AIG Bonuses: Legalized Theft Has Found Its New Champion
Companies / Credit Crisis Bailouts Mar 17, 2009 - 03:35 AM GMTBy: Oxbury_Research
Whatever happened to being paid for performance and rewarding competence? Have corporations and the present day slime that runs them become so corrupt that all hope for some kind of decency and moral leadership has become lost?
You see, there's something to be said about recessions, or a more severe recession in this case. Anything bad that can happen -- will happen. When the economy hums along, most people gain from the “rising tide that lifts all boats” theory, or at least they are able to keep their heads above water long enough to not feel compelled to say a peep about all the injustices around them.
When you think about it, much of the America public probably feels like mice trapped in a maze, worried about where they will find the next piece of cheese. And when they see someone slide through the backdoor and take what doesn't belong to them just because they can, it triggers survival instincts that begin with finger pointing and a call to arms to get our government to take regulatory action.
And so we begin today's article discussing bonuses.
What Happened to My Bonus?
In the past I used to think of someone as earning a bonus for being a diligent worker. Perhaps I was just brainwashed by the image of Chevy Chase, playing the role of Clark Wilhelm Griswold in the movie National Lampoon's Christmas Vacation. If you've seen this film, you'd know that Clark is an honest family man who eagerly awaits his Christmas bonus so that we can pay for a swimming pool. The problem is that he already coughed up a $7,500 check on the gift that his bank account doesn't have the funds to cover. In the end, Frank, who is Clark's boss, gets dragged to the Griswold home to suddenly discover the error of his ways and decides that he will hand out bonuses this year with a 20% increase on top of what was paid out the year before.
Ahh, you just have to love those perfect movie endings.
But unfortunately, that's not reality. Ironically, there are many similarities here between the story of Clark Griswold and the American public. In general, both have lived well beyond their means. And when you live paycheck to paycheck, or bonus in this case, there is a downward spiral that soon begins to materialize. Although I do have my pet peeves with today's overextended and misguided consumer, the purpose of this article is to pull back a layer or two on what is happening on the other side of the bonus fence.
Our lovely friends over at AIG have once again failed to avoid recklessness and seem very competent with regards to their ability to exploit the legalized theft corporate loopholes. In recent news, the company shelled out $165 million in executive bonuses during 2008. And this was all during the same period of time when the firm almost went belly up, dragging the rest of the industry into the abyss with it.
AIG Sets Record for Largest Corporate Loss in History
The New York Times just came out with a piece indicating that AIG is paying out bonuses out to executives who are responsible for sending this company on the current kamikaze course, destroying over $100 billion in shareholder valuation. These are the people who sold an incredible pile of derivatives that AIG couldn't support financially. Instead, it's the taxpayer that's being asked once again to foot the bill. They are the ones who will pay the price for a company willing to gamble its future on more than a few bad bets. Just to put this in perspective, AIG reported this month that it had lost $61.7 billion in the fourth quarter of 2008. That's the largest corporate loss in history.
I feel like I'm watching the same National Lampoon's movie play all over again – like a bad dream. And yet the movie continues.
Sources have verified that the company would have folded up shop had the government not stepped in with $170 billion in bailout relief to save the sinking ship. And now we find ourselves in a situation where such entities have become supposedly too big to fail? I'm all for letting bad business fail. Afterall, they deserve too. The problem is that such collapses would almost certainly trigger a domino effect of failed banking giants that would surely have the words “Great Depression” rolling off the tongues of every Joe and Jane in the neighborhood. That's what you call being pinned between a rock a hard place. Either way, people suffer.
But are we eventually setting ourselves up for an even larger financial calamity in the future by avoiding the bitter pill today? Future generations are almost certainly guaranteed more hardship. Chances are we will not wake up until something catastrophic happens to force a change in our habits. No longer can we afford to lie to ourselves, not save and live beyond what the market equilibrium dictates, because in the end, everything reverts back to the mean.
What really gets under the skin is the fact that AIG is legally obligated to pay out these bonuses. There were contractual deals made before all this madness decided to poke its ugly head above the surface. But we can't just go in and violate these contracts. It is just as important to think of the consequences that such actions would have on our system of law. But we can make sure that all future contractual activity is thoroughly reviewed and governed with a careful eye.
I realize that this $165 million in bonuses is relatively small in comparison to say the $3.6 billion handed out over at Merrill Lynch, but the amount of harm done to the industry certainly justifies the outrage. In fact, leaders of the White House economic team and even key Republicans have joined the chorus in denouncing payments made to executives inside the insurance giant. To our knowledge, AIG has agreed to the requests made by the Obama administration to pull the reins on future payments. And so we wait and see what happens next.
Stanley Barnes
Analyst, Oxbury Research
Disclosure: no positions
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
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