AIG Bonuses: Fooled Again

Terrance Heath

This is one of those times when I really hate to say, “Told ya so.” But…

Well, I did.

It was bloggers, by the way, who broke the news that the CEO salary restrictions in the TARP bill were toothless. It was bloggers who infiltrated today’s equivalent of a smokey backroom and alerted us to what was going on. For all the good it did.

The $500,000 CEO pay cap announced by the president, in the wake of bailed out firms handing out $18 billion in bonuses, has one huge catch. They’re not retroactive. And Sen. McCaskill’s attempt to make them retroactive was quietly removed from the stimulus bill. Just as before, there’s a loophole big enough for all of the companies that have already been bailed out to fit through, provided they don’t end up getting back in line for more bailout money.

And, true to form, quite a few of them want to return the money they’ve received, saying they didn’t really need it in the first place, and — as Josh Marshall put it — implying that they wouldn’t be giving it back if we hadn’t treated it so shabbily.

What did we do? Make some noise about consequences? Sure, but they were empty noise, and the Wall Streeters know it.

It didn’t take a genius to figure it out then, and it doesn’t now. Where there are huge amounts of money to be made, there are people who will do whatever it takes to get it, regardless of the harm it does to everyone else.

You can’t just hope they’ll do the right thing, especially when they’ve proven to be deficient in that department.

It is almost impossible to believe that there was any malfeasance in the decision that left the bonus management of the highest performing employees at these companies to the boards and senior managers. But, the government elected to avoid getting into a series of disputes over how thousands of people should be paid. Federal regulators chose to hope that the banks would use discretion when they made compensation decisions during this unprecedented credit crisis.

The government walked away from the entire matter because it was complex and time consuming. This is the same reason that the Treasury Department wrote checks to the banks instead of buying their toxic assets even though Congress had been told that the TARP funds would only be used to buy toxic assets. It was quicker and easier to just give the banks money because of the worsening crisis.

You especially can’t do that with people who don’t get or don’t care what’s wrong with their actions.

Anyone who finds it “impossible to believe that there was any malfeasance,” in the decision to leave bonuses to the discretion of the same people who presided over the the goings-on that got us here either suffers a terminal lack of imagination or has simply been lulled into believing that such well-spoken, well-dressed, well-intentioned, and well-off people couldn’t possibly fail to exercise some discretion and restraint. After all, look at where we are now.

Or they’ve been fooled by the mask of normalcy that serves sociopaths so well. So, regulators relied on “hope” that banks would act with discretion. Banks whose business decisions and pratices helped this happen and left them in need of rescue? Woudn’t their judgement be suspect already? The government didn’t just “walk away.” Right? Remember the CEO salary caps that were supposed to be part of the bailout? They knew all along that it wouldn’t fly.

…With a bit more smarts, slightly less bloodlust, a new suit and and updated haircut, Ted Bundy — one of the best known, most charming sociopaths — might have done well on today’s Wall Street, and made a killing of a different sort. His “mask of normalcy” worked so well that his victims only realized it was a mask when it slipped off, well out of public view. By then, he didn’t need it anymore. He was in control.

That’s the thing about psychopaths. They don’t care about right, wrong or the consequences. Period. They aren’t going to do right this time just because they got caught last time. And certainly not if they get rewarded. And who can say that they haven’t been rewarded?

They’ve been rewarded, alright. In a sense, they’ve been rewarded for the very behavior that got them and us into this mess in the first place.

Yes, any reasonable person at this point would probably think twice about (a) handing out business-as-usual bonuses in the middle of a worsening crisis or (b) trust bailed-out firms to do the right thing when it comes to money, when the utter lack of either the ability or will to do so in the first place is what got them a ticket on the government gravy train.

Oddly enough, reason failed on both sides, despite evidence that was plain to see as early as October of last year, when we already knew the terms of the bailout were too vague to curb absurd executive compensation.

New rules limiting executive payouts at U.S. banks participating in a federal cash infusion plan may not rein in CEO compensation at all because the language is vague and subject to government interpretation, critics say.

The pay rules were detailed Tuesday as part of U.S. Treasury Secretary Henry Paulson’s plan to inject $250 billion into banks in a bid to shore up confidence.

Critics say that while the pay limits do place some restrictions on things like so-called “golden parachutes” awarded to departing executives, the rules overall set no precise limits on corporate leaders’ compensation.

The Treasury Department says banks that accept the cash infusions must ensure that compensation does not encourage executives to take “unnecessary and excessive risks that threaten the value of the financial institution.” But the rules do not define those risks and many question who will decide what is excessive.

“Without clear limits on pay, the public is being asked to put their trust in Secretary Paulson, a man who made hundreds of millions of dollars as a Wall Street CEO, to decide what’s ‘excessive,”‘ said Sarah Anderson, a pay expert at the Institute for Policy Studies, which has pressed for CEO pay curbs.

