Washington Post About Cuomo's Blackmail and AIG's Betrayal of FP

AIG Employees to Repay $50 Million in Bonuses
Executives at Troubled Unit Vow to Give Up Payments, Staving Off Cuomo Threat to Release Names
By Brady Dennis
Washington Post Staff Writer
Tuesday, March 24, 2009; D01

The e-mail went out at 6:46 p.m. on Friday.

It had been a brutal week inside AIG Financial Products. News that the firm had doled out more than $165 million in retention payments over the past week had angered the country and sent lawmakers into fits of rage. American International Group's president, Edward M. Liddy, had asked that the unit's employees consider returning some, if not all, of the money. New York Attorney General Andrew M. Cuomo had subpoenaed AIG for a list of Financial Products employees and how much money each had received.

Now, the firm's chief operating officer, Gerry Pasciucco, had set a 5 p.m. Monday deadline for staffers to indicate whether they planned to return their retention payments, and if so, what percentage. His e-mail included what appeared to be a tacit ultimatum from Cuomo.

"We have received assurances from Attorney General Cuomo that no names will be released by his office before he completes a security review which is expected to take at least a week," Pasciucco wrote."To the extent that we meet certain participation targets, it is not expected that the names would be released at all."

Yesterday afternoon, 18 of the 25 most senior Financial Products executives had agreed to return their retention payments, amounting to more than $50 million thus far. Company officials expect more employees to follow suit.

"They are doing the right thing," Cuomo said on a conference call with reporters, adding that he now saw no need to reveal the names.

In addition, AIG issued a news release that said, "We are deeply gratified that a vast majority of FP's senior leadership have expressed a willingness to forsake their recent retention payments."

AIG's efforts to retrieve the payments after last week's outpouring of public indignation marked a dramatic reversal to months of assurances to Financial Products employees that the insurance giant would honor those contracts, according to numerous internal AIG e-mails and memos obtained by The Washington Post.

The retention program at Financial Products was created in March 2008. The unit's longtime president, Joe Cassano, had announced his resignation as it became clear that the housing bubble was collapsing and the firm's now-famous credit-default swaps were going to cost AIG billions of dollars. Company executives planned to keep Financial Products afloat, but they worried that its employees would flee without the promise of financial stability.

"AIG is committed to the future of AIG-FP and is confident about the long term prospects for the business," Bill Dooley, an AIG senior vice president, wrote to Financial Products employees on March 18, 2008. "AIG recognizes that it is important to combine our statements of support for the business with a retention plan that reassures employees regarding their current and future financial prospects with the company. We hope that this plan will encourage all of you to make the same continuing long-term commitment to AIG-FP that AIG is making."

Those promises kept coming -- even as the federal government rescued AIG in September, even as the company decided that Financial Products must be closed down, and even as it hired consulting firms such as McKinsey and BlackRock to work alongside the Federal Reserve to help chart the path ahead.

"The unwinding of FP's complex portfolio will take time to complete and will require the specialized skills and unique knowledge that you have," Dooley wrote to the Financial Products staff on Oct. 3. "I ask that you continue to operate with the same professionalism and grace that you have shown to date. . . . Although many issues remain to be resolved, I can tell you that AIG will live up to its commitment in honoring your retention guarantees."

Several AIG executives said that Cuomo was aware of the retention payments last fall.

"They showed it to Cuomo," said one executive, who was not authorized to speak on the record. "Cuomo was aware this thing was signed up."

Cuomo's office did not respond to a request to comment yesterday on when he became aware of the payments.

Cuomo had met with Liddy in October to express displeasure over executive compensation and lavish spending at AIG. In a news release that AIG and Cuomo's office jointly issued after the meeting, Cuomo was quoted as saying, "These actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG's employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York."

In November, AIG hired Pasciucco, a Morgan Stanley veteran, to help Financial Products carefully dismantle the unit's more than $2 trillion in exposures. "This is a tremendous undertaking and it will require the effort of the entire company," he wrote to the staff that week. "There is great urgency around this task."

Months later, on March 2, AIG posted a $62 billion loss for the fourth quarter of 2008 and announced an expanded bailout that included access to another $30 billion of taxpayer money. That day, Pasciucco sent another e-mail to his staff.

"Our mission at FP remains unchanged," he wrote. "Today is not a day to pause and be distracted by the news flow. Fortunately, today can be a day like any other. The restructuring allows us to continue to have the tools we need to stay focused and continue to professionally execute our plan."

Soon, however, the tide began to change. On March 13, the day the retention payments began to go out and two days after Treasury Secretary Timothy F. Geithner had chided Liddy about them, another e-mail arrived from Pasciucco.

