Financial Services AIG Hearing Panel 2 (Liddy)

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The hearing can be view on the committee stream or CSPAN3.

The witnesses are: 

Panel two 

Kanjorski: Pink ladies respond properly or please leave the room. Signs DOWN!!!

Kanjorski administers oath.

Kanjorski: We’ve had occasion to visit personally 2-3 months ago and 4-6 weeks ago a telephone conversation that wasn’t as great. Mr. Liddy is not a person that is being paid for the CEO position he occupies at AIG, impressed into federal service and he responded to their call. He is former CEO of one of our largest insurance companies. I wanted to make that clear bc I’m sure that you and your family have had a lot of abuse in the last few days. I think it only fair that we set record straight. When we discovered potential bonus payments, I urged you to suppress payment. My understanding that AIG people and my staff would cooperate and transfer docs to lend assistance. Specifically, we wanted to see whether we could vitiate this contract. As of Saturday last we have received no communication regard papers. Only thing we received was a letter indicating that payment was made.

[Note, this whole exchange suggests–rather implausibly–that Kanjorski knew about the bonuses before Geithner did.]

Kanjorski: Sometimes insurance companies delay payment until they’re sued. This appears to be a rushed payment. One of the last payments would have been a denial of the right to pay on the contract. Not a bad remedy. If you had taken that position, these bonus recipients would have been in the same position as the US, worst that could have happened would have been penalty. I thought you were missing gravity of this situation. 

Liddy: Why pay these people at all. Trying desperately to prevent uncontrolled collapse of that business. Only way to avoid systemic shock to the economy that the US government help was meant to prevent. We concluded that the risk to the company and the financial system and the economy was too high and that we would have happen what the involvement in AIG was supposed to prevent. I’ve asked employees of AIGFP to step up and do the right thing, those who received retention in excess of $150,000 to give up half. Some have already given up 100% of those payments. Obviously we are meeting at a high point of public anger. As a businessman I’ve Read more →

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Financial Services AIG Hearing Liveblog, Panel 1

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The hearing can be view on the committee stream or CSPAN3.

The witnesses in this panel are (Liddy, AIG’s CEO, comes later):

Panel one

  • Mr. Scott Polakoff, Acting Director, Office of Thrift Supervision 
  • The Honorable Joel Ario, Insurance Commissioner, Pennsylvania Insurance Department, on behalf of the National Association of Insurance Commissioners 
  • Ms. Orice M. Williams, Director, Financial Markets and Community Investment, Government Accountability Office
  • Mr. Rodney Clark, Managing Director, Insurance Ratings, Standard & Poor’s

Scott Polakoff: Rapid decline of AIG stemmed from liquidity problems in two business areas. CDS, typically based on mortgage loans. And securities lending. AIG stopped originating CDS in 2005. By that time, the company had $50 B on its books. AIG halted these activities while the housing market was still going stong. AIG protecting against losses for the least risky credit vehicles. There have been no underlying losses. Crisis resulted from liquidity calls. Two important lessons learned. CDS continue to be unregulated products. New regulations are essential. AIG story makes a compelling argument for a systemic risk regulator with authority to examine temporary liquidity problems.

Joel Ario: Hedge fund attached to large and stable insurance company. Financial products bet twice the value of AIG and faied to hedge the bets. It was to protect those leading financial institutions. We are doing this to protect our own financial system. AIG’s competitors claim AIG is underpricing in an attempt to maintain volume. Such disputes reflect insurers trying to protect profit margins in soft economy. We have reviewed charges on both sides. We have not seen any evidence of undercharging on either side. Insurance companies have the value they do because state level regulation requires reserves. Securities lending would not have caused a systemic risk. This does not compare to the credit default risk. The lending problem is solved. Need to identify and manage systemic risk. Insurance companies more likely recipients than creators of risk. 

Orice Williams: GAO prohibited by law from auditing the Fed. Assistance given to AIG has given AIG an unfair competitive advantage. Fed and Treasury told us goal was to avoid systemic risk. The Fed has been monitoring AIG since September and Treasury has begun to more actively monitor AIG. AIG has mixed success in progress on its restucturing. Has not sold off business units in this market. Declines in the values of its assets. Potential impact of AIG on commercial property casualty market. Read more →

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Financial Services AIG Hearing Liveblog, Member Blowhard Statements

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The hearing can be view on the committee stream or CSPAN3.

