Congress’s Clawing AIG Efforts

The retention bonuses were agreed to in early 2008. The employees/managers/execs could have gone elsewhere, but stayed put. The government put money in AIG in the fall of 2008. The government said nothing, allowed these people to continue to work under what the employees would have reasonably thought were certain terms, and now the government is altering the deal.

I wouldn’t return dime f’in one to the government. And I would fight this BS tax tooth and nail.

Is anyone asking to impose a retroactive tax on Franklin Raines, who signed off on creative financial statements such that he got paid more? And what’s even more galling is that Charlie Rangel, a big supporter of this tax, has NOT paid his tax liability arising from the fact that he got rent-controlled rents from a property management company that was not legally obligated to rent to him at those lowered rates.

Matt Taibbi has a good article on AIG over at Rolling Stone that explains how AIG occurred and the players involved.
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The Big Takeover
The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution.
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http://www.rollingstone.com/politics/story/26793903/the_big_takeover/8

The retention bonuses were agreed to in early 2008. The employees/managers/execs could have gone elsewhere, but stayed put. The government put money in AIG in the fall of 2008. The government said nothing, allowed these people to continue to work under what the employees would have reasonably thought were certain terms, and now the government is altering the deal.

New management (a.k.a. new administration) always renegotiates contracts in the business world. George Bush made a lousy deal in 2008, and Barack Obama is renegotiating in 2009.

Jay, when are you going to also do a story on Ms Pelosi’s matter of fact statement on video calling the Immigration and Customs Enforcement, “Un-patriotic”?
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http://www.foxnews.com/politics/2009/03/18/pelosi-tells-illegal-immigrants-work-site-raids-american/
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Video here:
http://www.foxnews.com/video2/video08.html?maven_referralObject=3836022&maven_referralPlaylistId=c985e69916535a2170b2b18ab0ab7eb60401f9bb&sRevUrl=http://www.foxnews.com/politics/2009/03/18/pelosi-tells-illegal-immigrants-work-site-raids-american/
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I hope all my liberal friends have a great day, I know I am!!!!

Aaron, you are an idiot. Renegotiation of a contract means that parties consent. Here, the government is unilaterally altering the terms of the deal. What’s worse is that the government allowed them to continue working under what they thought was the old deal from Sept. 2008 to March 2009.

spob:
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Your moral outrage is misplaced.
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It’s like you can’t seem to imagine that somebody besides the government would be acting in an immoral fashion, and so you keep going back to how unfair the government is being toward these individuals. Your sense of injustice is misplaced.
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What if a company had decided to set up a London office called “Financial Products” so that they could sell cyanide candy to American kids?
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Would you fault the government for not particularly caring about the the sanctity of the contracts specifying bonuses to these people?
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When we talk about “toxic assets”, and AIG’s executives designing and implementing a system for creating the biggest balloon of fraud in human history on top of them, it’s not that crazy of an analogy.
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Try thinking about the damage caused by this arrangement to your country, and then tell me how awful it is that the government isn’t keeping its word to the poison-sellers…

Stuart, good post.

Spob, is it really your position that those guys deserve to be paid millions for paying themselves millions to ruin the economy?

Jay Newton-Small as the voice of reason!
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Count me among those who regard the bonuses as the cost of education. As I’ve stressed all week, they are the tip of a stinking iceberg. The bills being put forward are counterproductive posturing. We need to be taking the long view. Its our short attention spans that brought on this mess in the first place.

“Spob,is it really your position that those guys deserve to be paid millions for paying themselves millions to ruin the economy?”
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Well apparently this is what really happen and is happening now. Read Matt Taibbie’s article in Rolling Stone. Its not the be all and end all, but it does a much better job of giving you an understanding of how f***cked we truly are. How this focus on bonus’ BS while important in a sense is such a misplaced priority. It also shows me how we are again being let down our media because they more interested in the drama of it all instead.
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You will never ever see this type of reporting produced here at Time or from most of any of the other publications and news outlets that most of us view everyday. Its a shame.

Aaron, you are an idiot.

Often true, but that does not mean I’m wrong here.

Renegotiation of a contract means that parties consent. Here, the government is unilaterally altering the terms of the deal.

Seeing as the government owns 79.9% of AIG, the government is the only party. A analogous was when NBC renogotiated the “Law & Order” franchise contract after purchasing Universal; they were the only party.

An analogous situation was when NBC renegotiated the “Law & Order” franchise contract after purchasing Universal; they were the only party. Businesses often buy up other businesses and find it much easier to renegotiate with only one party.

Funny, the auto workers had to renegotiate their contracts. But as I’ve said before, they just make stuff, so who cares.

