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Bonus Rewards;
An Open Secret
To most Americans, the idea that some employees in the executive suites of
companies handling finance and stock transactions could receive bonuses that
were often multiples of the employees annual salary seemed preposterous, but the
strange concept was hidden in plain sight.
The AIG case is a perfect example. The bonus concept was not secretive at all;
it was clearly spelled out in AIG contracts. The AIG Financial Products Corp.
2008 Employee Retention Plan holds all the details. It can be found in AIG’s
press release page.
It starts this way:
INTRODUCTION
This document sets forth the terms of the AIG
Financial Products Corp. 2008 Employee Retention Plan, effective December
1, 2007 (the "Plan"). The Plan sets out the 2008 and 2009 Guaranteed Retention Awards to
be provided hereunder to certain employees and consultants of AIG-FP (which term
includes subsidiaries).
The objectives of the Plan are:
1. To provide incentives for AIG-FP’s
employees and consultants to continue developing, promoting and executing AIG-FP’s
business;
2. To recognize the uncertainty that the
unrealized market valuation losses in AIGFP’s super senior credit derivative and
originally-rated AAA cash CDO portfolios have created for AIG-FP’s employees and
consultants;
3. To ensure that AIG-FP’s and its employees’
and consultants’ interests continue to be aligned with those of AIG and AIG’s
shareholders;
4. To continue to build and maintain the
formation of capital in AIG-FP; and
5. To show the support by AIG of the on-going
business of AIG-FP by
implementing a meaningful employee retention
plan.
It’s a remarkable document. Point number two, in convoluted yet blunt language,
informs certain salespeople that they can do well even if their shaky assets
fold. The language could be that of an exaggerated farce, except that it was
perfectly serious; it was the rules of the club, detailing how the members would
benefit, no matter what, so long as they actively participated in the use and
exploitation of such strange devices as credit derivatives, which seemed to be
created specifically to provide tools for exploitation. A perfect round robin,
which of course promoted further vulnerability.
Sales executives who were enticed to play the game were assured of rewards
regardless of what resulted from the tactics.
A few notes here: FP, Financial Products Corp., is the division of AIG that got
the parent company in such deep trouble. Much of the underlying problem was the
losses in AIG-FP’s “super senior credit derivative” backup funds. Those turned
out to be largely based on house mortgages that had been traded off from banks
to lending companies to other holders who could claim billions of assets to back
up their dealings.
Of course home mortgages, as everyone now knows, were increasingly being
provided to those who could not afford them, and a crash was becoming
inevitable. But of course the whole idea of this AIG document was to get
salesmen to amass larger totals of deals, so the bonus contracts smoothed out
the “unrealized market valuation losses.” The problem was that they were doing
business with fake money; there was nothing there. The backup mortgages were
empty.
There were workable rules for these bonuses and they could be forfeited by the
people trying to get them:
3.04. Forfeiture of 2008 and 2009 Guaranteed
Retention Awards as a Result of Termination of Employment of Covered Person….
… (b) the Covered Person’s employment (or, as
applicable, consultancy) is terminated by AIG-FP for cause (“cause” means
conduct involving intentional wrongdoing, fraud, dishonesty, gross
negligence, material breach of the AIG Code of Conduct or other policies of AIG-FP
or AIG, or conviction of or entry of a plea of guilty or no contest to a
criminal offense)…
So there were conduct standards right in black and white. Of course many of
these were rules as interpreted by AIG-FP. They were therefore of no real use.
Most Americans can find “intentional wrongdoing, fraud, dishonesty, gross
negligence” without hesitation. These salesmen and mangers were representing to
their customers that there was hard cash behind their coverage. Nothing was
there. This was what made the bonuses fraudulent. Who invented this nonexistent
money?
According to Lynnley Browning in the September 28, 2008, Conde Nast
Portrfolio.com, a number of AIG-FP leaders contributed. Heading AIG was Hank
Greenberg, who resigned as chief executive in 2005 and who was being
investigated by New York Atty. General Eiot Spitzer; Greenberger himself
launched a couple of investigating units in AIG, which did not find any wrong
doing. But what can a company expect from a self-policing effort? Later, under
AIG leader Martin Sullivan, the AIG-FL subsidiary got even less attention from
the parent company.
But why?
Part of the reason is that the business of turning commodities and mortgages
into seeming hard cash for the client was not a simple transaction to explain.
"Within AIG, FP had a cult status," said former senior executive at AIG-FP
Randall K.C. Kau.
Two men who actually ran the cult subdivision were Howard Sosin, who started it
in the 90’s, and later Joseph Cassano. As Browning tells it, Sosin invented the
“derivatives” concept; he was known as “Dr. Strangelove of Derivatives,” and
wrote scholarly papers on derivatives; he even taught at Columbia Business
School. Sosin got 20 percent of the unit and 20 percent of its stocks. Then big
boss Greenberg told Sosin to reign in the unit, Sosin instead resigned and
Cassano stepped into the AIG-FP lead spot.
Wherever the investigators finally fix the blame, the fact is that the company
was running its derivatives unit for something like a decade. It was a little
understood unit with a voodoo economics mystique. Justice Department and the
Securities and Exchange Commission were in on some of the investigation. But any
stripe of government investigation was questionable. These were the Bush years.
