The White Paper on AIGFP

The money consistently referred to here and in the various media as "bonus" was NOT on top of a large salary.

We had no pay rise for 15 years but were compensated in a lump sum at the end of the year for back office work that simply allowed the company to function.

It was our compensation for a year's work.

Could you afford to work for a third of your salary?

Neither can we.

Below is the analysis that preceded the payments and the current public hysteria.
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AIGFP Employee Retention Plan
Executive Summary
AIG is contractually obligated to pay a total of about $165 million of previously awarded
retention pay to AIGFP employees (in respect of 2008). This amount is due pursuant to a
retention plan entered into in early 2008. About $55 million of retention pay was
previously paid around December, and about $93 million of additional retention pay will
be eliminated because of losses at AIGFP (in accordance with the terms of the plan). AIG
is also obligated to pay about $6 million of guaranteed pay to AIGFP employees under
contractual obligations outside of the retention plan.
AIG is required to make these payments on or before March 15 by the terms of the
retention plan or individual contract guarantees, all of which pre-date TARP and AIG’s
current Chief Executive Officer. Outside counsel has advised that AIG is legally obligated
to pay and, under applicable law, risks a doubling of the amount owed as a penalty. In
addition to this and other legal obstacles, business requirements necessitate payment.
AIG has also attempted to develop acceptable alternatives to restructure guaranteed
amounts owed. However, efforts have not been successful for payments in respect of 2008
in light of the employees’ contractual rights to receive these payments combined with new
tax limits under Section 409A of the Internal Revenue Code that limit the ability of
employers and employees to alter payment dates for deferred compensation. However, AIG
has committed to use its best efforts to reduce the amounts AIG owes in respect of 2009.
This will be accomplished through voluntary acts such as salary reductions, through
negotiations when we sell businesses and through other arrangements over time. We
believe that guaranteed payments at AIGFP for 2009 can be reduced by at least 30%.
Details Regarding Retention Plan
In the first quarter of 2008, AIGFP adopted a retention plan for about 400 employees that
provided guaranteed payments to employees if they worked through specified payment
dates (or either resigned for good reason or was terminated without cause before the
relevant dates). At the time, AIGFP was expected to have a valuable, on-going role at AIG.
The plan was implemented because there was a significant risk of departures among
employees at AIGFP, and given the $2.7 trillion of derivative positions at AIGFP at that
time, retention incentives appeared to be in the best interest of all of AIG’s stakeholders.
The program was evidenced by a written plan distributed to employees and by individual
agreements executed by them.
For senior management the plan provides that 2008 and 2009 compensation will be 75%
of 2007 expected compensation levels. Other participants are set at the full 2007 level.
This resulted in a $313 million total for 2008 and a $327 million total for 2009 (because
some employees who had other guaranteed compensation for 2008 were excluded for that
year). The 2008 awards range from $1,000 to slightly less than $6.5 million. Only seven
employees will receive more than $3 million.
The total for each year is divided into two components. The first is required to be paid on
or before March 15 of the following year (this is $220 million for 2008), and the second is
retained by AIGFP, serves as part of AIGFP’s capital structure and is at risk for losses (this
is about $93 million for 2008). The division between current pay and at-risk pay is
highest for the most senior employees – up to almost half. This is how AIGFP has
traditionally structured its compensation.
Of the $220 million, about $165 million is required to be paid on or prior to March 15,
2009 and about $55 million was previously paid. In light of the large losses incurred last
year, current and former employees will see their deferred compensation accounts reduced
to the point where they will have negative balances. As a consequence there is no
immediate prospect that employees will receive any payout of the at-risk piece for 2008
(about $93 million) or the remaining approximately $582 million in at risk pay earned from
prior years.1 A senior AIGFP manager therefore worked in 2008 for about 43% of his 2007
expected level.
An additional $6 million is guaranteed to employees for 2008 pursuant to contractual
arrangements outside of the retention plan. To avoid any confusion, the information in
this section is specific to the retention plan.
Details Regarding Legal Obligation to Pay
AIG has been advised by outside counsel that a breach of the retention plan would subject
it to claims for not only the contractually owed payments, but also penalties and fees
under the Connecticut Wage Act.2 The Wage Act provides for the recovery of double
damages and attorneys’ fees when wages are improperly withheld and the employer’s
refusal to pay wages lacks a good faith basis. (Conn. Gen. Stat. §31-72.)3 In addition,
individual managers who decide to withhold wages that are due are individually liable for
violation of the Wage Act.4
“Wages” are defined as “compensation for labor or services rendered by an employee,
whether the amount is determined on a time, task, piece, commission or other basis of
calculation.” (Conn. Gen. Stat. §31-71a.) The courts have concluded that guaranteed
bonuses constitute wages under the statute when “the payment is premised upon work or
services the employee has performed as opposed to the general success of the company or