The problem with that comes when the official overseeing the bailout places his trust in the very institutions that have shown they aren’t can’t be trusted to behave responsibly or even sensibly; in other words, if they had the faintest notion of what’s happening outside their corporate bubble — that place where $500,000 a year is nowhere near enough to live on — or cared to know what’s happening in the rest of the world, where the worst crisis since the 1930s is in full swing, jobs are disappearing at a startling rate, job prospects are increasingly dim, more people are turning to food stamps, and some are forced to take lower paying jobs (if they can find one, that is), while the price of everything goes up, as more Americans worry about maintaining their standard of living. This, even as their tax tollars go to bail-out institutions that can’t pay their debts, but can hand out millions in bonuses to brokers whose bungling brought both their companies and our economy to their knees. (Meanwhile, American’s facing forclosure continue to wait for help.)

But, as John Thain said (in defense of his sneaking bonsues to Merriill Lynch employees just ahead of their merger with Bank of America) "..there is nothing that happened in the world or in the economy" that would justify suspending those bonuses. Nothing.

And the benfits of the govenment’s benefit-of-the-doubt trickled down from the CEO level to the next rung on the executive ladder.

While the government rescue limits the salaries of five top executives from each of the participating financial firms, Congress did nothing to restrict Wall Street firms from using taxpayer funds to boost the compensation of rank-and-file investment bankers. “Some people might argue that these bankers should not be penalized if they weren’t personally involved in the risky mortgage-backed securities,” says Sarah Anderson, project director of the Global Economy Project at the Institute for Policy Studies, a progressive think tank in Washington. “My response is that the average taxpayer wasn’t either, but she is being asked to take a hit.”

Earlier this month, the government announced that it planned to quickly inject $125 billion of the $700 billion economic rescue package into nine of the nation’s largest financial firms, including Wall Street titans Goldman Sachs and Morgan Stanley, as well as Bank of America, which recently acquired securities firm Merrill Lynch. That, along with other Treasury Department moves to rescue Wall Street, will mean the wallets of many investment bankers will be fatter than they would have been.

“It’s not the government’s money directly, but in the case of Morgan Stanley and Goldman Sachs, they were facing a severe crunch,” says analyst Brad Hintz, who covers financial firms at Sanford Bernstein and is a former chief financial officer of Lehman Brothers. “Had it not been for the government’s help in refinancing their debt, they may not have had the cash to pay bonuses.” When asked, the Treasury would not comment directly on Wall Street’s bonus plans, though spokeswoman Brookly McLaughlin did reiterate the bailout’s intent. “There is broad agreement that the Treasury’s capital purchase program was intended to strengthen the financial system and increase lending,” she said. 

Sure enough, by November, AIG was paying out $503 million in “deferred compenation.”

American International Group plans to pay out $503 million in deferred compensation to some of its top employees, saying it must tap the funds to keep valuable workers from exiting the troubled insurance giant.

News of the payments to top AIG talent comes as the federal government has just put more money into saving the company from bankruptcy, beefing up the total public commitment to $152 billion. Meanwhile, members of Congress are questioning the company’s expenditures — including lavish business trips to resorts — during a time when taxpayers are on the hook for the bailout.

AIG’s troubles stem from bad bets it made guaranteeing and buying risky mortgage investments. On Monday, the U.S. government announced that it would have to expand its rescue of the company to nearly double the $85 billion loan it first provided in September when AIG was unable to pay billions of dollars in claims.

Treasury officials said earlier this week that they had imposed some of the most stringent limits ever on AIG executives’ bonuses and compensation in exchange for the broader bailout.

AIG’s plans to crack open its deferred compensation bank for payments early next year is conveyed in a two-sentence paragraph buried inside a quarterly financial report filed with the Securities and Exchange Commission on Monday. But some compensation experts and AIG stakeholders yesterday said they considered the exodus of $503 million in AIG money dubious at a time when the company is drenched in red ink. The company reported losses this week that brought total losses to $37.63 billion for the first nine months of the year.

By mid December the bailout had grown to $700 bilion, but the compensation rules had yet to grow teeth.

Congress wanted to guarantee that the $700 billion financial bailout would limit the eye-popping pay of Wall Street executives, so lawmakers included a mechanism for reviewing executive compensation and penalizing firms that break the rules.

But at the last minute, the Bush administration insisted on a one-sentence change to the provision, congressional aides said. The change stipulated that the penalty would apply only to firms that received bailout funds by selling troubled assets to the government in an auction, which was the way the Treasury Department had said it planned to use the money.

Now, however, the small change looks more like a giant loophole, according to lawmakers and legal experts. In a reversal, the Bush administration has not used auctions for any of the $335 billion committed so far from the rescue package, nor does it plan to use them in the future. Lawmakers and legal experts say the change has effectively repealed the only enforcement mechanism in the law dealing with lavish pay for top executives.

“The flimsy executive-compensation restrictions in the original bill are now all but gone,” said Sen. Charles E. Grassley (Iowa), ranking Republican on of the Senate Finance Committee.

