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Guest Post: The CDOs That Destroyed AIG: The Big Short Doesn't Quite Reveal What They Knew And When They Knew It

By Tyler Durden
Created 03/15/2010 - 22:35
Submitted by David Fiderer

It's been eighteen months since AIG collapsed, and Congress has yet to seriously focus on the most important questions: What did they know and when did they know it?

"What" refers to the fatal flaws in the collateralized debt obligations, or CDOs, that AIG insured.

"They" are the bankers that structured and sold the CDOs, plus the AIG executives who took on the credit risk, plus the rating agencies that handed out AAA ratings.

"When" harkens back to 2005 and 2006, when those toxic CDOs were first issued.

Just before the backdoor bailout of AIG's banks actually closed, Michael Lewis addressed what they knew and when they knew it in Portfolio. [1] He explained why the CDO market was ground zero for Wall Street malfeasance that led to the meltdown:

The funny thing, looking back on it, is how long it took for even someone who predicted the disaster to grasp its root causes... [Fund manager Steve] Eisman knew subprime lenders could be scumbags. What he underestimated was the total unabashed complicity of the upper class of American capitalism. For instance, he knew that the big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust [i.e. a CDO], carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA.
?But he couldn't figure out exactly how the rating agencies justified turning BBB loans into AAA-rated bonds. "I didn't understand how they were turning all this garbage into gold," he says. He brought some of the bond people from Goldman Sachs, Lehman Brothers, and UBS over for a visit. "We always asked the same question," says Eisman. "Where are the rating agencies in all of this? And I'd always get the same reaction. It was a smirk."

The Disaster Created Under Hank Paulson's Watch

That collective smirk reflected more than the bankers' contempt for the rating agencies' analyses. It was a way of maintaining deniability about CDO investments that were obviously designed to become insolvent at the time they were created. In The Big Short, Lewis expands on this point:

[T]here were large sums of money to be made, if you could somehow get [triple-B mortgage bonds] re-rated as triple-A, thereby lowering their perceived risk, however dishonestly and artificially. This is what Goldman Sachs had cleverly done.
This all started at the end of 2004, when:

Goldman was in the position of selling bonds to its customers created by its own traders, so they might bet against them...

According to a former Goldman derivatives trader, Goldman would buy the triple-A tranche of some CDO, pair it off with the credit default swaps AIG sold Goldman that insured the tranche (at a cost well below the yield of the tranche), declare the entire package risk-free, and hold it off its balance sheet. Of course, the whole thing wasn't risk free: If AIG went bust, the insurance was worthless, and Goldman would lose everything. Today, Goldman Sachs is, to put it mildly, unhelpful when asked to explain exactly what it did, and this lack of transparency extends to its own shareholders. "If a team of forensic accountants went over Goldman's books, they'd be shocked at just how good Goldman is at hiding things," says one former AIG FP employee, who helped to unravel the mess, and who was intimate with his Goldman counterparts.

The guy in charge of all this, Goldman's CEO, was Hank Paulson. When he moved over to Treasury, Paulson acknowledged that the subprime bubble, which he helped foment, was central to destabilizing the markets. As he wrote [2] exactly two years ago:

The turmoil in financial markets clearly was triggered by a dramatic weakening of underwriting standards for US subprime mortgages, beginning in late 2004 and extending into early 2007.
[Those are Paulson's italics, not mine.]

Goldman now says that it didn't manipulate anything; it simply responded to market demand. Or as Lloyd Blankfein testified, "what we did in that business was underwrite to [] the most sophisticated investors who sought that exposure." Of course, a lot of so-called sophisticated investors were played for suckers. Just ask Bernie Madoff's clientele.

According to Lewis, the guys at AIG who bought Goldman's deals had no idea that they were so heavily exposed to subprime residential mortgages. I still find this part of Lewis's story too weird to be believable. Most of the deals disclosed investment schedules, like Appendix B for Adirondack 2 [3], which were pretty easy to eyeball.

But even smart people can be fooled by CDO terminology, which is Orwellian by design. Consider the super-senior tranches of high grade multi-sector CDOs [4] that AIG insured via credit default swaps. Where else in the English-speaking world does "multi-sector" translate into "singularly invested in risky real estate mortgages"? Where else are "super-senior" tranches exclusively invested in deeply subordinated claims? And how is it that "high grade" CDOs are differentiated their mezzanine counterparts by a 2% sliver of capitalization, a virtual rounding error?

Lewis also writes that these CDO deals were never seriously questioned by AIG's then-CEO, Martin Sullivan. In June 2008, Sullivan was fired and replaced by Bob Willumstad, an outsider who had first joined AIG's board in April 2006, after the AIG had decided to stop insuring subprime CDOs.

In September 2008, the one thing that AIG had going for it was a CEO who had no reason to defend the toxic CDO deals that closed in 2005 and 2006. Willumstad could look regulators and investors in the eye and agree with Lewis's assessment:

Goldman created a bunch of multi-billion dollar deals that transferred to AIG the responsibility for all future losses from $20 billion in triple-B-rated subprime mortgage bonds. It was incredible: In exchange for a few million bucks a year, this insurance company was taking the very real risk that the $20 billion would simply go poof.
So Paulson unilaterally replaced Willumstad, and installed a crony, Goldman director Ed Liddy, who would never challenge the dodgy CDOs. In On the Brink [5], Paulson's lobotomized financial history, he goes after Willumstad with a passive aggressive smear. He recounts a comment from a former Goldman partner, billionaire investor Chris Flowers, at a meeting to discuss financing options for Lehman, on Saturday, September 13, 2008:

As everyone got up to leave, Chris Flowers motioned me aside and said, "Hank, can I tell you what a mess it is over at AIG?" He produced a piece of paper that he said showed AIG's day-to-day liquidity...Flowers told me that according to AIG's own projections the company would run out of cash in ten days.
"Is there a deal to be done?" I asked.