Investigations were shams.
Many AIG-FP workers held doctorates with mathematics backgrounds; they were not
standard insurance brokers. Still, their goal of amassing money remained, and
their whole purpose was to develop financial “instruments” that could be used to
exploit the marketplace; in fact some of these new financial devices were so
complicated that top executives didn’t understand them, yet they supported using
them to sell to customers and other institutions. It was an ivy league shell
game.
AIG and its PAC contributors themselves donated lots of money to all the big
political players. According to the Hartford Currant and opensecrets.org,
donations over the last two decades included Sen.
Chris Dodd, D-Conn, $281,038; Former President George W. Bush,
$200,560; President Barack Obama, $110,332; Sen, John McCain,
R-Ariz., and Republican presidential contender, $99,249; Sen. John
Kerry, D-Mass., $85,000; and Secretary of State Hillary Clinton,
$61,515.
AIG wanted the unfettered
capitalist game to continue.
Specifically, the government regulators in the administration of George W. Bush
applied a brand of rule making that let the businessmen write their own rules.
Regulations were relaxed. Regulators were asleep, incompetent or both. No one
was watching the economic game, no one but the players who stood to win big.
Any sensible sports aficionado knows that a game needs a by-the-book referee
whose purpose is simply to be sure the play is fair. That way, the game is legal
and everybody knows the rules applied equally. Bush and company gave government
oversight an eight-year vacation.
In those years, business people had a protracted boom and loved it. Only problem
was that it was not umpired and naturally drifted toward shaky economic and
legal grounds. This was not a shocking development. It is exactly what happens
whenever profit seekers are left to their own powers. They are not programmed to
slow down and check the rules. They are by definition a driven group of people
who barrel straight at success.
It is just this unbounded lust for wealth and success that leads to
entrepreneurial advances, where new businesses and industries arise and expand,
and America has always recognized the overall process as the healthy expression
of capitalism. But this nation has historically recognized the need for
government to regulate and ‘umpire’ the process, to do what the average man
cannot in policing those with access to great capital.
Government has the power and the duty to make sure all comers have a chance at
grabbing the golden ring; this is not a sideline for a government, but rather it
is its basic role in its economy. Yet for nearly a decade, government did
nothing.
As a result, in the absence of an aggressive government watchdog, America
developed a whole new business atmosphere. That’s no surprise. Now it’s time for
Congress to grow up and fix the economic system; punishing the bonus makers and
recipients is a sideshow. Yet recently the House of Representatives passed a law
of the land that would have changed tax law for all Americans just to wrest the
$165 million from 75 AIG-FP managers and salespeople. The proposed law would
have taxed any bonuses earned by employees of recipients of federal bailout
money. Yet the real objective here is to save and rehabilitate AIG so it can pay
its $180 billion to the government and return to solid and honest profitability.
Senator Christopher Dodd sounded ludicrous saying his committee let pro-bonus
language slip into the bill and then passed it; that was carefully considered
and was put in to save the Unites States from being sued for breach of contract.
Americans were livid at this bonus news. If the popular call for 73 AIG
employees to be humiliated and even, for some zealots, physically harmed,
America will be acting exactly like the petulant children Bush tried to make of
the populous in the past eight years. Bush had a portion of the public just
where he wanted it, reacting to hot buttons that he would press to move voters
by fake issues – stem cells, abortion, same sex marriages to name a few.
Now the great majority of voters have replaced that type of polarizing politics
with Obama’s government by reason.
In terms of AIG, its restoration depends on the hundreds of professional
insurance professionals who will now have to work alongside public servants.
Getting this job done requires expert advice on the tangled mess that AIG has
gotten itself into and more vitally, that AIG burdened the nation and world
with. Remember, Obama called AIG too big to let fail: which means all hands –
public and private – must work at bringing AIG back from the brink of economic
failure.
From the private sector, the new combatants are William Dooley, the top AIG
insurance executive who replaced Cassano, and Edward Liddy, who manages AIG for
a dollar a year. He had been head of Allstate. Good start.
So how do they get top professionals to help with the rescue? Well, there might
need some special incentives to bring the best players to the table. America
needs extra talent and dedication from the new AIG whiz-kids.One of the best
prizes is a bonus. Yes, a bonus system: it can be tightly controlled,
performance driven, every penny actually earned and determined by whatever other
criterion the government wants to impose.
For people who know they are going into the toughest insurance disaster in
history, some premiums are needed. What else could AIG offer to make the top
professionals come into or stay with AIG?
The Bradley Report put the question to AIG Public Relations Director Joe Norton
in New York. He said his man Mark Herr would call us back. There was just one
clear question: if AIG has no bonuses, what lure exists to bring ace sales
people and other experts?
No one called The Bradley Report.
Sooner or later, the private and public representatives will have to come up
with some sort of reward for people who do excellent work. They can call it an
incentive or a goals attainment entity or whatever they collectively decide.
Meantime it needs to restructure the AIG-FP unit and put together a profitable
group of national and international units and finally draw a document that will
dictate how the government will bow out of the AIG catastrophe.
Yes, there will
be some punishment for handing out bonuses for failure in the time before the
government took over the firm. That, however, is barely a footnote to the huge
task of returning AIG to a respected and trusted enterprise.
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