More financial bailout drama. How are we navigating the worst economic crisis since the Great Depression?
The AIG Outrage: Where Are Your Taxes Going?
If you’re like me, you must’ve winced when you heard of the latest news surrounding AIG and how they’re funneling some of their bailout money towards employee bonuses.
With untold billions of dollars having gone to shore up the insurance giant AIG (American International Group), we taxpayers have the right to know what was done with that money and who it benefited the most. Tens of billions of those dollars have already passed through AIG to its derivatives trading partners, shielding them from losses as per news reports.
When asked to identify the beneficiaries of the bailout, the Fed wouldn’t give out names, saying in effect that nobody would do business with AIG if any names were revealed. Hogwash! If the business is above board and ethical, then what’s the problem? Well, AIG finally caved under pressure and has produced the list of recipients of their bailout money. More in this video.
We’re Not Paying For Bonuses, They’re “Employee Retention Awards”
Just the other day, we published a post on investment bankers with Wall Street jobs who were defending their salaries and big bonuses. Well here we go again: AIG has already received a total of $180 billion of taxpayer cash to avoid a collapse. Yet they insist that they need to honor contractual obligations to employees who were promised huge bonuses. The insurer had plans to pay about $165 million in bonuses by today, though some payments were reduced after Treasury Secretary Timothy F. Geithner intervened.
They could have taken the ethical and moral position here by deciding to scrap or defer their bonus program and to cap executive pay. But alas, greed rules!
We, the taxpayers, already own 80% of the company and yet, its board of directors still plan to fork over a ton of money! It’s beyond belief. Why don’t we just fire the whole group of executives (after all, we are the boss) and replace them with a fresh batch of graduate students just out of business school? I can’t see them doing any worse (and they just might do better) than those cynical old men who caused the crisis in the first place.
This video about AIG bonuses will get your goat:
Imagine this: 168 AIG employees are scheduled to receive payouts that range from $92,500 to $4,000,000 so that they stay with the company for ONE more year. Why doesn’t AIG call their bluff and allow them to leave? And how ridiculous is this, when unemployment rates are soaring and people are struggling to find jobs in this environment? Those who are struggling financially are the very people who are funding these outrageous bonuses via taxpayer dollars!
Small wonder that Time named Joe Cassano (insurance executive with AIG) as one of the “25 People To Blame For The U.S. Financial Crisis” and that CNN also included him in their “10 Most Wanted Culprits of the Collapse”.
Your Insurance Policies and Annuities With AIG
If you’re doing business with AIG in some way related to its insurance unit, don’t worry, your benefits are fully protected. Even if an AIG holding files for bankruptcy, the subsidiary that sold you your life insurance policy will continue to operate normally (this is according to InsureMe).
Also, you’re protected by your state’s guaranty fund. There is at least one in every state and they function pretty much like the FDIC for bank deposits. So do not panic!
Note as well, that if you have annuities with AIG through Vanguard, you are protected. According to Kiplinger’s:
For the annuities, the AIG life insurance companies hold substantial assets to back their payment obligations to the Vanguard Lifetime Income Plan fixed annuity contract.
So if you are thinking of pulling out of your life insurance with AIG, consider the financial consequences — the fact that you may have to pay up for cancellation penalties, surrender charges and higher premiums as an older customer, not to mention those commissions to new insurers. So think carefully before abandoning AIG at this time (even though they’ve made you angry enough to want to desert them!).
Should You Become An AIG Shareholder?
As of last week, you could buy one of AIG’s shares on Wall Street for $0.50. Yes, 50 American cents. It plummeted to half a dollar from a dizzying height of $49.50 before its shady deals were uncovered by negligent federal agencies.
You may be surprised that it’s actually crossed my mind to consider the possibility of buying some very cheap stock from a giant company that’s supported by our taxes. Then again, a part of me feels aggravated enough to stay away from AIG as far as possible, at least, until their controversy (scandal) boils over and until they restore the goodwill they’ve lost. I just don’t know how many people would have the stomach to “buy low”, or would find the desire to help out a company with such a tarnished reputation in the eyes of the public. Does it make sense to be an AIG shareholder right now?
Copyright © 2009 The Digerati Life. All Rights Reserved.
{ 22 comments… read them below or add one }
Yeah. We should fire the Board and infuse new blood for good.