"They are totally incompetent," Flowers said. "I would only put money in if management was replaced."

I knew AIG was having problems--its shares had been pummeled all week--but I didn't expect this. In addition to its vast insurance operations, the company had written credit default swaps to insure obligations backed by mortgages. The housing market crash hurt AIG badly, and it had posted losses for the past three quarters.

With his "I-didn't-expect-this" story, Paulson expects us to believe that he was surprised to learn the exact problems that were laid out by AIG to the Fed, which kept Treasury fully apprised at all times, 48 hours earlier. On September 11, 2008 [6], AIG approached the New York Fed, which simultaneously informed Treasury, to inform all concerned that AIG was running out of cash because it was facing a ratings downgrade that was caused by credit default swaps on subprime mortgages. On that very day in that very building, New York Fed employees were trying to determine if AIG's bankruptcy would have presented an unacceptable systemic risk.

"I have been blessed with a good memory, so I almost never needed to take notes," writes Paulson, who also testified [7], "I did not know -- I had no knowledge of the size of the [CDO] claim of any bank." That must mean that the topic never came up during the 24 different phone calls he had with Lloyd Blankfein during the week that AIG was bailed out. Apparently, the information was never conveyed by his personal proxy, Dan Jester [8], who "was calling many of the shots at the insurer between mid-September, when the New York Fed decided to go ahead with the bailout, and the end of October 2008, when Jester was replaced at A.I.G. by another Treasury official because, according to The New York Times, of Jester's 'stockholdings in Goldman Sachs.'"

Paulson's little hit-and-run smear against Willumstad was intended to distract us from the source of the mess and to conflate blame on to those tasked with the cleanup. On the Brink never recounts Paulson's personal role in role in destroying AIG, his decision to replace Willumstad with Liddy, or his own analysis dated March 13, 2008. In typical "Who me?" fashion, Paulson decries the problems with opaque CDOs, but never mentions Goldman's pivotal role in creating the disaster. Lewis writes:

Goldman Sachs had created a security so opaque and complex that it would remain forever misunderstood by investors and rating agencies: the synthetic subprime mortgage bond-backed CDO, or collateralized debt obligation...[I]t didn't require any sort of genius to see the fortune to be had from the laundering of triple-B-rated bonds into triple-A-rated bonds. What demanded genius was finding $20 billion in triple-B-rated bonds to launder...To create a billion-dollar CDO composed solely of triple-B-rated subprime mortgage bonds, you needed to lend $50 billion in cash to actual human beings. That took time and effort. A credit default swap took neither.
Those synthetic CDOs, including the notorious Abacus CDOs, were not sold by AIG to the New York Fed, which only financed securities holding "real" assets. They remain on AIG's balance sheet, shrouded in secrecy.

The CDO Market Remains A Bunch of Black Boxes

The bankers and hedge fund managers who made billions selling these toxic CDOs are still smirking. They made billions by shorting those subprime bonds and CDOs, but almost all of their handiwork remains hidden, concealed from public view. The Big Short [9], The Greatest Trade Ever [10] and The Quants [11] never give us specifics. The authors never identify the particular CDOs that Greg Lippman, John Paulson or Alec Litowitz bet against. Without the actual details on the trades, we must rely on the hearsay narratives of three journalists; we cannot examine the hard evidence to trace through to what they knew and when they knew it.

CDOs are not like regular mortgage bonds, which may be scrutinized via their initial prospectuses registered with the S.E.C. Bonds such as GSAMP Trust 2005-HE4 [12] are structured so that the mortgage pool is essentially fixed at closing. What you see is what you get. Actual bond performance is available, for a price, from ABSNet [13].

CDOs are different. Everything is concealed. Aside from a relative handful of cases, the public has no access to the initial prospectuses. Even if a CDO prospectus were retrievable through the Irish Stock Exchange, that CDO's investment portfolio is still likely to be kept secret. Unlike subprime mortgage bonds, these CDOs had no legitimate business purpose. They neither financed the mortgages, which had been financed through the bonds, nor did they add to liquidity in the marketplace, since the CDOs were non-tradable black box investments.

You'll never figure out a CDO by reading a rating agency analysis, which offers a few cryptic comments of substance buried amid the boilerplate.

In addition, the CDOs are set up so that the asset manager can do all sorts of bait-and-switch maneuvers, within broad credit-rating based parameters, after the deal closes. CDO performance cannot be tracked, because the performance data is only accessible to CDO investors.

Hundreds of billions of fatally flawed subprime CDOs were created, but, with a handful of exceptions, we still do not know who bought what under what circumstances.

That's why the investigation into AIG's CDO exposure is such an important opportunity. For the first time in February, we had a schedule where we could match up the CDOs with the relevant exposure amounts with the insured counterparties. It sure looks like Societe Generale "bought" CDOs for the sole purpose of acting as a front for Goldman, which created most of the CDOs that AIG insured on SG's behalf. When The New York Times [14] pointed out the suspicious circumstances of SG's CDO positions, Goldman spokesman [15] Lucas van Praag responded with a non sequitur denial:

NYT assertion: "In addition, according to two people with knowledge of the positions a portion of the $11 billion in taxpayer money that went to Societe Generale, a French bank that traded with A.I.G, was subsequently transferred to Goldman under a deal the two banks had struck."?
The facts: The assertion is false and misleading. Goldman Sachs provided financing to many counterparties, but in that role we would not have known whether a counterparty had obtained credit default protection, let alone from whom or in what amount.

Neither van Praag, nor the Goldman lawyers who reviewed his statement, are confused. They simply want to confuse us. The Times didn't allege that Goldman provided financing to SG; it alleged the opposite--that SG provided financing to Goldman. By acting as the middleman in two back-to-back transactions, SG bought the credit risk from Goldman and simultaneously sold the same risk, in the form of a credit default swap, to AIG. In other words, SG acted like the character in the Edward Jones commercial [16] who, after submitting the highest bid at an art auction, says, "I want to go ahead and sell it now."

