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2003 Lawsuit Suggests AIG Wasn't Always So Careful To Honor Bonus Deals
Since the AIG bonus brouhaha broke over the weekend, the hobbled insurance giant has essentially been claiming it had to make the payments because not doing so could have created a "defalt event," potentially exposing taxpayers to losses of hundreds of billions down the road.
That may or may not be a legitimate argument (most experts seem to be saying "not"). But it's worth noting that just a few short years ago, there was a case in which AIG wasn't quite so fastidious about honoring bonus agreements with its employees.
Earlier today, we highlighted some excerpts from a 2004 deposition given by Joseph Cassano, who was then the head of AIG's financial products unit -- the division whose massive losses on credit default swaps would later bring the company to its knees.
But the story of the underlying case, as summarized at the time by a trade publication, is just as revealing as Cassano's testimony.
AIG was being sued for breach of contract by a former employee, Rob Feilbogen. Feilbogen claimed that when the unit he worked for, AIG Trading, was put under the control of Cassano's AIG Financial Products, he was informed in writing by an AIGFP executive that the company's previous guarantee to pay him a bonus of $1.3 million would no longer be operative. Feilbogen said he was told he would still be eligible for a bonus, but the $1.3 million figure would not be guaranteed.
In a letter to Cassano, Feilbogen insisted on receiving his $1.3 million bonus. In response, Cassano played hardball, telling Feilbogen he could agree to the new deal, or resign. Feilbogen continued to resist, and was soon informed by an AIGFP lawyer that his employment had been terminated "as a result of his decision to resign."
The lawsuit was eventually settled out of court. But the case suggests that whatever bonus agreement Feilbogen had, or claimed he had, with AIG, Cassano and his colleagues weren't inclined to treat it with much respect.
Of course, in all likelihood, there are legal differences between Feilbogen's bonus agreement, and the ones that AIG is now claiming it has no choice but to honor. It may very well be that AIG is legally bound more tightly to honor these more recent deals, or that it could expose itself to greater losses by not doing so.
Still, the Feilbogen saga offers, at the very least an ironic counterpoint to the claims AIG is making today, and a reminder that the firm hasn't always seen pre-existing bonus agreements as sacrosanct.
Josh
Zachary
That is so ... dare I say .... rich!
March 17, 2009 6:51 PM | Reply | Permalink
Its unclear from this article whether the Feilbogen promise to pay a bonus was in writing or not and, if it were, how the language differs from the language in the new bonus contracts. I would like to see one of these new contracts to determine how they "guaranteed" a bonus since, generally, bonuses are discretionary.
March 17, 2009 7:16 PM | Reply | Permalink
Amen!
March 17, 2009 9:54 PM | Reply | Permalink
In the gambling industry....uh, I mean, in the Financial Services industry, it seems that no one earns a full salary. Instead, they get much, if not most of their salary in the form of a lump sum payment, called a "bonus". I assume this is done to bilk the IRS in some way, but it may be just to make it easier for the employees to deposit their loot in a Bahamian bank account. One thing you can take to the bank, speaking of banks, is that all of these "bonuses" are another scam by that industry.
March 17, 2009 9:31 PM | Reply | Permalink
'Banking' is looking more like the usury, loan sharking, fraud and extortion industry hoppy.
March 17, 2009 9:55 PM | Reply | Permalink
This is interesting: it is not clear that it is relevant. It seems that AIG as well as many other powerful financial companies were engaged in very sketchy business schemes: a full investigation is needed.
What we are seeing now, however, is not the main event: the building has already burned down.
Ok-AIG in the good old days that were actually the bad old days threatened to fire employees over bonuses, so is this a model to follow? If it is, which employees should be dimissed? Do the various politiicans elbowing each other to get in front of the microphone have anyway of knowing who is really necessary to unravel the toxic ball of string with the least further damage?
March 17, 2009 10:05 PM | Reply | Permalink
The bonus argument is only a diversion for a bigger theft.
What a surprise to see Goldman Sachs as the largest single $ recipient from the aig bailout “taxpayer benefit program for the already ultra wealthy”. gee, the chairman of Goldman sitting on the committee to save aig, who could have seen that coming?
