So much for the idea of lifting the bonuses from AIG employees. Tim “The Safecracker” Geithner has reported to Obama that there is no legal way to reclaim the bonuses already paid to AIG employees, and that any attempt to do so would likely result in lawsuits and awards that exceeded the total cost of the bonuses. This wasn’t hard to calculate (we speculated on it yesterday) since most claimants would be entitled to treble damages in recovery. The case for wanton, malicious interference with contract here is pretty strong, given that the government was pretty public about the way it targeted AIG employees, and considering the clear anger with which it did so. This was a bit immature of the Administration. Presidents aren’t supposed to get choked up with anger unless Americans die. “Unfair bonus payments” that amount to a tiny fraction of the dollars at stake shouldn’t be worthy of Presidential rage.
This result isn’t surprising, except insofar as there wasn’t a more direct extralegal power grab once Geithner delivered the bad news. Though it is popular to try and claim all manner of power over a firm 80% owned by “the taxpayers,” the reality is that nothing in that relationship gives the government the power to freeze payments like the ones AIG made to its employees. Much as armchair legal theorists would like to find a way to introduce “mob rule” here, it isn’t that simple. Even our good friend Andrew Ross Sorkin seems to admit that this battle might have been won and lost already.
You have to give some credit here to Liddy, the new AIG CEO installed after the present debacle. In the face of all the pressure Geithner could bring to bear, Liddy simply explained to Geithner that he intended to pay the bonuses, and did. That Liddy is still sitting in the executive suite is case enough that the administration is a lot more powerless than it would like to be.
All this aside, the government is pissed now. And a pissed off government does stupid things. Brace yourself for some stupid.
Political Heat Sears AIG [The Wall Street Journal]
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I am the President of the United States, what is a legally binding contract?
Wtf is Liddy still there after this? Put in Geithner, maybe get someone useful in at Treasury.
Google “Gold Clause cases” and you’ll soon see that “sanctity of contract” has been shit-canned since the early 1930s…
At the minimum AIG should be paying out bonuses in equivalent value treasury bonds rather than cash….
@4 here– I mean like present valued in 30 year treasuries….
@4 – your suggestion makes no sense. Treasury bonds are worth at least as much as cash issued by the Treasury.
Call options on AIG common would be a much better idea.
The only stupidity I see is that reflecting in “Equity Private’s” post. Treble damages? Wrong. Look at the CT law, dummy.
Also wrong is the assertion that the AIG execs have won. Even if the contracts can’t be broken, and I don’t think EP has made that case at all, all the funds can be recouped through special taxation.
Finally, EP displays his own ignorance of history and government by asserting arbitrary and contrived rules as to what can permissibly anger a President. The size of the bonus payments relative to the entire AIG bailout is hardly the point. What is relevant is the gross unfairness of these payments and how those payments reflect a complete disconnect between performance and reward.
EP is apparently a failed blogger and a failure at PE. So of all available bloggers in the world, why is he posting at Dealbreaker? The best and brightest indeed.
@4 cf. http://www.ca6.uscourts.gov/opinions.pdf/08a0322p-06.pdf
Dodd – give back your $100,000 AIG donation to the Treasury.
First, EP’s post is not shinny, so I would dip into your 5th grade bag o’ vocabulary words and take out ‘reflected’, stop eating your glue stick, and use it to paste it into your previous post.
Second, as you are clearly six months out of law school and desparately hoping for a second round interview at whatever ambulence chasing “law firm” you had applied to last month, please find somewhere else huff and puff.
And finally, EP is not a dude, which just makes you sound even sillier.
- Assistant Financial Janitor
“Finally, EP displays his own ignorance of history”
I’m a her, first of all.
“Treble damages? Wrong. Look at the CT law, dummy.”
I don’t have to. Treble damages are almost always an option where the offending conduct was “wanton, willful and deliberate.” That you don’t understand this most basic issue colors the rest of your comment appropriately.
“Finally, EP displays his own ignorance of history and government by asserting arbitrary and contrived rules as to what can permissibly anger a President.”
Sorry, this sentence didn’t make much sense. My point was that by expressing executive anger so obviously in public the President had locked up a “willful and wanton” case for the AIG employees. That was a bush-league mistake.
“What is relevant is the gross unfairness of these payments and how those payments reflect a complete disconnect between performance and reward.”
Totally irrelevant legally, as the Treasury Secretary will unhappily tell you.
“EP is apparently a failed blogger and a failure at PE.”
You know less about my career than you do about the law and my gender, and that’s saying something.