The best way to start to get to the bottom of all this is to pass a law that requires all performance reports of all private label mortgage securitizations, past and present, be made public. Second, as I wrote previously [17], there should be a national registry for every ownership claim, including every derivative claim, on a mortgage securitization. We won't get anywhere until these transactions are fully exposed to sunlight.

So far, Neil Barofsky, the TARP Inspector General appointed by Paulson, has shown no curiosity in finding out what they knew and when they knew it. His report [18] on the backdoor bailout of the CDO banks ignores the subject completely. The selective pursuit of evidence is a big topic for another piece.

AIG American International Group CDO Chris Flowers Collateralized Debt Obligations Counterparties Credit Default Swaps Ed Liddy Goldman Sachs Guest Post Hank Paulson Housing Market John Paulson Lehman Lehman Brothers Lloyd Blankfein Lucas Van Praag Market Crash Martin Sullivan Meltdown Michael Lewis Neil Barofsky New York Fed New York Times Rating Agencies Rating Agency ratings Real estate Subprime Mortgages TARP Transparency
Source URL:
[1] End by Michael Lewis.pdf
[3] 2005-2 LTD_23.01.06_2782.pdf
[4] [5]
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containing much that was in my blog and a great deal more....

AIG weekly recap - history, bonuses, Congress and outrage

March 20, 2009 by Steve McGough
Filed under Featured
& available here:

I certainly hope that this will not turn into a weekly feature, but the amount of news, sound bites, and heated rhetoric pouring in from every direction resulted in Jim and myself electing to take a knee for the past 48 hours when it comes to posting AIG articles.
That said, we’re slowly putting our toes back into the water and I’ve put together a recap for you to absorb this weekend. That way, you can get all fired up about it again on Monday morning.
AIG Financial Products (AIGFP) is a small division of AIG born in the late 1980s. The idea was to use AIGs strong credit rating and get involved with derivative trading - usually the purview of financial institutions - and make profits that would be split between AIG-proper and AIGFP. Even though derivative trades normally took years to pay out, AIGFP received profits up-front, with AIG holding most of the risk.
In the late 1990s, AIGFP got involved with credit default swaps (CDSs) by insuring the corporate debt of financial institutions like JP Morgan. AIGFP was hedging, treating the CDS business as they do other insurance lines of business. They bet that very few customers - like JP Morgan - would default on their corporate debt.
After AIGFP got rolling, the Republican Congress enacted, and President Clinton signed, the Commodity Futures Modernization Act into law in 2000, attached t0 - get this - another one of those huge omnibus budget bills that nobody seems to read. Not designed to weaken regulation, the act made the system more complex and opened doors to other ways of trading derivatives like credit default swaps.1
Many of the credit default swaps AIGFP made deals on included collateralized debt obligations (CDOs) with a high percentage of sub-prime mortgages. Yes, those sub-prime mortgages.
In March of 2005, AIGFP employee count had grown to about 400, and the New York attorney general was investigating AIG-proper’s accounting practices. Hank Greenberg, who ran AIG since the late 1960s was out, and the credit rating of the corporate giant was downgraded.
With their credit rating lower, and lots of the CDOs tied up in sub-prime mortgages, AIGFP was about to get squeezed - really hard - from both sides.
In late 2005, AIGFP pretty much got out of the CDS business due to the risk, but they could not undo the billions of CDOs already on the books.
With their credit rating lowered and the mortgage crisis hitting hard in late 2007, AIGFP was getting phone calls from investment firms like Goldman Sachs demanding billions to cover losses from mortgage-backed securities the AIG CDSs had insured.
The dominoes started to fall, AIGs credit rating declined, more phone calls came. Even when the writing was on the wall, AIGFP CEO Joseph Cassano and AIG CEO Martin Sullivan put on a consolidated front - the investments were solid.
AIG continued to loose billions. Cassano was gone by April 2008 and Sullivan by late June. A new CEO - Robert Willumstad formerly CEO at Allstate - was hired in June, but was gone by September and replaced by Edward Liddy when the government injected $85 billion in cash - with billions more to follow - to help save AIG while taking 80 percent ownership of the company.
It’s important to note that Liddy was called out of retirement by the new owners - the federal government - to guide AIG out of the mess it was in. His salary is one dollar per year.
In October, Gerry Pasciucco was brought in to lead AIGFP and try to figure out the tangled mess of derivatives with the remaining employees. I include his photo (right) just so readers can wonder about the Che T-shirt.
Retention bonuses
In early December, members of Congress knew about AIGs retention bonus program that seems to have been effective on Sept. 22, just after Liddy came in as CEO. The SEC knew about the retention bonus program by late September, within days - if not just before - the first $85 billion bailout.
The following is from a letter (PDF, 2KB) written on Dec. 1 from Rep. Elijah Cummings (D-Md.), the full PDF is courtesy and an article by Glenn Greenwald on March 19. It indicates that the day after Liddy came to AIG, the retention bonus program was put into place.
There is no way Liddy put this program into place in eight business hours, it was planned by former CEO Sullivan or Willumstad.
Why pay retention bonuses and who are the employees getting them? There is much confusion about who is getting the retention bonus cash, but my speculation is employees who were managing AIGFP into the crisis are gone, and employees who were brought in to extract AIG from almost $2.7 trillion in exposure were asked to stay and offered retention bonuses.
From Hinderaker at Power Line, with my emphasis…
All of these payments, as to AIG’s troubled financial products division, are retention bonuses, not performance bonuses.
The money is not going to anyone responsible for the implosion of AIG–those people, who were in the credit default swap area, are gone.
These retention bonuses were promised to AIG employees who are responsible for winding down the company’s financial products division. At the beginning, this division had a potential exposure of $2.7 trillion. Winding down AIG’s book of business in this area was a dead-end job, and there was a great likelihood that the people responsible for the work, who knew the most about the products involved, would take jobs elsewhere.
In late 2007 or early 2008, AIG made a deal with these employees: if they would stay at AIG until specified conditions were met, i.e., either certain business was wound down or a given period of time had elapsed, they would receive a specified retention bonus.
As to all of the employees involved, they satisfied the terms of the bonus by wrapping up a portfolio for which they were responsible and/or staying on the job until now. As a result of the efforts of this group, AIG’s financial products exposure is down from $2.7 trillion to $1.6 trillion.
If you were one of the 400 employees in a dead-end job trying to untangle a $2.7 trillion dollar problem would you stick around? Those employees - with knowledge - could possibly take off without the retention bonus program. My interpretation was if they stayed for specified periods of time they would get a certain retention bonus. The longer they stayed, the greater the bonus. Yes, some may have stay only for a certain period of time, but they stayed long enough - per contract - to get a retention bonus that was paid last week.
Now, if you were still at AIG and trying to work out the remaining $1.6 trillion problem, would you stick around as AIG corporate security advises you how to protect yourself? Maybe you’d feel OK about a United States senator suggesting you commit suicide? Screw the $1.6 trillion, I might walk.
But Edward Liddy isn’t walking. During the theatrical presentation on the Hill the past couple of days, Liddy was crucified by some members of Congress who refuse to acknowledge that Liddy was brought in to clean up the mess after the fact. Liddy is a man who knew what was coming, walked in and took it like a professional. I’m not sure if he will succeed in leading AIG out of this mess, but for darn sure he knows that Congress doesn’t care one whit about him.
What happens to that $1.6 trillion if - let’s say - half of the employees quit? Just wondering…
The theatrics of outrage
Outrage this week comes from every American and politician froma coast to coast, but Senator Chris Dodd (D-Conn. & Iowa) is getting the brunt of it. I actually feel bad for the guy since he’s so disliked everywhere. But I want Connecticut to have a glimmering shade of red in the future so I want him gone from office too.
Wyndeward recently commented…
Chris Dodd would appear to be being cast in the Lou Costello role — the hapless peanut-vendor who just doesn’t seem to “get” it, while Barack Obama, among others, takes the Bud Abbot role — the slick, smooth-talking manager who leads his hapless counter-part around the infield legislation, manipulating the senior senator from Connecticut to their own ends.
First Dodd said he knew nothing about the clause that protected the retention bonus program - big mistake - then he said he knew about it but it was not his idea and did not know why it was there. Then he said it was the Executive Branch and we finally learn that it was Treasury Secretary Timothy Geitner who demanded the change.
Now Dodd has suggested - and Congress is already working on - a bill to selectively tax the AIG employees who received retention bonuses.
The big picture
Goodness, we’re talking about $165 million in bonuses paid out to employees and AIG has gotten $170 billion from the federal government since September. We’re talking about less than one-tenth of one percent here for the retention bonuses. This group of employees seem to have successfully negotiated AIG out of $1.1 trillion in exposure in the past seven or eight months.
Is this a Congressional diversion to take the eye of the people - and the media - off the real problem?
When we started bailout-palooza we went in for a few billion, and we’re now in for a few trillion.
Washington Post article from Dec. 2009 - part 1, 2 and 3
Did AIG explicity lie about its bonuses? (Glenn Greenwald at
Allah at Hot Air providing an update on the AIG bonus tax bill in the Senate.
Ed at Hot Air with video - Geitner knew about AIG retention bonuses March 3
Malkin’s syndicated column looks beyond the bonus smokescreen
Michelle also has the breakdown of Republicans who voted for the targeted AIG bonus tax
Allah’s got video of the theatrical outrage designed to keep the heat off Congress - where it really belongs
1700-plus words… I don’t think I spelled anything wrong…
1 The act would again permit single stock futures contracts, allowing investors to treat stocks like commodities and resolving the disputes between the Commodities Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC) as to which regulating body would regulate the market.
As a side note, the act included language excluding energy commodity trading from regulation by the CFTC or the SEC. This allowed Enron to launch EnronOnline, their Web based commodity trading application that was the companies downfall. Sen. Phil Gramm (R-Texas) worked with Enron lobbyists to include the language in the omnibus bill.
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Wow, what a weekend!  So picked up on Friday by Carney:

