Taunter Media

Not surprisingly, the retention plan was finally located and published here.  Steven Davidoff, who writes the fantastic “Deal Professor” column at the Times, notes that it was staggeringly generous: the employees of AIGFP had a 30% cut of group profits (compare it with a typical hedge fund’s 20%) with their base comp and overhead absorbed by an entity that was AAA at the time they signed (as opposed to a hedge fund whose management fee is based on AUM that can decline), and on top of all of this, their 2008 numbers were essentially the higher of 2008 performance or 2007, instead of 2008 performance or zero.  It brings up this observation:

The contract also appears as inviolable as it states. Of course, this is not to say that it cannot be broken some other way, such as through bankruptcy, taxation or perhaps legislation. And there are many contract doctrines that allow for abrogation of contracts that might apply here. It’s against public policy, it was based on a mistake, it becomes impracticable, and so on.

It was highly negotiated to pay retention fees at high levels without regard to performance. This is obviously shocking. But it makes me wonder: perhaps one area of direction here should be actually looking at who negotiated this and why?

It should be fairly clear that AIG senior management either wanted to pay AIGFP lavishly (high comp levels would certainly trickle up) or at the least did not care (not their money).  OK, so be it.  We knew they were scum.

The bigger issue to me is that all of these sins have their natural cure – bankruptcy.  I have written at length about why AIG is holding itself hostage; the longer they stay a threat to the global economic system, the longer they can stay on life support.  Even Obama seems to have caught onto this:

It was the right thing to do to step in. Here’s the problem. It’s almost like they’ve got — they’ve got a bomb strapped to them and they’ve got their hand on the trigger. You don’t want them to blow up. But you’ve got to kind of talk them, ease that finger off the trigger.

Perhaps you don’t want him to blow up.  But if the guy is holding himself for ransom, and the only folks standing around are his fellow gang members, you don’t cave into his demands, either.  We have used AIG like the bad bank of the Paulson program, pouring cash through it to Goldman and everyone else Treasury wanted to fund but did not want to admit to funding.

In this state of affairs, why shouldn’t the employees rip off the money transfer?  Don’t you think drug couriers help themselves to a bit of the product?  It is our government’s refusal to admit the gravity of the situation we face and the details of what we are doing to fight back that have created this dirty war, where our government is hostage to the least solvent firms out of fear that if they go under it will be evident to one and all that we have been propping up a few favored firms instead of restructuring the financial sector.

Simon Johnson thinks AIG may be the straw that breaks the camel’s back.  I doubt it.  Congress has already egregiously overstepped common sense – and the Constitution – by trying to tax retroactively what it could not organize itself to do prospectively (any remotely competent control investor would insist as a condition of his funds that any preexisting compensation agreements be cancelled and restored only with his informed consent).  I wonder how long it will take for folks in Washington to realize that plenty of AIGFP folks are in London, and it would be quite a wrinkle on the US habit of worldwide taxation to try to screw them while their neighbors took their money free and clear around St. James.

Some new event will happen – credit card defaults, for example – the outrage will fade, and everyone will forget this ever happened.