The witnesses are:

Panel one

  • Mr. Scott Polakoff, Acting Director, Office of Thrift Supervision 
  • The Honorable Joel Ario, Insurance Commissioner, Pennsylvania Insurance Department, on behalf of the National Association of Insurance Commissioners 
  • Ms. Orice M. Williams, Director, Financial Markets and Community Investment, Government Accountability Office 
     

Panel two 

Liveblog

Barney starts by warning the hecklers.

Three other members included–I missed the first one [oh, I think it was Joseph Crowley], but Marcy Captur and Elijah Cummings are in there.

Kanjorski: AIG unique. Not a bank, and has received much more assistance than any other bankster. Treasury and Fed could not accommodate us. "We need to hear form them, directly and publicly." Full committee hearing on March 24. 

[Note, AIG’s much greater assistance was really assistance for the banks via other means. That Kanjorski statement does not inspire confidence in me, because it hides the degree to which this is still about the JP Morgans and Goldman Sachs of the world.]

Garrett: Where was the outrage when Bush was demanding money from taxpayers? I think I’ll blame it on Democrats.

[Note, the Republicans are going to be out for Geithner’s head here. He’s not going to have much fun when he testifies on Tuesday.]

Frank: I hope we can focus on the subject at hand, but I have to respond to Garrett’s complaint that he didn’t get a hearing quick enough. We did have the hearing in July 2008. At that hearing he asked no questions at that hearing. He declined to ask any questions about it. I suppose he’s disturbed that we didn’t give him a chance to ask questions a month earlier. 

Garrett: My understanding is that I went into other issues as well.

Frank: Not according to my reading of the transcript. Covered bonds hardly seemed to be the major topic that the gentleman wanted to have the hearing about. The committee had a hearing on this well before the Fed went into AIG. It is important for us to amend that statute, but doing it in the midst of that uncertainty is probably not a good idea. I guess we’ll just release the transcript. I guess a lot of people left their fight in the gym. Time to exercise our ownership rights.  Read more →

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Cassano’s Golden Parachute and the Retention Bonuses

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As you likely know, Joseph Cassano is the guy who created the AIGFP mess.

He was fired on March 11, 2008–probably at the same time or slightly after the retention bonuses for the other guys who screwed up AIGFP were negotiated. That means Cassano’s termination contract may provide some insight into those bonus contracts.

For example, this paragraph sheds some light on how AIG treated one of the three categories of those who would get bonuses–those "terminated without cause.

You are retiring effective March 31, 2008. You will retain your rights to all payments due under the AIG Financial Products Corp. 2007 Special Incentive Plan (the "SIP’), and your retirement will be treated as a ‘Without cause’ termination of employment for purposes of the SIP, unless I (or my successor) and the General Counsel of American International Group, Inc. both determine, in good faith on or before September 30, 2008, that Cause (as defined below) for the termination of your employment existed at the time of your retirement. Cause means your intentional misconduct, fraud, knowing violation of the Company’s Code of Conduct or conviction of or entry of a plea of guilt or no contest to a felony. In the event such a determination of Cause is made, you will have the right to contest that determination.

Make no mistake, Cassano was being fired in this contract, and it was clear at the time his division was utterly screwed up. Yet even as he was being fired, Cassano was being categorized in such a way that made him eligible for his past bonuses (I’m presuming the 2007 SIP is not part of the bonuses handed out last week).

That means, of course, that those 11 people who are still getting million dollar "retention" bonuses even though they’re gone also may have been fired. We don’t know whether they were or were not (there are two other categories they may have fallen under, in addition to "terminated without cause"). But it’s possible that you and I just paid $4.6 million to some guy who was fired.

But this passage also suggests the probable limits AIG put on bonuses received by those terminated without cause: if they’re found guilty of fraud or felony, they lose their bonuses. So what is DOJ waiting for?

Now look at the language describing Cassano’s "consulting" payments. 

You will provide consulting services to the Company as reasonably requested by the Company for a period of nine months, commencing on April 1, 2008 Read more →

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Edward Liddy’s Pitch in the WaPo

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On the morning of what is sure to be a grilling by Congress, Edward Liddy has an op-ed in the WaPo. There are two significant details in the op-ed.

