Friday, March 20, 2009


Ok, everyone is outraged at the AIG bonuses. But the President of the United States has spent enough time on this issue. It never should have risen above an assistant to Geithner. But as we say in the workout world, 'we are where we are'. The President was on Leno last night. According to Bloomberg, he said, "who in their right mind, when the company is going bust, decides we are going to be paying a whole bunch of bonuses to people?"

Well, it happens all the time. In the bankruptcy and workout world it is known as 'key employee retention programs (KERP).' Like most people, I believe that certain segments in the financial industry have been overcompensated over the years. However, when a company is failing, the leadership must make a decision as to which key people it needs to retain in order to maximize what is left.

In this case, the book of derivatives contracts is complicated and often incomplete. Traders often keep their own books of trades. Credit default swaps in particular are often not recorded immediately, there is a time lag. As a result, if AIG loses the people who brought them this mess, the situation gets even worse! I became aware of this speaking to the head of distressed trading for Bear Stearns and to the crisis manager brought in to run Lehman Brothers when it filed for bankruptcy.

The Bear Stearns managing director told me he that he and his team stayed around to work down their portfolio of trades. He said that it would not have been possible for an outsider to come in and even know what the trades were. At Lehman the situation was made much worse because it was a freefall bankruptcy and many of the traders just left and took their records with them. A number of them had to be hired back in order to make sense of what Lehman had.

You say, 'but where would the AIG people go?' The good people, (yes, even those who lost billions trading CDSs), can always get good paying jobs even in today's environment. So, what typically happens is a Key Employee Retention Program is put into place to reward people to stay and winddown their piece of the business. It is often much cheaper than the bonuses you would have to pay a new person to join a sinking ship and much more effective when done correctly. Who knows what AIG really did with these bonuses and whether it made good business sense.

So, while this situation looks very bad, it probably would be worse if those people did not stay on. I believe AIG's CEO Liddy was trying to explain this at the Congressional hearings. Unfortunately, he didn't explain it slowly and precisely so I think many at the hearing missed it.

Cheers, Mike


  1. Well said. There's some leadership.

    Too many people have jumped on the bandwagon on this subject. The idea that people that worked themselves out of a job and maximize the return (or minimize the damages) receive a retention bonus is just good business. Cleary, Congress did not have a clue on the subject. Havng said that, normally retention bonuses are needed as the employees have alternative long term employment opportunities. Anyone looking to start a derivative trading desk these days?

    The tax issue is another complicated question. Presumably, Treasury changed the previous bill to allow for bonuses that have previously been approved to make the statute constitutional. I wonder if this 90% tax bill will pass muster if it becomes law.

  2. Thanks for the comment. I will be looking at the tax issue this weekend. It feels like a rash decision with the taxes that may have far reaching implications on the compensation model of a number of firms. It will be interesting to see what finally goes in place.

    Cheers, Mike