Wednesday, March 17, 2010

Why AIG should NOT hold back bonuses

The news that AIG will hold back $21 million in bonuses may be sweet to the outraged American public that now owns most of the firm, but it’s bad for business.

It’s easy to hate the employees of AIG’s financial products unit that helped set off the global financial meltdown. But, despite their bad decisions, some of them have been making only a dollar or two a year for two years now. And they themselves lost fortunes when AIG’s stock dropped nearly 70% in one day. Without those bonuses, there’s little incentive for them to stay at their jobs. A lot of good people have already left.

It’s critical that AIG retain talent in this unit because AIG still has a trillion (yes, trillion) dollars in credit swap derivatives. These investments are actually turning around and should bring in profits over the years ahead.

AIG also needs to worry about lawsuits. A year ago today, I had an OpEd published in the Wall Street Journal stating:

(These bonuses) are part of legally binding employment contracts between these executives and AIG. Even if Mr. Liddy (then CEO of AIG) wanted some way out of awarding these bonuses, under current law he could not. If he tried, AIG would be sued by the executives.

And that’s what we can expect now, with an attorney representing a dozen AIG employees calling the holdback “a breach of their contract and a violation of the Connective Wage Act.” As a Wall Street Journal article points out, AIG potentially risks paying out double the amount it withheld in bonuses if it is found liable for violating wage laws. AIG acknowledged this risk a year ago, but apparently, it can’t ignore the demands from federal pay czar Kenneth Feinberg.

Feinberg told Fox Business News yesterday that in the next few weeks he’ll be prescribing pay guidelines that will be "tough medicine" for AIG and the other four companies that received help under TARP. He said, "Congress decided that since the American people saved these companies and are the chief creditors of these companies, they have a right to have a say, in just these five companies in individual compensation."

Maybe Feinberg has the right to make these demands, but they won’t help AIG hold onto the talented people needed to rebuild the company. And if AIG has to pay out on those employee lawsuits, it will have an even harder time paying back taxpayers.

Monday, March 1, 2010

Selling off a crown jewel

In its race to pay back billions in bailout funding, AIG has agreed to sell one its biggest assets, American International Assurance (AIA), the only wholly foreign owned insurer in China. AIA was founded in Hong Kong back in the forties and has been a tremendous moneymaker for decades.

AIG had planned to raise $20 billion from a planned IPO for its Asian life insurance business, so accepting Prudential of Britain’s offer of more than $35 billion is a no-brainer. AIG CEO Robert Benmosche says the deal will allow AIG to repay taxpayers more quickly and give the company "greater flexibility" with its restructuring plans. The reaction from analysts is this move will eliminate some of the pressure on AIG. Certainly, there are few CEO’s facing more pressure than Benmosche.

But I see the sale as yet another tragic chapter in the AIG saga. Founder C.V. Starr was an American who started his company in China in 1919 and built it into a worldwide empire, a remarkable achievement. Now, AIG has been forced to sell off one of its crown jewels, a vibrant company that had nothing to do with the mistakes that led to AIG’s near collapse and bailout.

It would have been nice to see AIG retain one of its most profitable operations in a growing region, eventually bringing in enough revenue to help pay back taxpayers. But right now, there’s little patience for AIG, and I can’t blame Benmosche for taking advantage of a good offer.