Who couldn't even be bothered to get my nick right.  But he seems to have achieved what he wanted - access to my better half.

Never mind that he did what Cuomo only threatened to do - publish our names.

Subsequently I've been called all sorts of interesting names by people with enough time on their hands to submit comments.

I really like the botox babe and welfare queen, shop-aholic descriptions of me - it's been keeping my friends catatonic with laughter.

Best bit is that it's really not that hard to find pics of me (even after we took down our website). But that would take thought and a couple of clicks.  Much easier to assume that I'm the bottle blonde executive trophy wife they expect.

Which brings me to the guy in the grey t-shirt and dark sweat pants who came to the door on Saturday claiming to be from the New York Post.

The person who opened the door and told you I wasn't home....

Yeah that's right.  Do a bit more research next time.

On Saturday I had just arrived home from a climbing session.  I never really got on very well with the executive wives because I do things. And I'd rather build instruments than have perfect fingernails.  I also made most of the dresses I needed for the black tie executive functions I've been required to attend.  It's ok, I usually talked to the 'help' and drank a lot to pass the time.  My favourite was the one in the Tudor building because they hired an "early music" group to add to the ambiance.  Turns out we'd done a gig in Leeds together.  Awesome.

Now I really must get back to work.  There's a film company that need some bone pipes for set decoration.
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Need a Real Sponsor here
MARCH 26, 2009

Give Back That Bonus!

Oh, and by the way, you still owe taxes on it.

