AIG employees angry with public

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    Mar 04, 2010 4:48 PM GMT
    " ... But behind closed doors, employees at AIG's Financial Products division -- the very unit whose trading had hastened the insurance giant's collapse -- were defiant, saying they were merely getting what they were due, recoiling at public accusations that they were behind their capitalizing on the company's massive taxpayer bailout. ... "

    http://www.washingtonpost.com/wp-dyn/content/article/2010/03/03/AR2010030303764.html?hpid=sec-business

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    Mar 04, 2010 6:04 PM GMT
    And they wonder why they need to wear bullet-proof vests when entering the building.

    What part of capitalism is this? They have a failed business model, only saved by the gov't to prevent the entire economy from sinking under the weight of AIG's collapse, but they feel entitled to raises and bonuses. What a stunning bunch of assholes.
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    Mar 04, 2010 6:14 PM GMT
    Christian73 saidAnd they wonder why they need to wear bullet-proof vests when entering the building.

    What part of capitalism is this? They have a failed business model, only saved by the gov't to prevent the entire economy from sinking under the weight of AIG's collapse, but they feel entitled to raises and bonuses. What a stunning bunch of assholes.


    That's more than a little unfair. AIG collapsed because of one trading division that racked up an absurd amount of liabilities. All the people responsible in that unit are now gone. So to blame the people who are there for what their predecessors did is a mite bit silly - not to mention the fact that given that a lot of those contracts are still being unwound, because the government stepped in with guarantees it'll end up costing taxpayers far more than the (by comparison) small bonuses/comp packages - additional costs that will likely be in the billions because of the complexity and size of the transactions.

    So how much is a public flaying worth?
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    Mar 04, 2010 6:17 PM GMT
    How dare they.... how friggin' dare they!
  • Celticmusl

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    Mar 04, 2010 7:06 PM GMT
    I've spent the last ten years as a stock broker. The only difference between AIG and all the other firms is that AIG got caught. Yes, most every single higher-up at all these companies has an incredulous amount of self righteous entitlement. If they did not, they would never have gotten to where they are now.
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    Mar 04, 2010 7:16 PM GMT
    riddler78 said
    Christian73 saidAnd they wonder why they need to wear bullet-proof vests when entering the building.

    What part of capitalism is this? They have a failed business model, only saved by the gov't to prevent the entire economy from sinking under the weight of AIG's collapse, but they feel entitled to raises and bonuses. What a stunning bunch of assholes.


    That's more than a little unfair. AIG collapsed because of one trading division that racked up an absurd amount of liabilities. All the people responsible in that unit are now gone. So to blame the people who are there for what their predecessors did is a mite bit silly - not to mention the fact that given that a lot of those contracts are still being unwound, because the government stepped in with guarantees it'll end up costing taxpayers far more than the (by comparison) small bonuses/comp packages - additional costs that will likely be in the billions because of the complexity and size of the transactions.

    So how much is a public flaying worth?


    This article is not about those who currently work there, but those who were directly involved in the failed unit, which put not only the company, but also the entire economy at risk. (And Tim Geitner fucked it up royally)

    Frankly, AIG should be completed broken down to it's unit size and then anti-trust laws should be passed to regulate how large an insurance company can grow.
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    Mar 04, 2010 7:41 PM GMT
    once again proving my point that all of these companies should have been allowed to sink or swim on their own merits.

    we would have then seen what tune they would have been singing today
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    Mar 04, 2010 7:57 PM GMT
    What blackguy4you said.
  • Celticmusl

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    Mar 04, 2010 8:10 PM GMT
    riddler78 said
    Christian73 saidAnd they wonder why they need to wear bullet-proof vests when entering the building.

    What part of capitalism is this? They have a failed business model, only saved by the gov't to prevent the entire economy from sinking under the weight of AIG's collapse, but they feel entitled to raises and bonuses. What a stunning bunch of assholes.


    That's more than a little unfair. AIG collapsed because of one trading division that racked up an absurd amount of liabilities. All the people responsible in that unit are now gone. So to blame the people who are there for what their predecessors did is a mite bit silly - not to mention the fact that given that a lot of those contracts are still being unwound, because the government stepped in with guarantees it'll end up costing taxpayers far more than the (by comparison) small bonuses/comp packages - additional costs that will likely be in the billions because of the complexity and size of the transactions.

