A different perspective on AIG bonuses
Friday, March 20, 2009 at 06:13PM I got an email today from a friend who worked in finance for many years, and in particular worked on a fixed income derivatives desk that traded credit default swaps.
It's very interesting, and offers a different perspective on the AIG/bonus mess. It's worth taking a read:
I have a few problems with the way the media is portraying this whole AIG issue - and it's just driving me nuts!!! The spin is so unbelievably obvious to me and it infuriates me that people are buying in to the load of BS that they are being served. Who are these people!?! Why are they making the public so irate about an issue that should be a non-issue, simply because they are not presenting the public with the full story!
1. First, the people that have received these "bonuses" are not the same individuals that created the mess. The traders that entered into the transactions that are so far underwater (the credit default swaps) have been gone from the company for at least a year. These individuals were hired to clean up the mess. They are a highly skilled, highly talented group of individuals with specific knowledge of credit derivatives and credit default swaps in particular.
2. These are not traditional "bonuses" for having done a good job. They are "retention bonuses" to make sure the individuals stay at the company to do the job they were hired to do. These were contracts that were negotiated and entered into in January 2008. They would have stated something like - if you stay with AIG and unwind these individual groups of trades within a timely basis, without causing further harm to the company (probably some sort of loss threshold), we will pay you X amount at bonus time next year - March 15 is always bonus day. This "bonus" is actually contractual compensation for having completed a task for the past year - to call it a bonus rather than simply "compensation" is misleading and causing this whole mess to begin with. My friend was right when he said it should have been just accrued somewhere as regular compensation and not presented as a bonus. I guess the problem is that the contracts didn't foresee a problem with this terminology.
3. If these specific individuals were to leave AIG because they did not have a contract in place - the result could have caused the company to rapidly spiral downward - you can not leave a volatile portfolio of underwater trades just sitting there with no one to manage it. It would have caused AIG and the economy to fall further and further into disarray. Same goes for telling these individuals that they were not going to receive the compensation that was due to them. What would be their incentive to stay and help AIG unwind these trades if they were not being compensated for their knowledge, skills and risks?
4. Yes, there are many highly skilled individuals that are now unemployed that would have taken over these positions to unwind the portfolio's, but remember who you are dealing with - highly educated, highly compensated, financial experts. Do you honestly think a single one of them would have gotten involved without some sort of contract in place to make sure they are greatly compensated for taking on such a highly risky task?
This "guarantee" or "retention bonus" idea is the way things work on the street. This is not new - this concept has been around forever. People outside of the "wall-street world" are making this out to be a new thing - that the traditional idea of a "Christmas Bonus" for having done a good job is the same thing - IT IS NOT! Executives weigh the risk of loosing the talented skilled people, and the cost of hiring replacements and getting them up the learning curve vs. the cost of a "retention" bonus to keep them on staff. The "retention bonus" is always the better way to go. Or so we thought :o)
Reader Comments (4)
This is a totally different viewpoint Nick - one that I haven't read anywhere. Great post, I'm going to chew on this for a while.
This is very similar to what my roommate keeps telling me but not as eloquently. Too bad your friend wasn't managing the PR for AIG. As with many things like Bear, the outcome could have been very different. In any case, I'm going to post this on my fb page.
While Fernando chews the rest of should consider this well-orchestrated distraction of what is really going on behind the curtain.
Obama works on his NCAA brackets or he’s on the Jay Leno! Washington is OUTRAGED! by the AIG bonuses; but meanwhile the Fed is quietly spending another $ TRILLION $ to try and fix the mortgage problem AND today the COB tells us (but we’re all chewing on AIG) that the budget deficit is nearly $2 Trillion $.
But, you know what Fernando? The treasury will have to borrow all this money someday – real soon. Who do you think we’ll have to borrow it from – China! And, what do you think we’ll have to do to convince China to lend it to us, now that we have devaluated our currency? Increase risk = increase interest rates – that’s how.
And we’ll be left with nothing but – CHANGE!
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