The AIG Fiasco

飞雪寒冰

The news broke on Sunday, March 15 that traders and executives of a small London- and Connecticut-based financial unit would share in $165 million in bonus payments from parent company AIG.  This may incite the outrage that fully tips the political scales.



That evening, Federal Reserve Chairman Ben S. Bernanke said in an unusual television interview on 60 Minutes that the bailout that angered him the most was the one to AIG. AIG has received more than $165 billion in taxpayer bailout money and no one knows yet if that is enough. “I slammed the phone down a number of times,” he declared. Earlier, Bernanke called AIG one giant hedge fund.



On Monday, with outrage building across America, President Obama said he instructed Treasury Secretary Timothy Geithner to “pursue every legal avenue to block these bonuses.”  He did not say, however, whether they could be legally blocked. Only days earlier, AIG’s new president Edward Liddy and Treasury officials said the payments were legally owed due to the trader’s employment contracts.

飞雪寒冰

So, the big question now is whether American taxpayer anger is strong enough to force politicians to pressure a company to void what may be legal contracts.  That would be a first for the subprime crisis. Until now, the government has concentrated on provable illegal acts, such as when two top executives at Bear Stearns, the collapsed Wall Street firm, were caught with emails that suggested they knew they were selling low-grade securities with high-grade assurances.



The AIG story is more complicated.  AIG is a company of 130,000 employees with a very successful life insurance business across Asia, a growing business in China and a strong relationship with Beijing-based life insurer Ping An. Its crown jewel is the American International Assurance division based in Hong Kong. Many bidders have looked at it, but AIG insiders say no one can come up with the estimated US$ 40 billion that management thinks the division is worth.



The group that destroyed AIG was a little known unit of less than 400 employees based in lower Connecticut and London called the Financial Products Division. Its former leader, London-based Joseph Cassano, is under multiple investigations but remains uncharged. Cassano’s group wrote a staggering $485 billion in credit default swaps, or CDS’s – contracts that insured holders of collateralized debt obligations against loss.  Because it is believed that hundreds of banks and financial funds around the globe would have to be paid off if the contracts were called, the U.S. has bailed out AIG four times to show that it will not let the company default.  It’s feared a default could trigger a global financial panic, undoing months of work to rebuild investor trust in the markets.

飞雪寒冰

“A small bunch of geniuses at the products division below a hole in us that sunk the whole aircraft carrier,” says an AIG insurance executive who asked not to be named.



Rage over AIG’s spending habits as essentially a ward of the government first hit the public last September when it rewarded 70 sales stars with a $440,000 resort weekend in California.  That event had been preplanned but was terrible timing for a company in the public eye. After that disclosure, AIG, acting under government pressure, said it would freeze some $600 million in deferred compensation and bonus payment at its Financial Products Division. With the company’s renewed intent to pay some of the frozen funds and Obama’s warning to stop the payments, a legal showdown could be underway that tests bonus payments for all of Wall Street. If government and public pressure stop the AIG payment, then pressure will build for “clawbacks,” that is, forcing executives to give back money they already took in 2007 and 2008. The amount of bonus to just top executives of seven Wall Street firms would be more than US$ 85 billion. How much could be “clawed” back and how much could come out of 2008 compensation may well depend on what happens to AIG’s pot of gold.



Robert Dowling is the editorial advisor to Caijing and former assistant managing editor of BusinessWeek