Posted tagged ‘AIG’

To Understand the A.I.G. Problem, Look no Further than the Public Resignation Letter

April 2, 2009

I’ll admit it, Jake DeSantis’ resignation letter got me extremely annoyed. It’s a bait-and-switch–a one-sided telling of the story that doesn’t even jive with itself. I’ve been a bit torn about whether or not to write about it, but here we are. So, let’s get started (my comments are interlaced, in bold).

Dear Mr. Liddy,It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

First of all, why is this letter public? They even have a screenshot of an email being sent from Mr. DeSantis to Mr. Liddy. To me, this is a huge P.R. ploy. When one writes a letter, knowing it will be made public, it immediately destroys the ability to “take it at face value.”

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

Ahhhhhh… Herein lies the most major problem. This is the common thread people are likely to hear over and over again. “It wasn’t my division/trading book/group that lost the money.” Well, unfortunately, this is completely and totally irrelevant. First of all, did anyone complain when that group was “juicing” the returns of your equity compensation? Did anyone hear, “I can’t take this! It wasn’t my group that made all this money!” No. Hypocrite. Second, you work at the same firm. This firm, 400 people large, as the letter states, is around the same size as my high school class. There are two possibilities for any front-office employees claiming to not know what the credit default swap businesses were doing: they are lying (highly, highly likely) or their head was in the sand (less likely). Firms like this have “town hall meetings.” There are transactions that cross areas and force people to work together and meet one another. Senior management (What is Mr. DeSantis’ title? Ahhh, yes, “Executive Vice President” …. Thank you screenshot) sits on executive committees, working groups, and other teams for business development, strategy sessions, and to ensure that everyone knows what is going on. In fact, we know that even accountants asked questions and saw enough inconsistencies to blow the whistle on A.I.G.! So, yes, very few people actually executed the trades. But, no, no one who worked there bears no responsibility for asking the right questions or raising concerns over things they didn’t understand.

This is exactly the same problem that existed in many other firms, so it’s not unique to A.I.G. This is one reason why Goldman is so successful, their co-presidents walk the floor and know traders and senior executives from all the businesses. A wide net is cast for opinions when doing a transaction or making a large decision. The partnership mentality exists there in a huge way, versus this “fiefdom” or “silo” mentality where people talk about “their business.”

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

Honestly, I’ll believe it when I see it. You shouldn’t get the credit for saying you’ll give away your money, you should get credit for giving away your money. Also, please note this: A.I.G. reassured them many times they would be rewarded… Doesn’t sound like a formal contract, does it? As for being “persecuted” … Show me the harm that elected officials have actually done. The T.A.R.P. surtax measure looks dead to me. And, if you’re giving it away anyway, not much harm there. Maybe you should have used another word, like, “lectured” or “scolded.”

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

I see. So you worked for eleven years because you’re dedicated and honorable, but now that you’re not getting paid for helping to maximize recovery for taxpayers, you’re leaving. Please note that, in reading this, it’s clear that the dysfunctional environment has been around before now, so that’s not the reason he is leaving. Even more amazing is the fact Mr. DeSantis agreed to work for $1 out of, “a sense of duty to the company and to the public officials who have come to its aid.” Is he <expletive> kidding? So the $1 was out pf a sense of duty, but the $742,006.40 (post taxes, we’ll come to that later!) was out of greed? Well, then I think we know what you’re about.

You and I have never met or spoken to each other, so I’d like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute’s generous financial aid enabled me to attend. I had fulfilled my American dream.

Congratulations on a stellar achievement, getting into M.I.T.! Unfortunately, your hyperbole surrounding the phrase “American dream” is asinine. If your dream was to go into debt to go to M.I.T., and then it was fulfilled, you probably should have thought a few steps beyond that.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

Ahhh, here again Mr. DeSantis changes it up a bit. Unfortunately for him, his choice of words is telling. “The profitability of the businesses with which I was associated clearly supported my compensation.” Oh? So you weren’t associated with A.I.G. the corporation? How about A.I.G. Financial Products?

As for your lost deferred compensation, well, then it worked! You were given deferred compensation, tied to the performance of your firm, to align your incentives with everyone else. This is part of the reason your attempts to disassociate yourself from the problems are meaningless. You likely made money, and cashed out portions of your deferred compensation (11 years of continued employment means a lot of it vested, I would assume). You clearly made money from this compensation scheme … Do you now intend to give back the portion you weren’t directly responsible for? No, of course not! Nor should you, by the way–live by the sword, die by the sword, as the saying goes.

