
Fire the AIG management - sanj
http://blogs.law.harvard.edu/philg/2009/03/18/fire-the-aig-management/
======
old-gregg
I used to despise tax evaders and considered my taxpaying obligations to be an
essential part of living in a civilized society. While I didn't really think
in terms of "getting something back" but I've been assuming that, in general,
my own well being, especially later in life, is kind of guaranteed simply
because I've been a good citizen of law obeying society.

During 2008 my attitude towards paying federal taxes has changed dramatically.
What I'm seeing now is pretty much a racketeering organization where
healthcare, finance and law have semi-merged with the government and are
pretty much holding the rest of the population as their personal slaves.
Justice and health (legal and medical costs) are out of reach for nearly
everybody and, frankly, what else is a government good for? Maybe for
protection from Canadians or Mexicans?

I don't want to sound like a crazy conspiracy theorist or a libertarian, but
paying taxes now looks pretty much like feeding these gangsters and I'm
determined to find every single available legal loophole and exploit it in
full. I also like to entertain myself with a thought that ultimately, over my
entire lifespan, this decision will cost US government a significant sum of
money, especially if I am not the only 30 year old aspiring entrepreneur with
such attitude.

~~~
tc
Don't be so sure you won't end up a libertarian if you keep your eyes open.

The injustices you've just discovered are the underlying sentiments that
motivate most libertarians. The basic libertarian insight is that far from
being new, these activities have been the fundamental business of government
for millennia. In times like these, the curtain is pulled back a little bit
farther than usual.

------
davetufts
Directing anger at AIG is misguided. Our government is the wrongdoer here.
Failing to let state bankruptcy court and natural liquidation happen - as we
did with Enron - started the problem.

The problem with exec bonuses was exasperated in the final version of the
American Recovery and Reinvestment Act of 2009. Here, Chris Dodd added the
“Dodd amendment” <http://www.google.com/search?q=dodd+amendment>

It reads: ‘‘(iii) The prohibition required under clause (i) shall not be
construed to prohibit any bonus payment required to be paid pursuant to a
written employment contract executed on or before February 11, 2009, as such
valid employment contracts are determined by the Secretary or the designee of
the Secretary.” <http://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1>:

That amendment guarantees all bonuses that were contracted before the date of
the Act.

Of course, Dodd and Obama are “outraged”. But why did Dodd add that provision?
Why did Obama sign it?

Not surprisingly Dodd, Obama, Bush, McCain, and Shumer are the largest
benefactors of AIG’s massive lobbying.
[http://www.opensecrets.org/orgs/recips.php?id=D000000123&...](http://www.opensecrets.org/orgs/recips.php?id=D000000123&type=P&state=&sort=A&cycle=A)

AIG isn’t taking our money. Our government is.

~~~
jhancock
you are correct in what is happening "right now". But that is not what got AIG
and many others into this mess.

AIG "insured" debts it did not have enough holdings to back up. I quote the
word insured because, insurance is barely what it used to be.

Traditionally, government demanded insurers have low-risk holdings to back up
a sizable percent of their outstanding obligations. The regulations that
handled this have been dismantled over the years. Additionally, the
"insurance" has been broadened to include other type of investment vehicles
instead of traditional insurance. AIG got greedy and was able to do so because
they and others lobbied hard to allow them to be greedy. This was a multi-
decade process.

~~~
anamax
> Traditionally, government demanded insurers have low-risk holdings to back
> up a sizable percent of their outstanding obligations. The regulations that
> handled this have been dismantled over the years.

As I pointed out in another thread, AIG's assets have not had losses and the
relevant regulations have not been dismantled over the years. (In fact, AIG
had to register as a bank because of new regulations.)

What happened to AIG is that the mark-to-market for those assets, which are
behaving exactly as predicted, went away. (AIG's portfolios are not taking a
foreclosure hit because they cherry-picked.) That took AIG's credit rating
down and then the covenants kicked in, requiring AIG to pay money that it
didn't have.

~~~
anamax
FWIW, daily mark-to-market as a way of valuing long term assets was the rule
before the great depression, was suspended under FDR, and reintroduced during
the Bush admin (I think during the Enron reaction).

