Brad Miller (D-NC) asks the complement to the question I asked last night: Where’s the guy who doesn’t know shit about Wall Street to assess these bailouts?
Brad Miller asks, doesn’t Edward Liddy’s past board membership on Goldman Sachs create the appearance of conflict of interest–not to mention someone without the sufficient distance to approach this problem fairly?
Geithner doesn’t seem too troubled about any potential conflict of interest.
The WSJ has a detailed chronology of when the Fed started looking at AIG’s bonuses. I think it, at times, confuses the AIGFP bonuses that were negotiated in March 2008 with the bonuses that were negotiated after AIG got bailed out (AIG gave retention bonuses to a group of employees that has expanded from 130 to 4700 since September–which I’ll return to in a later post). And it makes an even larger error, misrepresenting the main reason AIG kept the AIGFP bonuses, which was that they really felt they needed those employees to stick around (the WSJ focuses only on the legal question, which Edward Liddy has made clear was secondary to the perceived need to keep these people around).
But the WSJ story makes one thing clear: the Fed deliberately avoided discussing bonuses in the context of new bailout negotiations.
In late January, news outlets reported that AIG planned a total of $450 million in bonuses to help retain employees winding down the complex trades in the unit at the heart of the company’s collapse. In the weeks that followed, Mr. Liddy and other AIG officials briefed some lawmakers about the retention payments and other aspects of the AIG rescue.
On Feb. 28, as government officials worked on a fourth AIG bailout, the New York Federal Reserve Bank emailed Stephen Albrecht, a Treasury lawyer, laying out the AIG bonus issues and promising further detail, according to two people familiar with the email. Mr. Albrecht did not return a call seeking comment.
It was an intense weekend, as Treasury and Fed officials frantically prepared to close the AIG deal. "When we heard there was this executive compensation thing floating out there, we thought, ‘We’ll deal with this later,’" said one Treasury official.
On March 2, AIG announced both record losses and $30 billion in fresh Treasury aid.
This is appalling not just because the Fed and Treasury put off dealing with the question of bonuses at the same time as they were forcing the UAW to renegotiate its contract as a condition of new aid.
But it also seems to strongly suggest that neither the Fed nor Treasury have ever really questioned AIG’s representation that it needs to keep these finance guys around by bribing them. We learned on Friday that the guy receiving the biggest bonuses–Doug Poling–was the lawyer who crafted the CDS contracts. Don’t you think we ought to determine whether we ought Read more →
As I noted this morning, Doug Poling was the guy whom AIG decided last year should get a $6.4 million "retention" bonus for sticking around a year. (He has since turned down the bonus.)
The WSJ has some details on what Poling has done to be worth so much money.
In August 2007, Douglas Poling sat in on a meeting at which Joseph Cassano, then-head of American International Group Inc.’s financial-products unit, berated an in-house auditor for raising questions about the accounting for a joint venture Mr. Poling led.
The auditor, Joseph St. Denis, resigned the next month after his reporting lines were changed to limit his communications with auditors at the parent company, according to an account of AIG’s dealings he detailed in a letter he wrote to Congress last October.
[snip]
A former Wall Street lawyer who joined the AIG unit in the early 1990s, Mr. Poling oversaw legal work on the contracts that sat at the core of the unit’s business — such as customized insurance-like swaps and other derivative contracts that generated a steady stream of fees, according to former colleagues.
[snip]
In May 2007, as AIG’s swaps problems began developing, Mr. Poling expressed confidence about the business approach of AIG’s financial unit toward one of its products, in an investor presentation with Mr. Cassano.
"We are very careful and disciplined and rigorous in the way in which we structure and document these transactions, and are very sensitive to ensuring that we have early termination rights so that if the rules change, we’re able to unwind those transactions and move on to other segments of the business that are more attractive," Mr. Poling said, according to a transcript of the investor presentation.
[snip]
The Poling-led joint venture discussed at the meeting preceding Mr. St. Denis’ resignation was a partnership announced in March 2007 between AIG’s financial-products unit and closely held Tenaska Energy in Omaha, Neb. AIG began unwinding the partnership in January. [my emphasis]
So, our $6.4 million man was one of the people cheering the safety of AIG’s CDS business, and one of the guys in charge of an energy deal that seemed to be based on dicey accounting. (For more on Tenaska, see page 6-7 of this).
Now, when he testified before Congress the other day, Edward Liddy repeatedly assured the Committee that the people who had put together the CDS business were gone. He stated clearly that the people left over were the good guys, people tied to "traditional" derivatives business. For example, here’s Liddy telling Bill Posey that the guys managing the derivatives–who are distinct from the guys who brought the company to its knees–are getting the bonuses.