    So how much is a public flaying worth?


    So I guess the Toyota brake division is at fault for all the company's misdeeds. Give me a break. Most of the people doing the trades that are no longer there were the scapegoats only following the workflow structure of what was put in place by the higher-ups....all the way to the CEO. If you are suggesting no one from the company knew that this was happening other than the traders from one department, the company should be terminated for being completely ignorant, incompetent, and fiscally dangerous to the economy.
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    Mar 04, 2010 11:19 PM GMT
    riddler78 said
    Christian73 saidAnd they wonder why they need to wear bullet-proof vests when entering the building.

    What part of capitalism is this? They have a failed business model, only saved by the gov't to prevent the entire economy from sinking under the weight of AIG's collapse, but they feel entitled to raises and bonuses. What a stunning bunch of assholes.


    That's more than a little unfair. AIG collapsed because of one trading division that racked up an absurd amount of liabilities. All the people responsible in that unit are now gone. So to blame the people who are there for what their predecessors did is a mite bit silly - not to mention the fact that given that a lot of those contracts are still being unwound, because the government stepped in with guarantees it'll end up costing taxpayers far more than the (by comparison) small bonuses/comp packages - additional costs that will likely be in the billions because of the complexity and size of the transactions.

    So how much is a public flaying worth?


    I’m not usually one for populist sentiments, but I have to disagree with you.

    First of all, Christian73 is correct that the article is about people who were in the Financial Products division at the time it collapsed, although the article does mention that the “corporate leaders” of the time had left.

    Claiming that these AIG employees should receive the bonuses they would have if AIG never had problems just doesn’t make any sense. If AIG had entered bankruptcy, these people wouldn’t have received their bonuses, or would have only received pennies on the dollar of the contract bonuses’ facial value. So why should they receive their bonuses after a bankruptcy-averting taxpayer bailout? The employees argued they should receive the bonuses for staying to wind up the division, but they wouldn’t receive these bonuses if they left for other employers (and you can know this fact since if it were otherwise, these guys would simply have left for these other employers), so it can’t be to incentivize them to stay. Given how these employees’ credit default swaps caused the problem, these bonuses also can’t be as compensation for good results.

    So, I can see an argument that perhaps they should receive bonuses comparable to the ones they would receive at competing employers, but there’s no compensatory or incentive-related reason to give them the bonuses they would have received if these financial products had done well. Saying otherwise seems “a mite bit silly.”
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    Mar 05, 2010 12:21 AM GMT
    NNJfitandbi saidIf you work at a failed company, you don't get a bonus. That's business.

    Except in America.


    Yes. My point exactly. For this alone, Geitner should resign.
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    Mar 05, 2010 12:31 AM GMT
    Satyricon331 said
    I’m not usually one for populist sentiments, but I have to disagree with you.

    First of all, Christian73 is correct that the article is about people who were in the Financial Products division at the time it collapsed, although the article does mention that the “corporate leaders” of the time had left.

    Claiming that these AIG employees should receive the bonuses they would have if AIG never had problems just doesn’t make any sense. If AIG had entered bankruptcy, these people wouldn’t have received their bonuses, or would have only received pennies on the dollar of the contract bonuses’ facial value. So why should they receive their bonuses after a bankruptcy-averting taxpayer bailout? The employees argued they should receive the bonuses for staying to wind up the division, but they wouldn’t receive these bonuses if they left for other employers (and you can know this fact since if it were otherwise, these guys would simply have left for these other employers), so it can’t be to incentivize them to stay. Given how these employees’ credit default swaps caused the problem, these bonuses also can’t be as compensation for good results.

    So, I can see an argument that perhaps they should receive bonuses comparable to the ones they would receive at competing employers, but there’s no compensatory or incentive-related reason to give them the bonuses they would have received if these financial products had done well. Saying otherwise seems “a mite bit silly.”


