AIG bonuses

I apologize that my first post is 1000 words long. Next post will be more "fun".

Dear A.I.G., I Quit!

Yesterday the NY Times published this letter of resignation (link above) from Jake Desantis to the executives at AIG. CNBC discussed the letter throughout the day, and I’m told CNN talked about it as well. This letter got me thinking – once again – about politics & government intervention. I used to spend about 20x as much time thinking about the financial markets as I did thinking about politics. But now the two are inseparable.

First I should mention that Jake Desantis is a real person to me. I do not know him, but I have known the name for at least 6 years, and have spoken with him on the phone a few times on the rare occasions my desk traded with AIG. Furthermore, two of my colleagues were fraternity brothers with Jake at MIT.

I think the latter is worth reading in entirety, but let me sum it up in a few sentences. Jake was a derivatives trader at AIG for 10+ years. This past year as AIG blew up, Jake passed up other job opportunities at more stable companies in exchange for a contract where he’d receive a $1 salary and a large cash bonus in March 2009. Now he is resigning based on the claim that the company has offered no support as AIG employees have been vilified by the media, congress, and the attorney generals of NY and CT. Finally, he is donating his entire $740k after tax payment to charities helping people affected by the crisis.

The comments posted on the NY Times website were overwhelmingly negative toward Jake. Honestly, why shouldn’t they be negative? I didn’t lose a wink of sleep last night feeling bad for him losing his enormous bonus. But I appreciate him sharing his thoughts with the world – financial employees have not had a voice through this – and I’m happy to take his side here.

The bonus outrage is understandable. Taxpayers spend billions of dollars saving financial companies that took bad risks then these same companies pay their employees millions of dollars. In the case of AIG, I think the magnitude of the bonuses were inappropriate. But I’d like to compare bailed out financial companies to two other frequently bailed out industries – auto makers & airlines. Both industries require very large expenditures, which become fixed costs. GM has to build factories (well… had to build factories) and they spend millions and millions on steel and component parts to build cars. Airlines have to spend millions and millions on, you guessed it, airplanes. When Delta needs to buy a new 777, no one is outraged that they cut a 250 million dollar check to Boeing, even if that money is borrowed from the government. And in both industries, the labor is unionized. I do understand that the right to form a union is an important to labor in this country. But where’s the outrage when government lends billions to GM, who pays out millions to the both current and past union workers making 3x what their Toyota counterparts make, while having no incentive NOT to a take a long nap from nine to five every Monday through Friday. If auto makers and airlines are bailed out, should they stop buying steel, airplanes, and paying workers? Of course not! The way to save an industry is to repair their business. Every business that produces revenues incurs costs.

Just like airplanes, factories, and steel are necessary costs of business, competitive compensation is a necessary cost of business for financial companies. And competitive is the key word here. CEO compensation is not competitive. They decide their own pay packages & tend to get paid whether they perform or not. Professional athlete compensation is semi-competitive. Teams compete for the best athletes and biggest names, but players unionize, and certain talent is not easily replicable (look at the Pats without Tom Brady). But financial professionals have no unions & no agents. If a trader doesn’t like what he gets paid, then his ultimate bargaining chip is to leave the company (without severance). At that time the company replaces him with the next best available trader. The bottom line is that for a company to function successfully (which is what every taxpayer should want for AIG, Citigroup, Bank of America, etc), they must have talented and capable employees. For better or worse, talented and capable employees have a market price, just like airplanes, factories, and steel.

I admire Jake for stepping up and defending himself and his peers. The media has vilified these people. Congress passed a law to punish them with a 90% tax (which if signed into law will cost me money next Spring). The NY & CT attorney generals want to “expose” these employees. Last I checked, attorney generals have the mandate to prosecute individuals accused of a crime. Now they are turning the law into a bad Jerry Springer episode. One AIG employee’s house was shown on the cover of the NY Post. Other employees have reportedly received death threats. All they did was try to protect the government’s investment (which still may yield returns) & receive the market rate of compensation. I am far less confident that the government ever will get their money back if AIG’s management cannot run a proper business.

I think Jake probably did the right thing by giving away the $740,000 after tax dollars he made this year. He has been very fortunate. His hard work took him from a working class family, to MIT, to Wall Street, to affluence. No doubt he had several lucky breaks. But I can only assume he has colleagues who are sending their kids to private schools and are paying hefty Greenwich, Connecticut & East Hamptons mortgage bills, who cannot afford to return that money. I think those people are probably doing the right thing by keeping their bonuses. Congress is not doing the right thing. If they drive the best people away from the financial business, this crisis is only just getting started.