Mark-to-market is attractive, but does it necessarily make sense? Suppose that
I have an apartment building that is throwing off enough cash to meet my
obligations. Is it worth nothing on a day when no one offers to buy it? Is it
worth nothing on a day when no one offers to buy "comparables"?

~~~
dpatru
Mark-to-market applies only where the value of an asset is at issue. If, for
instance, you want your insurance company to have a minimum value for its
assets, to insure that they can pay out in case they need to, then you don't
care what that asset is earning. All you care about is the value of that asset
when sold, so that the insurance company can use that money to pay off its
obligations to you.

Suppose I offered you $10,000 worth of stock in AIG as collateral for a
$10,000 loan. When the value of that collateral goes down, it's fair for you
to call the loan, even if AIG is still making money and distributing
dividends.

These is the way that a bank treats its own customers who put up property as
collateral, but when banks themselves are putting up collateral, they want to
operate under different rules.

~~~
anamax
> Mark-to-market applies only where the value of an asset is at issue.

The value of bank and insurance company assets are always an issue.

> Suppose I offered you $10,000 worth of stock in AIG as collateral for a
> $10,000 loan.

That's a different situation because (as I understand it), the "collateral"
was performing loan portfolios.

I agree that the market price for those porfolios is relevant but does it
really make sense to immediately declare an institution insolvent and all that
implies when buyers take a holiday?

There was some stock involved in many of these cases, but it was the stock of
Fannie Mae and Freddie Mac. The US govt gave tax and other preferences to
regulated institutions that held Fannie and Freddie stock as assets. This
pretty much guaranteed that a lot of them would take a huge hit when Fannie
and Freddie went down.

------
CWuestefeld
These bonuses were a contractual obligation. If the problem had been allowed
to run its course, a bankruptcy judge would have determined how to discharge
all of the company's debts.

But that time is past. The US government has elected to keep AIG afloat, and
to do so without allowing the company to reorganize its debts. Thus, it still
owes 100% of its debts to all of its creditors.

The company cannot now go picking and choosing which debts to pay. To do so
would do far more damage than failing to retain the executives in question
now. While the US government has been trying to shore up confidence in AIG, an
action like this would cause ALL of its creditors to question whether the
debts that it is owed would be the next to be ignored. Thus, failing to pay
these debts would set expectations that future debt might not be paid. This
risk would at best increase all costs to AIG, and at worst completely prevent
it from doing any business in the future when they can't be trusted.

In short, welching on these debts would likely lead to exactly the problem
that the government has decided must be avoided.

~~~
sanj
I was under the impression that "bonuses" are discretionary, and not
contractual.

Every company I've worked with has a baseline bonus based on how the company
did and (sometimes) a spiff on top of that due to individual contributions
and/or your team's contributions.

 _All_ discretionary.

~~~
CWuestefeld
There seems to be little debate over the facts, including that these were, in
fact contractual. The debate is only over whether AIG is somehow not bound by
those contracts, and if not, whether they should break them. See, for example,
[http://roomfordebate.blogs.nytimes.com/2009/03/17/when-
bonus...](http://roomfordebate.blogs.nytimes.com/2009/03/17/when-bonus-
contracts-can-be-broken/#more-1459)

FWIW, I have a small contractual bonus in my own compensation (not from AIG)

~~~
jhancock
...and if you commit fraud or take risks that hurt your company, do they still
have to pay your bonus?

~~~
CWuestefeld
I would imagine that any employment contract worth its salt would subject to
immediate termination any committing fraud. But you and I have no idea about
these particular contracts, do we?

But that's really academic, because the AIG employees did not commit fraud.

And we're talking about investment bankers. Their _job_ is to take calculated
risks. These are very finely calculated. In the case of AIG, the problem isn't
that their gambles went south. The problem is that somebody changed the rules
on them, so the _paper_ value of the investments (said values not having been
realized yet) was changed, changing the calculations going into AIG's credit
rating and thus making lenders wary.