    The article itself is a rather vapid one. It's no secret on the street that strong performers have already long since moved on (not only from here but most of the TARP supported banks - largely because of compensation issues which is why any TARP funded banks have been so aggressive about paying down these forced loans). Christian isn't right about th article about being about those who caused the disaster. Here's a WSJ article from almost a year ago - which is already considerably more detailed: http://online.wsj.com/article/SB123957925343711995.html. E.g.
    WSJ
    That includes tens of thousands of trades, mostly with other large financial institutions, that, among other things, promise to make payouts if, for example, interest rates rise or fall, or commodity prices spike or plunge.

    Many of the trades are currently hedged, which is intended to limit losses, but Mr. Pasciucco said maintaining the hedges "is a task," which is one reason to pay bonuses to keep employees who are familiar with the portfolio.

    The bonuses were retention bonuses - not for what they would have earned had the company not gone bust. So think about it this way. There's a 1.6 Trillion dollar portfolio - and the cost to manage it is $165 million - to avoid further losses that they were promised if they stayed. If the bonuses were for performance, I'd absolutely agree that it would be mortifying if they were being paid for the crap job they did - but they're not.

    It's a near certainty that some of those hedged transactions have already been managed suboptimally because of departures (with costs probably already ranging in the billions). So my question stands - what's an acceptable cost of a public flaying? If you knew that taking away all of it would cost tax payers billions more - would that be ok so long as these traders didn't get it?

    You, me and the next guy might dislike the cost of unwinding these transactions - but it doesn't make them unnecessary or improper. I suspect that just as a matter of optics, this was a horrible way to unwind it. If I were to have done it, I would have hired say an accounting/bankruptcy firm, clearly paid 165M + for them to hire all the old employees to unwind the 1.6 trillion dollar portfolio (that's 1/10,000 of the cost - try getting anyone to manage money for that cost - not to mention the portfolio is still fraught with an incredible amount of risk). Sure it's a shell game but by presenting details like this, it clearly shows the cost-benefits - of course it probably would have cost a whole lot more than 165M - and while this was cheaper, articles like this is what we get as a result.

    BTW Christian - fwiw I like the new picture better icon_wink.gif. As for your comment - the goal of these retention bonuses is/was to wind down the unit. The problem wasn't the size of AIG (which made up most of the market capitalization of all insurers at one point) or even CDS's, but rather the lack of disclosure and risk management. Investors would have been the first to flay management had they understood the risks - and there were a lot of sophisticated investors/hedge funds who could have easily blown the whistle.
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    Mar 05, 2010 12:35 AM GMT
    Christian73 said
    NNJfitandbi saidIf you work at a failed company, you don't get a bonus. That's business.

    Except in America.


    Yes. My point exactly. For this alone, Geitner should resign.

    The fact he couldn't get his taxes right and was expected to oversee the IRS should be reason alone he shouldn't have been confirmed.
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    Mar 05, 2010 1:14 AM GMT
    riddler78 saidThe article itself is a rather vapid one. It's no secret on the street that strong performers have already long since moved on (not only from here but most of the TARP supported banks - largely because of compensation issues which is why any TARP funded banks have been so aggressive about paying down these forced loans). Christian isn't right about th article about being about those who caused the disaster. Here's a WSJ article from almost a year ago - which is already considerably more detailed: http://online.wsj.com/article/SB123957925343711995.html. E.g.
    WSJ
    That includes tens of thousands of trades, mostly with other large financial institutions, that, among other things, promise to make payouts if, for example, interest rates rise or fall, or commodity prices spike or plunge.

    Many of the trades are currently hedged, which is intended to limit losses, but Mr. Pasciucco said maintaining the hedges "is a task," which is one reason to pay bonuses to keep employees who are familiar with the portfolio.

    The bonuses were retention bonuses - not for what they would have earned had the company not gone bust. So think about it this way. There's a 1.6 Trillion dollar portfolio - and the cost to manage it is $165 million - to avoid further losses that they were promised if they stayed. If the bonuses were for performance, I'd absolutely agree that it would be mortifying if they were being paid for the crap job they did - but they're not.

