Professor of Corporate Law, Corporate Finance and Securities Law, Yale Law School
Tuesday, March 17, 2009 1:00 PM
Politicians and the public spent yesterday demanding that AIG rescind payouts that they said rewarded recklessness and greed at a company being bailed out with $170 billion in taxpayer funds. But company officials contend that the uproar is scaring away the very employees who understand AIG Financial Products' complex trades and who are trying to dismantle the division before it further endangers the world's economy.
President Obama yesterday vowed to "pursue every legal avenue to block these bonuses." But that pledge might have come too late. About $165 million in retention payments started to go out Friday to employees at Financial Products, after numerous discussions with the Treasury Department and the Federal Reserve.
Jonathan Macey, professor of Corporate Law, Finance and Securities Law at Yale Law School, was online Tuesday, March 17, at 1 p.m. ET to discuss the dilemma of the government caught between public outrage and the need to keep insurance giant AIG going so the company can restructure and the government can recoup some of its money.
A transcript follows.
Jonathan Macey: Hi, this is Jonathan Macey. I'm looking forward to discussing the AIG situation with you and to seeing your questions.
Rockville, Md.: Dear Mr. Macey, I may well be a minority of one, but I feel strongly that outrage and venomous pronouncements issuing from the mouths and keyboards of our media and political leadership may not be healthy and may have unforeseeable negative consequences. Yes, I am against the bonus/retention payments to AIG executives and managers. Alas, I am also against a laser-like focus on one rather small aspect of a tenuous and fragile economic situation that requires logic rather than emotion. No less importantly, the incivility of the discourse is discouraging and saddening: yesterday a United States SENATOR suggested that the executives of AIG might do well to resign or commit suicide. Perhaps he was being facetious, but suggesting that violent death -- whether inflicted by self or another -- is an appropriate end for these people suggests that something is deeply amiss here -- and not ONLY with the economic system. Thank you for your thoughts.
washingtonpost.com: Senator suggests AIG execs should kill themselves (AP, March 17)
Jonathan Macey: You are absolutely right that it is important to remain civil. Of course this is not easy to do, particularly for people who have lost their jobs and who know that, if they are able to find another job, 1/2 of their income will be paid in taxes to be used for the bailout/bonus program. This is pretty annoying, in my view. I have noticed a certain U.S.Senator (Dodd) from Connecticut trying to deflect attention from his own Countrywide-subsidized mortgage problem by excoriating the folks at AIG. This is even more annoying to me!!!
Haymarket, Va.: Jon: There has been a lot of discussion about the sacredness of contracts and that's why the bonus had to be paid to AIG people. At the time AIG took $70 billion of taxpayer money they were in effect bankrupt. If they had gone to bankruptcy court those contracts would have been made null and void. Would judges and/or courts agree with that logic?
Jonathan Macey: Probably... depending on the timing of the payments they might well have been void in bankruptcy. I do believe that the government should have forced AIG into bankruptcy and made the contract payments contingent on all of the bonuses being voided by the bankruptcy judge. I don't understand why the government didn't pursue this option. The government could have protected AIG's counterparties as well or better than they are doing now by offering so-called "debtor-in-possession" financing.
Detroit/D.C.: As Visteon and every other auto supplier circles the drain, autoworkers are throwing themselves under the bus for the sake of the country, AIG gets bonuses because W and Paulson wanted TARP to have no-strings, and now half our money went to European banks.
Happy St. Paddy's day.
My real criticism is that Obama is simply following the outrage, not leading (17 Treasury positions unfilled)...this federal employee (and Obama supporter) and former congressional staffer has plenty of ideas, hire me over to Treasury...I'd be glad to help.
Jonathan Macey: You have a point. Strangely, this is the one and only policy area (unlike stem cell research, Guantanamo, taxes, Iraq, etc. etc) in which President Obama expresses the view that we need continuity. I frankly don't understand this. Treasury Secretary Geithner is pursuing the same failed policies as his Bush administration predecessors, and with the same degree of success (approximately zero).
Raleigh, N.C.: Thanks for being here.
Well, when faced with the dilemma of what to do with a company that is too big to fail, we know what we, as a nation, will do. We'll bail it out. Going forward, what form might laws take that would shrink the dinosaurs? I'd rather the response to the concept of "too big to fail" be that if it's too big to fail, it's too big to exist.
Jonathan Macey: Wow, I'm impressed. I completely agree with your point and I think you put it very well. The problem we have at the moment is that none of our regulators noticed (or cared) that these institutions had become too big to fail. As a consequence many large financial institutions played "heads we win big, tails the American public loses big" without anybody in authority noticing. Your point is that we should not permit this to happen again. You are absolutely right in my view. This would be a very sensible and effective use of the antitrust laws.