Gunny,
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Good to hear from a voice of reason. But if you guys want to know what the BS storm should be over, take a look here:
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http://www.huffingtonpost.com/jeffrey-feldman/aig-counter-party-payment_b_176958.html

Aaron,
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As a lawyer, I must inform you that your legal interpretation of renegotiation or what we might refer to as modification does not mean that parties consent.
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First, you must start with the legal construct of what defines a contract. It is an offer, an acceptance and generally an exchange of mutual consideration. Contracts are legal mechanisms which define rights and assign obligations between at least two parties. They may be modified, abrogated, terminated and even subject to interpretation or what we refer as construction of the terms to the contract.
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I could go on all day about contracts, but your understanding is faulty. Not trying to be mean, but spouting ignorance doesn’t help our current predicament.

Fair enough.
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May I ask what would you call a situation where one organization has an existing contract with another party, but then purchases the other party? I’d like to know what the precise term I should be using. (I used “renegotiation” as that was the term I heard used when NBC Universal reopened the contracts that had existed between NBC and Universal concerning the Law & Order franchise; that seemed like an analogous situation.)
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Thank you!

AIG and the Government have never entered into an explicit agreement whereby one party has relinquished operational control while in the other situation NBC and Universal agreed specifically to establish a dominant and subordinate relationship. The fact that one party become a wholly or partially owned subsidiary to the other doesn’t automatically terminate their status as a party to the contract. For example, AIG FP was wholly owned by AIG, but FP existed within a subset of agreements on liability, revenue, indemnity, etc. Once again, your basis for your understanding is flawed. Not trying to be mean, just trying to enlighten.
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The fact that the government owns 80% of a company doesn’t mean that they have contractually purchased a company. It may mean that they have control of the capital but operational control only exists where one chooses to exercise it. There are any number of situations where a majority partner subrogates their decision making authority to a minority partner. Certainly, this is not typical, but it is what happened here. Additionally, one should note that the banker or entity with the bank roll generally has the power to walk away if they don’t like the situation, but here the banker’s very underpinning and financial well-being is wrapped up in keeping an entity alive. Nobody knows how many TRILLIONS of dollars that AIG is on the hook to other parties as a counter-party risk insurer.
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What we do know is that unlike in real insurance, they had no loss reserves because they thought there was no risk of default. Nobody tracked the contracts because the law was written as such to put them outside the purview of insurance contracts. And the REAL worry is this…AIG’s losses might be so big that it would stress the Government’s ability to back it by “full faith and credit.”
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That is the real risk. Read the Huffington post article on counter-party risk and then try to sleep tonight. If people realized the sort of financial armageddon that this country was facing, there would be riots in the streets all over America. But Wall Street knows this is too complicated for most people to ever understand, Obama can’t explain in a sound bite at his bully pit, and the media (who are owned by these huge corporate conglomerates) have a two fold self-interest: 1) Many of the MSM talking heads MAKE BIG MONEY and 2) They NEED to PROTECT the company to GET PAID!!

SZ, a few points:

1) Most of these guys did not make the decisions to enter into all these CDSs, they simply executed the decisions made by higher ups. Thus, the bulk of these bonus recipients are blameless in this mess.

2) It’s amazing that the House of Representatives will go after private citizens, most of whom are blameless and have been holding up their end of the deal to the benefit of the US taxpayer and the economy as a whole, when it refused to deal with its own members who have blown off the tax laws. For example, John Conyers. Conyers coerced staffers to do a bunch of gopher duties for him and his racist wife. Since that was not a legitimate benefit of his employment as a Congressman, he is liable for tax on the fair market value of those services. He never paid them. There’s also Charlie Rangel. Mr. Rangel recieved below market rents from a property management company that was not required by law to charge that lowered rent under rent control rules. That generated taxable income to Rangel. He never has paid it or even acknowledged it. (Note to JNS, why doesn’t someone at Time ask Rangel’s office about the tax implications of those rents.)

There are a lot more examples. This is naked naked hypocrisy. And if private citizens are going to be held to a standard of being taxed because we don’t like their income, then the House has an absolute obligation to demand that its members pay in full their tax liabilities. Charlie Rangel is scum. And the press needs to ask hard questions about Conyers not paying his taxes and Rangel not paying his. I doubt they will.

3) This is also about the actions of the US government. Forget about the fact that the deal was cut in early 2008 and memorialized sometime later. The fact is that when the government made its investment in Sept 2008, it did not demand that the employees forego bonuses, rather, it accepted the benefits of their work for months and is only now pulling the rug out from under them. The government simply cannot do business that way. If the government was going to take away their bonuses, even assuming arguendo that it could do so since AIG was contractually obligated to pay them (something recognized by Larry Summers), it had an obligation to inform the employees so that they could leave if they wanted to.