I heard on TV that AIG considered these bonuses a contractual obligation. I don’t know if the employees could have sued for breech but I say, who cares? What would have happened to the bonuses had AIG not received the bail out? Could the employees sue?
Short-sighted dumb government and selfish greedy corporations. Business as usual.
I’m right there with you. I cannot believe they are still allowing bonuses when they are depending on government money to survive. Talk about a slap in the face. Like they always say, “the rich get richer”.
With regard to whether to become and AIG shareholder, making this bet would be pure speculation. It’s speculation that may pay off, in that AIG doesn’t have to recover to that great of an extent in order for you to have doubled your money. That being said, Warren Buffett and other value investors suggest that investors only invest in businesses that they understand. Unless you understand the nature of the toxic assets that AIG owns, the derivatives contracts (basically insurance against stock price movements), their mortgage backed securities portfolio, etc., you probably can find more safety for your money elsewhere. Of course, your downside risk is limited, so making a small bet on AIG couldn’t hurt you too much, as long as you realize you’re speculating.
Mohnish Pabrai, another noted value investor, looks for stocks that have limited downside risk and great uncertainty. AIG would definitely meet those criteria at least. I personally won’t be putting any of my family’s money in AIG, because the derivatives contracts are too numerous and complex for me to understand. You might have better luck when you take a look at their assets yourself or with your advisor. Good luck – I hope you make a pile of money if you do decide to invest;)
I think this issue has been seriously overstated. It’s ironic that Barney Frank, who championed Freddie and Fannie (money pits that make AIG look lucrative) is pushing this story so much. Taxpayers are better off if AIG pays huge bonuses to its remaining qualified employees.
After all, the ones responsible for this mess are a tiny minority. What AIG needs to do now is to retain the other 99% of the company, even though many of them have lost their life savings in AIG stock.
While I have been appalled that investment bankers and traders have been provided retention bonuses, I will say that most likely, the AIG retention bonuses were justified in this case. Hear me out before you slam me.
Unlike the investment industry, the insurance industry, particularly the property and casualty industry still has quite low unemployment. Currently they are at 3.5% versus a run rate of 3%. Why is that?
Unlike investments, property and casualty insurance is fairly resistant to downturns in the economy as contractually, companies are required to carry insurance. Workers compensation is statutorially required by each state. Most contracts between business require at the minimum, general (Public) liability insurance and no company would think about cancelling their Directors and Officers Insurance. So even if companies wanted to cut back, they are required to evidence the insurance.
Add to that, that outside of AIG and XL, the rest of the insurance industry is healthy, such as ACE, Chubb and Zurich. In addition, Lloyds of London has been making a big push into the USA, and given that they went through bankruptcy several years ago, have not been affected by the subprime crisis given the limitations on t heir investment and underwriting critera.
What other people don’t realize about AIG, is it is one tiny London based division that took the entire company down. AIG’s biggest subsidiary, National Union, has 12 Billion in Surplus earnings. That is in the range of double their next biggest competitor. It is still very healthy. The great thing about state regulation of those entities, they are not allowed to dividend most of those earning back to the p arent, so are fairly protected against the parent dipping in.
So to protect the healthy portion of the company, i.e National Union, American Home, Lexington, retention bonuses are most like justified in those companies. Good underwriters, claims people and rainmakers are hard to come by.
Well, today (3/16/2009) 189 million shares have changed hands and the current price per share climbed to $.85, so some people do consider the stock as a great opportunity. You would have made $.035 net profit had you bought at $0.50. Come on, guys, because of the Feds, the company is not going under; they can’t allow that and it means a great opportunity is passing by. That said, I am no stock guru and The Personal Finance Playbook has some very valid points. Only invest in what you know and understand is however rather difficult for the common guy, so experts recommend mutual funds and let the financial managers decide for you. Thanks for the excellent comments!
The bonuses certainly seem outrageous given the situation.
But its really hard to know whats really going on from our perspective without more real information.
On one hand it could be that the greedy people who caused the problems are taking their one last chance at padding their wallets at our expense while the company goes down in flames. ON the other hand these could be normal bonsues paid as part of the standard compensation and necessary to keep the key people at AIG so that the company will continue to function normally.