First, Liddy reveals that the retention contracts are over a year old.

Make no mistake, had I been chief executive at the time, I would never have approved the retention contracts that were put in place more than a year ago.[my emphasis]

Thus far, AIG has been hiding the date when these bonuses were put into place, saying they were put into place last spring. This confirms the bonuses were in place at least by March 17, 2008. 

That’s significant because AIG first publicly admitted AIGFP was FUBAR on February 28, 2008 (h/t masaccio):

As of December 31, 2007, controls over the AIGFP super senior credit default swap portfolio valuation process and oversight thereof were not effective. AIG had insufficient resources to design and carry out effective controls to prevent or detect errors and to determine appropriate disclosures on a timely basis with respect to the processes and models introduced in the fourth quarter of 2007. As a result, AIG had not fully developed its controls to assess, on a timely basis, the relevance to its valuation of all third party information. Also, controls to permit the appropriate oversight and monitoring of the AIGFP super senior credit default swap portfolio valuation process, including timely sharing of information at the appropriate levels of the organization, did not operate effectively. As a result, controls over the AIGFP super senior credit default swap portfolio valuation process and oversight thereof were not adequate to prevent or detect misstatements in the accuracy of management’s fair value estimates and disclosures on a timely basis, resulting in adjustments for purposes of AIG’s December 31, 2007 consolidated financial statements. In addition, this deficiency could result in a misstatement in management’s fair value estimates or disclosures that could be material to AIG’s annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.

In other words, if those contracts were for all intents and purposes in place before AIG publicly admitted AIGFP was FUBAR, it makes it more likely they were an attempt to lock in their riches before things started falling apart (though they were undeniably put in place at a time when AIG knew those employees had screwed things up). 

Just as notably, Liddy emphasizes the continuing risk of the CDS portfolio as the reason to continue paying these bonuses, rather than the contractual obligation that has been emphasized in Congress and the press. Read more →

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The Geithner Master Plan To Recover The AIG Bonuses

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Pretty much the only news this week has been outrage over the bogus bonuses paid to individuals in the AIG Financial Products division (yes, they have already been paid) and discussion among the political class as to how to remedy the situation. The moment we have all been waiting for has arrived. Yep, Tim Geithner has announced his master plan to recover the ill begotten booty from the 73 individuals raking at AIG.

The first report came on Countdown with Keith Olbermann, who related the following:

"Breaking news out ot the AIG bonus outrage, in a letter to Nancy Pelosi, Treasury Secretary Timothy Geithner is revealing how he’d like to get the bonus money back. He wants that company to pay back all the $165 mil of bonus money by cutting that amount out of AIG’s operating budget. In addition as sort of extra punishment, geitner wants to take the upcoming $30 bil going to AIG and deduct another $165 from it, and deduct the same amount from an upcoming $30 bil additional payment."

Well that is simply brilliant. Jeebus, Geithner is going to impose punitive treble damages on ……. ourselves (we own and fund AIG). All the while taking the focus off the freaking 73 mopes that are skating with the loot after burning down the bank. Where did Geithner get this plan, from Goober and Gomer over at the filling station?

Never fear, there is another version. Not surprising, every Administration official in sight has been hemming, hawing and sidestepping since Monday morning on this issue. Here is how Yahoo News reports:

Geithner sent a letter late Tuesday to congressional leaders informing them that he was working with the Justice Department to determine whether any of the AIG payments could be recovered. He cited a provision in the recent economic stimulus law that gave him authority to review compensation to the highest-paid employees of companies that already have received federal assistance.

Like I said, these guys are all over the road. And they don’t appear to have a map or a plan. Interesting if the plan is now to hand off the hot potato to AG Holder, because just yesterday they were saying they would not go to court. Summers said the same thing earlier today.

Bottom line is the Administration is flailing wildly and they are not telling American citizens the straight story.

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AIG: “Retention” Payments for Leaving?!?!?!

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I wanted to make one more point about the revelation from Andrew Cuomo’s letter to Barney Frank that some of those getting "retention" bonuses are gone from AIG.

Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million;

"Retention" bonuses for those who left? That’s even nuttier than paying the guys who broke the global finance system millions for staying!

Here’s what AIG said about the purpose of those bonuses.