So, you still work for AIG, having decided not to desert a sinking ship. For this you received a retention bonus, but the politicians have decided to make a scapegoat out of you. Last week the House passed a bill that would tax your bonus at 90%--which, since you live in high-tax New York City, means you'd end up paying more than 100% when you add up all the taxes. In McCarthyite fashion, your state attorney general, Andrew Cuomo, says he has a list of names, as the Washington Post reports:

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."

In light of all this, you do the right thing and give the bonus back.


That's the upshot of blogger Richard Belzer's analysis of the tax implications of giving back a bonus.

The good news is that the House bonus-confiscation bill specifically excludes "any amount if the employee irrevocably waives the employee's entitlement to such payment, or the employee returns such payment to the employer, before the close of the taxable year in which such payment is due," provided that the employee does not receive "any benefit from the employer in connection with the waiver or return of such payment."

That means you won't be taxed at 90% on the money you held only briefly. But you will be taxed. As Belzer explains:

All compensation, including the retention bonuses, received by employees for services is included in the recipient's gross income, and in determining his adjusted gross income (AGI). If a bonus recipient gives it back, does the bonus vanish from the employee's income?
No. Because the recipient was entitled to receive the amount of the bonus, and actually received it, it cannot be excluded from gross income or AGI.

This is true under existing law, irrespective of whether the House-passed bill is ever enacted. Belzer notes a couple of ways in which you may be able to reduce the tax on your relinquished bonus:

A recipient could donate all or a portion of the bonus to charity. The amount donated would be deductible on the employee's 2009 return to the extent it does not exceed 50% of his AGI (as increased by the amount of the bonus). Any excess may be carried over and deducted in the succeeding 5 years, always subject to the 50% limit.

This may work if the law doesn't change, but the House bonus-confiscation bill makes no provision for deductions, so if it becomes law, a bonus donated to charity would still be taxable at 90%. Giving the money to charity instead of returning it to AIG would also seem to constitute a refusal of Cuomo's offer you can't refuse.

Belzer continues:

Another option may be to deduct the amount of the bonus returned to the employer as an unreimbursed business expense, incurred to avoid litigation or public disparagement that could harm the employee's current or future employability. Understandably, the instructions for IRS Form 2106 do not address a situation like this, and it is entirely possible that it has never previously occurred.
Assuming that the IRS were to agree, then the employee would be able to deduct the portion of the bonus exceeding 2% of AGI (again, as increased by the amount of the bonus). The proportion of the bonus that would be deductible depends on the relative size of the bonus to total AGI. No matter the ratio, the employee's tax bill would go up in proportion to the size of the bonus even though he did not keep it.

But wait. Because you're "rich," you don't get to deduct all your deductible income:

Regardless of whether a bonus recipient donates the money to charity, or claims a deduction for the return of the bonus, if his AGI in 2009 exceeds $166,800 (if single, or married and filing a joint return), his itemized deductions (other than for medical expenses, investment interest, and certain losses) are reduced by the lesser of (1) 3% of the difference between his AGI and $166,800, or (2) 80% of his otherwise allowable itemized deductions. For many bonus recipients, this will mean that a significant portion of the bonus is not deductible.

And it's even worse than that. Belzer does not note that unreimbursed business expenses, while deductible from the ordinary income tax, are subject to the alternative minimum tax. Thus you will pay at least 26%, and probably 28%, of the bonus you no longer have in AMT.

Add it all up, and the cost of returning your bonus is somewhere north of 130%. Suddenly that 90% rate doesn't sound so bad.

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Look who's getting the goodies

Angry about the AIG bonuses? Here's what should really disturb you.

By Allan Sloan, senior editor at large
Last Updated: March 26, 2009: 9:58 AM ET

NEW YORK (Fortune) -- To understand what Washington is actually up to, you have to watch what it does, not what it says. That's especially true when it comes to Washington's role in the ongoing bailout of Wall Street, part of its "let's hope this works" plan to revive the U.S. economy.

While Washington is setting the populist mob on the individual American International Group (AIG, Fortune 500) employees who got a total of $165 million in bonuses this year, far larger amounts of money are being quietly handed to Wall Street through programs that generate barely a peep of protest.

Let me count the ways - or at least some of them.

We'll start with the proposed public-private investment program for toxic assets. It depends heavily on a massive subsidy from the Federal Deposit Insurance Corp., which would insure the borrowings of the program's investors. The borrowings would be up to six-sevenths of the total invested; the Treasury and Wall Street (which I define as the nation's big financial institutions and money managers) would each put up half of the initial seventh.

I'm glad that taxpayers stand to get half the profits and fees because the Treasury's in the game. But the Treasury and the FDIC (whose guarantees for such huge sums are credible only because they're backed by the Treasury) run much more risk than the private investors, whose loss is limited to their investment.

The subsidy, by my back-of-the-envelope math, could be worth $18 billion a year to the Wall Street investors. That assumes that the program raises $75 billion from Wall Street and that the guarantees lower interest costs by 4% on the Street's $450 billion share of the borrowings. That's more than 100 times the AIG bonuses.

We also have the Federal Reserve Board's programs to revive the economy by offering cheap money under a dozen plans invented since the credit crunch began in earnest in the summer of 2007. They total around $1.1 trillion by my count, so a three-point saving - a very conservative number - is more than $30 billion a year.

Meanwhile, the Fed's decision to buy Treasury paper and assorted U.S. mortgage-backed securities isn't helping troubled home-owners. Rather, these purchases, designed to lower mortgage rates, benefit well-off homeowners, who can refinance at new, cheaper rates. It also boosts the market value of the tons of Treasuries and mortgage-backed securities held by Wall Street. Marginal or distressed homeowners don't qualify for cheap mortgages because lenders have toughened their credit standards.

I'm not saying, by the way, that any of these programs are necessarily bad. We have to get out of this horrible financial mess somehow, and the feds are throwing everything they have against the wall to see what sticks. But if you want to yell about taxpayer money subsidizing Wall Street, you should look at those programs, not waste time with AIG bonuses, which are symbolically important but economically meaningless.