I completely agree that we should just fire the whole lot of them. While the rest of the country is struggling and people can’t keep jobs, these executives are a classic example of the rich trying to get richer at everyone else’s expense. Since the US Government owns 80% of the company, these executives should be given two options 1) pass on the bonus and keep their job or 2) take the bonus and go look for another job.
I feel that the government never should have bailed them out in the first place. Without the risk of suffering losses, American businesses will become non-competitive. AIG should have been allowed to fail, along with the others. We are just postponing the effects of the bust of the real estate bubble.
At first look this does sound outrageous, but we don’t have all the facts so it is hard to judge. Politically, this is a no brainer for Congress and the President, right or wrong it is good press to try to look tough and talk about saving the taxpayers money.
However, as said above there are multiple issues here. There are contractual obligations that must be followed. If the contracts had no contingencies for overall company performance, which we don’t know right now, and the people met their objectives for the bonus, then AIG is legally bound and should payout. Also as mentioned, there were many areas of the AIG that were profitable and successful, so we shouldn’t generalize that everyone at AIG is a crook or incompetent.
I don’t like the idea of canceling binding agreements since that sets a bad precedent and basically puts in doubt the legitimacy of any legal document, in any business, for the future. If one party can just ignore a binding document it makes any agreement worthless.
We don’t know yet who is getting the bonuses, if its within the troubled derivatives group, or not. We don’t know the exact language of the contracts. I don’t think this a company being greedy because why would a company want to pay out more money to its employees? If the company were to go bankrupt, then yes that is when legally contracts can be ignored and re-written. That is what bankruptcy is for, but we can’t start a habit of ignoring binding agreements just because it is convenient.
Since it was a contractual obligation from April of 2008, and since Connecticut law allows TRIPLE damages, it probably was a good idea to pay them. After all, the Chairman of the Senate Banking Committee, Chris Dodd (D-Conn), fought to get an adder onto the latest spending bill to allow those bonuses to go through. Today, he’s righteously indignant???
Also, why did we give them the money in the first place? It was so they could carry on business as usual. This is just business as usual. The Obama administration was informed about these bonuses back in October and November. Now they act like it was just discovered.
Chuck Schumer is now claiming that he will tax those bonuses at “vitually 100%.” Sounds like an uneven application of the law to me.
We should NEVER have bailed them out in the first place. Remember, this was a rush job and it HAD to happen ASAP. Now we have Obama giving them four more installments, again with virtually no strings attached.
We haven’t heard the last of this.
Since AIG is planning a major reorganization, if the company goes bankrupt or is bought out by another company, will I still be able to receive my fixed annuity payments? They are supposed to be guaranteed for life. I guess I’m screwed? Help.
Just to add a little fuel to the fire, something like 10 of those employees they’re paying bonuses to don’t even work for the company anymore. So, this business of it being a retention program is a load of bull! Personally, I’m so disgusted with AIG that I can’t even consider the possibility of buying their stocks…even as cheap as they are.
But, I just found out today that one of the underwriters for my auto insurance is a subsidy of AIG. I’ve had the policy for 4 or 5 years, but I just can’t stomach supporting this company. I’m looking to switch my auto insurance.
Ron said “The Obama administration was informed about these bonuses back in October and November.”
Did you mean that the Bush administration was informed in Oct. / Nov. ? Cause President Obama didn’t take office until January.
What do you guys think about Liddy saying that if he didn’t give out bonuses then his management team would resign and they are the only ones who can get AIG out of this mess? Also don’t you think if the government interferes too much with private business then people will be less likely to use the government’s aid to buy toxic assets from banks since they fear that the government might try to run their business too?
@Jim – no, Obama was one of the senators that voted FOR this crap. Additionally, Bush kept him and McCain in the loop. His tax dodging treasury secretary was in charge of the Fed Reserve for that area and was fully informed. And backstroking Chris Dodd specifically wrote the legislation to allow these bonuses (after vehemently claiming he knew nothing about it). I know we want anything to do with the current administration to appear perfect, but we’re dealing with politicians. They are not on the side of the people, regardless of what the teleprompter says. And remember that politics is a Latin word – poly means “many” and tics means “bloodsuckers.”
Life ensurance policies (annuities are a kind of life insurance policies) are different animals from the CDS mess AIG is in. So most insurance policies should be safe. First these are separate parts of the company that they can’t take from to pay debts in the other part. Second, the insurance industry is heavily regulated and must have adequate assets. Third, each state backstops the policies written in those states and provides protection if AIG were to default on a policy.
