AIG Bonuses

Rabbi Gil Student writes: "R. Dr. Asher Meir published an article from two weeks about an AIG executive’s Op-Ed in the NY Times in which he announced his resignation (Op-Ed in NYT, Asher Meir). Dr. Meir calls the letter "a monument of misdirection." He says that the letter displays "the culture of entitlement that permeates Wall Street.""

Anon comments: In 2001 none of the upper level people in the FAA got bonuses, even if their groups did very well. Why? It should be fairly obvious why. There was no way that agency (or administration if you prefer) could be considered having a successful year with occured. This was even if their group had nothing to do with preventing planes from being hijacked. As as I understand it, this was a group decision, as they felt it be inappropriate for them to get bonuses (which at most would be measured in the 10s of thousands of dollars) after what occured.

Just because an executive is not directly involved with the bad behavior, sometimes things are so bad at a company that no one who is part of the management should get a bonus.

HABTBG WRITES: I also disagree with R. Dr. Meir’s contention that insistance on the bonus was unethical.

1. Mr. De Santis had a contract legally binding so long as AIG did not declare bankruptcy. Even arguing later changed circumstances is difficult. When Congress prevented the AIG bankruptcy it had the option of canceling these bonuses and chose not to. Indeed, it was only the public outrage when it became known after the fact that led to the Congressional outrage. The key is ‘after the fact.’

If De Santis completed the terms of his employment (and no one has yet suggested he has not), then how can he be faulted for wanting remuneration due?

Maybe it would be saintly of De Santis to reject the bonus. But he has no obligation to be saintly. Nor is it unethical to not be saintly.

Similarly we may feel the terms of the contract were ridiculous but there were two points before the terms were completed where this should have been addressed but was not: (i) the original employment negotiation, and (ii) at the point of Congressional intervention. At both points it was parties other then Mr. De Santis that were supposed to reign in expectations of salary and bonus (first his employers and then our government).

2. De Santis had a contract. Ergo if someone wants deviation from the contract the burden is on them to show a reason for the deviation. Asher Meir attempts to wrongly shift the burden unto De Santis to justify keeping to the contract. Meir does this by saying De Santis had to prove he was not involved in the debacle at AIG. That there was a debacle in his department does not mean De Santis was part of the debacle. Yet Meir assumes he was.

3. When we allow Goldman Sachs, as an AIG counterparty to get about $10 billion from the AIG bailout – and GS is certainly a bunch of sophisticated investors – then I fail to see the distinction that should outrage me more by De Santis, an AIG employee. Why is money to sophisticated investment firm GS something we can tolerate (indeed was part of the point of the bailout) but money to the employee unethical?

Of course, in fact, I am outraged that GS got all that money. To me its even ‘unethical’ in the obvious sense that the people who caused the mess and gotten rich by doing so are the ones getting bailed out – by me and people poorer then me. But yet bailing them out was part of the point of the legislation. And wording affecting employee bonuses was specifically removed from the legislation. How is GS’s acceptance ethical and De Santis not? We supported GS indirectly because of third party affects. Similarly De Santis has an obligation to his family to get paid his due.

4. One of the most troubling things out of this (other then that the taxpayers now own a massive dying insurance company) is the notion of the confiscatory tax.

A. WRITES: I’m surprised by this piece. Rabbi Meir is wrong.

There is a difference between "bonus" as it is usually understood, and a "retention bonus" as it was used here.

Di Santis, who does claim not to have had anything to do with default credit swaps, contra Rabbi Meir’s assertion, had an agreement with AIG that he would be paid to wind down his job. The incentive for him to stay and do it was the back-end payment, which they called a "bonus". He could have left to a competitor at any time, which AIG clearly feared. This fee structure guaranteed that 1) he would stay to complete the work and 2) he would be paid appropriately, but only if he completed the work.

There is nothing unethical about DeSantis expecting to be paid.

MOISHE POSTS: I read Dr. Meir’s piece twice, and he quite clearly does not know what he is talking about.

1. Insurers are not "required" to create a fund for natural disasters. Under both GAAP and statutory (i.e, insurance-specific) rules, they are prohibited from doing so until an event occurs.

2. The extremely risky bets that Dr. Meir blames for AIG’s troubles have consistently been profitable for AIG, in both the short- and long-terms. They mis-priced their CDS sales, to be sure, but Dr. Meir has no basis for asserting that other "extremely risky bets" explain AIG’s difficulties.

3. De Santis’"real compensation" originally included both salary and bonus – in agreeing to an annual salary of $1, he was, in fact, sacrificing a great deal of revenue.

The most useful point of De Santis’ letter, in addition to offering much more clarity than Dr. Meir perceives, is that it reasonably describes the capitalist mindset. In an imaginary world, perhaps, people would be more willing to produce more for less compensation, but in reality, whenever policies that attempt to limit compensation, productivity declines.

IBNR can only be recorded for an event that has occurred (or is believed to have occurred). European insurance accounting allows (or insists) on accruing an annual catastrophe reserve to smooth results for the inherent lumpiness of catastrophes, but neither US accounting standard permits it.

It might well be a good idea (US P&C stocks tend to over-respond to "good" and "bad" quarters that are largely out of management’s control), but it is not, by any stretch of the imagination, "required".

I’m venting more than I should – in my professional life, monitoring the employment situation at AIG is a big deal (and it’s largely why I’m required to post pseudonymously), but in general, most of the commentary surrounding AIG’s compensation is both uninformed and enormously destructive.

About Luke Ford

I've written five books (see Amazon.com). My work has been followed by the New York Times, the Los Angeles Times, and 60 Minutes. I teach Alexander Technique in Beverly Hills (Alexander90210.com).
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