happens, I also have a few shares of AIG papers to the bathroom wall. And yet, I am trouble.
As the New York Times reported:
Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.
The “lawyers said” makes for a fine excuse. Notice how everyone, even AIG Chairman Edward Liddy cares deeply about what the lawyers say? It makes me feel so, so, lawyerly. But I must admit, if I was the lawyer advising Liddy, that would probably be only a small part of what I had to say. I would find reliance on my say to be disingenuous, bordering on deceptive. I would tell Liddy that there are a multitude of ways to alter and modify these contractual obligations, created before the bailout and paid long after the taxpayers’ $170 Billion check had been cashed. Yes, I would put my lawyerly mind to work.
Connecticut’s conscience, Norm Pattis, is not happy about it either. This is important as he is far more likely to be eating next to one of these bonus babies at a fine Greenwich brasserie than I am, and Norm could sneak some extra salt on their steak au poivre when they get up to use the facilities. I can do little more than think bad thoughts.
Did I read that right? The federal government out and out gave American International Group $170 billion to keep from folding, and the company now plans to give $160 million in bonuses? I understand the need to stimulate the economy, but tossing lard-drenched oats to the swine makes no sense. Don’t we ever make the pigs squeal for their supper?
Norm is deeply upset by Liddy’s explanation.
Listen to Libby: “We cannot attract the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.” I am beginning to rethink whether balcony diving ought after all to be the fate of those who cannot face their failures.
The slimy shucksters who bobbed for our dollars by promising golden apples at the bottom of every barrel? Why are any of the “best and brightest” who waltzed we trusting suckers to the brink of disaster still working? Bonuses for this crowd? They’re lucky they don’t get bullets instead.
I wouldn’t want to get anywhere Norm and a salt shaker if you plan on paying for dinner with your bonus check. But Liddy’s reliance on the “best and brightest” phrase, derived from David Halberstam’s 1972 book of that title, reminds us of the fallacy of his thinking, and his argument. Are they the best and brightest, having driven AIG to need a $170 bailout? Are the “best and brightest,” putting aside Liddy’s hyperbolic claim, worth $160 Million in bonuses? Are they worth it under these circumstances?
Liddy obviously believes so, and is willing to put AIG on the line to back up his view. Jim Chen provides a reminder of what Halberstam’s “best and brightest” accomplished. What makes Liddy think his will do better? It’s not often that a phrase has been so successfully turned from sword to shield, masking its underlying point to the tune of $160 Million. It’s up to us to decide whether we accept Liddy’s use of the phrase, and his decision based on it.
While I have little doubt that AIG has a coterie of fine lawyers, perhaps even the “best and the brightest,” at its beck and call, I nonetheless have a small bit of advice to offer. Let us assume that Liddy, as a good and honorable capitalist, feels duty-bound to the good men and women due bonuses for the failure of AIG to fulfill their expectations. Let us further assume that Liddy does not wish to be remembered as a singular target of greed, hatred and derision. Here’s a quick trick for your bag, Ed.
Agree to pay out the bonus to each and every “B&B” employee, as contractually obligated, but inform them that if they do not waive their bonus, you will do so publicly, announcing their names, addresses and the amount of their bonus. State that you are doing so because the “lawyers said” you had to, but that these people are undeserving of these bonuses, given the bailout of AIG by public funds, but have chosen to take the tax dollars of their friends, neighbors and family. Of your friends, neighbors and family as well. Of your tax dollars. They have made the choice to demand compliance with their contracts in the face of AIG’s failure, and while others go hungry, they will eat too well.
Don’t worry about privacy concerns. The money is the same color as that paid to the group of banks and brokerages already released. When you are gasping for breath, privacy is the least of your problems. Your bonus babies won’t complain, as they would never want to be viewed as whiners. They are proud. They are the best and the brightest, after all, and will certainly recognize that the use of public monies by a public company means public exposure. Those who take their bonus will bask in their glory.
And one more thing. Throw in a free dinner at Norm’s favorite restaurant. He’ll make sure that some salt is rubbed in the wound.
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Shucks!
I thought you were going to discuss the provision in the agreements that guarantees the bonuses.
This is just more pounding on the chest.
If some clerk signed on for a bonus, busted his ass, did a fine job, then why the heck shouldn’t he get his bonus, as promised? It’s not his fault that everyone around him went mad.
I know, I know. Though if the bonuses were going to some clerks in the back office, say a $1000 bonus for forms well filled-out, I would likely consider it an obligation worthy of fulfillment.
There’s a bone in my head that makes it impossible for me to believe that the “B&B” would jump ship if they didn’t get their $25 million bonus. Is anyone really that necessary to any enterprise that they are worth that much? Perhaps I would buy into Liddy’s argument more easily if he had said, “without these best and brightest, we would have failed to the tune of a $500 billion bailout, so they have actually saved the taxpayers a ton of money.” But then, he didn’t say that.
