Wednesday, March 18, 2009

Media Missing in Action: AIG Bonuses and Loans

OK, Liddy's 3/18/09 testimony has been illuminating - although many of the members of the committee don't seem to be listening.

The Bonuses

These are NOT performance bonuses. They are retention bonuses for people in AIG-FP, the source of most of the problems. The purpose of the bonuses was to pay people to stay until they had wound down their positions. The people who have left, who signed the contracts in Jan. 2008, left because they had wound down the positions they were expected to wind down. And they got their retention bonuses because they had fulfilled their contractual obligations. Those still working are being paid their retention bonuses because they have not yet wound down their positions but are still working to do so.

This division had, at the start of 2008, as I understand it, 2.3 trillion in notational value of positions. Today, 50% has been wound down - so now it's about 1.2 trillion. In short, progress has been made. Each contract is complex and, sad to say, the people who made the contracts probably know more about how to wind them down than somebody new. Think about the effort requried for a new employee, from outside the company, to replace you in your job.

What Liddy feared is that if he failed to pay the retention bonuses, the people required to wind down their positions would simply have walked out the door. And these are positions that must be managed daily. Given the 50% decrease in the value of these positions since Liddy took over, they seem to be doing their jobs.

If you've ever been employed by a company that went bankrupt or was acquired by another company (as I have), you know that people are still needed to wind down the company: to fire employees, to work with the acquiring company to integrate systems, etc. - people who know they will lose their jobs when the integration is completed or everything has been sold (think about Circuit City employees who stuck around to sell every last item they could before they, too, lost their jobs). A bonus can keep them from walking out the door and making the bankruptcy or acquisition that much more difficult.

Yes, the dollar amounts are huge, but so are the salaries at companies like AIG. All you free-marketers out there, all you wealth-defenders out there, shouldn't be upset about the size of the bonuses.

To say that the American taxpayers have loaned the company 170 billion dollars misstates the case. AIG owes the Fed and the Treasury about 80 billion dollars. There is, I think I heard, a 30 billion dollar line of credit that has not yet been tapped. The rest consists of assets separated off into something called Maiden Lane 2 and 3 which are now assets on the Federal Reserve's balance sheet. These assets were bought for 30-40 cents on the dollar. Today, according to Liddy, their market value ranges from about 30 cents to 75 cents on the dollar. They are all performing assets. When the market improves, the Fed will sell these assets and the money will be repaid. If I understand this correctly, it is the equivalent of my accepting your house in payment of a debt. I pay you less than it is worth based on the conviction that, since I am rich enough to just hold it (and rent it out to cover ongoing expenses), I will be able to sell it some years in the future and make a nice profit.

All of this seems rather reasonable, if unpalatable, to me. But neither the media nor a lot of people on the committee grilling Mr. Liddy (all of whom precede their often vicious attacks with statements of praise for taking on a thankless job for $1/year and no stock options) do not seem to have either heard or understood Mr. Liddy's explanations.

In short, as far as I can tell from Mr. Liddy's statements, the company has made significant progress in winding itself down - in such a way so as not to create financial chaos.

The AIG mess should not have occurred in the first place, but one plays the cards one has to the best of one's ability. And I think that Liddy has done that.

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