One of David Cho's articles
Bailout King AIG Still to Pay Millions In Bonuses
Geithner Gets Firm To Make Revisions
By David Cho and Brady Dennis
Washington Post Staff Writers
Sunday, March 15, 2009; A01
Insurance giant American International Group will award hundreds of millions of dollars in employee bonuses and retention pay despite a confrontation Wednesday between the chief executive and Treasury Secretary Timothy F. Geithner.
But the company agreed to revise some executive payments after what AIG's leader, Edward M. Liddy, called a "difficult" conversation.
The bonuses and other payments have been exasperating government officials, who have committed $170 billion to keep the company afloat -- far more than has been offered to any other financial firm.
The issue came to a head when Geithner called Liddy and told him the payments were unacceptable and had to be renegotiated, said an administration official who was not authorized to comment on the Geithner conversation.
In a letter to Geithner yesterday, Liddy agreed to restructure some of the payments. But Liddy said he had "grave concerns" about the impact on the firm's ability to retain talented staff "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."
Lawyers at both the Treasury Department and AIG have concluded that the firm would risk a lawsuit if it scrapped the retention payments at the AIG Financial Products subsidiary, whose troublesome derivative trading nearly sank AIG. The company promised before the government started bailing out the firm in September that employees would be awarded more than $400 million in retention pay this year and next.
"I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," Liddy wrote.
At the same time, the company said in documents provided to the Treasury, any steps that encourage specialists at AIG Financial Products to leave could open the U.S. government to further risk because of the hazards still posed by the $1.6 trillion portfolio of complex derivatives those employees are working to dispose.
AIG's top seven executives, including Liddy, already agreed in November to forgo their bonuses through this year. Last week, AIG agreed to restructure bonuses for the next 43 highest ranking officers at the company, who are to receive half of their bonuses -- which total $9.6 million -- immediately, the administration official said. Another quarter of that would be disbursed on July 15 and the rest on Sept. 15. But these last two payments would depend on whether the company makes progress in restructuring its business and paying back taxpayers.
In addition, federal officials plan to recoup some of this bonus and retention pay in restructuring the company, an administration official said.
Officials at the Treasury Department and the Federal Reserve took over AIG in the fall, fearing one of the world's most successful conglomerates had grown so intertwined with the global economy that the firm's impending failure could have disastrous consequences.
In return for the bailout, the government took an 80 percent ownership stake in the company. Liddy was recruited by former Treasury secretary Henry M. Paulson Jr. to run the company. Since then, the rescue package has ballooned. But both the Bush and Obama administrations have been reluctant to completely and explicitly nationalize the company, though this could have avoided the current flap over bonus payments, first reported by The Washington Post.
AIG officials said debate over the bonuses and retention pay has been simmering for months. During the past year, the company has repeatedly disclosed these payments in public financial filings. But as lawmakers increasingly clamored for details of their size, outrage grew in Congress and beyond.
Although the AIG Financial Products unit is proceeding with the payments, Liddy said the company would try to reduce future retention pay by at least 30 percent. In addition, the 25 highest-paid employees at Financial Products have agreed to reduce their salary to $1 for the remainder of 2009, Liddy wrote. Salaries for the rest of the firm's employees will be cut by 10 percent.
The Obama administration has been sensitive to how companies receiving government bailout money indulge their employees. Spending on jets, extravagant office furniture and bonus checks -- while not always a significant portion of corporate spending -- sours the public's view of the financial rescue effort at a time when the administration is considering asking Congress for billions of dollars more to help banks.
AIG officials say that some of the upcoming bonuses are relatively modest once they are divided among employees. About 4,700 people in the company's global insurance units are receiving $600 million in retention pay. In addition, about $121 million in corporate bonuses will go to more than 6,400 people, for an average payout of about $19,000, according to AIG.
"These are not Wall Street bonuses," said one AIG executive, who was not authorized to speak on the record. "This is an insurance company." That executive also noted that the retention bonuses at AIG Financial Products were put in place in early 2008 at a time when it hadn't yet melted down. "They knew that the book was running into trouble," the executive said. "They thought they could weather the storm. But they thought they needed to keep people in their seats. They were worried."
Then, of course, everything changed. Financial Products kept posting bigger and bigger losses, burying AIG under a cash crunch from which it has not recovered.
Since that collapse, company officials say, many Financial Products employees have lost nearly two-thirds of their compensation under the firm's deferred payment plan, in which bonuses are doled out over several years based on the firm's profitability.
The new cutbacks raise the risk that more employees will depart before the firm can be wound down and closed.