1
Over the longer-term, AIGFP’s deferred compensation plans provide for the adoption of a
plan for restoring reductions to at risk pay, but only after all creditors (including the Federal
Reserve and Treasury) have been repaid.
2
The retention plan is governed by Connecticut law. (Section 4.04) Because the plan
mandates the application of Connecticut law, it is likely that Connecticut substantive law
will apply to claims related to the plan brought in the United States, the UK, France, Hong
Kong or Japan. Under Connecticut law, the payments are legally enforceable contractual
obligations of AIGFP. In addition, the payments are guaranteed by AIG. (Section 3.03)
3
Schoonmaker v. Lawrence Brunoli, Inc., 828 A.2d 64 (Conn. 2003)(double damages
appropriate for “bad faith, arbitrariness or unreasonableness”).
4
Butler v. Hartford Technical Inst., Inc., 704 A.2d 222 (Conn. 1997).
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the whim of management.”5 Here, the retention payments are fixed payments that
compensate for services rendered in 2008 and 2009.
In addition to claims for breach of contract and violation of the Wage Act, employees
denied their contractually guaranteed payments could likely claim constructive discharge,
allowing them to resign immediately and sue to recover the guaranteed payments for 2008
and 2009. We have also been advised that AIGFP employees in foreign jurisdictions,
including France, Japan, the United Kingdom and Hong Kong, could bring valid claims for
unfair constructive dismissal in those jurisdictions.
We have been advised that the bonus provisions of the American Recovery and
Reinvestment Act of 2009 prohibiting certain bonuses specifically exclude bonuses paid
pursuant to pre-February 11, 2009 employment contracts.
Details Regarding Business Impact of Failure to Pay
AIGFP’s derivatives portfolio stands at about $1.6 trillion and remains a significant risk.
Failure to pay the required retention payments therefore could have very significant
business ramifications.
For example, AIGFP is a party to derivative and structured transactions, guaranteed by
AIG, that allow counterparties to terminate in the event of a “cross default” by AIGFP or
AIG. A cross default in many of these transactions is defined as a failure by AIGFP to
make one or more payments in an amount that exceeds a threshold of $25 million.
In the event a counterparty elects to terminate a transaction early, such transaction will
be terminated at its replacement value, less any previously posted collateral. Due to
current market conditions, it is not possible to reliably estimate the replacement cost of
these transactions. However, the size of the portfolio with these types of provisions is in
the several hundreds of billions of dollars and a cross-default in this portfolio could trigger
other cross-defaults over the entire portfolio of AIGFP.
There are also substantial risks related to the hedging of AIGFP’s various books. Although
we view the large-market risk books at AIGFP as generally well hedged, the hedging is
dynamic – that is, it must be monitored and adjusted continuously. To the extent that
AIGFP were to lose traders who currently oversee complicated though familiar positions
and know how to hedge the book, gaps in hedging could result in significant losses. This
is driven to some extent by the size of the portfolios. In the interest rate book, for example,
a move in market interest rates of just one basis point – that is 0.01% or one-100th of one
percent – could result in a change in value of $700 million dollars if the book were not
hedged. It has virtually no impact on the hedged book. There are similar exposures in the
foreign exchange, commodities and equity derivatives books.
AIGFP’s books also contain a significant number of complex – so-called bespoke –
transactions that are difficult to understand and manage. This is one reason replacing
key traders and risk managers would not be practical on a large scale. Personal