On another topic, there has been a lot of rhetoric from the politicians, many of whom are now admitting their involvement. The laws being proposed would only be to tax 2009 bonuses, so anything received end of last year would not be affected. You can’t be writing 2008 tax law in 2009. This never mentioned in the media.
Finally, it does seem outrageous that such large bonuses are being paid in a failing company. However, do we really want the Government to be micromanaging all these companies and saying what wages can be paid? Starting to smell a lot like a step closer to socialism.
Honestly I, like a few above, think all these Bailed Out companies should have been allowed to fail. Damaging to the economy or not. Now because of this we are on the slippery slope. Others will come running with their palms out for their share from the printing press, because we certainly didn’t have that cash on hand… Companies will start thinking they can do whatever and not worry about failing. They will become less competitive and dumbed down as they will not have to worry about the competition. As such they will rightfully expect bail outs. After all we have now set precedent for it why not continue and create another reason for the dollar to drop in value.
AIG is an incredibly complex beast. Do you think every division of AIG is a losing entity? No, it was a few divisions that made bad choices years back that are now dragging down the profitable divisions. The people running those couple of divisions who saddled the company with too much risk are probably long gone (or seriously should be – but that’s really a different topic).
All those bonuses are being paid to the people running profitable parts of AIG. The bailout would have been MUCH bigger without them.
BUT -that’s an aside really. The whole thing is a smokesceen. The 165M of bonuses are less than 1/10 of a % of the bail out money. If I borrowed $10 from any of you to buy lunch, and my bill came to $9.99 would you really care about the penny? What the politicians don’t want you to see is that Dodd, (CT-D) recieved huge amounts of contributions from AIG, and more than 1/2 of the bail out money spent so far is going to OVERSEAS BANKS (the “I” in AIG does after all stand for International). We should have let AIG fail, and since we’re bailing out US banks left and right anyway, add to the bail out the US banks that ended up with unpaid claims from the bankrupt AIG, and the foreign banks could get bailed out by their governments. It would have saved fifty Billion, vs. 165 Million. (The politicians are trusting that the “dumb voters” can’t grasp the difference between Million, Billion, and Trillion…)
Oh, but AIG is based in CT, Dodd’s state, so we can’t let them fail…
I appreciate all the arguments out there to defend AIG, but I’m not one to measure the bonuses in terms of how they fit in the whole scheme of the bailout, although this seems to be what many a logical mind would tend to do.
In my mind, I view the bonuses more symbolically (forget that it’s just less than 1/10 of a % of the bailout money). To me, it’s the principle that counts and it’s an example set to all others who attempt to pull something like this during a time of economic difficulty for the entire nation. There’s the appearance of impropriety here and whether it costs $1 or $1,000,000 isn’t the issue.
I place a lot of value in how psychology works on the nation — something that strikes most of the nation as unsavory can hit at consumer confidence, which may in turn cost us even more money if we’re all going to lose faith in how this country is run.
So I completely disagree that 165M is just a drop in the bucket. It isn’t. It can cost a lot more when you consider the plight of the disgruntled masses having to swallow the bitter pill of watching a bloated company take taxpayer money only to have it used to reward well-paid executives, incompetent or not.
I read that a lot of the bonuses went to the department that caused the big financial mess in the first place. Whether it was for employees who were supposed to “rescue” the company makes no difference to the average taxpayer, who isn’t one to support any form of bailout anyway. During a time of financial upheaval, activities, behaviors and appearances of high profile companies are more carefully scrutinized so they should take the extra effort to avoid those stunts that make them “look bad” to the general public.
But these companies are dense and old habits die hard for their leaders. That’s why they’ve been slammed for “not getting it at all”.
This whole story has bothered me from the start. It’s hardly believable that AIG can even get away with this type of behavior. Just kind of ironic that their employees are getting bonuses. Let’s see, company not doing good, company needing bailout, employees responsible for company not doing good = hey, let’s pay 165 MILLION dollars to retain these folks since they’re doing such a great job.
AIG is just taking advantage of the fact that everyone knows of the repercussions that could happen if they fold since they are wrapped-up in so much globally. Hopefully someone will step-in and revoke them from doing these slap-in-the-face type moves.
Thanks for sharing the whole .50 shares, I didn’t realize that.