"Although today we honored our legal obligation to make this payment," he wrote, "it would be irresponsible for us not to recognize the extraordinary circumstances we find ourselves in, and to do as much as we are able to reduce other, non-contractually obligated payments."

Pasciucco noted that each of the firm's employees had "been severely tested in the past year and will continue to be challenged in the weeks and months ahead."

Little did he know how much they would be tested in the coming days, receiving the scorn of the public and the Congress and even facing death threats as word of the retention payments spread. As the hysteria began to swell early last week, Pasciucco e-mailed his colleagues once again.

"Barring a new meltdown by Britney Spears, we are likely to occupy the front page for some time to come," he wrote. "Ignore it. Focus on what we each do control. Focus on the future. Focus on the professional completion of the work at hand so that, when viewed fairly and away from the heat of easy populist sophistry, we will all be proud."

A View from Inside Banque AIG

Not from someone I know. But from someone I would be privileged to meet....


Dear Family, Friends and Colleagues,

As most of you know I work at AIG, specifically in the division known
as Financial Products which is often cited as the "root of the
problem" at AIG. It seems to me that given the media circus, political
hypocrisy and witch-hunting going on in the US right now, I should try
to set a few facts out and make a few points that, while they are
appearing in the press, are being drowned out in the populist frenzy.

First of all, what happened at AIG? AIG has been destroyed by a
systemic failure of management that started when Hank Greenberg was
booted out. I have facts that prove that had Greenberg not been
removed, AIG would be in fine form today, but he does need to accept
the blame for the weak overall structure of the place. Now what I mean
by systemic failure is this: while it is true that AIG FP lost a
fantastical amount of money, something like 45 billion dollars, other
units at AIG, namely AIGGIC in its securities lending activity has
lost even more. It is misleading and an intentional distortion of the
facts by AIG and the treasury to pin this solely on FP, much as FP
does richly deserve blame. The real issue is that AIG management was
absent from FP, they left it to be run as the personal royal estate of
Joe Cassano, entrusting him with risk management, deal making, and all
compensation decisions with no recourse by the employees to AIG
management nor any oversight by AIG management. By the way, the head
of Risk Control for the whole of AIG, Bob Lewis, is still working in
that role today.

Even worse than this is that the failure of AIG is part of a systemic
failure of the anglo-saxon financial world. If AIG alone had failed,
then the lessons to be learned would be at AIG alone. However, as
clearly as AIG itself is a case study in corporate governance failures
that I hope will be taught to the future class of sheep/managers at
Harvard Business School, the real failures in the US and UK banking
systems stem from an extremist belief in the free market. How else to
explain the simultaneous failures of virtually every large US and UK
bank? And the blame for this lies squarely in the corrupt circles of
US politico-business classes. Joe Cassano used to extort contributions
from his employees for Chris Dodd, the very man now leading the charge
against the employees of FP. Basically at the heart of the US
democratic system is the fundamental issue that those with money can
influence those with power and that usually their interests are
narrow, short term and take no account of the country at large.

Personally I hate this system, I fear for the future of America and
the world and I and many of my colleagues strongly supported
candidates of change like Obama because we could see something was
amiss. I will tell you though, what was amiss was not that a bunch of
hard working, highly motivated and intelligent individuals working in
finance got paid a lot, what was amiss was that the wider culture led
by people like W Bush and Dick Fuld and Jimmy Cayne set and reinforced
the example that money was the ultimate arbiter of goodness and
rightness and that people who stuck to their traditional values and
actually cared about the institutions they worked in and refused to do
crappy business that would blow up their banks were sidelined and
underpaid and made to feel like fools for "not getting it". My team
contained a Slovak physicist who in act of great courage and wisdom,
defected from the eastern block during the cold war. A French civil
engineer who would like to build bridges but couldn't resist the lucre
of finance. A Russian-Jewish immigrant who has worked his way up from
busboy in a brooklyn diner to key member of the the commodities
business and an indian graduate of IIT who fixes his own broken
electronics gear on his desk at work.. These people are not corrupt.
They have earned their success. Their stories are even testament to
the simple fact that anyone could come get a job in finance and
succeed. If anything, the tragedy is that so many talented people
worked in finance when they and society would have been better off
with their efforts focussed else where.