5
See, e.g., Feilbogen v. AIG Trading Group, Inc., No. 3:03CV1624 (DJS), 2006 U.S. Dist. LEXIS
29184 at *26-27 (D. Conn. May 15, 2006) (holding that whether guaranteed retention bonus
payments were wages was an issue of fact).
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knowledge of the trades and the unique systems at AIGFP will be critical to an effective
unwind of AIGFP’s businesses and portfolios.
In this current environment, any perceived disruption in AIGFP’s ability to conduct
business, such as one that would result from the departure of a number of key employees,
could also cause parties to limit or cease trading with AIGFP. Obviously, this would
adversely affect its ability to continue to cost-effectively hedge its positions.
Departures also have regulatory ramifications. As an example, the resignation of the
senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire,
the French banking regulator, to appoint its own designee to step in and manage Banque
AIG. Such an appointment would constitute an event of default under Banque AIG’s
derivative and structured transactions, including the regulatory capital CDS book ($234
billion notional amount as of December 31, 2008), and potentially cost tens of billions of
dollars in unwind costs. Although it is difficult to assess the likelihood of such regulatory
action, at a minimum the disruption associated with significant departures related to a
failure to honor contractual obligations would require intensive interactions with
regulators and other constituents (rating agencies, counterparties, etc.) to assure them of
the ongoing viability of AIGFP as well its commitment to honoring counterparty contracts
and claims.
Details Regarding Progress of Wind-down
The team that remains at AIGFP has made significant progress in bringing down the risks
and winding down the portfolio. Since October of 2008, they have reduced the number of
trades by over 25% and AIG believes they have reduced most risks commensurately. They
have focused initially on reducing complex and difficult to manage positions, so several
risk measurements have been disproportionately reduced.
From another perspective, late last year AIG divided the risks at AIGFP into 22 separate
risk businesses or “books”. Progress has been made on assessing and managing the risk
in all books, and five books are almost completely wound down.
From the personnel side, AIGFP has gone from about 450 employees in five locations in
early 2008 to about 370 employees today. AIGFP is scheduled to close two locations,
Tokyo and Hong Kong, this year.
Details Regarding 2009 Fiscal Year
Under the retention plan, $327 million is due for 2009. Of that, $97 million constitutes at
risk pay that will be eliminated by AIGFP’s losses. An additional $7.6 million is
guaranteed to employees for 2009 pursuant to contractual arrangements outside of the
retention plan.
AIG has taken significant steps to limit overall compensation at AIGFP where it can and
has committed to doing more. The 25 highest paid active contract employees have agreed
to reduce their remaining 2009 salaries to $1. Salaries for this group ranged up to
$500,000, and the average salary was in excess of $270,000. (There are apparently legal
limits that may complicate the implementation of this and AIG will likely implement the
lowest salary levels we can equitably put in place across the relevant jurisdictions.) The
remaining 2009 salary of all other officers – anyone with a title of associate vice president
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or higher – is being reduced by 10% (subject to compliance with local law requirements).
In addition, other forms of non-cash compensation will be reduced or eliminated.
We also believe that there will be considerably greater flexibility to reduce contractual
payments in respect of 2009, and AIG intends to use its best efforts to do so. AIGFP
intends to sell some of its books of business during the year. The employees related to
these books will go with the sold businesses, and we intend to require the buyer to assume
going-forward compensation payments. It is also expected that, over the course of the
year, employees will leave voluntarily or be terminated for cause and will therefore no
longer be entitled to retention amounts from AIG. Because the plan was designed to
provide security for employees, including protection against terminations without cause,
AIG is required to pay the amounts owed to employees who are downsized. However, if a
downsized employee finds new employment, retention amounts will be reduced by the
earnings from the other employer. In addition, for employees in foreign jurisdictions who
are not U.S. taxpayers, to whom the limits of Section 409A do not apply, AIG will have the
ability to negotiate with employees who are downsized. With all of these actions and other
creative restructuring solutions, AIG hereby commits to use best efforts to reduce expected
2009 retention payments by at least 30%.
Plans Complex
The preceding constitutes only a summary of the terms and operation of the AIGFP
retention plan. It is necessarily incomplete and was produced quickly, in light of
applicable time constraints. AIG has provided additional, more detailed information that
is relevant to an understanding of, and should be considered with, the summary
information in this document.

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Washington Post - a single sane voice

Inside AIG-FP, Feeling the Public's Wrath

Brady Dennis
Washington Post Staff Writer
1210 words
19 March 2009
The Washington Post

Copyright 2009, The Washington Post Co. All Rights Reserved

A solitary flat-screen television hangs on the back wall of the trading floor inside the headquarters of AIG Financial Products here. Wednesday afternoon, the most-talked-about employees in America huddled around it to find out just how despised they have become.

They watched quietly as members of Congress referred to them as greedy and incompetent. They heard more than one demand that their names be released to the seething American public. They heard the chairman of American International Group, Edward M. Liddy, tell lawmakers that people, in e-mails sent to AIG-FP, suggested that the firm's leaders "should be executed with piano wire around their necks."
The evening before, the firm's chief operating officer, Gerry Pasciucco -- whom Liddy recruited in November from Morgan Stanley to shut down Financial Products before it could do more harm to the economy -- had gathered them together in the same spot.

