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Wrapped in the Flag of "Systemic Risk"

March 18, 2009, 2:58 pm

A couple of questions about AIG:

1.  Is there any real legal difference between the contractual commitment by AIG to pay bonuses to employees and their contractual commitment to pay off mortgage bond guarantees to companies like Goldman Sachs? **

2.  In a bankruptcy, how senior would contractual promises of deferred compensation to employees be?  Everyone comes after the government, of course, but would such claims be more or less senior to, say, commitments to pay counter-parties?

** before claiming one commitment was outrageous and unjustified, one needs to be clear which commitment he is referring to, since both commitments in retrospect seem crazy to me.  It is just that one party (ie Goldman Sachs), which has the added advantage of being represented by many of its former employees in the Treasury department, has convinced Congress and the Administration that not paying them carries systemic risk to the economy.

That seems to be the new key to government largess:  Carrying systemic risk.  It used to be one wanted to be poor or female or black to merit special consideration in the government spending sweepstakes.  But nowadays, in our post-racial society, the key is to be the one who can wrap himself in the flag of "systemic risk."  Here is AIG's entry into the "we have systemic risk, so give us taxpayer money" essay contest.

Tags: ,
Category: Economics, Government
  • http://herdgadfly.blogspot.com/ gadfly

    Employees get top priority in bankruptcy but only for the first $10K owed to each employee. Executory contracts are subject to evaluation by the trustee and, in AIG's circumstance, it is unlikely that these retention bonuses would have been honored. Likewise, in my opinion, neither would the counter-parties have received much restitution for the derivative instruments that they purchased . . . especially if the government had not interfered in the obvious bankruptcy situation.

  • Link

    Am I wearing an aluminum hat?

    I suspect that the AIG bonus story is part of a co-ordinated campaign by Obama & Co.:

    Step 1: Use the AIG bonus story as a distraction from their failings on fixing the banks and to fuel populist outrage that they hope to channel into support for their budget -- Obama & Co were fanning the flames of this story beginning on the weekend.

    Step 2: Have Barney Frank hold hearings. Saul Alinksy would be proud of the focus on exec comp at AIG -- a minor issue in the schme of a $150 billion bailout, but one that can fuel populist outrage. He'd also like the way the attacks were personalized.

    Step 3: The Service Employees International Union is planning nationwide protests today at major banking institutions, with the express intent of turning populist anger at Wall Street into legislative action in Washington.

    Step 4: Put Obama on Leno tonight. Look for this meme to develop: "The Republicans gave all this money to Wall Street, why not some for you." March on your representatives now to get the budget passed. Again, Alinksy smiles.

    Step 5: From WaPo a couple of days ago ... "Obama Enlists Campaign Army In Budget Fight": President Obama will kick off an all-out grass-roots effort today urging Congress to pass his $3.55 trillion budget, activating the extensive campaign apparatus he built during his successful 2008 candidacy for the first time since taking office. The campaign ... will rely heavily on the 13 million-strong e-mail list put together during the campaign ... Aides familiar with the plan said it is an unprecedented attempt to transfer the grass-roots energy built during the presidential campaign into an effort to sway Congress ... Several people closely involved in this campaign's planning made it clear that they believe this is the moment Democrats have been waiting for since Obama's election -- the deployment of the volunteer army that helped catapult a freshman senator to the presidency.

    This is running the Presidency as a community organizing exercise, with the immediate goal of getting an agenda-riddled budget passed.

    Am I crazy?

  • ExBanker

    To add onto Gadfly, the rest of the claim is a general unsecured claim, which would get paid out at pennies at best. There's actually an open question as to what seniority the gov't is going to get on the AIG "investment" if or when it gets formally wound down. The original bailout most likely violated a number of covenants that secured debtors let slide, which they likely will try to enforce in court, or at least posture as such. It's going to be long, it's going to be messy.

  • Mesa Econoguy

    It’s actually systemic risk.

    1) Government was fully aware of these bonuses long before they were to be paid out.

    2) If people are so pissed off about the bonii (?), how about we let AIG fail, declare bankruptcy, back the (potential) counterparties, and nobody gets bonuses? Oh, wait, we can’t let them fail.

    3) If AIG “derivatives traders” (whoever they are) are indeed to blame, how is it they managed to keep this secret given the already enormous extant regulations governing capital markets and capital requirements, not to mention trading?