Yes, AIG has received vast amounts of bailout money from the government. But that doesn't mean that every bonus-receiving employee is some sort of troll or incompetent who deserves to be threatened with a 90% tax or with having his address made public so that people can picket his house.

I won't even mention that this uproar in the name of preserving taxpayer money has cost taxpayers bigtime. We own 79.9% of AIG's stock and have committed $180 billion in loans and investments to it. This uproar has eviscerated our investment by destroying AIG's reputation and shredding the value of its businesses. Good luck on getting anything like our $180 billion back.

Finally, if you want a real bonus outrage, consider this: The operation getting the biggest taxpayer subsidy of all - the federal government - pays bonuses to its employees too. This year it plans to hand out about $1.6 billion of bonuses, despite running more than $1 trillion in the red.

So there you have it. While the public is focused on AIG small fry, Wall Street's big fish are getting the bulk of Washington's goodies. As always, follow the money. Not the noise.

Allan Sloan invites you to post your questions to him about Wall Street, dealmaking and the state of the financial crisis in a Fortune Talkback forum. He'll choose several questions to answer in a future online installment of his column, The Deal.

First Published: March 26, 2009: 4:03 AM ET
jespirals: (Default)
As this is getting wider circulation than originally anticipated...

For the record.

We own no houses, we rent.
Our car is 12 years old as is our TV.
We've not bought a house here because we could not afford to.
What we lost were involuntary investments in the company.
What we have is anything we kept in an ordinary savings account.

I home educate our youngest as he has Aspergers and the schools here could not provide what he needed.
I research and build early instruments and my idea of a hot designer can be found here

If it were only about money and only about me, I wouldn't care. But it was the children's education fund and 15 years of my husband's work. Even then I could say tough luck, it happens, and get over it, just like the folks at Enron & Lehman

But they were not vilified and threatened. That's the only reason I spoke up.

Read it again. I don't ask for sympathy, nor do I use exclamation points.

With gratitude to those who read it carefully the first time and responded thoughtfully.

-----------------------------------original post---------------------------

Once upon a time my husband, working as a contractor from Digital, helped move the offices of FP from Manhattan to Westport, CT. When he came home to Vermont he was glowing with satisfaction of a difficult job well done and the pleasure of having worked with so many committed and intelligent people. I said "Wow, I wonder what it would take to work for them?"

I got one answer then.

When the CEO left with most of the IT department, the contractors who had worked on the move were the heroes who came to the rescue. And my husband was hired.

Thus began 15 years of being on call every hour of every day of every week of every year.

Never getting to read the boys a bedtime story without the phone ringing from Hong Kong or Tokyo or London or Paris because the mail server was down or someone couldn't log on to their office machine from home or....

Eating at his desk with a phone to his ear - at dinner - at home.

And that was in Connecticut where we had bought a modest home and were able to save most of the 'bonus'.

Then we were asked to go to London. My only questions were When and How!

Little did I know he was moving over and would use my husband as his chief geek and whipping boy for the next 10 years.

My husband was held accountable by Cassano for other people's performance but never given direct authority over them, screamed at in public (as were most employees who had to encounter Joe) if any fault was found. Systems must never fail or there must be an instant correction and explanation and preventative measures put in place for the future - or else. That someone else beyond his control had made the error was never allowed as an explanation.

Some how my husband managed to get most of the others in the department to work with him.

Fortunately these challenges were a joy. But the lack of authority or promotion or respect were not. Especially when one person was hired to work in London who set out to undermine what trust there was between Cassano and my husband. This cost us most of our year's 'bonus' and lowered the level of rises for the next 3 years.

Joe Cassano is a bully. I wanted very much to like the person who made our amazing London adventure possible but it was not going to happen.

Sent to London on a 2 to 3 year commitment, half a house left in storage in CT, we have been here 'indefinitely' for 11 years pushing 12. We were unable to press for anything more than the ex-pat package we were given at the beginning and lost even housing support after the first 5 years.Our housing costs rose to 5 times what we paid in Connecticut. The salary did not.

Raises were only given in the 'bonus'. So imagine having to pay 5 times your mortgage or rent on your current salary with the promise of the rest of your compensation to come once a year, in December. How do you leave that job?

Do you leave in December and disrupt your children's education? Well, not without a very good reason.
Do you leave at the end of the school year and essentially throw away 6 months of under compensated work? Not likely.

- Oh and, a percentage of your paycheck you will be forced to 're-invest' in the company for 5 years before you will see it.

It is a very pretty velvet lined cage with a tyrant holding the key.

It was ok while the company was ok. I was familiar enough with the way the deals worked and the internal as well as external oversight to be willing to stay in the cage in order to try to save enough to be able to send the boys to university some day. - like the ordinary tax paying citizens we happen to be.

FP had ridden through some heavy weather. While rogue traders took down other banks, I knew of the peer review of the trades and the transparency that would keep that from happening at FP.

When one rogue did get in and began setting up false deals with fake companies it was my husband who pulled together all the evidence that was used to remove him and keep him from ever getting another trading job.

I had many reasons to trust that, though I was having to do most of the utility parenting and keep the world ticking over for the family while he spent all hours working, we would come out of the long hard road with money for the boys education and a retirement fund that would allow my husband to have time to do the things he loves.

Then Cassano betrayed us. The CDO business was his. The other businesses were profitable and still are. When the executive in charge of risk challenged him he was told to shut up. When it blew up Joe walked around the office, looking at people who had worked loyally for him (no choice there if you wanted to stay) and took home $1,000,000 per month, knowing that those around him were going to lose their savings and more. We have.

Ok, it was a huge blow but the government stepped in and my husband still had a job for now. But the description had changed.

Since January 2008 he has been working with Congressional auditors and investigators and the FBI to compile evidence on the deals and dealings of the people responsible, most particularly Joe Cassano.