    It's a near certainty that some of those hedged transactions have already been managed suboptimally because of departures (with costs probably already ranging in the billions). So my question stands - what's an acceptable cost of a public flaying? If you knew that taking away all of it would cost tax payers billions more - would that be ok so long as these traders didn't get it?

    You, me and the next guy might dislike the cost of unwinding these transactions - but it doesn't make them unnecessary or improper. I suspect that just as a matter of optics, this was a horrible way to unwind it. If I were to have done it, I would have hired say an accounting/bankruptcy firm, clearly paid 165M + for them to hire all the old employees to unwind the 1.6 trillion dollar portfolio (that's 1/10,000 of the cost - try getting anyone to manage money for that cost - not to mention the portfolio is still fraught with an incredible amount of risk). Sure it's a shell game but by presenting details like this, it clearly shows the cost-benefits - of course it probably would have cost a whole lot more than 165M - and while this was cheaper, articles like this is what we get as a result.

    BTW Christian - fwiw I like the new picture better icon_wink.gif. As for your comment - the goal of these retention bonuses is/was to wind down the unit. The problem wasn't the size of AIG (which made up most of the market capitalization of all insurers at one point) or even CDS's, but rather the lack of disclosure and risk management. Investors would have been the first to flay management had they understood the risks - and there were a lot of sophisticated investors/hedge funds who could have easily blown the whistle.


    The WSJ article is subscription-only; all the preview says is that 20 of the division’s 370 employees left.

    When you say that “Christian isn't right about the article about being about those who caused the disaster,” you’re assuming that the Financial Product division’s traders who remained (who were nearly everyone, by the WSJ’s numbers) had no causal relationship to the outcome, which is a very difficult claim to believe.

    Even if they didn’t, since we agree these bonuses aren’t to compensate them for performance but rather to incentive behavior, the fact remains that people in their situation could easily have had a causal relationship to the outcome, even if these particular ones had some peculiar naïveté (which seems odd at best since you claim “there were a lot of sophisticated investors/hedge funds who could have easily blown the whistle”), and since we want to disincentivize such outcomes in the future, we still need to shape the expectations of people who, in expectation, have some causal role. The problem you’ve overlooked is that even your hire-them-back approach wouldn’t address the incentive problems that the bailout created, meaning you haven’t really considered the costs and benefits the problem poses.

    You’re saying that the departure of 5.4% of the employees entailed “costs probably already ranging in the billions,” which doesn’t seem that much since we’re discussing a $1.6 trillion portfolio – even assuming your speculation is correct, $2 billion would be only 0.125%, and even $99 billion would only be 6.2%. Insulating financial managers from the risks that would otherwise disincentivize them from endangering the global economy would seem to pose a much greater cost. I’m open to the possibility that these employees’ incremental value over a replacement set is so large that they can hypocritically blackmail the government into paying them these bonuses. However, such incremental value would have to be very substantial relative to the size of possible future economic catastrophes for it to be worthwhile.
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    Mar 05, 2010 1:20 AM GMT
    Satyricon331 said...Insulating financial managers from the risks that would otherwise disincentivize them from endangering the global economy would seem to pose a much greater cost. I’m open to the possibility that these employees’ incremental value over a replacement set is so large that they can hypocritically blackmail the government into paying them these bonuses. However, such incremental value would have to be very substantial relative to the size of possible future economic catastrophes for it to be worthwhile.

    Promise me you'll consider being my CFO, when I form my corporation?
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    Mar 05, 2010 1:31 AM GMT
    Satyricon331 said
    The WSJ article is subscription-only; all the preview says is that 20 of the division’s 370 employees left.

    When you say that “Christian isn't right about the article about being about those who caused the disaster,” you’re assuming that the Financial Product division’s traders who remained (who were nearly everyone, by the WSJ’s numbers) had no causal relationship to the outcome, which is a very difficult claim to believe.

    Even if they didn’t, since we agree these bonuses aren’t to compensate them for performance but rather to incentive behavior, the fact remains that people in their situation could easily have had a causal relationship to the outcome, even if these particular ones had some peculiar naïveté (which seems odd at best since you claim “there were a lot of sophisticated investors/hedge funds who could have easily blown the whistle”), and since we want to disincentivize such outcomes in the future, we still need to shape the expectations of people who, in expectation, have some causal role. The problem you’ve overlooked is that even your hire-them-back approach wouldn’t address the incentive problems that the bailout created, meaning you haven’t really considered the costs and benefits the problem poses.

