Quitting AIG: A banker’s tale

With a tip of the hat to Brian, here is a resignation letter from one of AIG bonus recipients that is very indicative of the overall mood within financial industry.

I find these passages the most telling:

I and many others in the unit feel betrayed that [AIG Chairman/CEO Edward M. Liddy] failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that [Mr. Liddy] didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

The letter is a bit too heavy on self-justification, but it gets across a point. People have the right to be compensated for their services. A compensation contract should be honored if the person done their job and done it well (to say nothing of the fact that said person is not compensated in any other way).

Inventing laws on the spot to satisfy public hysteria and the thirst to punish “greedy bankers” can only lead to the exodus of better people from those firms that need them the most. Anybody thinks that that can improve the chances for recovery?

10 comments on “Quitting AIG: A banker’s tale”

  1. Eric

    Ilya, I hate to say it here, but I’m not real sympathetic to folks at AIG having to give up millions of dollars that I’m not convinced they deserve in any kind of moral sense. Especially right now, when one of the things my employer is looking at to make up for the budgetary crisis created by the economic meltdown is a possible two-year freeze of government employees’ statutorily-mandated longevity payments: meaning a 5%/10%/15%/20% salary cut for people who have worked a corresponding number of years. Alternative propositions include furloughs. And we public-sector folks aren’t making bankers’ money to start with.

    I agree the problem could have been avoided if the Treasury had kept a firmer hand at the tiller and had said that any contractually-required bonuses would not come out of taxpayers’ donations to the company (because that’s what the bailout is starting to look like). Then again, some of these AIG employees could have taken one for the team and turned down their bonuses–which, by the way, is what some people have said we gov’t workers ought to do regarding our salaries.

    I’m not aware, by the way, of any plumbers or electricians who are employed by the same company, and then the electrician burns down the house through gross negligence, foolhardiness, and borderline criminal behavior, and then the whole company goes on welfare and the plumber says, “Well, I should be getting a bonus.” As a general rule, plumbers are separately contracted from electricians by the people for whom the work is done and they don’t expect, say, the neighbors down the street to fulfill their contracts. Aside from being completely different situations that aren’t the least bit comparable, I guess the author of the letter is right that if there was any analogy whatsoever it would be unfair. Of course, speaking as the neighbor down the street, it hardly seems fair that I’m being sent a bill from the guy who did the plumbing for the house down the street that burned down, and I’m inclined to feel like I have the better claim to fairness.

    The only reason to even consider paying these AIG bonuses is that they might be contractually required (say at some point I foolishly went on as some sort of co-signer or guarantor of the plumber’s contract with the idiot whose house burned down). And if some clever attorney figures out a way to break that contract–or if Congress taxes the hell out of the proceeds–I’m not feeling as sense of outrage.

    Sorry, Ilya. I can’t go with you on this one.

  2. Ilya

    I thought the analogy was much simpler, Eric. A plumber has done his work, but before he was paid for that work, the house burned down. Is the plumber still entitled to be paid for the work? (I suppose the word “bonus” blinds you here a bit – using something like “contractually agreed compensation” would be more appropriate, though.)

    I admit I find it a bit shocking that you’re so cheerful at the prospect of finding ways to break contracts – or to invent new laws to make those earlier contracts more or less useless.

    Because this is my problem. It is not the money itself, it is the idea that the government decides that contractual obligations can be discarded at will when it plays well into the swell of public opinion. When the government shows itself so keen to change the rules on the spot, do you honestly think that there will be enough people willing to play eventually?

    Yes, there are the idealists and the well-heeled who can “take one for the team” and work for a $1 yearly salary (and if I read the letter correctly, this guy was working on no salary). Majority of people, I expect, would insist on being compensated for their work. Your salary is going to be cut, I’m truly sorry for that, but you still are getting paid a predetermined amount of money for every day that you worked; and nobody is demanding that you pay back your compensation for the previous months. Would you continue in your current position if the terms were “you will possibly be required to forgo your entire compensation at the end of the year”?