As was noted elsewhere in this thread
(<http://news.ycombinator.com/item?id=522777> ), these executives weren't
committing fraud, nor were they even losing actual money.

~~~
jhancock
you are correct that I know nothing of what's in their contracts. and you know
nothing of if they committed fraud...or do you?

The real problem is AIG is an INSURANCE COMPANY, not an INVESTMENT BANK. At
least the part that the gov is bailing out is about its insurances. An
insurance company is only supposed to invest its moneys in very low risk
investments. The reason is they are supposed to constantly monitor the costs
of covering their underwriting and keep enough funds on hand to cover their
bets. They have not done so. This is the root of the problem.

Is it fraud for an insurance company to not have enough to cover its
underwritings and to continue to take on more? I think so...and that's the
core of this problem.

------
anthonyrubin
"This shows a worrisome lack of basic business knowledge."

"The manager of your local McDonald’s is smarter than the AIG executives."

These types of remarks seem common when discussing this and similar situations
related to the current economic situation. Perhaps the intentions of these
executives was not to save the company, but to take care of themselves. I
don't see this as stupidity. Greedy and unethical? Most definitely. These
people are not stupid.

------
jobeirne
>"The manager of your local McDonald’s is smarter than the AIG executives."

I would beg to differ. The manager at my local McDonald's hasn't convinced an
entire country to pay him $6.5 mil for doing a horrible job.

>"McDonald’s doesn’t say 'We had a bad year last year and you might be
discouraged, so we’re writing you a fat check unconditionally in hopes that
you will like us and stick around this year.'"

Broken analogy; it's the government who wrote the fat check, not AIG.

------
jacoblyles
>"We voters do it every 4-8 years for the U.S. government, a vastly more
complex operation than AIG."

The government is not in the business of meeting any objective goals. It
simply appropriates funds, does things with them, and then tells you about
what it did with the best spin possible. As long as nothing too bad happens
and the people in charge are serious-looking and wear suits, nobody complains.
The government could be run by a ferret, as long as it had a good press
secretary.

Private companies, on the other hand, have an objective performance standard
to meet. They must make money, or eventually die. The pressure of an objective
performance standard makes them much harder to run. The ability to achieve
results is much more important, and the ability to look good on camera is much
less. There is punishment for incompetence.

I suggest that firing the current crop of executives and making it clear to
new potential hires that they will be underpaid and under intense public
scrutiny is a good way to run what is left of the company into the ground.
Given the other options available, this might be a good thing, but it could be
done more directly.

~~~
gnaritas
> The government is not in the business of meeting any objective goals.

That's an absurd statement. We don't send officials to congress without them
running a campaign specifying their goals. You might not like the process, or
trust the process, or think private companies (dictatorships) do it better,
but don't say they have no goals. Every single one of them has goals for their
districts/states and they get fired (not reelected) if they fail more than the
public likes.

If government seems so inefficient and difficult to get things done, it's
often because members of congress have conflicting goals so getting anything
done is difficult. This isn't an accident, it's how the system is supposed to
work.

> There is punishment for incompetence.

Usually, but as we're clearly seeing now government and business are so
tightly interwoven in the modern world that execs knowingly abuse the
government and do things that would be bad if they didn't know they'd be
bailed out by their buddies in government who they paid to have elected.

> I suggest that firing the current crop of executives

Not going to happen and you know it.

~~~
jacoblyles
There is a qualitative difference between the vague and often contradictory
corpus of promises that a politician makes on the campaign stump and the clear
contractual obligations that a corporation owes to its creditors. That
difference is captured with the notion of "objectivity", which is why I said
that corporate executives face an objective performance standard while
politicians do not.

The only potential discipline for politicians is made by voters who mostly
don't understand the issues that well and don't spend a lot of time following
their representatives in office. Thus, the job of a politician is largely PR.

This, again, is in stark contrast to the creditors of a corporation, who are
very interested in its actions, follow it very closely, have very clear
expectations, and who have deep knowledge of its activities.

I know I am not going to convince you, but I think my point is good and my
logic is sound.

>"Not going to happen and you know it."

My sentence had a fairly large phrase in the middle. If it is removed, it
reads "I suggest that firing the current crop of executives...is a good way to
run the company into the ground". Although, I suspect it is likely that AIG is
already beyond salvage.

~~~
gnaritas
> My sentence had a fairly large phrase in the middle.

Apologies, I misread what you wrote, my bad.

As for the rest of it, you're presuming that no one votes with any
understanding of the issues. I disagree, though many don't understand them
deeply, or possibly misunderstand, people don't vote unless they care about
some of the issues. That's why most people don't even vote. So those who do
are certainly doing it because they want some objectives met or some ideology
upheld.

I've worked at many companies and I've been an employee of the federal
government and quite frankly, the federal government is vastly more efficient
than _most_ private companies as far as I can tell.