    You’re saying that the departure of 5.4% of the employees entailed “costs probably already ranging in the billions,” which doesn’t seem that much since we’re discussing a $1.6 trillion portfolio – even assuming your speculation is correct, $2 billion would be only 0.125%, and even $99 billion would only be 6.2%. Insulating financial managers from the risks that would otherwise disincentivize them from endangering the global economy would seem to pose a much greater cost. I’m open to the possibility that these employees’ incremental value over a replacement set is so large that they can hypocritically blackmail the government into paying them these bonuses. However, such incremental value would have to be very substantial relative to the size of possible future economic catastrophes for it to be worthwhile.


    Talent at the high end of any range doesn't scale in a linear way. But that said, there are more articles about turnover in the group following the article that appeared April of 2009. Considerably more have left since then. The people who leave are rarely the weakest players - they leave because they have better opportunities elsewhere.

    What is appalling in this case is that the government told these people that they would get $x if they stayed but then threatened to renege on their agreement / tax the bonuses at 100%. I think you're talking about moral hazard - which is a distinct risk - and essentially a number of these firms held the Fed at gunpoint claiming that their failure would result in a catastrophic results to the economy.

    I'd agree on this point. The bailouts were miserable public policy. Too big to fail is crazy on so many levels. It rewards shareholders and bondholders who should be penalized for not asking more questions. The issue now isn't about trying to resolve the issue of moral hazard - that's over - the government caved. The issue is about cost mitigation - unless you are saying that any losses would be the cost of sending a signal that anyone who works for a firm that's bailed out should have little to no trust in any contractual agreements that they have with that firm.

    None of the principle managers / directors who caused the crisis are there anymore. Further as for the 20 who left, there were a lot more than that. As I noted, as well, there are a number of hedgefunds who do have the sophistication to at least investigate the financial reporting if it were made publicly available which could have averted the risk much sooner. The risk was developed mostly after Hank Greenberg was ousted by Eliot Spitzer for something that seemed trivial at the time (at least to me). The management turmoil in the time that followed allowed for the levels of risk to build in order to pursue ever increasing returns on capital (everything fell apart after they lost their stellar credit rating with which their trading group used to trade - which meant that the cost of capital dramatically rose causing some of their hedges to fall apart).

    Of course the irony would be if we find out decades from now that if AIG does indeed blow up that former AIG traders were on the other side of the trade simply because it paid better - after all, they're the ones who were intimately aware of the transactions.
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    Mar 05, 2010 1:52 AM GMT
    riddler78: “The issue now isn't about trying to resolve the issue of moral hazard - that's over - the government caved. The issue is about cost mitigation - unless you are saying that any losses would be the cost of sending a signal that anyone who works for a firm that's bailed out should have little to no trust in any contractual agreements that they have with that firm.

    None of the principle managers / directors who caused the crisis are there anymore.”


    It’s unreasonable to pretend that the only people who caused the crisis are the principle managers and directors, especially since you’ve maintained that there were people who, although outside the division, could have blown a whistle on the risks the CDSs entailed. If they could have done so, it’s implausible that people within the division couldn’t have as well. Your post assumes that moral hazard only existed at the firm level, but you’ve offered no argument to support such a conclusion, and the claim isn’t compatible with rational choice theory or basic intuition. Yes, it’s unfortunate that there’s no immediately obvious way to penalize the most culpable, but your defense of these bonuses simply doesn’t follow from that fact.

    Red_Vespa: “Promise me you'll consider being my CFO, when I form my corporation?”

    lol icon_smile.gif I’m afraid I’d be doing an injustice to your shareholders >_<.
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    Mar 05, 2010 2:43 AM GMT
    SATYRICON331 "It’s unreasonable to pretend that the only people who caused the crisis are the principle managers and directors, especially since you’ve maintained that there were people who, although outside the division, could have blown a whistle on the risks the CDSs entailed. If they could have done so, it’s implausible that people within the division couldn’t have as well."

