From the Publisher Arnold G. York


No millions for you? So sue me

AIG executives receive $165,000,000 in bonuses.

Every time I hear that number I can feel my blood pressure rising. What do we call it? Is it a performance bonus? I guess we’re supposed to be grateful; after all, it’s only $165 million for a bad performance. Imagine what it would cost us if it had been a good performance.

It sort of reminds me of the Little League trophies. Win or lose, every kid gets a trophy. Sorry, kid, that your team went 0 and 13, but here’s your trophy because we don’t want you to lose your self-esteem. I can kind of understand it with an 11-year-old playing Little League, but it’s a little bit more difficult when you’re dealing with a 45-year-old insurance executive working for AIG whose business acumen and Harvard MBA have managed to leverage the company into a situation where only $170,000,000,000 (that’s $170 billion) from the U.S. Treasury can keep the entire company from sliding down into the rat hole, and taking the entire economy with it, or so they tell us.

Now the government clearly doesn’t want them to pay these bonuses, but according to the Secretary of the Treasury (who is quickly qualifying for the wimp of the month club), we have no option because there is a contract and the Treasury’s lawyers say that we’re legally obligated to pay those bonuses; if we don’t, those people could actually sue us, and even collect punitive damages.

Well, I got to tell you I don’t know much about the Treasury business but I do know a little bit about the suing business. I spent 22 years as a litigator suing large entities, primarily automobile companies, construction companies, hospitals, doctors, HMOs, counties and cities, but principally insurance companies. In those 22 years I heard 10,000 reasons why they thought they had no liability or that my demands were outrageous or why they were prepared to fight the case all the way to the Supreme Court if necessary. The one thing I never, ever heard were those magic words, “We know that we’re legally obligated to pay this claim in full because we have a contractual obligation to do so.” Apparently, those are the words that AIG is now uttering in support of paying out the bonuses to all of its executives. Maybe they got religion but I strongly doubt it.

So let’s try and take a cool detached look at this situation and see if we can figure out what’s going on.

First of all, AIG probably did sign contracts with certain key employees to pay either performance bonuses (I assume for good performance) or retention bonuses to incentivize them to stay with the company. If AIG signed them and they’re legitimate contracts then, by yimney, AIG is obligated to pay them. But there is one small fly in the ointment, and that is AIG is a totally insolvent company. The only reason that it’s not officially dead, buried and bankrupt is the U.S. government decided it would be dangerous for the economy to let AIG go bankrupt. Whether that’s good judgment or not I certainly don’t know, but I think for now we just have to accept that governmental judgment on faith.

Still, just because the U.S. government has decided to keep AIG alive doesn’t mean the Treasury has to pay everyone who walks through the door with a claim, even if the Treasury decides it’s a valid claim. Most certainly they don’t have to pay 100 cents on the dollar. Now anyone who has ever been involved in a workout of a company in trouble knows that you get all the creditors together and figure out how much is owed. Then you figure out what you’ve got in the kitty. Now all creditors are not in the same situation. Some legally are at the front of the line and some are at the back. You then split up the dollars into classes, and one class might get 60 cents on the dollar and another class 30 cents on a dollar. The shareholders are lucky if they end up with a nickel on the dollar; more often they end up with nothing. There is absolutely no reason that the Treasury shouldn’t do that with AIG’s creditors.

Although there are a number of things about the AIG situation that I don’t understand, there are some things I do know with absolute certainty. I know whoever puts up the cash calls the tune. If the government decides not to fund AIG anymore, that’s it. Game over. If the government says we’ll fund AIG but no bonuses or no bonuses to exceed 25 percent of last year’s salary, that is it. If the government decides that anyone AIG insured gets 67 cents on the dollar, again game over. If you don’t want to take it, that’s OK, feel free to sue AIG, an insolvent company.

Another thing I know for sure is that no financial company, bank or hard moneylender ever walks in and says here the $170 billion you need, do what you think is best. The thing that amazes me is that the Treasury is acting as if we have to pay the money or else it’s Armageddon

Take a look at the people who already received Treasury bucks. Goldman Sachs got $12.9 billion. Société Genéralé of France and Deutsche Bank of Germany each got $12 billion. Barclay’s of Britain, $8.5 billion, and UBS of Switzerland, $5 billion. Merrill Lynch got $6.8 billion, Bank of America, $5.2 billion, Citigroup, $2.3 billion, and Wachovia a mere $1.5 billion. After that, apparently a cast of thousands.

Even if Treasury Secretary Tim Geithner couldn’t figure it out, I think the president got it right when he said, “We have to pursue every single legal avenue to block these bonuses …” I think we have to go over this entire bonus deal, and also the rescue deal, with a fine tooth comb before we pay out a dime, and if they don’t like it, well, so sue me.