Sure enough, just in time for the holidays we learned that bailed-out bank executives got $1.6 billion in salaries, bonuses and other compensation that year.


Banks that are getting taxpayer bailouts awarded their top executives nearly $1.6 billion in salaries, bonuses, and other benefits last year, an Associated Press analysis reveals.

The rewards came even at banks where poor results last year foretold the economic crisis that sent them to Washington for a government rescue. Some trimmed their executive compensation due to lagging bank performance, but still forked over multimillion-dollar executive pay packages.

Benefits included cash bonuses, stock options, personal use of company jets and chauffeurs, home security, country club memberships and professional money management, the AP review of federal securities documents found.

The total amount given to nearly 600 executives would cover bailout costs for many of the 116 banks that have so far accepted tax dollars to boost their bottom lines.

Rep. Barney Frank, chairman of the House Financial Services committee and a long-standing critic of executive largesse, said the bonuses tallied by the AP review amount to a bribe "to get them to do the jobs for which they are well paid in the first place.

By January, we knew that 80% of Wall Street got bonuses.

Recently axed Merrill Lynch chief John Thain is getting lynched for handing out some $3 to $4 billion in bonuses to employees just before the firm merged with Bank of America. But Thain wasn’t the only one handing our checks last year.

While 2008 was a devastating time for investors, 79% of Wall Street workers received bonuses, according to a study by employment Web site efinancialcareers.com.

"Following one of the most tumultuous years in financial history, smart people who did good work deserve to be recognized," said John Benson, the site’s founder. "The future of the financial services industry may be opaque, but the industry has a vital role to play in the global economy–and that requires talent."

It must require even more talent to get off the hook again, but that’s just what happened when it looked like we were getting serious about compensation. Wall Street got let off the hook again.

For a while, the disappearance of an executive bonus restriction from last month’s economic stimulus looked like sleight of hand worthy of a Las Vegas stage. No one could explain how the provision faded into thin air.

On Wednesday, Sen. Chris Dodd, D-Conn., acknowledged that his staff agreed to dilute the executive pay provision that would have applied retroactively to recipients of federal aid. However, Dodd said he was not aware of any American International Group Inc. bonuses at the time the change was made.

The provision was the subject of new attention this week because, had it survived, it would have prevented AIG from granting $165 million in bonuses to employees of its financial products division.

"I’m the one who has led the fight against excessive executive compensation, often over the objections of many," said Dodd, the chairman of the Senate Banking Committee. "I did not want to make any changes to my original Senate-passed amendment, but I did so at the request of administration officials, who gave us no indication that this was in any way related to AIG."

He added: "Let me be clear: I was completely unaware of these AIG bonuses until I learned of them last week."

Yeah, but you didn’t have to know about these particular bonuses to guess that Wall Street might continue behaving as it always has, especially since there have been few consequences. It’s true, those who don’t know their history are bound to repeat it. But those who don’t know what’s been going on for the last six months, cannot have been paying attention.

It’s been said that corporations have all the rights of human beings, but none of the responsibilities. As a parent of a six-year-old, the only analogy I can draw is that corporations are kind of like six-year-olds.

Case in point, every morning I make breakfast for our six-year-old son, which he eats while I finish getting dressed, etc. By the time I come downstairs, he’s usually done and ready to get dressed (once I remind him). Like any six-year-old, he knows what’s not allowed, but like any six-year-old, he’ll still try to get away with doing what’s now allowed, if nobody’s watching.

So, the morning after Halloween, I came downstairs to find he wasn’t in his usual spot (on the floor in front of the television, playing). I walked into the kitchen to find him standing on the kitchen counter, about to reach into the plastic pumpkin that held his haul of candy from the previous night. If I’d walked in a few moments later, he might have gotten the candy and eaten it, leaving only the empty wrapper to help me guess what happened.

I admonished him, and he got down. Then I did something that just made sense to me as a parent. Seeing that our son couldn’t resist trying to get the candy he wasn’t supposed to have in the morning, I moved the pumpkin to a secure location — one he’ll have to grow several more inches in order to reach, at which point perhaps he’ll have more restraint. Until then, he has parents. And that’s an important thing, because six-year-olds generally can’t be in charge of themselves. They can’t always self-regulate. They require adult supervision.

So do Wall Street firms that behave like six-year-olds.

"Fool me once," the saying goes, "shame on you. Fool me twice, shame on me." Or, as George W. Bush put it once:

“There’s an old saying in Tennessee — I know it’s in Texas, probably in Tennessee — that says, fool me once, shame on — shame on you. Fool me — you can’t get fooled again.”

As the grown-up in charge of my six-year-old, my goal was not to get fooled again.

The grown-ups in charge of the bailout (and, by extension, bailed-out firms, including one that we now own 80% of) have been fooled once. Twice, even.

They would do well not to get fooled again.

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