What Should AIG’s Liddy Do?

What on earth should Edward Liddy do? Liddy was asked a year ago by the US government to take over as CEO of beleaguered insurance company, A.I.G. I’m not sure why anyone would want such a job. (Liddy is being paid $1/year, plus equity grants which give him a vested interest in seeing the company do well). Anyway, tough job.

Latest challenge on Liddy’s agenda: the recent dustup over $165 million in bonuses scheduled to be paid to executives. Bonuses? To executives? At A.I.G.? Why give bonuses to a bunch of people who so mismanaged their own company, and indeed contributed to destabilizing the entire U.S. economy? How on earth could that be ethical?

I blogged about this yesterday . I said I thought A.I.G. should honour the contracts, pay the bonuses. I argued that — distasteful as it might be — we ought to hold our noses and support Liddy’s intention to pay those bonuses. They are, after all, part of legally binding contracts. And though ethics and the law are not equivalent, honouring the law is ethically important. It’s just unethical to toss important rights out the window simply because we don’t approve of the people who benefit from them. I even offered a rather unflattering comparison: we supply state-appointed attorneys to (accused) child molesters (or even to ones who have confessed). Part of what it means to be a nation of laws is that the law protects even those we think unworthy. (Almost no one agreed with me, yesterday. I got accused of being an apologist, insensitive to the plight of those harmed by A.I.G.’s wrongdoing, etc.)

But yesterday I overlooked the significance of one fact: the bonuses in question are not performance bonuses. They’re retention bonuses, designed to keep people from fleeing the company for greener pastures. (Andrew Ross Sorkin, writing for the NY Times, explains this well: The Case for Paying Out Bonuses at A.I.G.) So, these bonuses are not backward-looking ‘rewards’…they’re forward-looking incentives.

OK, so, knowing all that, ask yourself this: what’s Liddy to do, if he really wants to rescue A.I.G.? To answer that, I think Liddy needs to know two things.

First, he needs to know whether the bonuses were a good idea in the first place. That is, are the people receiving these retention bonuses people worth retaining? Let’s assume, for the sake of argument (but I happen to think it’s a realistic assumption) that they’re mixed bag. Some of them are smart & honest, others are deadwood, and still others are untalented and/or dishonest.

Second, he needs to know whether, legally, he could in principle get away with breaking these contracts. Opinions seem to differ on that question. Glenn Greenwald, writing for Salon, says “yes.” A.I.G.’s external counsel says “no.” Let’s assume, for sake of argument, that he could.

So, we’re assuming a) that Liddy could weasel out of paying the bonuses, and b) that the employees in question are of mixed quality. So, Liddy has a genuine, non-obvious choice to make.

Here, as far as I can tell, are the 3 things that would follow a decision not to enforce the contracts:
1) A lot of people would cheer. They’d feel like they’d been granted just a little bit of vengeance, like they’d seen a little justice done.
2) Capable employees would flee A.I.G. (According to the NYT‘s Sorkin, ‘word on the street’ is that A.I.G. personnel are already being recruited by other firms.) That might include some of the execs who were owed bonuses; and it might include other A.I.G. employees who realize the company’s promises aren’t worth much. And do not assume they’d all be easy to replace. Would you take a job at A.I.G., if you were qualified? I wouldn’t, in part because…
3) A.I.G.’s credibility for signing contracts would be shot. No one in their right mind would accept employment, or supply goods or services.

Seriously. What should Liddy do?

15 comments so far

  1. Anonymous on

    Obvious, easy, clear choice for him to make: “we won’t pay those bonuses” or “we will ask for these bonuses back from execs” (they apparently were mailed out on Friday). But I already commented on that yesterday. If honoring the law were (always?) ethical, then people who broke the law in Nazi Germany to protect legally prosecuted Jews were unethical? Ignoring laws that are unreasonable, short-sighted, and increase overall costs to society (e.g., current prohibition of many “illegal” drugs or laws banning euthanasia) is not necessarily unethical. Sure, breaking the law usually runs contrary to self-interest, but it is not necessarily unethical. I happen to have lots of respect for people who have the courage to break unethical laws.NY AG Cuomo and others in government are on Liddy’s and the AIG employees’ trail: http://news.yahoo.com/s/nm/20090317/ts_nm/us_aig … and there is nothing wrong with that anti-bonus zeal! Another bonus storm is brewing btw: http://news.yahoo.com/s/nm/20090317/ts_nm/us_wallstreet_bonusShows many in business will never learn. The outcome I predict: Draconian regulation (if the Obama Admin shows some spine). And if businesses, in merry disregard of repuation and public opinion that grants them their license to operate, continue to act contrary to the spirit of the law, public financial support to those firms should be cut off immediately… and the public should start dancing on those bankrupt firms’ graves. Note: AIG would be bankrupt now if the W Administration had not rescued them with billion $ cash infusions. The execs don’t seem to realize they were thrown a life-line… and their lives and pay should change accordingly. They should not insist on bonus pay promised in possibly fraudulent contracts: http://news.yahoo.com/s/ap/aig_cuomo Cuomo gets this one right. Cheers, Marc

  2. Chris MacDonald on

    Marc:You’re of course right about the relation between ethics and the law. I never said they’re coextensive. In face, I specifically said “ethics and the law are not equivalent.” I just said following the law is important. It’s an important-but-defeasible duty. The core cases of ethical violation of the law involve civil disobedience, in which one publicly breaks a law and then voluntarily accepts the consequences, as a form of protest.Your comment today seems to apply to yesterday’s posting. Thanks for the useful links, though.Chris.