Bitburg, Germany: I've seen an article that said that Senate Democrats would seek to craft a narrowly focused tax to recoup 98 percent of these bonuses. Is that really possible?
Jonathan Macey: Probably not, but the U.S. Senator proposing this (Chris Dodd of Connecticut) wants to deflect attention from his own corruption issues, which involved getting subsidized home loans from Countrywide.
Washington, D.C.: There are so many ways to compensate employees. I understand that to attract and retain talented employees a firm needs an attractive compensation package. Currently, society is questioning the wisdom of bonuses in their current form. Why is AIG insisting on bonuses when there are so many other options? It makes them seem like pretty untalented thinkers to me. How else could AIG structure employee compensation?
Jonathan Macey: You're right: there are a lot of ways to compensate employees. AIG's claim is that these are "retention bonuses" which means that they are bonuses being paid to these people for having agreed to stick around and not go to work for any other financial institution. It is interesting to ponder why so many institutions want to hire these folks!
New York: What I don't understand is why would AIG rather outrage the president and the entire country instead of upsetting a handful of overpaid underachievers?
So they'll sue AIG to reclaim their bonuses? OK, let them sue. I have a feeling public shame might prevent them from suing (everything becomes public in a law suit)
But even so, let them start ball rolling and we'll see how long a lawsuit takes. We'll see if a jury feels sorry for these ruiners of the economy.
Jonathan Macey: This would work for the bonuses that have yet to be paid; it wouldn't work for the money that is already out the door.
Washington, D.C. -- Work for a living: Publish their names. If these irreplaceable geniuses want to proudly defend bonuses that surpass many years' income by the average American family, they will not be afraid of the public's knowing their names and faces. There's a lot of hoopla about many other lottery winners; why not these?
Jonathan Macey: The problem is that lottery winners agree when they buy their lottery tickets that if they win their names will be published. I don't think that AIG has even disclosed the bonus recipients' names to the government. NY Attorney General Andrew Cuomo is trying to get the names of the people at Bank of America/Merrill who were paid big bonuses prior to the firms' merger and is being stone-walled.
Chicago, Ill.: I will admit to not knowing much about AIG's contracts or their obligations. I am trying to learn more. But what I'd like to see is one (or more!) of these individuals who are supposed to receive these bonuses come out publicly and say, "Given the state of our economy and our company, taking this bonus is morally wrong. I am giving it back to AIG and ask my fellow bonus-receivers to do the same." That, in my opinion, would go a long way in tempering some of the public outrage.
Jonathan Macey: You're right; the fact that not one of the thousands of bonus recipients has even agreed to give back a little shows the big gap between the way they view the world and the way most of the rest of us see it!
Annandale, Va.: I think AIG is in big trouble. It should be broken up into smaller companies so that none are ever too big to fail.
We don't need any MaBells in the finance and insurance industries.
Jonathan Macey: I think that any institution that is "too big to fail" is too big to exist: that's what the antitrust laws are for.. to break up companies that pose a danger to the overall economy. So I agree with you about AIG.. I just wouldn't stop there!
Too big to fail?: It should be noted that under Greenspan, the Fed was encouraging bank holding companies to become as large as legally possible under the Bank Holding Company Act and to acquire new financial services arms. The idea was that any economies of scale (which in my opinion, vanish well before you are as large as BoA) would accrue to depositors in the from of better interest rates and services.
I know, restrain your laughter. Even after it became apparent in the mid 1990s that this was a ridiculous joke, the Fed still plunged ahead. As we entered the new millennium, many should have been horrified to learn about how many banks and other financial institutions were in effect bigger than the Fed itself. Yikes!
And that leads me to my common sense definition -- if you are bigger than the supposed lender of last resort (on a good day, not now), then by definition you are too big. Period.
Jonathan Macey: Very good point. The reason that Alan Greenspan and others wanted U.S. financial institutions like B of A and Citigroup to grow through merger is because they wanted U.S. companies in finance to be big enough to compete with their non-U.S. rivals, especially in Germany and Japan. Nobody thought that maybe being huge was not the only way -- or even a good way -- to be competitive
New Haven, Conn.: Do we have any idea how much of that bonus $ went towards contractual agreements vs. those for lower paid employees who receive discretionary bonuses? It would be a shame to take away $ from the lower ladder while those at the top strutted away with the big $$$.
Jonathan Macey: Hi to my home town of New Haven! Of course we have no idea, but I think it is clear that the people at the top got very big money and the people at the bottom got little.