Pasciucco urged them to keep their heads down, to act professionally and to continue working to extricate Financial Products from its more than $1.6 trillion in outstanding derivative contracts. He acknowledged that the past few days have been like being "inside the pinata."

In reply, they told him that they worried mostly about getting shot, despite the guards now patrolling the parking lot, the front door and some of their homes.

A sense of fear hung in the room -- the palpable, unsettling kind that flashes across people's eyes. But there was anger, too. No one would express it publicly, of course. Who wants to hear a wealthy financier complain? And yet, within those walls off Danbury Road lies a deep sense of betrayal -- first by their former colleagues, now by their elected leaders.

The handful of souls who championed the firm's now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president.

"They've chosen to throw us under the bus," said a Financial Products executive, one of several who spoke on condition of anonymity, fearing reprisals. "They have vilified us."

They say what is missing from this week's hysteria is perspective. The very handsome retention payments they received over the past week were set in motion early last year when the firm's former president, Joe Cassano, was on his way out the door. Financial Products was already running into trouble on its risky credit bets, and the year ahead looked grim. People were weighing offers from other firms, and AIG executives feared that too many departures could lead to disaster.

So AIG stepped in with an offer to employees of Financial Products. Work through all of 2008, and you'd get a lump payment in March 2009. Stick around through 2009, and you'll get paid through 2010. Almost all other forms of compensation -- bonuses, deferred payments and the like -- have vanished.

"People are trying to do the right thing," the same Financial Products executive said. "Guys have worked their [tails] off to try to get value for the taxpayer. This isn't money that's being advanced to us. People have performed the work and done it exactly as we asked them to do."

Pasciucco cringed at the notion, articulated by many lawmakers and even President Obama, that Financial Products is a firm of nearly 400 reckless and greedy derivatives traders.

In actuality, he said, nearly all the troublesome sectors of the business -- namely, the risky credit derivatives written on mortgage-backed securities -- are now out of the equation, as are the people who worked on them. That leaves a small number of employees to untangle the remaining trades in four main areas: commodities, interest rates, currency and equities -- most of which were fully hedged and have caused little problem. The effort also requires a sizable number of "back office" staff, such as systems, computing, accounting, human resources and legal teams.

"Everybody, including my secretary and including the guy down the hall that serves lunch, gets a payment," said Pasciucco, who added that he received no retention payment and has no contract.

But what about the argument made by top AIG officials that the people receiving retention bonuses have unique skills and knowledge that make them indispensable?

"They are replaceable," Pasciucco acknowledges. "If we were running a long-term business, we could probably replace them over time, not all at the same time."

But it would be impractical at best, dangerous at worst, to get rid of everyone at Financial Products, according to AIG officials. If everyone leaves, Pasciucco said, "you don't have people that really, truly understand the book [of business]. We're still big enough that that matters."

If they did walk out the door, who would volunteer to work at the Chernobyl of the financial world? And what would become of the mammoth portfolio that remains?

"It would become the biggest naked position on Wall Street," one longtime Financial Products executive said, "and everybody would exploit it."

Before he waded into the circus on Capitol Hill on Wednesday, Liddy e-mailed a letter to the employees of Financial Products, asking them to "step up and do the right thing." He asked that anyone who received more than $100,000 in retention payments return at least 50 percent.

The Financial Products staff met twice Wednesday inside one of the firm's large, glass-walled conference rooms to discuss the boss's letter. Numerous employees indicated that they would be willing to return the money, but most wanted nothing more to do with the firm. It was a preview of the possible exodus to come, one that concerns Liddy himself.

"My fear is that the damage is done," he told a congressional subcommittee. "That they will return [the money], but that they will return it with their resignations."

There is little doubt within Financial Products that he's right about that.
"Nobody is going to give it back and then stay," said one of the firm's employees. "If they give back the money, then they will walk. And they will walk into the arms of AIG's counterparties."

In the meantime, the e-mails from the public have continued to roll in, including death threats and calls to blow up the firm's Wilton headquarters. Reporters and photographers have camped out in front of the offices in London and Connecticut. They have staked out employees' houses. The New York Post identified one executive and labeled him "Jackpot Jimmy." Another employee had to relocate his family after a London tabloid printed his address. A protest group is organizing an "AIG magical mystery tour" Saturday, loading up a 47-seat bus to stop at Financial Products and at the homes of some of its executives.

"People are really upset. Everybody's calling them," one Financial Products employee said. "College roommates are calling. In-laws, relatives, cousins nobody has heard from. Because people are reading this around the world and saying: 'Oh, my God, you work for that place?' "