I might suggest that your comments are better directed at the Wall Street Journal, which reported these facts. Perhaps they got the story wrong and you are an undiscovered genius among legal scholars.
@7
I like to think of EP as wearin’ a Tuxedo T-shirt, ’cause it says, like, “I want to be formal, but I’m here to party too.” I like to party, so I like my EP to party.
“All this aside, the government is pissed now. And a pissed off government does stupid things. Brace yourself for some stupid.”
Concise, brilliant, and 100% accurate.
Suck it, Obama.
Sincerely,
AIG
Solution:
The US government is not a party to these bonus contracts, therefore it cannot be bound by them.
Unless bonuses are returned/denied, AIG will receive no more government money.
If the employees decide to take the bonuses and AIG fails/chapter 11 (because of the lack of goverment support), the names of those employees as well as their home addresses and email will be published in the NY Times. They will be publicly called before Congress to explain exactly what their trading strategy was and why it failed.
@15 Congratulations, you’ve just made AIG employees ludicrously rich from the lawsuits they will successfully file in the wake of your cunning plan.
“If the employees decide to take the bonuses and AIG fails/chapter 11 (because of the lack of goverment support), the names of those employees as well as their home addresses and email will be published in the NY Times.”
Common thuggery. Charming.
It’s a Joke
I cant help but chime in here. While the whole of “Main Street” seems to be in denial about its culpability in the current economic crisis and is further emboldened in these belief by an administration that is incapable of moving beyond stump speaching the evils of wall street, people need to take a couple of gulps of the corporate coffee they hate so much and think about how this idiocy is going to impact our economic future.
Fist, even the simplest schmuck out there is sitting in his manufactured home (financed by the securitization market) is watching Dukes of Hazzard on DVD (financed via securitization) on a big screen tv (financed on a credit card financed via securitization from an electronics manufacture who finances their receivables via securitization) with a brand new truck (financed via securitization made of parts financed via securitization) in the drive way. Nuff said – we’ve ALL enjoyed the life style benefits of the massive liquidity in the markets over the past decade plus. Just because you didn’t understand what was in the brownies doesn’t mean you didn’t enjoy the benefits.
The only folks out there with a right to be righteous are those that lived within their means and used the flood of cash and credit in the market to build a safety net for just this kind of event. I’m thinking those folks are few and far between these days.
Second, caps on compensation, disemboweling contract law, brazen nationalism and taxation of the largest source of capital investment will produce only one result – an opportunity to hand the mantle of global economic leadership to someone else! Hey EU. Hey Dubai. Provide an opportunity to invest and earn to the top global talent without an administration intent on punishing those who follow the rules they set and let us know how it goes.
So it’s a joke alright. But we won’t be laughing and neither will president Pippin. While we jackass around with this triviality the world will pass us by.
I know $165m is nothing in the grand scheme of things but oh what a precedent that would have set! The word “clawback” is the scariest/dirtiest word in the English language for any banker. If the USG had succeeded, all present/former/wannabe bankers would have the fear of God put back in them.
So much misplaced rage on this topic.
Sure, the AIG FP guys are reprehensible but the decision makers are probably off “sitting on a beach, earning 20%”.
Liddy is the government’s appointed guy. He’s on board with the whole “break up the company / pay back the government” notion. He didn’t create, but inherited, these problems.
AIG’s outside counsel and the Fed’s own attorneys have concluded that they have to pay these bonuses. It’s a giant leap to suggest that Liddy is happy about it, or “pulling one over” on the government.
Finally, why again is everyone so worked up about $165M – when no one blinked as 300 times that amount has trickled out the door to AIG counterparties who, in turn, paid their own bonuses?
Ah, yes, the Divine Sanctity Of Contracts….
But then again, it would appear that some are more inviolable then others.
While EP is sooo in favour of AIG contractual “bonuses” being The Sacred And Unchangeable Foundation Of Our Way Of Life, I do wonder if she would stand by this Holy Principle of Contractual Infallibility when it comes to contracts which the UAW negotiated with GM …
Somehow I do not think so.
You see, the only Contracts That Count are really just the ones the Masters Of The Universe (temporarily Wall-Street based) make. The peons and the rabble may safely be ignored. Until they get themselves armed that is…
@3 I cheated and asked a law student. Congress can impair contracts, but it’ll be a cold day in hell before Republicans and southern Dems allow that through the Senate. On a side note, it’s always disconcerting to be rooting for the historic anti-civil-rights coalition.
@20 The counterparties probably deserved the bonus for realizing how much they could rake in off AIGFP.