Sure, if you look at the fortune 500 the government might look incompetent,
but that's not a fair comparison, those are the top companies in the market.
If you look at the fortune 5 million, i.e. the vast majority of the rest of
the market, the federal government comes out looking quite efficient.

~~~
jacoblyles
I doubt I ever convince you of anything with any argument. So in conclusion, I
only offer the observation that the most significant prior managerial
experience of the current chief executive of the United States government was
running his own campaign for the position, and yet he seems to be doing no
worse than his predecessor. I offer, with the observation, a humble and
limited hypothesis: that there is a fundamental difference between the talents
needed to be the chief executive of a company and the chief executive of a
country, and that this difference counters Mr. Greenspun's point, which I
originally commented on.

~~~
gnaritas
You're right that there is a difference, I don't argue that point. The thing
is, I don't want a good CEO as president, I want a good commander in Chief and
running a business with the primary goal of being profitable is vastly
different than running a country where the primary goal securing the country
and upholding our values as a country as defined by our constitution.

Having been in the military, there's just a certain difference in the way you
look at your job when you've worked in a place where you completely divorce
pay and work. Pay... that's the finance department on the other side of base,
it has nothing to do with your job or your performance, only with your rank.

At work, you just don't think about pay at all, you think only about your job
and being good at what you do out of _pride_ for what you do rather than how
much money you can make. Every one knows exactly what everyone else makes,
it's printed in the stripes on your arm and a standard pay scale. This allows
a commradare that generally doesn't exist in the private sector because
jealousy over pay interferes with it.

It's totally different than the civilian world where most keep their salaries
secret, or lie about them, and everyone is stepping all over each other trying
to make more money than the next guy, by any means necessary, quality of the
work be damned because manipulating people seems to work better when climbing
the ladder.

The last thing I want in a president is a guy who thinks the seeking of profit
trumps all else, because it doesn't. This idea that seeking profit
automatically results in the most good I just find absurd. Frankly, the idea
that being a great CEO somehow prepares you to be a great president I also
find silly.

Great CEO's != great person, in fact more often than not being a great CEO
requires being ruthless. That's not what I want in a president, I want a great
person as president, someone who I can morally look up to, someone who takes
responsibility for his actions, is honest with the public, someone who leads
by example, not by privilege of power. Someone I can point to and tell my
kids, that's how to be a man.

------
ratsbane
It's very Merchant-of-Venice-ish - Antonio owed Shylock money via a legally
valid contract which permitted Shylock to claim a pound of flesh in case of
default. The court ruled in Shylock's favor - he could claim the pound of
flesh - but said that if Antonio died that Shylock would be tried for murder.

I'm starting to read more thorough explanations of the bonuses - they were
approved 1Q 2008 to encourage retention during the 2008 year, with payment at
the end of the year. As such they're probably legal, but the proposal to tax
them 100% - or better yet, scrutinize the actions of the bonus recipients
during the last year and hold them to a high standard of responsibilty - seems
appropriate to me. Holding highly-compensated executives to high standards is
what we should be doing anyway. With rewards come responsibilities.

EDIT - It wasn't threat of murder - the court ruled that Shylock couldn't take
any of Antonio's blood on pain of forfeiture of all of his (Shylock's) assets.
<http://en.wikipedia.org/wiki/The_Merchant_of_Venice>

------
condor
I love it, everybody has an opinion because in theory everybody is a part
owner . . . AIG will be a great case study on why companies are best managed
as dictatorships and constrained by a marketplace. It'll be interesting to see
what happens when neither of those is in place.

------
bwd
A couple of points to consider here.

First, for all of the people who think that AIG should have gone bankrupt: go
look at www.aig.com under "individuals and families" to see what lines of
business AIG is in, then check out the "insurance holdings by state" section
of the wikipedia page. AIG owns two dozen insurance companies in California
and controls 4.7% of the life insurance and 2.7% of the property and casualty
market in West Virginia, among other things. IANAL, but I have to assume that
policy holders would revert to general creditors in the event that they had a
loss and the insurer was bankrupt. Would you want to go to bankruptcy court
and stand in line with Goldman Sachs, Societe Generale, etc. to try to get
your payout if your house had burned down or your spouse had died and you
needed the money to pay your bills? It may be the case that state governments
stand behind insurers that do business in their state (insurers are regulated
at the state level so this may vary by state) but this converts the problem
into one that is much more complicated and expensive to sort out than just
giving money to the parent company. I expect that this is why the parent
company was bailed out instead of going bankrupt.