Then the government and AIG parent lied to us. My husband had been asked to, and signed an agreement to stay for the next 2 years. In October we were told that all the prior compensation we had been forced to 're-invest' in AIG was gone and would never ever be paid to us EVER no matter whether the company ever made any more money ever again.

It was a body blow. It was what we had worked 15 years for. It was our children's education, our retirement, the down payment on a house (we own nothing). Can you feel it? That's the draining away of hope.

But one bone was thrown - we were assured that the 'retention payments' (remember we're still on a 15 year old salary that's never risen so this is actually the bulk of our annual compensation)
would be paid.

Assured by Cuomo, the Federal Government and Liddy, the CEO of AIG. So he went back to work for another 6 months.

They paid us part in December - I suppose I should have smelled a rat, but that's that 20/20 hindsight thing. It was nice, we'd planned on no Christmas as we didn't expect the money until March. So the boys got to pick out something they really wanted and we had a nice Christmas.

The year before they had moved our payment from December to March. Yes, we had budgeted for 12 months and it suddenly turned into 15. Could you do that? Go 3 months without getting paid. Amazingly we managed.

We waited worried that the March payment might not come, despite the assurances. We counted the days until the transfer was to be made, checking the FX rate, wondering what the final number would be that we would live on and try to rebuild the children's education fund with - retirement fund will have to wait.

And then our government betrayed us, painted us as thieves and threw our co-workers in Connecticut to the mob. No one ever approached anyone at FP to re-negotiate those contracts and everyone currently screaming about them knew what they contained in October if not in January.

And now Cuomo says that the security of our families can be purchased by returning the compensation we had been promised with his re-assurance in October. He is no better than a highwayman waiving a gun "Your money or your lives."

Now I know what it would take for my husband to work AIGFP.
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Little populist outrage at latest AIG hearing
The Associated Press
Tuesday, March 24, 2009; 5:30 PM

WASHINGTON -- Treasury Secretary Timothy Geithner made a House Republican go "hmmm."

This was news, considering Geithner's audience on Tuesday: the venerable, and lately venomous, House Financial Services Committee, for which no explanation, professed sorrow or death threat report from a witness last week was good enough.

No, Rep. Frank Lucas, R-Okla., actually let Geithner answer a question about how much risk public investors might take on under the Obama administration's public-private partnership to relieve non-banks, like the demonized AIG, of toxic assets.

Very little risk, Geithner said. Potentially, an investor's dollar might earn six times that.

"Hmmm," Lucas replied thoughtfully. "Hmmm."

No scoffing? No populist rejoinder? No call for Geithner's head?

Was this the same committee that six days earlier beat the tar out of Edward Liddy, American International Group Inc. chief executive who came out of retirement for a salary of $1 to steer the failed insurance giant back to solvency, only to be told that AIG stood for "Arrogance. Incompetence. Greed?"

The same panel whose hearing spurred Republican calls for Geithner's resignation, for failing to talk Liddy into canceling the bonuses?

It was. Chaired by Rep. Barney Frank, D-Mass., the committee this week pivoted from calling for people's heads to probing what's in Geithner's, and that of the man wearing an identical tie, Federal Reserve Chairman Ben Bernanke. In many cases, panel members asked about actual economic policy.

One Democrat who had been part of the pitchfork brigade during Liddy's hearing suggested the panel should apologize to Liddy and the employees of AIG.

"Some of us are learning that we've hurt a lot of otherwise innocent and decent people that just fulfilled their contractual obligations in ... this massive company having nothing to do with the real problem that took place in the financial products division" of AIG, said Rep. Gary Ackerman, D-N.Y.

The cooler heads in the committee room reflected the breezier attitude toward AIG generally, from House leaders on down. Obama has signaled opposition to a House-passed bill that would levy a 90 percent tax on the roughly $170 million in bonuses AIG paid to some of its employees out of federal bailout funds.

And that's OK, in light of the news that AIG's senior bonus-receiving executives seem likely to return the money, House Majority Leader Steny Hoyer, D-Md., said.

"Apparently, the House bill had its effect _ they're giving it back," Hoyer told reporters at his weekly press availability.

This newfound tameness and earnest approach seemed fitting, since Frank's committee has a big job ahead that tracks Geithner's and Bernanke's.

It's composed of what are supposed to be the House's 70 leading experts on the housing and financial services sectors. Well before the 2010 elections, when every one of them will be on the ballot, the committee will have considered enough economic rescue legislation to own the results.

So most spent their time Tuesday asking substantive questions, a marked change from a week earlier. And a newly-confident Geithner defended the administration's plans, his new staff and the intentions of many like Liddy who have been demonized in the financial sector.

Rep. Maxine Waters, D-Calif., wanted to know whether the big investment firm, Goldman Sachs, was exerting too much influence over Geithner's plans.

"You hear a lot about the dissatisfaction about the bonuses, et cetera, but underneath all of this is a conversation about the linkages and the connections of the small group of Wall Street types that are making decisions," Waters told Geithner. "That's what's causing a lot of the distrust."

He did not dispute that and acknowledged that Goldman Sachs has connections to Liddy and some of Geithner's new staff. But he stuck up for Liddy and for AIG employees, calling the public treatment of them unfair.

He faced little challenge from other questions.

"What in the Constitution could you point to to give authority to the treasury for the extraordinary actions that have been taken?" asked Michele Bachmann, R-Minn.

The treasury, the Federal Reserve and the FDIC were acting under powers granted "by this body, the Congress," Geithner said, looking puzzled.

"In the Constitution, what could you point to?" Bachmann pressed.

"Under the laws of the land, of course," Geithner replied.

Apparently satisfied, Bachmann moved on.

Rep. Lynn Jenkins, R-Kan., wanted to know how much more public money AIG would need. Bernanke said that depended on how well the economy does.