    My two comments are far from incompatible - you're talking about two different issues. Many of these trades collapsed when AIG lost their triple A credit rating. Further, there was nothing to blow the whistle on within the company because nothing was illegal. They just broadly accumulated greater amounts of risk - betting with the assets/stability of the other parts of the firm. It was however the oversight that allowed for risks to be balanced off that was missing - so it's not unfair to say that management and directors should take direct and primary responsibility.

    What hedge funds would have been able to blow the whistle on was to see the risk at a macro level.

    SATYRICON331 "Your post assumes that moral hazard only existed at the firm level, but you’ve offered no argument to support such a conclusion, and the claim isn’t compatible with rational choice theory or basic intuition. Yes, it’s unfortunate that there’s no immediately obvious way to penalize the most culpable, but your defense of these bonuses simply doesn’t follow from that fact."

    Without moral hazard at the firm level, this discussion would be pointless. I've had absolutely no need to "support such a conclusion". For a trader it's quite simple - you're given a set of tools and your goal is to achieve a certain return - compliance and oversight checks and balances the risk you take in order to broadly achieve greater returns. If compliance and oversight aren't working, this isn't necessarily the fault of the trader. And I only say necessarily because sometimes traders do something wrong (e.g. rogue traders like Nick Leeson and Barings bank - but this hasn't been the case or at least there haven't been any allegations as such)

    My defense of the bonuses are simply that a contract was made by the government to retain these people for $x. The people employed had a reasonable expectation to rationally choose to believe that the government would honor these agreements. That's fact. For us to resent this is what does not follow basic fact.

    I get that we're angry about what happened overall, but the cost of wrapping up the portfolio is minimal compared to the potential costs if there does end up being a blow up.

    Incidentally, as far back as 2001 when I was in still in banking, there was a great deal of speculation that AIG's financials were just one big set of smoke and mirrors. I don't remember the exact numbers but at the time though, they composed something like 60-70% of the market capitalization of insurers. That said, at the time management had far more incentive to ensure that they didn't fail - because more of their personal assets were wrapped up in the company.

    Someone could make the rational argument that it was only after Spitzer forced the resignation of Hank Greenberg that the interests of management diverged from that of shareholders and took on excess risk - ie moral hazard.
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    Mar 05, 2010 3:21 AM GMT
    I never said that management and directors shouldn’t take primary responsibility. I note my earlier point that even if the traders here suffered some sort of naïveté that kept the overall risk unclear to them despite their access to the underlying sets of information, it creates better incentives for any future actor who might consider he or she is in an analogous situation if we act strongly to disincentivize bad trading. Your anecdote that people recognized there was a risk as far back as 2001 simply substantiates this point, since these traders could have acted to disassociate themselves from these risks – labor pressures which would have made conducting these CDSs more costly.

    I simply don’t see how the two sentences, “Without moral hazard at the firm level, this discussion would be pointless. I've had absolutely no need to ‘support such a conclusion,’” make much sense. I never suggested that moral hazard didn’t exist at the firm level, and it’s unclear to me why you say you have no need to support the conclusion it only existed at the firm level when you go on to offer exactly such an argument.
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    Mar 05, 2010 3:41 AM GMT
    Satyricon331 saidI never said that management and directors shouldn’t take primary responsibility. I note my earlier point that even if the traders here suffered some sort of naïveté that kept the overall risk unclear to them despite their access to the underlying sets of information, it creates better incentives for any future actor who might consider he or she is in an analogous situation if we act strongly to disincentivize bad trading. Your anecdote that people recognized there was a risk as far back as 2001 simply substantiates this point, since these traders could have acted to disassociate themselves from these risks – labor pressures which would have made conducting these CDSs more costly.

    I simply don’t see how the two sentences, “Without moral hazard at the firm level, this discussion would be pointless. I've had absolutely no need to ‘support such a conclusion,’” make much sense. I never suggested that moral hazard didn’t exist at the firm level, and it’s unclear to me why you say you have no need to support the conclusion it only existed at the firm level when you go on to offer exactly such an argument.