Anyway, let’s make apparent what you aren’t saying. How much of this compensation, over the years, was actually in deferred equity compensation? Standard amount for a bonus of your size is 30-40% of your bonus. This could be 20-30% of your total compensation for a given year. So, for the past few years, most likely 30% of your compensation has been in equity, likely vesting over 3-5 years with equal amounts of any years award vesting over each following year… This means that for the first six years you kept 100%, for the next year you kept approximately 94%, then 88% … The lowest proportion being 65-70%. Now, these are all approximate, but unless something is very amiss, it’s all in the ballpark. It isn’t like Mr. DeSantis didn’t know his risk the entire time and one shouldn’t think, from the vagueness, that it’s much higher than it truly is.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

No, no, for all the reasons I’ve stated before, Mr. DeSantis, Mr. Liddy is much more blameless than you are. He didn’t have 11 years to figure out what this division was doing, ask questions, raise red flags, or exercise the option to quit and sell all his unvested stock. You, however, did.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

Ibid. (Don’t want to sound like a broken record.)

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.

Honestly, this is where this <expletive> <insulting non-expletive> really gets under my skin. Let me give Mr. DeSantis a piece of advice: When you agree to an employment contract that has a total compensation (post taxes, more on that in a second!) of over $740,000 (don’t forget, he’s getting his benefits, too!), but the salary component of that is $1, you aren’t getting farily compensated by the non-salary portion and making a huge sacrifice by working for a $1 salary. Both cannot be true! This sort of posturing and propaganda falls very nicely into the “what isn’t he saying?” overtone that colors this entire P.R. stunt. Also, note that this entire paragraph is guessing. The only objective portion of this sentence is that A.I.G. management assured a group of people that they would live up to their commitment on three seperate occasions. Keep in mind no representations were made by A.I.G. as t the tax rate they would pay. They could have! This is a common executive perk called a “Tax Gross-Up” … I wonder how it works when there is over 100% tax rate, though…

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”

More guesses. I agree these actions seem inconsistent, though. I wonder if Mr. Liddy himself knew the specifics and timing.

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It’s now apparent that you either misunderstood the agreements that you had made — tacit or otherwise — with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

I’m sure Mt. Liddy takes comfort in hearing your thoughts on his actions.

You’ve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

And yet most of the bonuses have been paid back.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.


Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

This is also stupid and, likely, doesn’t stand up. Likely this is built from hearsay But, I’ll give the truthfulness of this statement the validity of the doubt. First, understand the point here: the only reason these A.I.G. employees agreed to stay at A.I.G. and fix the mess they and their colleagues created is because they extracted large, guaranteed payments from A.I.G., now owned by taxpayers. Nice! Second, if they are truly the rationally thinking economic agents they claim to be, why did they turn down a job from a stable employer for a job that has an expiration date (the full unwind of A.I.G. F.P.)?

So, either these people are irrational idiots or they ransoming taxpayers and the American economy. I don’t care which they pick, honestly.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to “name and shame,” and his counterpart in Connecticut, Richard Blumenthal, has made similar threats — even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

The only motivation? What about, well, Mr. DeSantis put it so well… “a sense of duty to the company and to the public officials who have come to its aid” … ? Oh, right, that was when there was a guaranteed, $700,000+ payment.

So what am I to do? There’s no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.

Woah, stop the presses. So, you’ve been overpaid, your family isn’t “suffering devastating losses,” and you’ve benefited more than most form the past few years. So why are you resigning? Oh, right … because you didn’t get over $700,000.

Well, to your question about what you should now, I have an easy answer! If you’re truly needed to unwind A.I.G. F.P., and you’re going to be available, volunteer to help! Please note: volunteering doesn’t include a $700,000+ bonus. Your $1 salary, however, is still there if you’d like.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.’s or the federal government’s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less — in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

Subtext: Congress will be stealing from the needy if they pass this surtax! Also, note that it’s $742,006.40 after taxes. If his effective tax rate is 35% then the payment is $1,141,548.31. If his tax rate is higher, it’s more!

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company’s diverse businesses — especially those remaining credit default swaps. I’ll continue over the short term to help make sure no balls are dropped, but after what’s happened this past week I can’t remain much longer — there is too much bad blood. I’m not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I’ll leave under my own power and will not need to be “shoved out the door.”

I see. So there’s too much bad blood in the place that paid you millions and millions over ten years. What’s the word… right… perspective!

Jake DeSantis

Who else now supports the T.A.R.P. surtax measure?