"These employees are highly specialized and/or are part of businesses that control billions of dollars of revenue and value that will be needed to repay the U.S. taxpayer," Liddy wrote in a letter last month. "Our competitors understand how valuable our top executives are, and we are acutely aware that they would like to siphon off our most talented leaders."
Over time, both the amount of retention pay and the number of recipients throughout AIG have grown.
Since taking over the rescue effort of AIG, the Obama administration has imposed stricter compensation rules, banning golden parachute payments for executives leaving firms and barring executive compensation above $500,000, except in the form of stock that cannot be cashed in until the government's loans are paid back.
But the government could not revoke bonuses promised before the government's rescue efforts began, officials said.
Sen. Christopher J. Dodd (D-Conn.), a leading critic of excessive executive compensation, backed a measure earlier this year to curb the practices but it included an exception for bonuses agreed to before Feb. 11, 2009.
This will make your stomach turn, for sure!
Reuters Blogs
DealZone
Behind the deals and deal-makers
March 13th, 2009
The pizza guy will miss AIG-FP’s business
In Wilton, Connecticut, a bucolic town an hour’s drive from Manhattan, there is nowhere for AIG’s derivatives whiz kids to run, but neither is there a need to hide.
Even as questions of who is benefiting from AIG’s billions of bailout dollars stir resentment on Wall Street, people in Wilton — where AIG Financial Products, the unit that built highly complex trading instruments that eventually gutted the insurer, is based — aren’t throwing any brickbats.
People who live in the area said they have very little interaction with the dozens of businesses based in Connecticut’s dollar-dripping “Gold Coast,” dotted with golf courses and 10,000 square-foot homes.
Even local politicians didn’t have much to say about AIG-FP. “Ordinarily, I would be happy to answer your questions, but in this case I really have no knowledge of the company other than it is there,” said John Kalamarides, the local Democratic Town Committee chairman.
Michael Tucker, a professor of finance at the nearby Fairfield University, said the university’s business school engages with hedge funds and other financial institutions (in southwestern Connecticut, they’re a dime a dozen) from time to time, but recalled interactions with AIG Financial Products as being minimal.
“I went to one of their (AIG) meetings when Larry Summers was one of the speakers last fall,” Tucker said, jokingly adding, “seems like no one was talking about it at the time.”
Since it moved to Wilton in 2000, AIG-FP seems to have kept a low profile in the town of about 18,000, which seems eons removed from the bustle of Wall Street finance, with its gently rolling hills and colonial-style houses.
But with a median home price of about $750,000, Wilton is no stranger to wealth. Many of its residents work in trade, finance, real estate or services. Why, the town even has a triple A bond rating from Moody’s — the same rating that was once a source of great pride for AIG and helped the Wilton unit to insure so many billions worth of debt derivatives.
The AIG unit’s low profile could be because it only employs about a hundred people. Also, the unit is located on the second floor of an office park on the southern tip of Wilton, along a corridor of strip malls and nail salons about five miles from the heart of town.
The 50 Danbury Road office complex, a 220,000 square foot space that rents at about $40 per square foot, is typically hush-hush in the manner of corporate environs, with all the trappings — tennis courts, a nice gym, inoffensive abstract paintings on the walls, artistic floral arrangements, a cafe that features pan-seared mahi-mahi, red chili-rubbed salmon and other upscale fare.
The AIG-FP employees were pretty tight-lipped when asked about the mood in their office. “I can tell you for sure, it isn’t business as usual,” said one worker. “I’ve got more important things to think about, so I must respectfully decline,” said another, when I asked him if the nervousness was palpable inside.
But one guy sure was upset at the news of AIG winding down its Wilton business. Dan Letizia, who runs Letizia’s Pizza with his brother in Norwalk, one town over, said he’s been delivering pizza to AIG-FP workers for years.
But “they’ve been ordering a lot less lately, ever since the financial mess happened,” Letizia said. “Will we go out of business because of AIG? No. But will we be affected? Yes!”
(Photo 1: A $2.5 million, 6BR home for sale in Wilton; courtesy Hastings Real Estate website. Photo 2: Reuters)
Here is some information on the company:
MISCELLANEOUS FINANCIAL SERVICES
AIG Financial Products Corp.
SnapshotPeople
OverviewBoard of DirectorsCommittees
KEY EXECUTIVES FOR AIG FINANCIAL PRODUCTS CORP.*
Name Board Relationships Title Age
Thomas R. Savage No Relationships President 59
David Ackert No Relationships Head of Transaction Development Group and Energy Group --
Thomas Bruch No Relationships Managing Director --
John Cappetta No Relationships Executive Vice President and Head of North American Marketing --
Karen Fang No Relationships Managing Director --
Thomas Plagemann No Relationships Managing Director --
Matthew Schwab No Relationships Managing Director of Investor Coverage Group --
Russell L. Sherrill No Relationships Managing Director
One more article, a tad older, but none the less, informative!
