The 2009 AIG bonus fiasco

The government funded bailout of the banking system is featuring heavily in the news these days, and for good reason. There's something perverse about paying billions of dollars to the very people who created the mess in the first place. As companies grow in size and influence, their potential failure becomes a larger problem. If the Big Three auto manufacturers, for example, were to go out of business, they would pour thousands upon thousands of blue collar workers into the unemployment lines, not to mention the catastrophic impact on the steel industry and other suppliers of raw materials.

The financial industry is in a similar state, as the value of the whole banking system depends on the faith of its investors. Suddenly going bankrupt is bad for that sort of thing. Since many of the affected companies, like AIG, are multi-national, and the US dollar is so important in international commerce, a failure of the US banking system would have consequences felt all over the world.

So clearly we can't simply let these giants fall, because if they do they'll fall on us. But they don't have to rub our faces in it, which is what some of the top-paid employees at AIG seem to be doing. In a fiasco that recalls the top executives of the Big Three automakers flying to Washington, D.C. on private jets to beg for money, AIG just paid the parties responsible enormous bonuses.

Despite receiving $170 billion in government bailout money, 73 already highly-paid employees at AIG each received over $1 million in bonuses on Friday, March 13, 2009. One employee received over $6 million, and the total bonuses amount to $165 million (about 0.1% of the bailout package so far, for those keeping track). To the American taxpayer, it looks like we're forking over millions of dollars to the very people who caused the crisis in the first place by their greed, poor judgment, and manipulation of the less-educated poor into accepting variable rate sub-prime loans that were destined to balloon out of their ability to pay. On the surface, it looks like nothing less than blackmail. "Give us millions of dollars or we'll let the economy collapse."

Understandably, the public reaction largely consists of variations on "They shouldn't be getting bonuses, they should be getting fired." Congress has joined the moral outrage, telling AIG that if they don't give up these bonuses willingly, they'll tax the money back out of them (although since some of the recipients are not US citizens, this may be of dubious effectiveness). Senator Chuck Grassely (R-IA) has received a fair amount of bad press for suggesting (obviously, I think, facetiously), that they should consider an honorable suicide.

Performance bonuses vs. retention bonuses

On the surface, at least, it looks black-and-white. The people who created the crisis should not be receiving performance bonuses for screwing up catastrophically. Any blue collar worker would be fired for such staggering incompetence.

Except that these aren't performance bonuses.

And that's where the situation gets complicated. In the highly competitive world of high finance, the most in-demand people tend to change jobs like they change their socks. Constructing elaborate deals, working their way around the complex US legal system, and making sure everything will work out in favor of the finance company is hard work. It takes a great deal of education and years of experience. The ones who show results can see competition from numerous companies trying to hire them away from their current jobs.

This $165 million is in retention bonuses, not performance bonuses. Retention bonuses are contractually agreed-upon bonuses in addition to the regular salaries of the financers that simply ensure that he's receiving enough money to be happy where he is and won't go gallivanting off to the next company that offers him a newer car. So it's not tied to his performance and it's not, by the terms of the contract, affected in any way by the fact that he screwed up so badly that it affected the entire global financial system.

I bet that phrase has never appeared on your annual performance review.

The second complication is that these bonuses were pre-arranged by contract. Despite the moral outrage, neither AIG nor the US legal system can go around tearing up business contracts just because they look like a bad idea in hindsight. Contractual agreements are a long-standing fundamental of the legal system and it would set a terrible precedent to suddenly decide that a perfectly legal agreement between two parties should be discarded because the public is upset about it.

So Congress is making the appropriate noises, wringing their hands, gnashing their teeth, and telling the voters that they're doing everything in their power to ensure that these evil, greedy men will get what's coming to them, but ultimately there seems to be little that can legally be done about it. They got what's coming to them all right, all $165 million of it.


All right, so by contract, AIG had to pay these bonuses to its employees. That doesn't change the fact that the public at large is also calling for the company to terminate these employees. Sounds like a pretty good idea, they screwed up, so fire them, and hey if they're fired, you won't need to pay them, right?

Almost. 11 of the people who received these bonuses don't even work for AIG anymore (they received the bonuses paid at the end of their retention terms). So that won't completely solve the problem.

Indeed for the remaining employees it would create more problems, because AIG and many financial analysts are claiming that only the people who put these immensely complex failed deals into place have the knowledge and experience (some amusingly word this as "talent") to unravel them and stabilize the market again. It's like firing all your COBOL programmers with Y2k rapidly approaching, sure they were responsible but your Java and Visual C++ people aren't going to be able to help, at least not in a timely manner. Let's not make the problem worse.

Nobody is going to argue that the American public hasn't been served a big, steaming shit sandwich, but it looks like we're going to have to choke it down.

National Public Radio