    Again - just because the risk from the outside isn't transparent doesn't mean it isn't clear if you're on the inside - just as the fact a "veil" exists doesn't mean that anyone is doing anything wrong / illegal or even unusual. It's very possible that none of the traders did anything wrong if their risk wasn't managed by their superiors. The role of a risk officer - is just that - just to look at and control overall risk the firm takes - and to see if say the effects of two traders magnify that risk.

    My point about 2001 was that there wasn't the transparency at the firm level vis a vis the outside world - not that anything was wrong - simply that there wasn't transparency. The lack of transparency only became a problem when there was a forced management change (when previous management was highly invested with the bulk of their own capital) - which ironically was the result of populist outrage. Your attempt to direct blame/responsibility at the micro level makes a number of assumptions that the traders acted outside the direct interest of the firm - and there's absolutely no evidence of that here especially in the context that (a) trades collapsed because the cost or risk rose dramatically after the firm list their AAA credit rating and (b) it's entirely possible that a trader can take on additional risk in the interest of a firm and do so with absolute transparency. The problem is in the oversight and the broader level of risk management.

    Further, it again comes back to the fact that these traders were promised a certain level of compensation if they stayed and now the government wants to take it away from them without looking at why it's necessary for there to be competent people to unwind these complex transactions.

    (oh and yeah, that last paragraph in my previous response was totally unclear on my part. my bad).
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    Mar 05, 2010 3:47 AM GMT
    maybe those aig assholes should just lose their jobs and see if they would rather have a job without a bonus or no job at all. hmmm. i wonder what they would choose....
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    Mar 05, 2010 3:51 AM GMT
    It’s not necessary for someone to do something illegal or improper for it to be optimal to disincentivize their behavior. I think your post’s key move is at the end of the sentence, “The role of a risk officer - is just that - just to look at and control overall risk the firm takes - and to see if say the effects of two traders magnify that risk.” First of all, you’re assuming that traders had no knowledge of what the others were doing. Even if there were no inter-trader transparency, it’s unlikely, with 370 people managing a $1.6 trillion portfolio, that individual traders didn’t manage more than one trade, in which case they would have been in a position to know whether there were trades that were magnifying each others’ risks. They didn’t stop to think about the situation because they had no incentive to, which is exactly the problem penalizing them can help to allay in the future. Simply handing them bonuses as if there were no populist backlash just rewards their individual irresponsibility.
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    Mar 05, 2010 4:07 AM GMT
    Satyricon331 saidIt’s not necessary for someone to do something illegal or improper for it to be optimal to disincentivize their behavior. I think your post’s key move is at the end of the sentence, “The role of a risk officer - is just that - just to look at and control overall risk the firm takes - and to see if say the effects of two traders magnify that risk.” First of all, you’re assuming that traders had no knowledge of what the others were doing. Even if there were no inter-trader transparency, it’s unlikely, with 370 people managing a $1.6 trillion portfolio, that individual traders didn’t manage more than one trade, in which case they would have been in a position to know whether there were trades that were magnifying each others’ risks. They didn’t stop to think about the situation because they had no incentive to, which is exactly the problem penalizing them can help to allay in the future. Simply handing them bonuses as if there were no populist backlash just rewards their individual irresponsibility.


    If the bonuses were for their overall performance - I'd agree with you. But they're not. They were/are being provided to these individuals to stay in order to unwind hedges/the unit. Penalizing them by not honoring contracts does nothing to prevent others from avoiding the problem in the future.

    Many traders wouldn't know what others are doing specifically. Try hanging around a trading floor (or traders for that matter). It tends to be highly competitive but also a great deal of secrecy over what each individual is doing over the other. They might know snippets but they won't know the whole picture - it's just not possible to at the micro level. It's not a trader's job nor would it be reasonable to expect them to monitor what another guy is doing - or to even recognize the significance given the thousands, hundreds of thousands of transactions that could be ocurring.