A Meek Ending For Mighty Unit That Gutted AIG
By Brady Dennis
Washington Post Staff Writer
Saturday, February 21, 2009; A01
WILTON, Conn. -- In this small town an hour north of Manhattan, in a bland office park alongside suburban strip malls and gas stations, the unit that wrecked American International Group is dying a slow death.
The employees of AIG Financial Products are mostly in their 30s and 40s. They roam the firm's open trading floor in khakis, button-down shirts and sweaters -- a far cry from the pinstriped pandemonium of Wall Street. Everything appears perfectly normal, from the ringing phones to the meetings unfolding in glass-walled conference rooms to the company newsletters arranged neatly on a lobby table.
But the mission of this once-mighty enterprise has shifted in recent months. Once a virtual money factory, Financial Products is no longer growing and profiting, but shrinking and fading. Its workers, once power brokers of billion-dollar deals, are methodically extracting the firm from a tangled web of transactions that bound it to nearly every major financial institution in the world.
In recent years, Financial Products wrote a series of private contracts that faltered and came back to haunt its parent company in a very public way, leaving the insurance giant on the brink of collapse. Fearing that the failure of AIG could send shock waves throughout the financial system, the federal government stepped in last September with the single largest bailout of a company in U.S. history, a total rescue package of up to $152 billion.
Taxpayers now own nearly 80 percent of AIG. Federal officials are closely monitoring the company's operations and even signing off on key corporate decisions.
In November, AIG hired veteran Morgan Stanley executive Gerry Pasciucco to dismantle Financial Products, to terminate its outstanding trades, eliminate as much risk as possible and shut down its offices around the globe.
"My task is very narrow and very limited," Pasciucco said.
He is a grim reaper of sorts. His task is to take a firm that was once a darling of the financial world and make it go away.
* * *
As word came of the federal bailout in September, a cloud of disbelief and disgrace settled over Financial Products. The firm founded on avoiding risk was suddenly synonymous with recklessness and ruin.
"It was a horrifying experience, watching it happen," said Jim Haas, the firm's co-leader of North American marketing and an employee since 1996. "There was a real badge of honor that one carried when they were able to tell people they worked for AIG, and in particular for AIG Financial Products. That vanished in a flash."
For years, the firm carved out a reputation as an innovative force envied and emulated on Wall Street. It made billions of dollars in the complex world of financial derivatives. But in 1998, executives approved a break from the firm's cautious past. Financial Products began writing credit-default swaps, which essentially insured a company's debt in case of default.
Executives at Financial Products viewed the swaps as "free money" because computer models showed almost no chance of ever having to pay out. But the swaps contracts included provisions requiring the company to put up cash as collateral if AIG's Triple A credit rating ever fell. When those downgrades came, signaling that AIG was no longer as reliable as it once had been, companies like Goldman Sachs that had done business with Financial Products demanded it put up billions of dollars.
By the end of 2007, AIG had suffered write-downs of nearly $8 billion on Financial Products' credit-default swap portfolio. The first two quarters of 2008 brought another $9.5 billion in paper losses.
"AIG bet the ranch on a business that wasn't part of our core business," current AIG chairman Edward Liddy said. "And when things seized up, we paid a hell of a price."
Only when Pasciucco arrived at the Wilton headquarters in November did he discover the full scope of winding down Financial Products. The firm had $2.7 trillion worth of swap contracts and positions; nearly 50,000 outstanding trades; 2,000 firms involved on the other side of those trades; and 450 employees in six offices around the world.
"Most of the business was written here appropriately," he said.
But the failure to prepare for the collateral calls had proved a fatal miscalculation. The firm had written contracts that lasted 50, even 70 years, but had not adequately guarded against the volatility that could bankrupt it along the way.
"If you don't account for that liquidity need, you can blow up the business," Pasciucco said. "That is really the fundamental problem."
As the collateral calls kept coming, the Federal Reserve Bank of New York announced in November it would create a separate company, dubbed Maiden Lane III, to help alleviate AIG's cash crunch caused by the credit-default swaps written by Financial Products. By buying up the underlying mortgage-related securities, the government freed Financial Products to terminate billions of dollars in credit-default swap contracts that had plagued AIG's balance sheet. So far, the government has poured more than $60 billion into the effort.
