AIG Bonuses

By Clarice Feldman

As usual, the reports of substantial bonuses to bailed out AIG officials is grist for the populist, anti business pro government interventionist mill, but in two lengthy posts, Tom Maguire argues the cheap shot is extremely stupid:

As the letter to Geithner explains, AIG FP is hardly monolithic. They divided their acvtivities into 22 "risk books", each of which must be managed. I strongly suspect that the credit derivatives books only represents one or a few books - corporate, multi-sector, sub-prime, and prime would be four logical credit derivative divisions (the letter mentions a "regulatory capital CDS book" of $234 billion). However, AIG FP has huge ongoing operations in currency swaps, commodity swaps, and interest rate swap and option products in multiple currencies, so it is entirely possible that all the credit derivatives are packed into the 22nd book, the book of the dead.

Some folks are clearly under the illusion that all 370 AIG FP employees spent their days (and nights!) writing credit derivative swaps that were doomed to disaster. Let me just sketch an alternative hypothetical scenario for the outraged to contemplate.

Joe Cassano, who ultimately emerged as the leader of AIG FP after several rounds of managerial changes, was one of several contenders for the top post. His rivals, some of whom may have had serious disagreements with his personal style and professional judgments, could elect to stay on in senior posts at the satellite offices in Tokyo, Hong Kong, Wilton, Paris, and wherever, or they could leave for high paying jobs at hedge funds or other investment banks. Some stayed.

In the spring of 2008 it was clear that the Cassano-led charge into credit derivatives was an impending disaster and Cassano was on the way out. Would it better for the AIG board to (a) sack Cassano and let his disgruntled rivals quit for jobs at other firms, or (b) sack Cassano and guarantee a bonus pool to those who agreed to stay on and attempt to pick up the pieces?

The idea that the only correct answer is (a) is absurd.

He is merciless on those who argue that AIG should compell those entitled contractually to bonuses to sue for them, noting it will end up costing AIG twice as much if they take that tack.

Tom concludes that

"The alliance between the current crop of regulators (who failed badly) and the political element that always favor more regulation of everything will assure that credit derivatives remains the whipping boy."

As to the President's directive that Treasury find a way to undo the bonuses, he notes:

Final thought - if the AIG FP employees simply walk away from their desks on Monday night never to return the market disruption would be stunning. If I were at the Fed I would exhort Obama to put a sock in it.

I think the very notion that the 8:45a.m. Obama media hit squad and the cheap shot pols would think this through and avoid demonizing the bonus recipients and pushing for ever more (futile) regulation is unfortunately fantasy.