  3. Shel Horowitz, author, Principled Profit on

    Let’s look at it this way, Chris: AIG is using OUR tax dollars to pay nonperforming execs who took down the company and a big chunk of the economy. If they want to pay the bonuses, let them use their own assets and not come to the government for a handout. I just blogged on this at http://principledprofit.com/good-business-blog/aig-clueless-again-on-exec-bonuses/2009/03/17/

  4. Chris MacDonald on

    Shel:“Let them use their own assets”?Huh?Money in one big pile… if bonuses gets paid, they get paid. If they take rent money to pay bonuses, and then pay rent with tax dollars, there’s zero difference.Also, note that these are <>not<> performance bonuses. They’re <>retention<> bonuses.Chris.

  5. A voice in the wilderness on

    If the bonuses are truly retention bonuses then failure got pay releases the employee from their contractual obligation to stay at AIG. Thus no other action is possible agains the party that chose not to exercize the option.I just wonder if paying the bonuses just to honor the contract is a good thing. Perhaps a class action lawsuit on behalf of the shareholders (now the US taxpayers) on the grounds that the payment of unearned bonuses constitutes a criminal conspiracy to defraud the shareholders.This would bar any payments until the litigation was decided and also put future boards and senior management on notice that their contracts must be equitable to both parties or they risk being declared unenforceable.

  6. Chris MacDonald on

    I think honouring contracts is prima facie good. But now I’m more & more convinced that it’s a business necessity (as implied in my blog entry above).Liddy thinks so. Of course, Liddy could be wrong about that. However, courts are perhaps unlikely to step on his judgment:http://en.wikipedia.org/wiki/Business_judgment_rule

  7. DLO on

    Two Points:First. It’s not entirely clear to me that these contracts are as immutable as I think you’re suggesting. As pointed out by several contributors to < HREF="http://roomfordebate.blogs.nytimes.com/2009/03/17/when-bonus-contracts-can-be-broken/" REL="nofollow">this<> discussion, contracts are frequently re-examined, re-negotiated, etc. And under these rather extreme circumstances, I would think that a re-examination of contractual obligations would be expected by everyone involved. Suggesting that ‘taking another look’ at these bonus contracts would undermine confidence in AIG for evermore is probably an exaggeration.Second. I think it’s interesting to consider that as of right now, the money’s been paid. That makes the question of how to retrieve the money less of a contractual argument and more something to be decided by the courts. If Obama successfully ‘retrieves’ the bonus money, will this still undermine confidence in the contract system?

  8. Chris MacDonald on

    DLO:First: I think “taking a look” is fine; but I think finding a loophole is likely a bad idea, in terms of the likely consequences for AIG, and hence for the U.S. citizens who have an 80% stake in it.And I think yes, paying and then taking them to court would be just as corrosive of trust. No one would accept a AIG contract if they knew the government was willing to just pull the rug out from under it.Chris.

  9. Anonymous on

    ok, if you insist on contractual obligations, it’s the prerogative of government to tax this type of income as they see fit in the interest of the taxpayer-turned-AIG shareholder/owner: http://albany.bizjournals.com/albany/stories/2009/03/16/daily23.htmlWhoopi Goldberg on Leno (starting at 3:02): “After you lose the first billion, doesn’t something say to you ‘hmmmm, I lost a billion dollars.'” (Go to http://www.youtube.com/watch?v=CS7VEi27n-c , you have to see her mannerism to appreciate it.) That’s exactly the kind of “talent” for whom contractual obligations must be upheld, right? And all at US taxpayers’ expense. Liddy and his apologists need to have their moral compass reset.

  10. Chris MacDonald on

    Yes, it’s the government’s legal prerogative to institute a punitive tax. But to do so would be to institute a punishment <>without due process<>. And, it would lump together <>all<> recipients of AIG retention payments, not <>just<> the culpable ones. Not a good idea.As for the “kind of people” for whom I want contractual obligations upheld: YES, those sort of people. And everyone else. That’s what it means to be governed by laws. That’s why (see yesterday’s blog) we give lawyers to accused child molesters. The protections of the law do <>not<> only apply to people we approve of.Chris.

  11. Anonymous on

    You seem to somehow presume that laws should always trump other considerations (such as utilitarian considerations or, in fact, emotional outrage). Should we assume that laws and contracts are perfect and non-negotiable ex post? Laws are as imperfect as anything else created by humanity (medicine, religion, science, bridges, moral theories, etc. etc.). Because they are, laws need to be revisited and revised if they don’t make any sense anymore in the context of changed circumstances. Yes, and that reasoning does apply to enemy combatants held at Gitmo until next year or so. If due process leads to overall bad outcomes or to extremely high risks, it is sensible to start questioning due process as an important guiding principle. E.g., with respect to terrorists, the W Administration’s policies were much more sensible than the current Administration’s. There are no perfect guiding principle or documents, such as the Constitution, the Bible, or anything else. News flash: Liddy seems to have asked for the bonuses back: http://news.yahoo.com/s/ap/aig_outrage . Again, might be posturing, but definitely a good choice compared to his earlier insistence on “honoring old contracts.” He finally seems to have seen the light. Larry Summers changed his tune as well between Sunday and yesterday. A moral consensus seems to be emerging…

  12. Chris MacDonald on

    Anonymous:Actually, the argument I made above is pretty much <>entirely<> utilitarian.It suggests that failure to make the retention payments would have very bad consequences.Chris.

  13. Anonymous on

    You primarily focused on (likely/possibly?) bad consequences for *AIG*. Utilitarianism requires focusing on the consequences for a social and even ecological system a bit broader than the (in your view) “most important company” of the USA. It requires assigning utility to taxpayers’ anger (and the effecting of happiness by retrieving the money). It requires assigning utility to a new sense of “we’re all in this together” (regardless of direct culpability). It requires the revisiting and revising of badly conceived contracts. In fact, CEO Liddy now seems to admit the latter. And that’s as it should be…

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