Giving bonuses to company executives of a bankrupt, government-rescued company, now that’s a story most news organizations dream about. After all, nothing plays better than outrage—especially when you can play the greedy fat-cat theme, too. So, on its surface, AIG’s handing over $3 million to executives would seem absolutely outrageous. With all due respect to our friend Paul Tharp, the veteran newsman over at the New York Post, we think he miffed the angle of his story yesterday. He should have looked under the obvious story line for mitigating circumstances.
The Post headline writer depicted the AIG’s CEO Edward Liddy’s paying bonuses to key AIG executives as a “bungle.” Tharp wrote in his lead, “Executives at government rescued AIG who are taking cash perks to remain in ther jobs—some as much as $3 million—are lucky even to be employed.” The list of executives hasn’t been disclosed yet, so we don’t know if any of the recipients are undeserving. But not every one—not even senior managers—at AIG is at fault. Certainly, we would agree that executives of the firm who had a hand in its disastrous credit default swap strategy should be fired (if they haven’t already resigned or been fired). Indeed, we all can agree that incompetent executives who nearly brought down the entire financial system should not be rewarded—public money or not. (AIG’s lifeline is now a record $150 billion.) And, with layoffs having begun at AIG, it would seem particularly galling to throw money at “fat-cat” nincompoops.
But, we’re going to argue that Liddy actually had the right idea in paying retention packages to key managers. Liddy may have had no choice. (Yes, and Ken Lewis probably had no choice but to pay Merrill’s top FAs to stay too. FAs didn’t cause the problem and, in a way, are victims of bad management, too. And since the 16,000-strong advisors represent 37 percent of Merrill’s revenue, Lewis could not take the chance that they would bolt—taking their clients and assets with them.)
The only AIG executive named in the story was Jay Wintrob, head of AIG's Retirement Services (which includes the company’s independent broker/dealers); according to the report, Wintrob will receive $3 million in a retention bonus. About 130 other key executives were scheduled to receive their retention packages this month, too, according to forms filed with the SEC. The original package consisted of “cash awards payable 60 percent in December 2008 and 40 percent in December 2009.” We’re told by a high-ranking source of ours at AIG that typically the retention bonus is worth three times an executive’s annual salary, paid in two or three installments. (This source also stressed that he wasn’t personally knowledgeable about Wintrob’s deal.) It’s not like the AIG execs are looting the company. Late last month, AIG said executives agreed to delay their payments for at least four months. And the new agreement would payout a portion of the money in April 2009 and the rest in April 2010. By the way, no bonuses will be paid to any executive in 2009; nor will they receive raises. In addition, Liddy is working for a $1 salary.
Our AIG executive told us that two-thirds of their compensation was paid in company stock. “We were wiped out,” he says. “And Jay runs a big, very profitable business.” The Post story “didn’t tell the whole story,” he argues. In short, Wintrob’s unit performed relatively well. In the third quarter, for example, the Life Insurance and Retirement Services segment's operating income (before net realized capital gains or losses) dropped 51.4 percent to $1.01 billion from $2.49 billion in the prior-year period. Okay, that sounds bad—but the unit still made money—lots! Like many of AIG’s other segments, the Retirement Services group is up for sale, so keeping strong management of strong business units strikes us as smart. And if the unit is sold before payments are due, then AIG won’t have to pay the awards, according to a Bloomberg report.
AIG’s brush with insolvency wasn’t caused by Wintrob, or other unit chiefs. The AIG Financial Products group was responsible—a unit that was staffed by as little as 32 (or so) people, our source tells us.
But the fat-cat bonus angle sure makes good copy—and excellent theater on Capitol Hill. The Post story quoted Rep. Elijah Cummings (D-Md) demanding that AIG reveal all the names of executives getting the money, and explain why the money is needed to keep them. "Taxpayers have a right to know why senior executives at AIG, who are frankly lucky to still have jobs, need to receive additional bonus payments," Cummings said in a letter to AIG.
Again, while some AIG units wait for buyers, it may be wise to keep them running with familiar faces. Cummings won’t have any of it. He’s already called for Liddy’s resignation.