I and most of colleagues at FP are in that group. Last year, amidst
the greatest financial crisis in a long time and the crumbling of AIG,
the businesses I ran made tens of millions of profit eve after
deducting losses taken when we had to pay others to take over our
books of business after AIG failed. In my career I have probably made
something like a billion dollars for the banks I worked for (Bear
Stearns and AIG) and doing this required all my intelligence, energy
and hours. I have spent over 15 years waking up at 5am and coming home
late at night , playing by the rules, making thought-through, ethical
and conscientious decisions in the framework of an industry that has
existed for thousands of years and currently employs hundreds of
thousands of people in the major financial centers. None of What I did
was illegal, none of what I did was unethical, none of what I did
keeps me up at night. I will happily stand in front of congress and
justify every deal, every mark, every decision I made. And most of the
employees at FP, many of whom I count as friends and honorable people,
will happily do the same. I can also tell you that for my profits I
have earned less than Joe Cassano earns in interest every year on what
he was paid for producing world record losses. Joe Cassano has not
been asked to return a penny of his 280 million dollars.

What is happening in the US political system today is a travesty of
fairness, basic rights and transparency. Where was this congressional
outrage and mob-baiting over abu-ghraib, guantanomo, the failing
educational system, the failing health care system, the incredible
inequality of opportunity and outcome in the US, the illegal war in
iraq and I'm sure this list can go on? This outrage is manufactured by
the very politicians, Barney Frank, Chris Dodd, Andrew Cuomo and
others who supervised the system, who took it's fruits as campaign
contributions, to hide their own far greater culpability in the
creation of the mess we are in. The crisis is systemic and the leaders
of the system are trying to blame it on 10 guys in connecticut.
Please, you should feel insulted to your core that the US political
establishment tries to lie to you again.

I am not shocked. I am an observer of US foreign policy. I see how the
US corrupts, betrays, its principles lies, mis-names its deeds and
turns on its allies all over the world all day every day. That this
rot and corruption are now being evidenced domestically in the form of
a McCarthy like witch-hunt of "bankers" is much less shocking than
that they would kill a million Iraqi's and then declare victory for
democracy. I am not shocked that in a country where only 30% of the
population can name the three branches of government (but 70% can name
an America Idol judge) that it does not seem important that congress
is trying to pass ex-post-facto taxes or secure bills of attainder.
It flows naturally that the vitiation of contract law doesn't seem
worthy of remark. THE ENTIRE US SYSTEM IS COMMITTING SUICIDE. And why?
Because congressman only really care about the next election and care
nothing about the long term. The same crappy incentive scheme that has
destroyed finance is destroying the US government. The real leaders
are being mocked for their stands on principle. Today it is not god
bless america, it is god help america.

Now on the specific case of the AIG bonuses, let me spread a little
fact:
1) On October 22nd 2008 (one month after bailout) Andrew Cuomo
reaffirmed our right to payments under the retention plan.
2) On October 9th Bill Dooley, the head of financial services at AIG,
restated that the treasury and AIG were committed to payments under
the ERP.
3) AIG reduced the value of our deferred compensation to zero,
effectively cutting the value of the contracts under the ERP by about
30-50% depending on the amount due to each employee.
4) AIG wiped out the value of our previously earned deferred
compensation, costing me, for example, about half my saving and many
others in the company the same.
5) At no time did AIG ask to renegotiate the contracts or plead
extenuating circumstances. Many of us would have worked for much less
or for nothing just to clean things up.
6) AIG prepaid 30% of the ERP amount in December with their hearty
thanks for a job well done. The treasury knew of and had to approve
this.

Is it really fair of them to try to renegotiate after we have
performed on our half of the contract? It would have been fair in
september during the bailout, or in october. Those were extraordinary
circumstances. But is it fair of them to come to us after the end of
the contract and then ask for the money back after many of us have
made personal and professional sacrifices based on these contracts? I,
along with many of my colleagues, have expressed a willingness to give
the money to charity. But under no circumstances will we accept that
we did not earn the money. Is it fair or criminal that Cuomo would
threaten us with the release of our names if we don't return the
money? That is blackmail. It is a crime of the most despical nature.
Hopefully Cuomo will meet the destiny of the last New York Attorney
General to mess with AIG, Spitzer.

Lastly, let me say one thing on the matter of the practicality of
running AIG FP with out us. AIG FP is the nexus of thousands of
contracts of incredible complexity. These are managed in purpose built
systems using carefully crafted procedures. If all of us leave, who
will maintain the systems for which there are no manuals? Who will
know how to operate the technological machinery that is totally
purpose built in house? Who will have the relationship with the
relevant client with whom we have to negotiate as we unwind their
contracts? True one or two or ten of us could be replaced (although
after the current furor they would would want to paid a lot and in
advance and with a letter from the president and the treasury and the
supreme court that they can keep their pay) but if we all leave? Even
a hijacker has enough sense not to shoot the pilot unless he can fly.
Mr Frank, Mr Dodd and Mr Cuomo, can any of you run AIG FP?

I didn't think so.