    And why does it matter that the guy is effectively working for the taxpayer now, rather than the private company? I am no lawyer, but I am pretty sure that a new owner, no matter public or private, cannot just tear up pre-existing contracts without legal repercussions. Am I wrong on that?

    And if the government does do that – tear up the contracts, effectively, – to the cheers of many, my main concern is that the companies that need to keep their best people – best in terms of skills and business savvy, not in altruistic terms of willing to work for nothing, – will lose them to retirement (for those fortunate to be able to afford it) or to some other vocations, due to their lack of willingness to subject themselves to the new reality of their conditions of employment. Which will make the road to recovery much harder.

    I don’t see it as being about bonuses, per se. I see it as being about law and the effect of retroactive jerk-reaction law changes on the future of the economy.

  3. Eric

    As I said, the only reason I can see for making these payments is because they appear to be contractually required.

    Is the plumber still entitled to be paid for his work? I don’t think the analogy is quite that simple, actually. Again, we’re not talking about a separate contractor and whether or not he’s paid by the same employer. If the plumber is a partner of the electrician, he may actually share liability for the electrician’s negligence, depending on the form of partnership. The reason the analogy is appealing to you, I suspect, is that if you change the relationships between co-workers at AIG to make them more like separately-hired contractors, it does make the equities argument more attractive. The problem is that this isn’t the situation: this is fellow employees of the same firm, and the one employee (acting on behalf on the firm and with the firm’s consent and oversight) has created a situation where the public-at-large has been called upon to rescue the firm. An analogy that many would find more apt would be a situation in which somebody (the letter-writer) is complaining that the fire brigade failed to save his garage and storage shed while the whole neighborhood was burning down because of a fire his brother started: he still has most of his house, and maybe he could have kept a sharper eye on his family, and anyway the rest of the village could have let his entire home burn down if they weren’t afraid of the fire spreading, so maybe he’s lucky to have most of his stuff and next time we’ll just let the fire take what it will if that’s going to be his attitude.

    I am not sufficiently versed in contract law to say whether a new owner is required to pick up the old contracts; I suspect it depends on the terms of the transfer of ownership. There is some feeling that a lot of the AIG employees who received these bonuses should have been sacked when the Treasury took over; the argument that these people needed to be retained because of their experience and familiarity with the accounts, and that bonuses were necessary inducement to retain them, is one that I (and a number of other people, it appears) don’t find especially compelling: normally, when somebody has royally screwed up, nobody says “Oh, and we need you to fix it, so we’ll pay you extra.”

  4. Ilya

    The difference between our views seems to be neatly summarized in that very last word of yours, my friend. You are intent on seeing this as a discretionary above-salary compensation, while my interpretation of the facts suggests that these payments are not discretionary in any sense. Whether these people should have been sacked instead is immaterial (even though it is easy to surmise that this guy is not only blameless for the CDS debacle, but also may be working in one area that could help AIG become solvent again); if they were sacked, then they wouldn’t have provided their services and would not be looking to be compensated for that work.

    I am perfectly satisfied with your concession that a contractually required payments should be made. That was my entire thrust. That you are cheering attempts to retroactively nullify those payments, while I find such attempts abhorrent, speaks to our different political credos. Which should not be a surprise to either of us, should it? 🙂

  5. Eric

    I’m not sure how much of this goes to political credos in this case and how much of it goes to different senses of what is just and fair under the circumstances (and that isn’t meant as a backhanded criticism of your sense of fairness): you see the payment as legitimate compensation while I tend to see it as an ill-gotten gain acquired by taking advantage of corporate culture (which took the practice of giving this money for granted) and poor oversight by the Treasury Department.

    The thing is, I’m not wholly comfortable with all of the means proposed to balance the scales–I don’t necessarily think it’s a good idea to void otherwise legal contracts or apply specific retroactive taxes to specific parties, for instance. On the other hand, I don’t particularly feel the AIG folks were entitled to their jobs, much less additional compensation above their salaries whatever the label. So if I’m uneasy about the methods being employed to even the scales, I’m outright offended by the AIGers whining about it.

