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AIG Contracts a Brain Freeze

Posted by Larry Doyle on March 17, 2009 9:27 AM |

Given the public outrage over the millions in bonus payments at AIG, is there any doubt that there has been a massive failure to perform by all involved?

When AIG was on the verge of bankruptcy last September, I am willing to bet the topic of employment contracts was not the lead item on the agenda. In fairly short order, though, as AIG was moving ahead with its attempt to sell divisions and repay the government loan, I have to believe outstanding liabilities, such as employment contracts, became a topic of discussion.  

Let’s bring the main players at that point in the process back to the table. What does Hank Paulson have to say? How about Robert Willumstad, former AIG CEO? How about current AIG CEO, Edward Liddy?

Make no mistake, both the government and AIG executives could have imposed their will to renegotiate – if not outright dismiss – any outstanding contracts. How? When an entity such as the government takes over a company, a change of control occurs. That change of control does not unilaterally extinguish outstanding liabilities, but it certainly opens them for renegotiation. The fact that these contracts were not seriously renegotiated is a massive failure to perform on behalf of the government officials and AIG executives.

I have personal experience with renegotiating contracts. When I was at JP Morgan, the firm took massive hits to income from exposure to Enron and Worldcom. The business I managed had no involvement whatsoever in those exposures. That said, when it came time to pay our people at year end, the firm “strongly encouraged” everybody (whether on contract or not) to share in the firm’s underperformance. As a result, every single individual on contract took a haircut. 

Many people maintain that all contracts must be honored and paid in full in order to maintain continuity at AIG Financial Products, the division which took the risks and incurred billions in losses. If it even exists a year from now, AIG FP can very easily restaff given the enormous number of layoffs on Wall Street. Every single new hire could easily occur without a contractual obligation. The current work situation on Wall Street is a buyers’ market.   
Back to the matter at hand.  Are we to believe that the same scenario that occurred at JP Morgan in 2002 could not, or more importantly should not, have already occurred at AIG? It seems to me that everybody involved in managing AIG and the government’s ownership of this entity has had a massive brain freeze.  

Congressman Steny Hoyer (D-MD) commented this morning regarding individuals at AIG who received bonuses, “these people have no shame.” I would make the very same statement about the government officials and AIG executives who have failed to perform. 

Why am I not surprised?

LD

  • fiscalliberal

    Merideth Whitney was guest host on CNBC the last hour. She really had some good points like empower the small banks and others. Kind of a level head person with real solutions.

    I googled her and found out she marries a muscle bound wrestler – wonder what that is all about?

  • Larry Doyle

    I had also seen that and found it interesting as well.

    I think there is little doubt that her new enterprise will do quite well. She has a very solidgrasp of the big picture along with an understanding of the minutiae.

    As the landscape is resettled, I do think that community banks will and should gain market share.

  • thinkaboutthis

    Again, the lack of due diligence that legislators and the others have involving these scenarios is amazing. Since Turbo Tim was privy to all this before the new administration and now a big player perhaps he is the one that should be on the hot sea. Since Obama took office AIG has received more money and that would of been the time to do a thorough needs assessment with a plan and regulation.

    I think these legislators are short of due diligence and I do not understand when they pass things without thorough debate and reading it all why it is not called GROSS NEGLECT and Dereliction of DUTY. This includes the POTUS everytime he signs a bill and has not thoroughly read it.

    Lar, this is off subject — but I heard this morning that the IRS may consider giving back taxes to the Madoff ripped off folks. The theory being, if it was not really their money than why should they really pay taxes. Personally, I say, so sorry for your bad luck folks, but if we are going to go that route than I suggest we retrieve every single bit of property obtained by all those dollars spent by the victim along with everything gained property wise. In other words, this is so out of control. I do believe that if they sell Madoff’s material items and find money hidden under a rock to split that amongst the ripped off folks. But to get the IRS involved — how many nightmares are we to bear? This idea does not even make sense — how would they differentiate any monies used for profit in other arenas. Your thoughts?

    Also, thanks for the business question answer. It is a service oriented business. I am concerned about the taxes that may befall a start up in 2 years and wondering if it is high risk and they will put the little guy out of business before he even can have a chance to survive it all.

    • Larry Doyle

      Thinaboutthis…My pleasure on the business question.

      In regard to Madoff, my first impression is “all the kings horses and all the king’s men couldn’t put Humpty together again.”

      This AIG fiasco is a travesty of mythic proportions. Could our collective governmental and regualtory bodies be this bad? I guess they can.

  • anon

    LD,

    Check out the link to this proposition from Cramer? (I know, I know!) It is a very provocative idea and I have to say, quite appealing. Your thoughts would be very appreciated!

    http://www.bloggingstocks.com/2009/03/17/cramer-on-bloggingstocks-aigs-the-ultimate-gamblers-guide/

    • Larry Doyle

      Anon…I could not access this link. I tried a number of times with no luck.

  • anon

    Sorry about that, hopefully this one will work for you.

  • anon

  • Ben Simeone

    Larry,When I think of the AIG Execs,the yiddish word “schnorrer” pops up in my head.The Merriam-Webster Online Dictionary defines a schnorrer as “one who wheedles others into supplying his wants”

  • Larry Doyle

    Ben…the AIG saga is a story with so many angles as to literally defy credibility.

    AIG, under Hank Greenberg, developed business units that truly pushed the envelope and gained huge market share. The division with the bulk of the risk, AIG Financial Products, was so far over the line as far as their risk that it makes me believe that they had no appreciation for what risk was all about.

    With all due respect to quants in the crowd, the quants at AIG took down the company. Where was management to monitor risk?

    Thanks for commenting. Visit often!!






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