Thursday, March 19, 2009

AIG Bonuses To The Best Of My Understanding

Well one of my regular readers, of the 4, asked my take on AIG and this current debacle. I want to start by saying that this is not a “news” blog in the sense that I rarely cover “breaking” or current news. The point of this exercise is to diagnose what happened and try to avoid repeating history. You are more apt to hear predictions about the future then you are to hear about something that just began to be news worthy today or yesterday. I have a fear of commenting on something that I don’t have enough facts about that I can’t make an informed assessment. This AIG Company is wrapped in so many layers of bullshit that I am having a hard time figuring out how holds what part of the blame. But I will share my perspective thus far. Maybe somebody else can fill in blanks or misassumptions that I have.

Now I had written some gobblely goop about who AIG is an their role in this mess. I had planned to start this post with it. But it took too long to get to the question most people are interested in. So I will get right to the sweet stuff and I will put the other text at the end for anybody interested in my take on their role.

As for the question I suppose is on everybody’s mind. (No, not how long after Hanna Montana turns 18 will we see nudey pics of her. Sickos, the other question.) What does LOL think of compensation in the millions for people who had to take billions in taxpayer dollars. The answer is that I don’t have enough information. But I do have a running opinion. They are preposterous and exemplify the definition of irrational greed. However, outside the moral bankrupt issues, the question is “are they legal?” We are a “nation of laws”.

From what I have come to understand is that these “bonuses” were paid out in respects to contracts. The word “bonuses” is misleading in this context. We all think of getting bonuses when we do something good and profitable for our employer. Christmas bonuses are usually based on the company’s profitability that year. But bonuses in this case really should have been called “retention”. I have heard them referred to as “retention bonuses”. Most of us think of the word retention when we think of lawyers. A company keeps a law firm “on retention”. That means they pay them, or in this case promise to pay them, a certain amount to sort our any legal issues that come up over a period of time. It doesn’t matter how many legal issues, they are to work on whatever comes up for that one set price. Now imagine you are in some legal dispute that is very complex. Maybe it is some kind of real-estate deal. They can get messy and a lot of research, some documented other just general findings, goes into these cases. You wouldn’t want your lawyer to just quit in the middle of it, forcing you to find another lawyer that has to go into it cold. It is my understanding that that is what these “bonuses” were contractually bound for. There are people who knew the inner workings of this very complex system of insurance law that were human assets to AIG.

One more quick analogy, cause that is what I do. Say you are in the middle of an operation. Your doctor has your heart out on the table. You are awake being kept alive by a machine. Would you turn to your doctor and say, “you know what, I can’t afford to pay you anymore. I am going to look for another doctor.” That is the situation AIG is claiming they were in. Now one of the representative in the grilling of the AIG CEO said, “couldn’t you go and find somebody else to do these jobs?” While it is true that there are many doctors that could have performed your open heart surgery, at that point, only one could do the trick. You had him on “retention” until that job was done.

Now that is what I understand that AIG is trying to claim. What I don’t understand is how our legislators didn’t have somebody look over their books and say, “hey who is this guy you have a couple of million dollar obligation to?” The fact that this is hitting them out of the blue scares the crap out of me.

One other point about the guy who receive $2 million form AIG for his services. Mabe he is “living beyond his means”. He has a 10 million house, another million dollar house in the Caymans, a wife with a giant coke habit, 20 cars all with loans, and health insurance to pay out of his own pocket. To him taking that $2 million hit was going to be devastating. He was promised it in the contract. I personally don’t believe AIG should have been allowed to promise one guy that amount of compensation at the same time they paid their janitor $10 an hour. But I have covered that in previous post.

As far as the Congress goes, they passed a law that was not only unconstitutional but dangerous I fear. I haven’t seen the details. But what if they tax 90% of the bonuses. What if a guy that works for AIG lived on a yearly bonus from them of $100,000. Is he now going to only bring home 10 grand? While I still believe we have made the best choice this past electoral season. I am not sure they have the intellect to see us out of our self made mess.


This is where the rest of the post begins. Read if you would like.

Now, who is AIG? As I understand it, AIG’s role in the housing debacle was “eyeballs deep in muddy water”. They made it much more appealing for Fannie Mea and Freddie Mac to take on the irrational home loan exposure. AIG is, as we all know, an insurance agency. Anybody who has read any of my post related to insurance knows that I think it all (health, auto, home, and the likewise) should be illegal in a free market system. Only life (which has a guarantee payoff) and maybe on the blackjack table should be allowed. It allows for the artificial rise in prices. Fannie and Freddie expected an “X” percent default rate on the mortgages they held. As long as that rate didn’t exceed that percentage, then they were still racking in cash. AIG insured them against bad single quarters where maybe that default rate was higher. The mortgage companies paid a pretty high premium and in return their business gained stability. Now those of you worried about the big banks spending money they on this silly stuff, don’t. You the borrower paid that premium for them. It was called “PMI” (Private Mortgage Insurance). So anybody who had no equity in their house when they bought it, were insured to pay off their loans by this AIG product. The problem is that quarter after quarter mortgages defaulted beyond the acceptable percentage. AIG was soon paying out more then it was taking in.

Now that is a very simplified version of what AIG did and still does. However the inner workings are beyond my grasp at the moment, and defiantly beyond my ability to put in laymen’s term.

That brings us to why the government thought they were so important. As the housing dominos started to crumble, our leaders felt that if AIG went belly up, lenders would stop lending money to people who couldn’t afford 20% down on the home they desired. That would bring the housing market to a screeching halt. Construction would stop, millions would become unemployed. More people would default on their loans, and the vicious cycle would spin into a depression. In the end it just seems to be slowing the inevitable. So the democratic government whose base are the “poor people” who can only afford expensive houses if they don’t have to save up for them were as afraid of the housing collapse as the paranoid aggressive chest pounding “faithful” base of the republican party were of Iraq’s nuclear weapons. The only difference is that the collapse of AIG really was going to lead to much worse economic times. Can’t really say the same about Saddam using nuclear weapons. So in a bold attempt to get re-elected, the democrats and many moderate republicans promised AIG the world if they would stay in business. It turns out “the world” meant a few irrational loopholes.

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