    A hedge can involve any variety of instruments. Alternatively a risk officer/portfolio manager can tell a trader to specifically target a risk without telling that same trader what the "other side of the trade is" / hedge that would mitigate the risk. I think you're making assumptions about how a trading floor works that simply aren't true.
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    Mar 05, 2010 4:32 AM GMT
    You misapprehend an individual’s optimization when you conclude that an incentive effect depends on the original intention from some point in the past. I fail to see how “penalizing by not honoring contracts does nothing to prevent others from avoiding the problem in the future” when it simply signals that people, who could have had grasped the risks but didn’t, will face opportunistic penalization. That type of uncertainty provides an obvious disincentive from endangering the economy.

    Your claim that they had no way of knowing what they were doing is, again, simply implausible. Even if they couldn’t have taken the time to think about it while they were in the midst of doing these trades (which is implausible enough to begin with, given how elaborate these transactions were, and therefore how much time these people invested in them), the mere availability of rumors about AIG’s systemic risks could have prompted them to reflect on the situation at some other point (and so, contrary to your claim, I simply don’t need to make assumptions on floor mechanics to identify abstract information structures). Moreover, they wouldn’t have needed to know what the others were doing specifically; they wouldn’t have even needed to know it generally, although they probably did. Even if they didn’t, people in such situations in the future may have opportunities to do so, and it’s perfectly reasonable to induce those people to take every opportunity to do so. And lastly, even if they never will have such an opportunity, ex ante there’s still the possibility they could. This idea you have that their contracts should be sacred and inviolable seems antiutilitarian.
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    Mar 05, 2010 7:19 AM GMT
    Satyricon331 saidYou misapprehend an individual’s optimization when you conclude that an incentive effect depends on the original intention from some point in the past. I fail to see how “penalizing by not honoring contracts does nothing to prevent others from avoiding the problem in the future” when it simply signals that people, who could have had grasped the risks but didn’t, will face opportunistic penalization. That type of uncertainty provides an obvious disincentive from endangering the economy.

    Your claim that they had no way of knowing what they were doing is, again, simply implausible. Even if they couldn’t have taken the time to think about it while they were in the midst of doing these trades (which is implausible enough to begin with, given how elaborate these transactions were, and therefore how much time these people invested in them), the mere availability of rumors about AIG’s systemic risks could have prompted them to reflect on the situation at some other point (and so, contrary to your claim, I simply don’t need to make assumptions on floor mechanics to identify abstract information structures). Moreover, they wouldn’t have needed to know what the others were doing specifically; they wouldn’t have even needed to know it generally, although they probably did. Even if they didn’t, people in such situations in the future may have opportunities to do so, and it’s perfectly reasonable to induce those people to take every opportunity to do so. And lastly, even if they never will have such an opportunity, ex ante there’s still the possibility they could. This idea you have that their contracts should be sacred and inviolable seems antiutilitarian.


    Me thinks you're confusing timelines here. These contracts were made post AIG blowing up and after the government bailout. If you were to argue that they should have no expectation to receive any bonuses because they helped cause the blow up - or at least were part of the company as it went down - I would agree. However, that's not what happened. We're not talking about contracts made prior to the bail out, we're talking about contracts after! In a normal bankruptcy as I understand it, all contracts get renegotiated - and that's more or less what happened here.

    If they had screwed up the unwinding, I'd agree - take away their bonuses but that's not what happened either.

    The only lesson to be learned then is not to trust the government or any bailout firm. It'd take a big stretch to suggest that by taking away what was promised to them in order to help clean up the mess that they'd feel remorseful or learn from their role before hand seems bizarre at best.

    You've made a series of assumptions of how a trading floor works and information structures on that floor that simply aren't true - which is the primary reason why what you suggest doesn't make sense for anyone who has worked on a trading floor, around one, or with traders. The people on the floor just don't have the ability to see the big picture and generally aren't given the tools to do so. They would have very much understood their own trades and their individual risks/part of the hedge (a hedge has two sides of course), but it is very possible and likely they didn't know the whole picture - either the entire hedge and definitely not what everyone else on the trading floor was doing.

    Further, you've discounted the importance of retaining people to unwind transactions because of the potential for a significant blow up that could cost billions and even hundreds of billions. All to save $165 million that the government acknowledges it promised these people in the first place to keep them from leaving.