    By way of crude metaphors, since that seems to be the mode-of-the-day for this subject: I don’t especially approve of violence and I believe that the court system should handle criminal activities, and I think vigilantism is inherently evil–and yet if Batman and The Joker were real people, I know who I’d be rooting for. (Hey, I don’t think it’s any more absurd than the plumber metaphor! 🙂 ) I suppose that part of this is to clarify what, exactly, I might be “cheering”: I think what I initially said was that if some clever attorney found a way to void the contracts I wouldn’t be outraged (and it ought to be noted that any voiding of the contracts would almost certainly be based on equities: that is that the contracts promising those bonuses were somehow unconscionable to begin with). I’m not necessarily cheering efforts to go “Batman” on AIG’s rear-end, but I’m far from upset if those Jokers lose a few teeth.

  6. Ilya

    Your point is taken, Eric. I have my own topics on which I’m likely to cheer for a Batman. I’m a bit uncomfortable with your readiness to paint everyone who is tainted by association with a “bad” company in one broad stroke, but I am not beyond that myself in other cases.

  7. Brian Greenberg

    Wow…first of all, I’d like to say that I’m glad to see that lively discussions like these exist on other blogs as well as my own.

    As to the discussion itself, the disconnect I see between Eric’s arguments and Ilya’s refer to the proactive/retroactive nature of the money involved. If Congress has summarily fired all 400 AIGFP employees, leaving them unemployed (and, therefore, with no salary) I don’t think you’d see these same complaints. What we’re talking about here, though, is people who worked all throughout the year, and when they went to the window to get their paycheck at the end, were to be told, “Sorry – change of plans. All that work you did this past year was for free.” That’s why the bonuses weren’t redacted in the first place.

    The “clever attorney loophole” Eric is referring to came in the form of the threatened 90% tax. This is not retroactive, as we don’t pay tax on our 2009 income until April of 2010. It does, however, smack of “the government can take your salary away if it doesn’t like you,” which I don’t think anyone (not even President Obama) is completely comfortable with.

  8. jason

    Again, late to the party… sorry.

    As I wrote over at Brian’s blog, I think part of the anger many people feel over the AIG situation stems from a communications barrier, and a lack of understanding how people in the financial industry are paid vs. how “regular folks” get paid. The word “bonus” is especially problematic, because to working-class people, a bonus is not “contractually agreed compensation,” it’s a reward for something, an extra.

    Personally, I’m ambivalent on the whole topic. I’m not overly offended by the AIG bonuses; I am troubled by the huge disparity between executive/financial industry pay and what the average American gets, but I suppose that’s my idealistic liberalism speaking.

    I do find it interesting (and I mean no insult here) that many people are quick to defend the AIG execs by saying they’re contractually obligated to get that money, but didn’t comment at all on the auto workers being asked to surrender and/or renegotiate their contractually agreed compensation. Again, I’m not trying to antagonize anyone, just an observation.

  9. Ilya

    I was not going to return to this topic, but I suppose I cannot leave your juxtaposition aside, Jason.

    I don’t see the situations as very similar. I don’t think that autoworkers are being asked to pay back their wages, are they? In a nutshell, they are being given a choice: Be out of work because the industry cannot satisfy the previous levels of agreed obligations to its workforce or agree to reduced obligations so that we can all stay in business. If a valid, non-expiring contract that does not have any provisions for renegotiation is being torn up here, I am very much disturbed by that. But to my knowledge, the collective agreements of this kind are perpetually open to renegotiation. (Otherwise, we really shouldn’t be having all of those strikes or threats of the like every now and then.)

    Knowing that you have to work for a reduced pay going forward is one thing. Having completed your term of work and then be told that you are not entitled to your pay for that body of work is, in my opinion, quite another.

  10. Ilya

    And since I’ve come back to this topic, making up a law in response to something that happened in the past and effectively for the sole reason of dealing with that past event is the definition of “retroactive” lawmaking. If the law said that any bonuses paid out on or after the date on which the law was first proposed would be subject to 90% tax, that would not be retroactive.

    Otherwise, I do not disagree with your summary at all, Brian.

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