Posey: We wouldn’t care about the bonuses if it weren’t for the bailout money. Read more →
The memo AIG sent to employees offering safety tips might lead you to believe that AIG is concerned about its employees’ safety. And, true, it offers really practical advice about how to limit the chances that someone is going to attack an AIG employee: hide your badge, alert security if people are hanging around.
I do hope AIG employees–and all the banksters–remain safe.
But there’s one fact that suggests this memo is simply a scare tactic.
Edward Liddy, someone who has been on TV as the public face of AIG, took the train to DC for his testimony.
Whatever Liddy’s personal record — he is taking $1 in salary this year without a bonus and took the train to Washington for the hearing — lawmakers didn’t stop in their quest for the names.
If you are genuinely concerned about the safety of your employees, you do not let the most public of those employees take public transportation on a widely-publicized trip.
So I would suggest that the warnings from AIG might serve a completely different purpose (aside from instilling a sense of defensiveness that might draw employees closer together). Consider this warning, for example, ostensibly designed to keep employees safe:
Avoid public conversations involving AIG and do not engage any media personnel regarding the company.
You see, all but a few of the warnings AIG gave its employees have a dual effect: they remind employees to guard their personal safety (and I do hope they remain safe). But they also ensure that anyone trying to report on AIG will be regarded as a physical threat.
And the net effect of such fear-mongering is articles like this one, in which the employees at the highest risk AIGFP employees quoted as being concerned about their privacy and safety (in an article, funnily enough, that provides names and towns of residence), are ignoring the guidelines AIG gave them on protecting themselves. They are talking to the press!!!!
But I’m guessing that’s not exactly what happened–that Jackpot Jimmy somehow ignored the warnings and instead decided to gab to the press. You see, I find it rather curious that the two AIGFP employees described in the article–Jackpot Jimmy and Douglas Poling, the latter of whom got the biggest bonus–are now returning those bonuses. Read more →
The other day, Atrios pointed to this passage, explaining that AIG was reinsuring some of its own insurance businesses.
Thomas Gober, a former Mississippi state insurance examiner who has tracked fraud in the industry for 23 years and served previously as a consultant to the FBI and the Department of Justice, says he believes AIG’s supposedly solvent insurance business may be at least as troubled as its reckless financial-products unit. Far from being "healthy," as state insurance regulators, ratings agencies and other experts have repeatedly described the insurance side, Gober calls it "a house of cards." Citing numerous documents he has obtained from state insurance regulators and obscure data buried in AIG’s own 300-page annual reports, Gober argues that AIG’s 71 interlocking domestic U.S. insurance subsidiaries are in hock to each other to an astonishing degree.
Most of this as-yet-undiscovered problem, Gober says, lies in the area of reinsurance, whereby one insurance company insures the liabilities of another so that the latter doesn’t have to carry all the risk on its books. Most major insurance companies use outside firms to reinsure, but the vast majority of AIG’s reinsurance contracts are negotiated internally among its affiliates, Gober says, and these internal balance sheets don’t add up. The annual report of one major AIG subsidiary, American Home Assurance, shows that it owes $25 billion to another AIG affiliate, National Union Fire, Gober maintains. But American has only $22 billion of total invested assets on its balance sheet, he says, and it has issued another $22 billion in guarantees to the other companies. "The American Home assets and liquidity raise serious questions about their ability to make good on their promise to National Union Fire," says Gober, who has a consulting business devoted to protecting policyholders. Gober says there are numerous other examples of "cooked books" between AIG subsidiaries. Based on the state insurance regulators’ own reports detailing unanswered questions, the tally in losses could be hundreds of billions of dollars more than AIG is now acknowledging. [my emphasis]
Masaccio pointed me to these two passages in AIG’s 10K, which sound like they may describe what Gober is talking about:
Various AIG profit centers, including DBG, AIU, AIG Reinsurance Advisors, Inc. and AIG Risk Finance, as well as certain Foreign Life subsidiaries, use AIRCO as a reinsurer for certain of their businesses, and AIRCO also receives premiums from offshore captives of AIG clients. In accordance with permitted accounting practices in Bermuda, AIRCO discounts reserves attributable to certain classes of business assumed from other AIG subsidiaries. (10)
I’m with Jane.
