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AIG Pay Madness Needs a Stop From Geithner: Roger Lowenstein
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Commentary by Roger Lowenstein
March 17 (Bloomberg) -- Treasury Secretary Timothy Geithner is unhappy that American International Group Inc. is paying tens of millions in bonus payments to some of its traders.
So why doesn’t he forbid them?
The company says it’s afraid of being sued. But contrary to what lawyers and legalistic bureaucrats will tell you, there are worse things than lawsuits. Stiffing taxpayers to pay gluttonous derivatives traders -- and in the midst of an economic crisis -- is among them. To judge by his recent comments, even President Barack Obama is looking for a way to cancel the bonuses. Besides, this is a lawsuit the government just might win.
AIG is doling out $165 million to traders in the very group that caused the company to fail. The payments are part of a $450 million bonus pool that AIG agreed to early last year, when it was beginning to take on water, and when it feared that high- flying traders would jump ship.
Since then, AIG has been bailed out four times by the federal government. The taxpayers have provided AIG with $173 billion in investment and loans. That’s enough money to run the entire state of New Jersey for six years.
Although other companies have gone on the federal dole, of all the government’s corporate stepchildren, AIG is making the least progress.
Citigroup Inc., which got three bailouts, at least operated at a profit during January and February, according to its chief executive officer, Vikram Pandit. Morgan Stanley, which got a bank charter last September, is off the critical list. But the news at AIG keeps getting worse.
Worst Outrage
Ben Bernanke, the normally even-tempered Federal Reserve chairman, has said he is fuming over the way the regulated insurer used its high-rated balance sheet to run a hedge fund- type operation that helped to derail Wall Street. Lawrence Summers, the president’s top economic aide, says of all the outrages, AIG is the worst.
So why is the government allowing AIG to use its taxpayer lifeline to pay seven-figure bonuses? Seven employees will get at least $3 million and one will get $6.5 million. What kind of company pays such bonuses for a year in which it lost $99 billion -- the biggest loss ever by a U.S. corporation?
My inner jester says, “Maybe they got the sign wrong,” that is, maybe the employees will be paying back the company?
No such luck. Edward Liddy, AIG’s CEO, says he reviewed the bonus agreement, and the contracts are airtight. Liddy says the bonuses are “distasteful,” but if he doesn’t pay them, he can’t retain “the best and the brightest talent.”
Say Goodbye
In that case, he should let that “talent” go. All it has done is lose the taxpayers oceans of money. It’s time to consider folding the non-insurance part of AIG for good.
Liddy, though, works for Geithner. The U.S. government owns almost 80 percent of AIG’s stock. Assuming the checks haven’t been cashed yet, here is what Geithner should say to Liddy: “Sorry, Ed. We’ll keep track of what we promised, and maybe in a couple or three years, if AIG is earning money, and a pool exists (outside of taxpayer funds) to pay bonuses, then OK.”
If its traders end up suing to get their full bonuses, the company (and the government) could claim that the promised bonuses were a “fraudulent conveyance.” This defense is usually employed in bankruptcy cases. Under the theory of fraudulent conveyance, it is illegal to transfer assets that are needed to pay creditors. So, if the owners of a highly leveraged company give themselves a big dividend, leaving the corporation unable to service its debts, the creditors can sue to reclaim the funds.
Dire Situation
True, AIG wasn’t insolvent when the bonuses were negotiated. But it could argue that it was facing such a dire situation that it didn’t have the money it agreed to pay. Thus, the promised bonuses exposed its creditors to potential loss.
The U.S. government, which loaned the company billions of dollars, might claim this invalidates the contracts. Granted, this would be a tough case. And contracts shouldn’t be breached lightly.
This is why it would be much smarter, on all sides, to renegotiate the bonuses. Pay a very modest portion now and give the employees a chit for the rest to be redeemed later. Employees who are unhappy with such a compromise can take it to a judge. AIG then would have the option of filing for bankruptcy, rupturing the contracts, and putting an end to the derivatives business for good.
Gone Too Far
Geithner & Co. never should have allowed it to get this far. When the government agreed to the first rescue, in September, the U.S. could have demanded a waiver of bonuses as a condition. That rescue was enacted under incredible time pressure. But Henry Paulson, Treasury secretary then, did take the time to insist on the resignation of Robert Willumstad, AIG’s top executive, while denying him any golden parachute. Willumstad, who recognized that the situation was larger than himself, had the grace to agree.
It will be interesting to see if the million-dollar traders have the same sense of perspective. Of course, the only way to overhaul corporate pay, and to end such outrages, is to regulate bonuses before they are agreed upon. One remedy I have proposed would require big bonuses to get prior shareholder approval.
Now read about Ronald Logue, the CEO of State Street Corp. He received total pay of $28.7 million in 2008. The company’s stock fell 51 percent last year and his bank took $2 billion in federal bailout money. This year, the stock is down 36 percent.
Nice work, if you can get it.

source:http://www.bloomberg.com/apps/news?pid=20601039&refer=columnist_lowenstein&sid=anq1Ovj_7KBU