Pasciucco meets weekly with Federal Reserve employees, "making sure they're fully briefed on what we're doing and what our plans are," he said. In addition, four workstations on the firm's trading floor are reserved for Federal Reserve staff members who regularly visit Wilton. The Fed team sits in on steering committee meetings and must grant a waiver whenever the firm wants to make debt payments.
A bespectacled Harvard Business School alum who runs and plays squash, Pasciucco was a logical choice to oversee the unwinding of Financial Products. He had spent his career working in capital markets. A colleague at Morgan Stanley who was advising the government on the AIG bailout asked Pasciucco whether he'd be willing to help out, and he agreed.
Pasciucco devised a plan early on to divide the firm's portfolio into 22 groups, or "books," of business -- from foreign exchange to interest rates to commodities -- with the intention of closing them out one at a time. The goal was partly to help AIG pay back the government loan, but mostly to stem any further losses.
"You want to look across every one of your books and say, 'Where could I be surprised?'" said Pasciucco, 48. "Where I can be surprised, I want to get rid of that. We're trying to get rid of complexity and risk."
He approached about a dozen counterparties, all major banks in the United States and abroad, about buying Financial Products' holdings. He promised these firms favorable access to the company's holdings in return for their help in addressing Financial Product's need for cash.
"We've described each of the books to them," he said. "They've identified which books they may have an interest in. We've tried to make this a mutually beneficial relationship."
As a result, the firm has cut the number of outstanding trades by 25 percent, with the primary focus on reducing risk.
Last week, it announced the sale of two groups of financing contracts from its energy and infrastructure sectors, worth $60.5 million. That comes on the heels of an agreement last month to sell its commodity index business. There are more sales in the pipeline, Pasciucco said, but the complexity of many deals and unfavorable market conditions require patience and caution. Staffing numbers have fallen to 370 from 450, and the firm plans to close its Tokyo and Hong Kong operations this year.
Ultimately, Pasciucco hopes to have the riskiest fires at Financial Products mostly extinguished by the end of 2009.
"There are definitely some views that there's no way you can reduce a book of this size in less than four or five years," he said. "My view is we're going to break the back of the risk in 12 months."
* * *
The potential for disaster remains.
"There are going to be surprises," Pasciucco said. "There always are."
Few surprises could be worse than further downgrades in AIG's credit rating. Another slip could trigger a new round of collateral calls from Financial Products' counterparties and sink the parent company deeper into debt.
There's also the specter of investigations on both sides of the Atlantic. Last week, Britain's Serious Fraud Office announced that it had opened a preliminary investigation into the Financial Products' London operations, "to determine if there has been criminal conduct," according to the agency's director. Meanwhile, the FBI has been scrutinizing whether executives at AIG knowingly concealed mammoth losses that helped lead to the company's downfall. AIG has vowed cooperation in both investigations.
Then there is the thorny issue of the employees who remain at Financial Products. They are literally working themselves out of a job. As each set of business falls away, so do the people working on it.
"In a situation like this, it's hard to keep everybody on task, motivated, focused. People know they are going to be out of jobs," Pasciucco said. "So they are constantly doing that calculus in their heads, as to what's left in terms of what I get paid here? What can I get paid in a new career? When should I start my new career?"
For the better part of two decades, Financial Products had been a place where workers raked in princely sums, even by Wall Street standards.
Since the collapse, many Financial Products employees have lost nearly two-thirds of their compensation under the firm's deferred payment plan, in which bonuses are doled out over several years based on the firm's profitability.
"It's like the stock going to zero," Pasciucco said. "It's been wiped out."
Still, employees who stick around are eligible for hundreds of millions of dollars in retention payments -- half next month and the rest in March 2010 -- a practice that has roiled some members of Congress and further stoked public anger. Executives say the payments are justified because few people possess the expertise to handle the mind-bending transactions at Financial Products.
Haas, the Financial Products veteran, said no one at the firm is looking for sympathy. "The whole world hurts right now," he said. But he said the vast majority of current employees had no role in the problems that wrecked the firm, and many feel a measure of shame and guilt for how its troubles spread to AIG and helped poison the economy.
"People have great pride in this organization. Everyone is horrified at what happened," he said, adding they are determined to close down the firm with dignity and professionalism. "There's a duty. We owe it to AIG. And now we owe it to the government and the taxpayer."
These days, Haas avoids telling people where he works. But he and the others who remain still show up each week at the office park off Danbury Road. They keep framed pictures of smiling children on their desks. Letizia's Pizza in Norwalk still delivers each night to those who stay late, chipping away at the pieces of Financial Products until it is finally gone.
"The great irony in it," Haas says, "is the better job we do, the sooner we'll be out of a job."