Vermont: I am missing the logic here... isn't the purpose of retention bonuses to retain workers in a competitive marketplace? Haven't thousands of financial workers been laid off recently? Working at AIG is better than competing with thousands of others for a diminishing supply of jobs. If AIG did not pay the bonuses, workers would likely stay anyway since they don't have other options.
Jonathan Macey: You raise a very important point.... think of it this way: AIG, like dozens of other financial institutions around the globe has billions in toxic assets. AIG is paying bonuses to people who are talented at selling these assets, that is at moving them off of AIG's balance sheet and onto somebody else's. The problem is that once AIG is off the hook (and has paid employees huge bonuses to get them off the hook), then the U.S. government will have to bail out the poor suckers who took the assets from AIG. Oddly nobody at Treasury seems to fathom this.
Arlington, Va.: Has there been any psychological research done on the people who are accepting these bonuses? I don't mean to insinuate that they are mentally unstable, but I'm curious as to their thought process as to why it's okay to accept this money, given the public outrage.
Separate question, could they simply give the money back? If legally AIG is required to pay them, wouldn't returning the bonus be a solution?
Jonathan Macey: Of course these people could give the money back. They don't want to because they think they deserve it. They live in a world very different than that of most folks and they tend to be surrounded by people with very similar compensation arrangements and very similar values.
Reston, Va.: I understand the need for bailouts to prevent otherwise healthy companies from being severely damaged. However why is there such hesitation with wiping out the stockholders in these situations? Many of these companies are not likely to recover to positive value in the near future.
Jonathan Macey: The failure to wipe-out shareholders is completely inexplicable... and inexcusable.
Maryland: These folks didn't ruin the economy! They are asking for bonuses related to prior work performed for which the terms outlined related to the bonus payment appear to have been met.
Jonathan Macey: your point assumes, erroneously in my view, that the underlying work for which these people were paid bonuses was beneficial. It may have been beneficial to AIG (in some, but not all or even most cases), but it definitely wasn't beneficial from a broader social perspective! Of course if AIG weren't getting taxpayer money the broader social perspective wouldn't matter, at least not so much!
Washington, D.C.: Why is it OK to demand contract concessions from auto workers unions as a condition of federal money, but it's not OK to demand the same of these guys?
Jonathan Macey: GREAT POINT!
Washington, D.C.: It seems that AIG could have let go all those employee, avoiding the bonuses and then offered the new contracts, perhaps higher base pay without the mega bonuses. You have to wonder how deep the market is for folks who wouldn't help their companies out in a time of crises? You'd be surprised how many companies let go hourly workers just before benefits vest, restructuring, and then when business picks up has a "new hiring round.
Jonathan Macey: The problem is that these debts, unlike wages to hourly workers for work not performed, had already accrued, so AIG would still owe these executives the money even if it fired them.
Bitburg, Germany: It seems to me that the biggest problem with these bonuses is that they're not tied to corporate performance, and they're made possible only because of bailout funds.
It seems like a big part of the problem is that financial sector salaries, like those of CEOs, have become disconnected from the rest of the economy. Is AIG really so out of touch that they don't understand how this appears from the outside?
Jonathan Macey: Yes, they do appear that out of touch. These problem is that much financial performance is compensated on the basis of profits that are booked today but not realized for years.. by the time it turns out that the profits will never be realized (and are actually losses) the bonuses have been paid and spent by the executives.
Washington, D.C.: What do you think of the coverage of this story by the media? And are there obvious questions journalists are missing?
Jonathan Macey: To me the most obvious question that the media is missing is this: "what services precisely were these executives performing that made AIG want to pay them so much to retain them?" Everybody assumes that the payments reflect some sort of cronyism.. this is not true. The payments are made to people who are talented at doing certain very sophisticated, complicated tasks that are highly undesirable from a societal point of view.
Glenmont, Md.:: In your opinion, how much did the repeal of Glass Steagall have to do with this crisis?
Jonathan Macey: Glass-Steagall was repealed only partially; and plenty of companies, like AIG, that were not covered by Glass-Steagall, failed big.. so I don't think that Glass Steagall repeal really is to blame.
Washington, D.C.: With the way the government is verbally attacking the banks and the general public outcry, it makes me wonder about the general mindset of the individuals who are collecting their bonuses; particularly, are they cognizant as to why people are so infuriated about these payouts? Do AIG employees (and others collecting bonuses) feel that they are simply entitled to the money that was promised to them before the whole bailout occurred, hence they plan on keeping it?
