17 March 2009

Going Apoplectic Over AIG

There has been plenty of righteous indignation coming out of Washington, D.C. regarding AIG paying $165,000,000 in bonuses after receiving between $162,500,000,000 and $170,000,000,000 in federal rescue bailout money. If you have missed the political theatrics, here is a small sampling:

"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?"
President Barack Obama

"This is a corporation that finds itself in financial distress due to recklessness and greed."
President Barack Obama

"I suggest, you know, obviously, maybe they ought to be removed. But I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide.

"And in the case of the Japanese, they usually commit suicide before they make any apology."
Sen. Charles Grassley (R-IA)

"This is another outrageous example of executives -- including those whose decisions were responsible for the problems that caused AIG's collapse -- enriching themselves at the expense of taxpayers."
Sen. Chris Dodd (D-CT)

"It's an idea very much at the embryonic stage. You can write a tax provision targeted specifically at 98 percent of the taxable proceeds."
Sen. Chris Dodd (D-CT), referring to the idea of taxing the AIG bonuses away

"Our financial sector will never heal unless the financial companies who helped create this economic crisis begin to regain the public trust. The actions of AIG do just the opposite, and every American is justified in their outrage at this breach of public trust."
Sen. Harry Reid (D-NV)
There you have just some of the sanctimonious politicians who are confirming that outrage over the payments of the bonuses by AIG is justified, and insisting that the government must do something to recover those bonuses. Look for any news story about AIG bonuses, and you will most likely find more of the same.

So, what could have possibly possessed the leadership at AIG to pay these bonuses, certainly knowing full-well that it would kick-off such a firestorm? Well, as CEO Edward M. Liddy noted in a letter to Secretary Geithner, AIG was contractually obligated to pay the bonuses that were agreed to in early 2008, well before any TARP restrictions on pay.

I do not participate in any AIG bonus or retention program, have never attended a single AIG sales event or conference and, before September, did not have any relationship with AIG. I was asked to serve by your predecessor in connection with the acquisition by the government of almost 80% of AIG's outstanding shares. My only goals are to have AIG repay, with interest, to the maximum extent possible, the assistance the American taxpayers have given it and to continue AIG's main insurance companies as strong, thriving businesses and contributors to the economy. My only stake is my reputation.

In the first quarter of 2008, prior management took significant retention steps at AIG Financial Products. These arrangements were designed at a time when AIG Financial Products was expected to have a significant, ongoing role at AIG, and guaranteed a minimum level of pay for both 2008 and 2009. (Due to losses at AIG Financial Products, a senior manager will receive about 43% of his 2007 expected level for 2008.) Some of these payments are coming due on March 15, and, quite frankly, AIG's hands are tied. Outside counsel has advised that these are legal, binding obligations of AIG, and there are serious legal, as well as business, consequences for not paying. Given the trillion-dollar portfolio at AIG Financial Products, retaining key traders and risk managers is critical to our goal of repayment. This is all discussed in more detail in the attached "white paper."
AIG was contractually obligated to pay, but what could be the worst possible scenario if the company had chosen not to uphold their end of the contract? The truth is, AIG (and the taxpayers) could have then been on the hook for twice as much money.

If the crumbling insurance giant didn't make good on its retention packages, employees could sue the firm for at least $330 million -- double the total size of the bonuses.

And, some say, a successful lawsuit could ultimately mean a higher tab for taxpayers, who are already footing the bill for $162.5 billion in rescue loans and investments into AIG from the federal government.
Let's recap. AIG's CEO sent a letter to Treasury Secretary "Turbo Tim" Geithner on 14 March 2009 to inform him that these bonuses would need to be paid in order to avoid serious legal and business consequences. Politicians and the media then became sanctimonious over retention packages that amount to about 0.1% of the bailout money provided to AIG so far, all the while willfully or ignorantly overlooking the fact that AIG would be legally liable for twice as much if the bonuses weren't paid.

You will notice, however, that the picture being presenting by the politicians and the media is quite different than a basic showing of the facts. The media isn't interviewing AIG's CEO for his explanation of why the bonuses were paid. Further, the media isn't interviewing any of the blathering politicians to find out if they were aware of how much it would have ended up costing if AIG had not fulfilled the retention packages. The spin is simply one of a greedy corporation that is taking advantage of large sums of bailout money, with no context, or even a full disclosure of the facts.

Strangely enough, this same level of outrage and righteous indignation was not evident when $410,000,000,000 in taxpayer money was being allocated, with somewhere between $3,000,000,000 and $7,700,000,000 being funneled into pet projects. What was being said about taxpayer money going to projects like swine odor and manure management research, a carbon neutral green campus in Nevada, the Old Tiger Stadium Conservancy, theater renovations in California, and the Polynesian Voyaging Society?

"In farm country, manure and odor management are profoundly serious challenges that can be mitigated through scientific research," Senate Agriculture Committee Chairman Tom Harkin, D-Iowa, said in a Senate speech last week. His defense of swine odor research and a $5.7 million earmark for school construction in Iowa covers four pages in the Congressional Record. [...]

"I have an obligation to the people of Nevada to make sure there is not some bureaucrat down in one of these big offices in Washington, D.C., who determines every penny spent in Nevada," said Senate Majority Leader Harry Reid, D-Nev. [...]

Sen. Carl Levin, D-Mich., defended $3.8 million to help redevelop Tiger Stadium into an anchor for a redevelopment project of retail outlets, restaurants and other commercial projects in Detroit's struggling Corktown neighborhood. [...]

Appropriations Committee member Dianne Feinstein, D-Calif., gave an impassioned defense of the practice.

"Yes, I fight for funds for my state. That's what I came here to do," Feinstein said. "Candidly, why be an appropriator if you can't help your state?" [...]

After Coburn scoffed at an earmark by Inouye to give $238,000 to the Polynesian Voyaging Society, which runs voyages using ancient navigation methods in double-hulled sailing canoes, Inouye made an impassioned defense. He said the program instills native Hawaiian youth pride in their heritage and helps troubled, mentally ill youth.

"The voyage is much more than one of miles," Inouye said. "It is a voyage of young people discovering that they are able to accomplish much more than they ever thought possible."
Beyond the earmarks (which were between 0.7% and 1.9% of the total bill, depending on which numbers were used), the $410 billion omnibus spending bill included an 8% discretionary spending hike, instead of keeping spending at current levels. Also, an amendment to end automatic pay raises for Congress was defeated.

So, Congress and President Obama are indignant over AIG fulfilling contracts which they are legally obligated to pay, but the same politicians defend billions in pork spending, an 8% increase in discretionary spending, and the maintaining of automatic pay raises for Congress.

Maybe Congress, the president, and the administration should all take some of Senator Grassley's advice and "come before the American people and take that deep bow and say, 'I'm sorry,' and then ... resign." I won't suggest that our politicians commit ritual suicide, unlike what Senator Grassley suggested some executives do because they actually upheld the legal obligations of their business.

What a bunch of two-faced asses.


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