I do not think that anyone understands that some Rube Goldberg model, where we pay out a billion in bonuses, and then try to get the money back in taxes, is going to be a winner. But that appears to be what the administration wants, because both Nancy Pelosi and Barney Frank are saying the same thing. Then again, we’re talking about a bunch that thought this wouldn’t be a big problem in the first place, at least not one they couldn’t solve with faux "outrage" and blaming Chris Dodd.
I’m fairly confident they’ll have a chance to rethink this in the near future — somewhere around the time Tim Geithner’s "I knew nothing" story crumbles. The only question is how much public rage they’ll have to suck up before they face that reality. [my emphasis]
The Administration is shortly going to be dealing with the uncomfortable job of admitting Tim Geithner knew a lot more about bonuses a lot earlier than he has let on.
And while news outlets like Time are chasing down precisely when Geithner learned the details of AIGFP bonuses, I’m more interested in an earlier round.
As Elijah Cummings described in the waning moments of yesterday’s hearing, Edward Liddy approved a round of retention payments back in September.
On September 18, 2008 AIG’s compensation committee of the Board of Directors approved retention payments for 168 employees.
Cummings’ point is important, because it shows that, however distasteful Liddy may find paying off the banksters who broke the world economy, he’s willing to pay retention bonuses himself, even at a time when AIG was engorging itself on the federal teat.
But the retention contracts negotiated in September also put them squarely in the time when Tim Geithner was intimately involved in bailing AIG out. We learned yesterday that he recused himself from matters pertaining to AIG once he was picked to be Treasury Secretary (that nomination was announced on November 24). But back on September 18, when this round of bonuses was approved, Obama hadn’t even won the election yet, much less picked Geithner to be Treasury Secretary. Back on September 18, Geithner was in charge of the well-staffed (his current excuse–that he’s not staffed up yet, doesn’t work here) NY Fed, and in charge of negotiating this bailout. Read more →
For earlier liveblog posts:
Royce: Any discussion with members of the Senate to guarantee payment of bonuses?
Liddy: We have a strict prohibition against lobbying.
Royce: Could you check?
Royce: Discussions with members of the Administration?
Liddy: Geithner. First discussion would have been about a week ago. One on a Tuesday and one on a Friday. When I said administration, I did not include Federal Reserve.
Royce: Please send any talking points. The issue to us is that Senator Snowe was concerned about this provision. That measure applied these restrictions retroactively.
[Once again, Royce refuses to chase this down. Liddy has just said he was talking to the Fed, but Royce still wants to be able to claim that Dodd was the one responsible, so he backs off any questioning about the Fed.]
Scott: We are in effect at war. We need to hurry up and get this bonus issue off the table.
Posey: We wouldn’t care about the bonuses if it weren’t for the bailout money. A big bonus for these people is that they’re not in jail, and that they still have jobs. I can’t imagine that the demand is that great for someone who can screw up an entire company. Have you seen any signs of what someone might normally consider criminal activity.
Liddy: Nothing has come to light that I am aware of. It really is easy to paint with one brush. There are people who worked on one piece called CDS. Another regulatory capital. Derivitives book. For the most part those are separate people. Those are the ones that brought our company to our knees. In the derivitives book those are the ones we’re asking to please wind this down. Those are the ones that got the bonuses.
Posey: Is there an obligation to report unethical behavior? To whom?
Liddy: Absolutely.
Liddy: What we have at AIG is too much appetite for risk, too much appetite for business outside our core competence.
Posey: 73 people got bonuses that exceed 1 million, 11 are no longer with the company.
Maloney: Submit questions in writing. On bonuses, you mentioned a number of people said they’d give back bonuses. On the floor tomorrow will be a bonus that will tax the bonuses. How many said they’d give back the money. I requested for many months now for a list of the counterparties. Read more →
When Barney Frank asked AIG CEO Edward Liddy to send him a list of the people who got bonuses, Liddy said he’d only do so if Frank could promise they’d remain secret. He read from a threat letter that disgustingly threatened the children of AIG employees.
I agree with Barney Frank: those threats are disgusting and inappropriate. Those who send those threats should be turned over to law enforcement.
That said, the white paper AIG submitted to explain why AIGFP employees should receive their bonuses was, itself, a massive threat: pay these bonuses or AIGFP employees will trigger a default event that will bankrupt AIG and cause American taxpayers to lose billions–if not crash the entire financial market.
No one should be physically threatening AIGFP’s derivatives traders–at least not with anything short of legal investigation and, if appropriate, indictment.
But at the same time, neither should we tolerate threats issued on behalf of traders holding a gun to our economy.
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 →
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 →