Saturday, March 28, 2009

Two sides to AIG bonuses?

Jake DeSantis was, until recently, an executive vice president of the American International Group’s financial products unit. His resignation letter was published in the New York Times (genuflection optional) on March 24. (The link embedded in the preceding sentence will take you to the Op-Ed posting; this copy of Mr. DeSantis' resignation letter is on the Times' DealBook blog. I don't know which link will last longer.)

This Associated Press article, carried on Boston, says that DeSantis received $742,000, after the first round of tax withholding (that is, without taking into account a possible 90% tax now being bandied about in Congress) of the now infamous $165,000,000 in bonus money distributed to AIG executives.

An excerpt from the DeSantis letter, addressed to AIG Chairman Edward M. Liddy:
The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.
Here, Mr. DeSantis makes a valid point: Not all units of AIG were a financial disaster. Some were making money right along. I can't independently confirm, of course, that Mr. DeSantis was in one of these units -- but I know -- and even congresspeople should have known -- that AIG in its entirety was not a financial black hole.

An additional excerpt:
I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.
Ooops. Although Congress, at the behest of Sen. Dodd (who says, in turn, that he was acting at the behest of the Treasury Secretary, Mr. Geithner) had specifically authorized these payments, given the firestorm stirred up by disclosure of these "bonuses" in the press, Mr. Liddy had to know that the House Committee was going to land on him with a full body slam.

And, if Mr. DeSantis is to be believed, at least in his case, the "bonus" was no bonus at all; it was really his salary. "Like you," he wrote in his resignation letter to Mr. Liddy, "I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid." Well, he agreed out of a sense of duty and with an expectation that his contract would be honored.

Where DeSantis falters is when argues that he no more should be cheated out of his payment "any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house." Actually, if his account is accurate, the electrician burned down the house before DeSantis was asked to fix the pipes.

But it is a small point. It was a particular unit of AIG that dragged the giant down. The public has been unable to distinguish between the persons responsible and AIG as a whole. Sensationalist press accounts about multi-million dollar executive bonuses and hyperventilating congresspersons have not helped sharpen the distinctions in the public consciousness.

Responsible leaders here would promise to thoroughly investigate why we've come to this pretty pass and to prosecute any criminal violations uncovered to the fullest extent of the law. Unfortunately, according to Roger Simon, when Jay Leno asked President Obama if someone shouldn't be going to jail over getting us in this mess, he said, "Most of the stuff that got us into trouble was perfectly legal."

The President's statement may be premature -- because the investigation sure doesn't look to have begun yet; we're still in the hand-wringing stage. It seems to me that there are quite a number of existing bank fraud and security statutes and regulations that may have been violated in the run up to the financial collapse. But if the President is right, the as-yet-unstarted investigation must determine why "the stuff that got us into trouble" was legal... and whether the laws need revision.

Don't say 'yes' automatically. There is one Higher Law the applies here and everywhere when laws are tinkered with for purposes of reform or otherwise.

And, no, I'm not injecting religion into this already contentious discussion. I'm talking about the Law of Unintended Consequences. I must post separately about this Higher Law soon.

Meanwhile, mention must be made of two other not entirely unrelated stories: After all, phony mortgages were at the root of the assets were being sold and hedged and whatever by AIG and others.

In this March 27 Chicago Tribune story, we learn about a club owner, Darrell Rodgers, who admitted Wednesday to "wire fraud and engaging in a monetary transaction in criminally derived property" in bilking area banks out of at least a million dollars in loans on 28 Chicago-area homes.

On the very day Mr. Rodgers entered his guilty plea, the U.S. Attorney's Office in Chicago announced the indictments of two dozen people in a phony mortgage scam. In "Operation Madhouse," as it was called, cooperating witnesses and FBI agents posed as persons willing to enter into phony mortgage transactions. They allegedly found all sorts of folks willing to help them out.

So, for those ready to grab pitchforks and torches and storm AIG, pardon me if I hold back awhile. I am certain not everyone there should be tainted by the credit default swap debacle. I'd like to see the criminal investigations keep coming... and climb the food chain to see who is really responsible for this mess. My pitchfork will be ready then.


landgirl said...

Thanks, Cur, once again for politics in the middle of the road. This credit crunch and the heroes and villains is a much more complex issue than has been explored. It is too easy to go for the quick answers which inevitably lead to scapegoating.

Shelby said...

"I'd like to see the criminal investigations keep coming... and climb the food chain to see who is really responsible for this mess. My pitchfork will be ready then."


In the same vein, but different "scandal" - I'm waiting to see if Mr. Stanford and Mr. Davis will ever be held responsible for their bank mess that is still allegedly a fraudulent mess.

So far, only the lone young woman underling has been 'ruined'. I say ruined because I have no other appropriate word really to express my extreme frustration with how this entanglement is winding up all around her and no one else.

It is personal tho, because she is a dear friend of the family. I am troubled that day after day she is held accountable for the alleged crimes of two very powerful owners of the company she worked for - while the two very powerful owners (one of which was also a friend of the family) plead the fifth and hide in their houses helping no one.

Jean-Luc Picard said...

Bankers and bonus earners are not exactly flavour of the month, are they?