4) We also cannot forget that these people could have left the company. So basically they got baited and switched. Is there any possible justification for this?

Once again, your basis for your understanding is flawed

Thank you for explaining how and why! (I’m sure you summarized some things, but at least now I know which major assumption I made was wrong.)

Read the Huffington Post article on counter-party risk and then try to sleep tonight. If people realized the sort of financial Armageddon that this country was facing, there would be riots in the streets all over America.

Again, thanks for the information. Admittedly, I was already in a panic since the Fed announcement Wednesday. Now I know what specifically keeps Ben Bernanke up at night …

Yeah, Aaron, so now that you’ve been educated on basic legal issues, are you wondering why an equity investor would want to screw employees over a paltry $165MM?

Pelosi, Rangel etc. are not just moral cretins, they are idiots as well. But of course, anyone paying attention knew that.

Aaah, yes, the MSM types will never be able to discuss that. They don’t understand it. It has been referred to as quantitative easing…really it is qualitative. The reason that a Central Bank would engage in such a behavior is because they are EXPLICITLY afraid of a deflationary spiral. My salary hasn’t fallen, but my insurance costs more, my paid parking is gone and so are our guaranteed performance bonuses for a certain number of hours of work….all deflationary…and I’m not special. This is happening across the board from house resale values to car trade-in values, etc….if the Fed can’t reflate the economy, we are going to be enjoying a long-ride on a very slow road to recovery. When we finally get going again in 20 years, it will make the Great Depression look desirable…not in terms of intensity but certainly in terms of duration.

are you wondering why an equity investor would want to screw employees over a paltry $165MM?

Management would do it to keep the shareholders happy, for one thing. (Anyone with a understanding of basic business issues knows that employees get “screwed over” for far less than that.)

bryanfromhouston,

Thanks for discussing the deflationary aspects of the recession and why the Fed is doing what it’s doing. I should have linked to Ben Bernanke’s Deflation: Making Sure “It” Doesn’t Happen Here earlier. I assume you’ve read through this before?

Aaron, your attribution of ignorance on my part, i.e., “Anyone with an understanding of basic business issues knows that employees get ‘screwed over’ for far less than that.” is pretty rich, given that basic contract law had to be explained to you. The government obviously wants these people to be employed for a reason (i.e., to manage the winddown), and most of the business people I’ve dealt with aren’t stupid enough to screw over people they need to get your money out of a business.

Could you take your arrogance and ignorance down a notch?

spob,
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Let’s step off the high-horse there, shall we? There are many things that I don’t know and might never fully understand, but this is discussion not a ritualistic stake-burning exercise.
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Beyond that your anecdotal story is nice, but unconvincing. Political economics sometimes dictates seemingly perverse behaviors. Further, there is an implicit assumption in your statement that it is critical to recognize.
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Primarily, and fundamentally, all arguments which are based on the concept of assigning some type of value or loss to AIG (i.e. “to get your money out of a business.”) are suspect, at the least and dubious more likely. Once again, it has only been estimated that AIG was responsible for 20% of the at one time estimated $72 Trillion dollar CDS market in 2007 dollars. But NOBODY really knows. NO ONE has a clue. Your statement therefore smacks of a bit of arrogance itself. AIG might be completely insolvent in which case there is no there, there. People wouldn’t be getting screwed over. They would just be suffering from the effects of what actually takes place when money is owed someone from a bankrupt entity.

Good god, bryan, your post is ignorance on stilts.

First, the BK analogy doesn’t really work. Had the company gone BK in September, then yes, the employees wouldn’t have gotten their bonuses (of course, with deferred comp, BK’s a risk you sign up to). But they also wouldn’t have worked from Sept. to March unless they had gotten a new deal to their satisfaction. (Note: BK entities have to pay people to keep them–multibillion dollar entities don’t just disappear, they wind down.)

Second, obviously, the government wants these people to stick around to wind down this operation, which still has some ways to go. (Note to bryan, insolvency is not a synonym for no value in company.) The government is screwing the very people it wants to stick around. The government clearly wants a return on its investment and hopes to get at least 100 cents on dollar.

Third, you completely fail to address one major point here–the government made its investment in Sept., allowed these people to work for what they reasonably expected to be a certain level of comp and now is changing the deal. That is unconscionable behavior, and there is no defense to it.

Jay N-S: “Eviscerate that straw?” As the New Yorker puts it, block that metaphor!

spob: There’s rational discourse as a tactic, and then there’s ad hominem and name-calling. Reliance on the latter option is ineffective regardless of the merits.

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