As for bonuses paid to executives, these people are employed in units that
basically trade derivatives, and they know what positions AIG has on its
books. It is thus possible that the guy who earned $6.4 million in bonus could
earn a lot more than that if he started a hedge fund and bet specifically
against the positions that he knows AIG has. If this is the case, then AIG is
actually saving money by paying this guy to stick around and help them unwind
the book. Confidentiality provisions will not protect a company from a former
employee betting against their positions, only from having them disclose
information.

~~~
erso
I don't agree with your position that AIG was in the right by paying bonuses.

If the executive in question can be bought so easily I don't think they'd
stick around when they know they can make more money elsewhere. Case in point:
NYT reported today that according to Andrew Cuomo 52 of the executives that
were given bonuses have already left the company.

These people took the money and ran.

~~~
anamax
> These people took the money and ran.

They got pre-agreed bonuses for what they did. They saw that things were
changing for the worse and left.

What part of that do you have a problem with?

Thanks to the handwringing, started by people who knew about the bonus months
ago, AIG is going to have trouble hiring people. Since we're hoping to get tax
money back, it's unclear why that's a good thing.

~~~
erso
Again, Andrew Cuomo: "AIG chose to lock in bonuses for 2008 at 2007 levels
despite obvious signs that 2008 performance would be disastrous."

Are you saying AIG is only now going to have trouble hiring people, since they
won't be handing out lavish bonuses to people who don't deserve them? I'd have
thought they'd be having trouble hiring people for other reasons.

~~~
anamax
I don't know about you or Cuomo, but when I'm considering a job, I don't say
"the company is going to have a bad year, so I'm going to take a pay cut and
stick it out". I say "If I can do better elsewhere, I'm leaving".
(Interestingly enough, I say that even if the company is going to have a good
year.)

AIG was and is going to have trouble hiring good people. We're telling folks
that AIG won't live up to its agreements. Who is that going to help?

Apart from shoveling money to Goldman Sachs, AIG is in the process of
unwinding a lot of transactions.

AIG is going to lose money and go under no matter what. However, that doesn't
imply that good people aren't needed. The amount of money lost depends on how
well the unwinding is done.

Me - I'd like the unwinding to be done so as to lose as little money as
possible. If you agree, how do you propose to do that without hiring good
people?

Of course, you may think that good people can be had for less than AIG thinks.
Do you have evidence for that theory beyond "you can't do any worse" and "AIG
went into the toilet"?

As I pointed out elsewhere, AIG's mortgage portfolios have performed as
advertised....

~~~
joe_the_user
Interesting "Me - I'd like the unwinding to be done so as to lose as little
money as possible. If you agree, how do you propose to do that without hiring
good people?"

Interesting how in the financial industry, there is a working assumption that
skilled financial people require a lot of money to hire and maintain. Yet the
financial industry is quite happy to save money by hiring H1-b's for their
lower costs while arguing that they can provide equivalent quality.

Yes, one would certainly like AIG's unwinding to be done competently. Does
that mean that it has be done by the same class of people-seekers who seem to
have gotten us into this mess and who expect their every profitable or
unprofitable action to be "bonused" to the hilt?

Possibly not.

The Federal government, for example, has a large and highly competent
workforce that it pays much less than the financial industry pays its "whiz
kids".

~~~
anamax
> Does that mean that it has be done by the same class of people-seekers who
> seem to have gotten us into this mess and who expect their every profitable
> or unprofitable action to be "bonused" to the hilt?

[http://www.washingtonpost.com/wp-
dyn/content/article/2009/03...](http://www.washingtonpost.com/wp-
dyn/content/article/2009/03/18/AR2009031804104.html?sid=ST2009031801503)

"The handful of souls who championed the firm’s now-infamous credit-default
swaps are, by nearly every account, long since departed. Those left behind to
clean up the mess, the majority of whom never lost a dime for AIG, now feel
they have been sold out by their Congress and their president."

"If they did walk out the door, who would volunteer to work at the Chernobyl
of the financial world? And what would become of the mammoth portfolio that
remains?"

"'It would become the biggest naked position on Wall Street,' one longtime
Financial Products executive said, 'and everybody would exploit it.'"

------
ironsam
This is quite a poor article, for reasons others have already mentioned here.
Ultimately, any government "solution" that involves the bailout of companies
is flawed and immoral.