Rep. Peter King, R-N.Y., asked Geithner how the government should go about preventing companies that receive bailout money from handing out contracted bonuses, without undermining legal contracts generally?

Geithner said there can be limits placed on contracts for bonuses among firms receiving taxpayer rescue money.

There wasn't a pitchfork in sight.

Ackerman was contrite about the committee's treatment of Liddy and AIG employees generally.

"We probably owe them an apology and maybe even more than that," he said. "We owe them some kind of a remedy to the damage that it looks like we've been engaging in."

© 2009 The Associated Press

Yes, yes they do.
jespirals: (Default)
This man attempted to negotiate an agreement with AIG and other parties that our returned "bonuses" (remember these are payments in lieu of a proper salary - so don't let the term confuse you) should go to a charity benefiting the victims of the economic troubles, the jobless and homeless.

This offer was refused by AIGs CEO. Liddy has never once negotiated with us. All overtures are refused. The PR that work for AIG do nothing but assist the media in pillorying FP. What about AIGIG? What about Cassano, the man who wrote the business?

This guy can afford to leave, we can't.


New York Times

March 25, 2009
Dear A.I.G., I Quit!

The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group’s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”


Jake DeSantis
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Wire: BLOOMBERG News (BN) Date: 2009-03-20 04:01:00
Congress Curses the AIG Frankenstein It Created: Ann Woolner

Commentary by Ann Woolner
March 20 (Bloomberg) -- For all the righteous indignation
at American International Group Inc. spewing from Capitol Hill
this week, you would think Congress had played no role in
creating this mess.
All the screaming this week at AIG’s Chief Executive
Officer Edward Liddy diverts attention from the role Congress
played. It helped build the mammoth firms taxpayers are bailing
out and the risky, unregulated derivatives business that made
them so vulnerable.
At a mid-week House hearing focused on AIG, New York
Democrat Gary Ackerman ridiculed credit default swaps as
insurance dressed up as something else to avoid regulation and
full collateralization. And yet, in just a few years swaps
became a multitrillion-dollar market, one so toxic that it lies
at the very heart of AIG’s near-collapse, spreading economic
chaos around the world.
“How is this suddenly an industry?” an outraged Ackerman
demanded, wondering aloud how it all happened.
Ackerman and other longstanding members of the House
Financial Services Committee should know full well how it
Lawmakers made the monsters they have reluctantly been
trying to rescue in recent months and which they’re now
bludgeoning by popular demand. They did it with laws passed in
1999 and 2000.
What ignited the firestorm this week was news that AIG, the
beneficiary of a $173 billion government bailout, had set aside
a $165 million pool of retention bonuses for people in the very
unit whose reckless trading threatened to bring down the firm
and wreaked havoc on the economy.

Eve of Destruction

“They’re getting paid for the destruction they’ve caused
to our communities,” House Ways and Means Chairman Charles
Rangel said yesterday. “They’re getting away with murder.”
House members traded partisan blame yesterday over who’s to
blame for mishandling AIG’s bailout. But no rescue would have
been needed if it hadn’t been for earlier legislation that
opened the door to the current meltdown.
First with the Gramm-Leach-Bliley Act in 1999, Congress
tore down a 66-year-old wall that kept investment and consumer
banks separate from each other and from insurance companies,
securities firms and any other outfit with a financial service
to sell.
That allowed the creation of “behemoths” that “would
would become too big to fail or, more importantly, too big to
manage,” says James Cox, who teaches securities and corporate
law at Duke University.

Bigness Is In

Next came the Commodity Futures Modernization Act of 2000,
which exempted credit default swaps and collateralized debt
obligations from government regulation by the Commodity Futures
Trading Commission.
President Bill Clinton signed both bills into law.
So to answer Ackerman’s question, that’s how this industry
was born. The 1999 law was Republican-driven in Congress and
pushed by the powerful financial services lobby. Sanford Weill
had already merged the Travelers Group with Citicorp in 1998 on
a bet that Congress would legalize the move.
Next, both parties in Congress gave Wall Street a Christmas
present at the end of 2000, allowing credit default markets to
grow in the dark, away from the spotlight of government
“The credit default market has grown to gargantuan
proportion in a very sort period of time,” Cox says. “It’s a
classic illustration how private enterprise not closely
monitored by government can change the face of the Earth,” he

$1 Trillion Collapse

Lawmakers can’t claim they weren’t warned against the
danger of letting credit default swaps avoid government
When the hedge fund Long-Term Capital Management with more
than $1 trillion in derivative contracts almost collapsed in
1998, it should have set off alarms.
Yet when Brooklet Born, then-acting chairwoman of the
Commodity Future Trading Commission warned that an unmonitored
market in private derivative contracts would pose “grave
dangers to our economy,” she went unheeded.
Working against her was the powerful financial services
lobby as well as then-Federal Reserve Chairman Alan Greenspan,
Clinton Treasury Secretary Robert Rubin and Arthur Levitt, then
chairman of the Securities and Exchange Commission. Levitt is a
director of Bloomberg LP, parent of Bloomberg News.
They argued Born was trying to stretch the Catch’s reach
beyond congressional intent. So no agency was put in charge of
monitoring the derivative contracts.
Now there are more calls for regulating the derivates
market. Back in September SEC Chairman Christopher Cox called on
Congress to do it “immediately.”
We’re still waiting for that.
But don’t we feel better that Congress is so quickly acting
to recoup a few million dollars in bonuses?

(Ann Woolner is a Bloomberg News columnist. The opinions
expressed are her own.)
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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?' "
jespirals: (Default)
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.

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

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.
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)
Schoonmaker v. Lawrence Brunoli, Inc., 828 A.2d 64 (Conn. 2003)(double damages
appropriate for “bad faith, arbitrariness or unreasonableness”).
Butler v. Hartford Technical Inst., Inc., 704 A.2d 222 (Conn. 1997).
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

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).
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
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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