Jonathan Macey: In a word, "yes." these folks do believe that they are entitled to the money. Apparently they seem to be intent on keeping it. I haven't heard of one individual interested in "sharing" with taxpayers!
Madison, Wis.: Mr. Macey, What is the reason that Obama should be the target of everyone's ire? A story in the Post claims that his stock is falling rapidly because he wasn't able to stop the bonuses from going out. Do you think many people out there are putting Obama and the AIG execs in the same bin? Thanks.
Jonathan Macey: I think that people may be miffed at President Obama because he is following the same strategies towards the economy and Wall Street as did President Bush. This is odd because the contrast is so stark with respect to President Obama's policies in other areas. In other areas he is steering a completely different course from President Bush. In this area, he is in lockstep with Pres. Bush. I think that this is a mistake on Pres. Obama's part, a big mistake
Seattle, Zero Newspaper Town: Why can't they just imprison the AIG CEO and CFO who approved the bonus payments in GITMO until they agree to return the money they stole from the taxpayers?
Jonathan Macey: I think we're trying to reduce occupancy levels at GITMO!
New York, N.Y.: Haven't TARP funds been used by large financial institutions to acquire smaller failing financial institutions? As we complain about AIG being "too big to fail" hasn't the government/treasury encouraged others to do likewise?
Jonathan Macey: Yes, we seem to be creating new institutions that are too big to fail as fast as the older ones are failing! I think that this is a very flawed, short-term policy that President Obama should reconsider (hopefully with a new Treasury Secretary!!).
Princeton, N.J.: On Credit Default Swaps, I thought that most of these were "insurance" on instruments that the policy holder did not have a strong material interest in. The Insurance Commissioner of New York says 80 percent were of this type. It's like me taking a fire insurance policy out on your house. If this is the case, if AIG defaulted on the policy, it would not strongly affect me. It is hard to see why taxpayers dollars should be used to indemnify me. I took two gambles. Your house would burn down, and AIG would pay. If your house did burn down, you should get paid, but as for me, I just lost one of my gamble (on AIG), and I deserve nothing. Furthermore, since I am not really suffering any loss, I do not see why this would be so bad for the economy.
Jonathan Macey: Very interesting point.. I don't think that insurance contracts for what are known as uninsurable interests (such as the ones you identify) should be considered valid contracts. The government obviously has a different view. Both the Bush and the Obama administrations are of the view that all of these dreadful agreements must be honored in order to maintain "confidence in the financial system." There are many reasons why I disagree with this view, not the least of which is that there is no confidence in the financial system left now anyway!
Someplace, : Why doesn't the president simply announce that the IRS will audit the last three years and the next four years of tax returns of any AIG employee who accepts a bonus? I'll bet there is a stampede to return the bonuses.
Jonathan Macey: I think that Richard Nixon tried something along these lines without great success.
Alexandria, Va.: If I had a contract to get a bonus, I certainly wouldn't give a dime back. That is part of their salary. Why don't you ask employees at all the companies who accepted government money to give back their paychecks? That is the nature of the financial jobs in this country. I think it's getting dangerous to start a lynch mob after one group of employees.
Jonathan Macey: I agree that lynch mobs are bad. There is a difference, though between reasonable, incentive based compensation on the one hand and outrageous bonus payments on the other. Of course it is hard to draw the line between these two things, but at the extremes I think that it is possible to draw a distinction.
Detroit, Mich.: What about outrage over the Detroit school system? After dumping hundreds of millions dollars it is still a failure, why not ask the money back from them?
Jonathan Macey: Some though not all failed school systems in the U.S. do share something in common with AIG... At AIG U.S. taxpayers are paying executives who are not performing, and, in many public schools, taxpayers similarly are paying teachers who are not performing
St. Louis, Mo.: I'm a big Obama supporter, but I can't understand why we have to look to the Atty Gen of New York, rather than the Justice Department or Treasury Department to do something about the AIG atrocities. Obama and Treasury are being made to look like fools. Have the bright lawyers there never heard of TROs based on alleged fraud, or corporate malpractice actions. Also, how about a Special Prosecutor to really investigate the mess.
Jonathan Macey: I too am a big supporter of President Obama. Unfortunately his advisers on this particular issues are Wall Streeters who don't see things the way that you or I or the NY AG does. He's so right on so many issues, I hope he sees the light on this one before too long! I'm still hoping. The problem, in my view, is that he has only Wall Street insiders advising him on this. He needs somebody who thinks outside the box.
Jonathan Macey: Thank you all for your questions. I had fun and hope to do this again. Best, Jon Macey, Yale Law School, New Haven, Connecticut.
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