Reading: Good For You, In Moderation

January 10, 2009

Okay, as I promised, I’d post on something I’m doing: catching up! Seriously, why do people keep writing kilo-worded articles? And all these must-read pieces… argh! Here’s what I haven’t gotten around to yet…

  1. The Weekend That Wall St. Died — The WSJ Journal piece that seems to be the answer to their three-part series on Bear Stearns.
  2. Fannie Mae’s Last Stand — Vanity Fair, in an effort to prove that they can write a lot of words about finance too, delivers 10,000 words on the G.S.E.’s end.
  3. Joe Nocera on VaR — Honestly, the fact that everyone read and commented on an article focused on VaR probably means I should get a less-nerdy blogroll. That being said, I can’t avoid the fact I’ll probably enjoy reading it.
  4. Two Part Op-ed from Einhorn and Michael Lewis — They should write a book. It can be called, “The New Profitable Thing: Fooling The Government All The Time”
  5. Judd Gregg’s Op-ed in the WSJ — Apparently, we (taxpayers) are making money hand over fist! Can I put more money with them?
  6. John Paulson’s Profile in Portfolio — The man put himself on the map and went from good, but not special, merger-arb to the king of the Fundhouse.
  7. The Reckoning — This series by the NYT goes int all sorts of topics. Really, though, NYT … China caused the crisis? Every article is lots of words.
  8. The End of Wall St. — Ugh. I know, should have read it by now. Sorry well-informed people.
  9. A Reasonable Query for AIG — Simply asks the question, “Where did the cash go?” I have no idea, I haven’t read it yet.
  10. AIG’s Bailout — A long article on it. That’s all I know.
  11. How India Avoided a Crisis — Joe Nocera talks about how India avoided … fine, you get it. Gotta be something worth knowing in here.
  12. How Spain Avoided a Crisis — It goes into some details about how they thought about the risks in the market and how they avoided the issues.
  13. Three Part Washington Post Series on AIG’s Collapse — By the end of this reading list I’m going to know every detail about the AIG bailout or the mainstream media should be vivisected.
  14. Anatomy of a Crisis — Profile of Bernanke and the crisis. It’s long and in the New Yorker, so it must be both worth reading and difficult to find the time and will to read.
  15. Euromoney Article on Lehman and Prime Brokerages — Once again, it’s long and it’s about a crisis. Must be worth reading.
  16. Banks vs. Consumers — In one corner you have lobbyists, PACs, and well-connected executives. In the other corner you have the people that actually elect the public officials who make that rules that will determine the outcome. Given that description, it has a surprise ending!
  17. NYT Advocates a Consumer Czar — This is just something I believe should be done. Hopefully they have facts I can arm myself with.
  18. Profile of Henry Blodget — This might actually remain on my list for a long time, since he never answers my emails. Although, Dan Frommer and I are Twitter pals, so maybe I’ll read it soon after all.
  19. Profile of Jimmy Cayne — I guess I’ll wait until I’m feeling down on myself…
  20. Inflation Swindles the Equity Investor — Not sure how this 1977 Warren Buffett article got on my list, but it hasn’t been on anywhere near as long as it’s been around.
  21. A Short Banking History of the U.S. — I have no idea how this got on there… NONE!
  22. A whole bunch of “Background of the Merger” sections from filings….

Argh. CliffsNotes… ?

GOES: Government Owned Equity Stake. What could GOES wrong?

October 4, 2008

Here’s the biggest question I have about all these 79.9% stakes the government is taking in various companies: what happens to these stakes?

1. What will the government do in terms of exercising control? How heavy handed will the government be in forcing the businesses out of risky business lines?

2. How will these G.O.E.S.’s be disposed of? Who determines the price? When do the people sell? How do they get their money back? Is there a targeted return? Does the government even have to sell?

3. How will the conflicts of managing private businesses be managed? For example, if the government starts playing favorites when it comes to making discretionary regulatory decisions, potentially in the name of protecting it’s investment, then it’s a huge potential problem for the players in the same space that are healthy.

4. Speaking of which, what duty does the government have to protect it’s investment?

5. How do we avoid people getting rich off of the taxpayers’ money? What kind of compensation controls will the government seek to impose?

6. If these companies exist can they still employ lobbyists (Fannie and Freddie don’t, but I saw nothing about AIG being banned from lobbying)? Why should they be allowed to continue lobbying? (Why these companies shouldn’t be allowed to continue lobbying is left as a simple exercise for the reader.)

Seems like Hank Paulson has just gone out and taken over a bunch of companies. Didn’t anyone ask what his plan was? Well, except of course buying the rest of them too…