An educated guess would surmise that the payment per recipient amounts recently divulged is small potatoes related to the real reason aig was left alive.
Could it be that some firms (gosh, i wonder who?) also wrote LARGE dollar amounts of credit default derivatives on aig paper? enough to sink these firms writing the credit default derivatives should aig have been allowed to file bankruptcy. might we surmise if aig were allowed to fail during the duration of coverage of these credit default derivatives, one or two very prominent firms would have gone bye bye? gosh, I wonder what major investment bank (oops there are no investment banks anymore, they are all banks now) had a ton of credit default derivatives on aig related paper?
Wouldn’t it be a surprise if the cost of paying off those credit default derivatives, on a default by aig, was of a $ size MANY magnitude larger then the funds so far payed out to aig winning bet counter-parties. as soon as those credit default derivatives time limits expire, so will the necessity of keeping aig alive.
Might this be the real reason the taxpayers have been forced to shovel well over $180 billion into aig? so the parties who wrote credit default insurance on aig do not have to pay up? The old magicians trick, mis-direction. while everyone focuses on the small potatoes (what an ironic use of the term but probably correct in relevance in this case) of who got paid out the obscene $75 billion or so for winning bets, they fail to look for the likely real, and much large $, reason aig was kept alive at taxpayer expense:
The question the public should be asking is what favored firm would have been on the hook for hundreds of billions in credit default derivatives if aig had filed for bankruptcy last year (gee, could it be someone also on the recently released list of $’s received from aig?). Also, regarding the term “credit default derivative” don’t get hung up on the exact wording. it may not be called “credit default derivative” but you get the idea. nothing like being able to answer a direct congressional inquiry in the negative, because the terminology is not a perfect match for the question asked. Time reveals all. Nothing like taxpayer charity for the already ultra wealthy.
Luckily the above scenario could not be the case because the U.S. markets are self regulating and free of corruption and self dealing. i know this because Alan Greenspan and others have stated this, so it must be true.
March 17, 2009 10:47 PM | Reply | Permalink
The Real AIG Scandal By Eliot Spitzer
http://www.slate.com/id/2213942/
It's not the bonuses. It's that AIG's counterparties are getting paid back in full.
.....But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?
The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.
So here are several questions that should be answered, in public, under oath, to clear the air:
What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?
Was it already known who the counterparties were and what the exposure was for each of the counterparties?
What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?
What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.
Why weren't the counterparties immediately and fully disclosed?
Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.....Con't
March 17, 2009 11:33 PM | Reply | Permalink
A question on these "bonuses" : are they also lump sum "bonuses" rather than salaries because somehow the bonus lump has passed through some tortuous process that has turned it into a capital gain rather than regular income? I do recall a brouhaha about the inordinate sums "earned" by hedge fund "managers" when it seemed to be a profitable line of work somehow being treated as though it were their capital. And don't I remember that Chuck Schumer fought very hard to retain whatever flim-flam rules permitted this?
March 17, 2009 11:33 PM | Reply | Permalink
Based on past results what AIG really needs to do is to find some way to pay high dollar for these folks to go work for the competition ...
March 18, 2009 9:57 AM | Reply | Permalink
Lol!
March 18, 2009 10:21 AM | Reply | Permalink
Close but no cigar
If you actually READ the summary of the facts of the case you will clearly see that it is not all Zachary suggests it is.
The Company offered discretionary bonus language modification to an existing contract with guaranteed bonuses. The employee in question was offered a new position with a new bonus provision...take it or leave it. He left. Was that a constructive termination appears to have been the issue, NOT the bonus provision
March 18, 2009 11:17 AM | Reply | Permalink
The bonus culture on Wall St. is a leftover from the days when the Investment Banks were Partnerships. The partners paid themselves enough to get by on as salary during the year then the rest of the profits were distributed after the books were closed at year end. The reason why this sort of disaster never happened while they were partnerships was that the partners were playing with their own money, that ended when the investment banks went public.
March 18, 2009 1:08 PM | Reply | Permalink