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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






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