Before The Market Goes To Shit

Wall St. weasels' change their performance bonuses into "retention bonuses." Kevin Drum explains:

Of course they got their comp locked down when they saw the storm ahead of them...

What happened at AIGFP is standard practice throughout corporate America. America's corporate titans like to talk endlessly about performance-based pay and how capitalism rewards risk, but in real life compensation packages are almost always constructed to avoid as much risk as possible. If you work in a growing industry, your bonus depends on raw growth rates. If you work in a declining industry, your bonus is linked to relative growth rates. If the market is up, your bonus is paid in stock. If it's not, suddenly deferred comp and increased pension contributions are the order of the day. Heads you win, tails you win.

We may not like it. Hell, we rarely even know it. But the public, we're always the ones stuck assuming the risk. We literally pay for their mistakes.

Mr. Drum points to Hilzoy's take on AIG's contracts:

I hope the Obama administration is looking very hard at this question. The introduction to the contract says that one of its aims is to "recognize the uncertainty that the unrealized market-valuation losses in AIG-FP's super-senior credit derivative and originally-rated AAA cash CDO portfolios have created for AIG-FP's employees and consultants."

That certainly suggests that AIG-FP was aware that there might be significant losses, as does the fact that they got their compensation locked down in a way that made it independent of their profits or losses. (Unless their bonus pool exceeded the amount guaranteed in the contract -- then they got to keep more!) And hard as it is to imagine that AIG's general management had somehow overlooked the signs of trouble in the subprime market in early 2008, it's even harder to imagine that whatever whoever signed off on this would not have asked: why does AIG-FP want this? How bad do they think it's going to get?

I imagine it would be worth scrutinizing the public comments of AIG executives between the first quarter of 2008, when this contract was written, and September, when it collapsed. But that's only one point. I hope that every law enforcement agency with anything resembling jurisdiction goes over everything about AIG-FP with a fine-tooth comb. There are more than enough peculiar aspects to this story to warrant it.

I hope the Obama administration is looking very hard at this question. The introduction to the contract says that one of its aims is to "recognize the uncertainty that the unrealized market-valuation losses in AIG-FP's super-senior credit derivative and originally-rated AAA cash CDO portfolios have created for AIG-FP's employees and consultants."

That certainly suggests that AIG-FP was aware that there might be significant losses, as does the fact that they got their compensation locked down in a way that made it independent of their profits or losses. (Unless their bonus pool exceeded the amount guaranteed in the contract -- then they got to keep more!) And hard as it is to imagine that AIG's general management had somehow overlooked the signs of trouble in the subprime market in early 2008, it's even harder to imagine that whatever whoever signed off on this would not have asked: why does AIG-FP want this? How bad do they think it's going to get?

Over at Digby's joint dday digs deeper. Bottom line: AIG execs brazenly lied to everybody -- the Fed, the Treasury, SEC, regulators, investors -- about everything. How AIG chose to conduct their business positively drips with fraud.

Somebody's gonna go to jail for this.

-AF