As fun as it is to whine about bailouts, the gov’t just learned a tough business lesson at the hands of AIG. You want to be a big white knight by taking a large equity stake in a company you deem “too big to fail”? Better do your fucking due diligence then. Unless these compensation contracts were concealed by AIG or some other incidents of fraud are present, caveat emptor Obama & Co. Just because its taxpayer money doesn’t mean the gov’t isn’t an arms length buyer and gets a free pass.
Second paragraph of 15 is spot on. You want the money back? Use your leverage. Put a gun to AIG’s head in the next round of financing, and try to get it. You’re in the big leagues now. Act as if.
If Congress really cared about the actual money, they’d just pass a law that made all nonsalary payments to employees of entities majority-owned by the government subject to a 100% tax.
They don’t care about the money. They piss away $165M in less than ten minutes every goddamn day. They are looking to score points. It’s all about points. If it wasn’t this, it would be the fact that they still have plant service on the ferns in the AIG lobby, or some shit.
Frankly, you can ignore all this. The AIG people will be keeping the bonuses, they will keep their jobs, and we will continue the pleasant fiction that AIG Financial Products is something other than a claims center where rich people and large companies can cash in their losing lottery tickets at face value from the Gummint.
@18 – such comments attempting to interject facts and common sense will get you in deep trouble with the “peasants with pitchforks” crowd.
@20 – I am still dying to know what AIG was theoretically supposed to do with that money. If it was not supposed to pay its major creditors in order to keep itself from defaulting on obligations that would put it into bankruptcy, then why are we trying to “save” it? So the gubmint was supposed to say “here’s money to keep yourself afloat, but here’s a list of creditors you can’t pay, and we suggest you politely ask them not to put you into an involuntary BK.”
EP:
If you were in PE, please tell us how many times your firm walked away from a portfolio company that you had signed up to buy after deciding once you got under the hood that you just didn’t want it?
Why was that contract different? I guess when it is “your” money it changes the rules?
@ 26, you’re retarded.
That’s the whole point of negotiating the terms of an LOI. If EP’s firm called off a deal without meeting some pre-determined condition (e.g., material adverse changes or finds), then they would have paid some pre-determined amount. Terrible analogy.
Great, more legalese… Bailout$$ now neither help US Govt, US Citizens, nor US Corporations. Rather funds get burned in the courts, where it only helps the Weinsteins and Weinbergs
This is just background music to the govt’s tap dance as it tries to distract us during the 10% unemployment, -6% gdp times until the green shoots start to appear.
Enjoy the show.
@15/@23 – You’re right. That *must* be it, we are not playing tough enough with AIG. Fire everyone above VP, rescind all bonuses, and sell all business units at current market prices. Satisfying? Sure, but hardly a good ROI on the Government’s $175B.
@25 – I’m with you, just pointing out that: the scale is small, and that AIG has been a giant “public relations buffer zone” for quite some time.
~20
@27
I have a feeling she walked from a deal at some point outside of the “outs” provided in the LOI or APA.
Happens all the time. What are the sellers going to do, sue and soil their reputation, run up legal bills and never sell to any PE firm?
No, as I’ve seen they generally take it on the chin and thank the banker that there are others in line who are interested. Especially in the space that she operated in.
How about this one since you didn’t like the prior and seem to know the space:
How many times did she transfer information to a friend in the biz even though it was still under a confidentiality agreement? How many times did she retain documents after not doing a deal despite an agreement to destroy or return such documents embedded in the CA? How many times did she accept and use purchase multiple information knowing full well it was likely protected under a CA? This happens all the time.
Are these contracts less sacrosanct than the AIG employment agreements? What a joke.
@Novice, Republicans passed the first civil rights acts under Eisenhower. Eisenhower nominated Warren to the Supreme Court after defeating him in the Republican primary. Warren subsequently wrote Brown v. Board, and Eisenhower called in the National Guard to enforce the decision.
AIG’s employees acted with gross negligence in constructing this derivatives mess. There is clear evidence that they did not understand or totally ignored mark-to-market risk. AIG needs to fire them all “for cause” and clawback the bonuses. These employees are worthless, they are not valuable to AIG, the owners of AIG, or the taxpayers. If these employees want to sue for being dismissed, then, fine, let them.