I usually enjoy your columns, but this one gets me a bit. Why, as an attorney, are you advocating the extortion of an employee by an employer? There are thousands of individual employees in the group of employees getting bonuses. They have contracts. They worked. They are entitled to be paid.
The problem here is the governments failure to condition the bailout funds on the foregoing of bonuses by the top executives. No extortion, no blackmail. The decision makers at AIG should have been given a choice – bailout funds and no bonus or no bailout funds and no bonus, since the company would go under without the bailout funds.
But the government didn’t do that, and now the very same politicians are screaming that AIG is honoring its employment agreements?
Something smells.
[Ed. Note: Self-promoting link to commenters blog deleted.]
I like your “bonus plus sunshine” proposal, Scott. Maybe the sunshine should include describing just what the boner did to deserve the bonus. I’d love to see who “earned” lots of money by selling the very instruments that brought down AIG and our economy.
On the other hand, of course, I hope the word bonus doesn’t become another nasty four-letter-word. It will be interesting to see what new nomenclature will be used in its place.
Probably “enhancement,” short for “contractually-required associated performance enhancement.”
What’s so frustrating about this is that it’s exactly the kind of political grandstanding that will only muck up the economic recovery. Yes, it seems bad that bonuses are being given to executives who mismanaged 401(k) money, but the bonuses are a much smaller fraction of where the bailout money is going. So for the purposes of pandering to populist rage, you’re holding up a bailout that can only help the very people whose pensions are on the line, let alone not honoring contractual obligations and discouraging competent, honest employees.
Thorne, I think the issue is more that people who are unemployed, impoverished, or massively in debt have very little sympathy for the AIG execs making large bonuses, which is completely understandable. But I think the larger issue is relaying to the people who got the short end of the stick that the bailout is the only thing that’s going to save them, and that the bonus issue, while unfair on a very shallow level, is an incentive that was previously agreed upon before the mess started. In his address to Congress Obama seemed to emphasize explaining to the general public the need for the bailout and how it benefits all, and warned not to get caught up in the angry emotional side. It seems that part of his administration, at least, is not pursuing that mission as firmly as it probably should.
[Ed. Note: For future reference, you can either use a real name or link your website, but you can’t use a promotional name as well as website here. So I’ve made the choice for you this time by changing the name.]
If we were talking about employees pay, it would be one thing. But we’re talking about bonuses, which by definition is in excess of pay, even if part of an employment contract. There is the difference. That said, I agree that the bailout funds should have been conditioned (properly and adequately) on no executive bonuses, but government incompetence in handling the bailout funds doesn’t make the bonus payouts more palatable. I don’t care about how the politiians are screaming. I care about how my taxes are being used.
The flaw that permeates your comment is that you blindly accept two things: First, that the bailout is the “solution”. Second, that if Obama says so, then it must be. Not everyone is prepared to accept either premise quite as loyally as you.
Even assuming you are correct, what part of giving AIG’s top executives $160 million in bonuses provides a benefit to the public? That it won’t “muck up” the stimulus? A very shallow rationale.
Had AIG been forced into bankruptcy the obligation to pay the bonuses would have been extinguished. They received a federal bail out to avoid bankruptcy; receipt of those funds should have been contingent on voiding the bonuses. Getting a reward for screwing a pooch makes no sense.
Generally, when people whose job it is to make money (even if they’re not very good at it) get into a negotiation with people whose job it is to get themselves or somebody else elected or reelected, the people whose job it is to make money end up making money.
One might think that when the folks whose job is it to make money are in a desperate panic, say, because their multigazillion-dollar enterprise is about to go belly-up, things would be different, but one would apparently be wrong.
Sure: it’s outrageous; definitely, if the deal had been negotiated more competently, the bonuses might have been negotiated away (“Phil, in order for the company to be bailed out, we’re going to need for you to sign off on this waiver of your bonus; if you don’t, hey, no problem — we just go bankrupt, and you don’t get your bonus, anyway…”)
But, also unsurprisingly, if the folks on the government side thought about that in advance at all, they were successfully distracted (“Look, Mr. Secretary! The Winged Victory of Samothrace! Oh, nevermind — just sign here . . . “)
The distinction is that they are paying out the bonuses with our cash. No matter how poorly our politicos handle things or how easily they are distracted by shiny objects, the money still comes from our pockets. So here’s plan B. Take the bailout back and let them pay out whatever they want on their way down the toilet. We have leverage. We should use it. It’s still our money being used.
It doesn’t make it more palatable, but it does make you wonder if the anger is misplaced. Two administrations could have conditioned those bail out funds on renegotiated bonuses. Neither did.
BTW, in the financial world, a “bonus” is part of compensation, not a “bonus” in the real world. You get hired, your comp is $500,000, you get $150,000 over the course of the year, and the “bonus” is $350,000, payable in March of the following year. Its all a scheme to keep employees at the firm since if you are not employed on the payment date you don’t get the bonus. It also lets firms pay less than they promise since it is a “bonus.” That may not be the case for the “executives” but for the 400 or so employees getting some of that bonus money, that should be how it works.