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.

Now, we still don’t know shit about these contracts–even Cuomo, who has at least seen the contracts, doesn’t know who got them. But assuming this white paper is not lying (which I wouldn’t guarantee), then the people who have left AIG but got the "retention" bonuses fall into one of three categories:

  1. Still employed by AIGFP as of a specified payment date, but left after that date
  2. Terminated without cause
  3. Resigned "for good reason"–whatever that means

In other words, either they’ve got the retention bonuses tied to dates that mature long before the bonuses themselves do (which seems unlikely, but so do these bonuses more generally), some of these 11 people were terminated without cause even knowing they’d get humongous bonuses anyway, or they resigned "for good reason." Since the first two seem so stupid, I’m going to guess that these 11 people fall into the last category (but that’s just a wildarsed guess).

So what does "for good reason" mean?

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Time to Get Geithner under Oath on AIG

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Edward Liddy, AIG’s CEO, will testify before Barney Frank’s committee tomorrow (10AM, CSPAN3, and yes, we’ll be liveblogging it).

But after reading the letter Andrew Cuomo just sent to Chairman Barney, I think the guy we need under oath is Tim Geithner. After all, over the weekend Geither allowed himself to be convinced that AIG had to pay out its retention bonuses. But today, we learn the following:

  • [Cuomo’s] Office has reviewed the legal opinion that AIG obtained from its own counsel, and it is not at all clear that these lawyers even considered the argument that it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money.
  • AIG was able to bargain with its Financial Products employees since these employees have agreed to take salaries of $ I for 2009 in exchange for receiving their retention bonus packages. The fact that AIG engaged in this negotiation flies in the face of AIG’s assertion that it had no choice but to make these lavish multi-million dollar bonus payments.
  • [N]umerous individuals who received large "retention" bonuses are no longer at the firm [including one person whose bonus of $4.6 million made him one of the top seven receipients of bonuses].
  • [T]he contracts under which AIG decided to make these payments … contain a provision that required most individuals’ bonuses to be 100% of their 2007 bonuses.

Now, presumably, Tim Geithner knew all these details from his conversations with Liddy over the weekend. Hell, he should know the details from when, as NY Fed President, he negotiated the bailout last year.

Yet he came to the American people and claimed we simply had to pay these bonuses. Why?

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Obama to Geithner: Get That Bonus Money Back

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It sounds like Obama has told Tim Geithner to go back to Edward Liddy and explain that $100 million bonuses are unacceptable.

I’m glad that Obama did this (after seeing the outrage in Congress no doubt). I’m still astounded that Geithner needed to be told. And I’m still suspicious that Geithner was responding to threats from AIG that no one is much talking about. 

Obama’s statement here has a hint of something I’d like to see more of: he suggests that the appropriate response to AIG’s audacious demand for its bonuses is the same kind of regulation over big finance schemes like AIG that FDIC has over banks.

Still, it was only a suggestion.

It seems that this AIG demand ought to elicit the kind of response that drives reform over all the weasels in Congress trying to prevent it. "Well, that’s the last straw," I wish Obama had said, "If that’s how you respond to hundreds of billions in help from the federal government, we’re going to regulate you so heavily you’ll be begging to give your bonuses away in a matter of months."

There are still a lot of obstructionists in Congress who don’t want their gravy train to get clipped. This is the moment when Obama should be mobilizing the outrage of such events to roll over those obstructionists.

Of course, that’s not going to happen so long as there are so many obstructionists in Obama’s inner circle. 

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The Semtex in the AIG Retention Contracts

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Here’s how I understand the white paper AIG just used to convince Tim Geithner that, while the US government can force car companies to cut the wages of line workers, the US government cannot force banksters to cut the wages of the thugs who broke the global financial system. There’s a lot of mumbo jumbo about contract law, but that’s not the real reason AIG is arguing Geithner can’t strip the bonuses. It’s the "business reasons" that amount to a deliberate threat:

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.

Translated, I take that to mean that AIGFP is a party to a bunch of contracts insured by AIG the US government. And if AIGFP somehow does something that equates to a default on those contracts, then AIG the US government is on the hook for hundreds of billions of dollars. 

The white paper goes on to explain just one scenario that might trigger a default in terms of these contracts.

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. Read more →

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