Biggest Congressional recipients of AIG largesse…
Name Office Total Contributions
Dodd, Chris (D-CT) Senate $103,100
Obama, Barack (D-IL) Senate $101,332
McCain, John (R-AZ) Senate $59,499
Clinton, Hillary (D-NY) Senate $35,965
Baucus, Max (D-MT) Senate $24,750
Romney, Mitt (R) Pres $20,850
Biden, Joseph R Jr (D-DE) Senate $19,975
Larson, John B (D-CT) House $19,750
Sununu, John E (R-NH) Senate $18,500
Giuliani, Rudolph W (R) Pres $13,200
Kanjorski, Paul E (D-PA) House $12,000
Durbin, Dick (D-IL) Senate $11,000
Perlmutter, Edwin G (D-CO) House $10,500
Just popping in to say that I’m in VC and haven’t done any of the stuff 31 says is NBD.
Equity Private
7 here -
I am sorry I didn’t realize you were a woman. You come off as such a douchebag that I assumed you must be a dude. Maybe you are a tranny?
As far as your career status goes, I was only going by what you said on your own (now defunct) blog. You “drifted away” from PE? WTF? Please share with us. What are you doing now other than posting in defense of the AIG Financial Products looters?
As to your last post, you confuse and conflate treble damages with punitive damages. The former is statutory, the latter originates in the common law. Punitive damages can be more than triple the actual damages or less. So when you use one term interchangeably with the other, you are showing the whole blog that you are really dumb.
Further, although punitive damages are available where a defendant has been found to have acted with malice or criminal indifference, they are rarely granted in contract-related disputes. If New York law applies here, it is extremely unlikely that the punitives would be awarded. Further, even assuming a claim for punitives survived a motion to dismiss and made it to a jury, the odds of any recovery for punitives on these facts would be exceedingly small.
@33 – AIG FP has approx. 300 employees how many do you suppose:
1) Had the authority to define/structure/execute the derivative contracts
2) Are still employed
3) Are in the bonus pool?
@30
23 here. I didn’t advocate the breadth of changes you mentioned. AIG is still a going concern (barely). I was simply saying that if the gov’t doesn’t want AIG to do something (like pay bonuses to idiots who allegedly blew up the company), it should impose its will in the boardroom and/or at the closing table. Sure, there are times to use the press to create pressure. But right now, all of Obama and Geither’s collective rhetoric gets them nowhere in any practical sense. Just populist stumping.
@37, @33 here.
It would be nice to find out. Clearly, all the people in the bonus pool were at AIG during the “good times” since the bonus contracts were signed before the bailout or the losses that precipitated the bailout. Furthermore, those in the bonus pool must have had significant negotiating power at the time since they were getting guaranteed retention bonuses. This makes it likely that many, if not all, were directly involved in structuring these supposedly lucrative products. I doubt that a typical back office employee would be able to negotiate similar terms.
Does anyone understand constitutional law here? All this – “the government can’t abrogate contracts” is a fundamental misunderstanding of the power of Congress. They surely can interefere with contracts. The constitution only prohibits States from interfering with contracts, not the federal Congress. Congress has rather large plenary power under the Commerce Clause to regulate commerce, which includes private contracting. And, as long as they do it with “due process of law” – meaning, passing any old law under legislative due process saying a contract is null and void – they can break a private contract.
How do you think Congress passed federal bankrupty laws with allow federal bankruptcy judges to abrogate contracts in bankruptcy? This whole system was developed pursuant to the power of the Congress to regulate commerce and the lack of prohibition against Congress interfering with contracts. They can break those AIG contracts if there is the will to do it. What they really are trying to do is say “we really want to get that money back but our hands are tied by these iron-clad, can’t ever be broken” contracts. Bull crap!
@32 A toothless bill that only solidified opposition to civil rights. Warren was the Souter of his day: he was wildly more liberal once appointed, and spoke with LBJ about arranging his replacement by a very liberal Abe Fortas.
Meanwhile, Kennedy and Johnson spent their presidencies overcoming the entrenched powers of the anti-civil-rights coalition– unless you’re suggesting that 2 southern Democrats could somehow block something in a twelve-man committee without cooperating with the four Republicans?
I got my muthafuckin torch.
I got my muthafuckin pitchfork.
I’m ready for the first muthafuckin banker I see.
The Fat IT Guy, comin’ for you bitches.
31 – sellers do go after buyers who reneg on signed PSAs (Carlyle+John Maneely/NLMK, Huntsman/Apollo, etc).
so shut up
I like the assertion that Liddy stood tough to Geithner. But I’m going to be bold and make two (seemingly obvious) predictions
1. The bonus money will be paid back
2. Liddy won’t last the month.
I don’t know what it was like to be a banker trying to foreclose on farms in 1932(a few got tarred and feathered, and they had dollar sales where the neighbors bought the farm for a dollar and gave it back to the families) but I think being a banker now is like being a dotcommer in fall 2001 trying for a new IPO.