Andrew Ross Sorkin Explains

Today's New York Times features a fascinating front-page article by Andrew Ross Sorkin, entitled "The Case for Paying Out Bonuses at A.I.G.". Sorkin argues that if we do not pay $165 million in performance bonuses to executives at the failed insurer, we risk chipping at the very foundations of the rule of law:

If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

If government officials were to break the contracts, they would be "breaking a bond," Ms. Meyer says. "They are raising a whole new question about the trust and commitment organizations have to their employees."

It may be worth recalling why taxpayers now own 80% of American International Group. AIG's business model for the past few years was make expensive promises about the creditworthiness of third parties. In exchange for a fee, AIG would guarantee to pay you in the event someone else defaulted.

When those third parties began to run into trouble, AIG discovered that it actually couldn't meet its obligations. Without massive government assistance, the company announced, it would have to start abrogating contracts left and right.

This is nice work if you can get it. I personally would also like to offer insurance on the creditworthiness of large corporations, backed by the full faith and credit of the U.S. Treasury, and I bet I could do it at lower rates than even AIG. In fact, if readers will PayPal me the money, I will happily insure the creditworthiness of any listed or unlisted corporation for one penny per dollar per year.

As we computer programmers put it, if it doesn't have to work, I can make it run as fast as you want.

When a small company does what AIG did, it is called 'fraud' and people are sent to jail. However, since AIG had signed contracts with most of the biggest financial institutions in the world, it instead received a very large sum of money ($170 billion so far). This also makes sense. When a teenage kid breaks your storefront window, you chase him down and give him a pounding. But when the local mafia breaks your window, you sweep up the glass and make sure to increase the heft of your next monthly envelope.

Mr. Sorkin is now arguing that contracts AIG signed with the financial "brainiacs" who bankrupted the company also need to be honored, however distasteful it seems to us.

This makes it particularly instructive to read an article of Mr. Sorkin's from three months ago, discussing the future of General Motors, in which he advocates that the company be taken into bankruptcy so that its contracts with "gold-plated" employees can be renegotiated, or nullified:

G.M. currently employs about 8,000 people who actually don't come to work. Those who do go to work are paid about $10 to $20 an hour more than people who do the same job building cars in the United States for foreign makers like Toyota. At G.M., as of 2007, the average worker was paid about $70 an hour, including health care and pension costs.

Those costs are already coming down slightly because of a renegotiated deal with U.A.W. last year, but not nearly enough

....

Part of the problem is summed up by comments like this one in The Detroit Free Press, made by Kandy O'Neill, 39, an assembler at G.M.'s plant in Lake Orion, Mich., where she builds the Chevy Malibu and Pontiac G6. "I think we've given enough," she said about the cuts to her salary and pension plan.

"Everybody wants to come down hard on the workers," she said. "Nobody knows what we do inside there but the people who work there. It's hard. It is not an easy job."

When you read a line like that you might sympathize with her, but then you realize that nothing can be accomplished without bankruptcy. Ms. O'Neill: your company is asking the taxpayers -- many of whom don't have health care coverage -- to pay your salary and health insurance."

This second article is full of interest. It's worth explaining that Mr. Sorkin's figure of $70/hr is not actually the hourly wage of an auto worker -- that is between $14 and $33/hr, based on the type of work performed. GM's figure comes from adding in such things as payroll taxes and health insurance. But breaking it down to an hourly figure serves the helpful propaganda purpose of making it sound like Kandy O'Neill and others like her are taking home half a grand a day in cold, hard cash, rather than living a modest middle-class life in Michigan.

The notion that a livable wage with basic health insurance (five free doctor visits a year) and some vacation and sick days represent "gold-plated benefits" says a lot about Mr. Sorkin and his view of the world.

But even using GM's cost figures, a single $3 million retention bonus for one AIG "moneymaker" is enough to cover the cost of 1,200 skilled union auto workers. Yet according to Sorkin, contracts with the former are bulletproof, while contracts with the latter need to be renegotiated posthaste from a position of strength, or broken if necessary through bankruptcy.

The simple idea that the egregious AIG bonuses could also be nullified through bankruptcy does not enter into the equation. And I cannot seem to find a quote from Pearl Meyer or other compensation professionals about the trust and commitment companies need to show their blue-collar employees, though I will continue looking.

Sorkin's second argument for paying out the AIG bonuses is much stronger, and perfectly explains the difference between the two situations:

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave -- the buzz on Wall Street is that some have, and more are ready to -- they might simply turn around and trade against A.I.G.'s book. Why not? They know how bad it is. They built it.

Future GM employees, if there are any, would do well to learn from this, and build self-destruct circuits into their vehicles. And Mr. Sorkin should stop avoiding simple words like "extortion" and "ransom" if he is so concerned about defending the rule of law.

This was originally published at idlewords.com

Comments

[jmpfjoy]

I don't know what planet Sorkin lives on-

"They are raising a whole new question about the trust and commitment organizations have to their employees.­"

I work for a financial institution, and there isn't a stitch of 'trust or commitment' within a five-mile radius of the place. Every decision is made to promote the image of the company and to enhance the bottom line. It is every man (or department) for himself and everyone and everything else be damned. There is no democracy here- everyone is unhappy, overworked and angry. Employees have lived in fear of downsizing or the infamous 're-org' for years and this is just the addition of yet another layer of corporate coercion for all of us who actually do the real work.

That is the corporate culture that exists today..

[mikelartist]

Not paying them is well worth the risk. Let them sue. Let them come face to face with 12 jurors, 12 citizens, and let them explain how they worked hard at cutting bad mortgage paper into tiny little bits, mixing it all up with tiny little bits of good mortgages, putting them all back into bonds that were falsely rated AAA and sold across the world to unsuspecting investors.

Let them explain to the people that they duped how they should be paid a bonus for their "hard work".

There is a good chance they would never see the light of day from that point on. They would be lucky to be cuffed by the bailiff and hauled away.

The common folk have a reason to be pissed.

This isn't rocket science. This is a simple massive scam. Arrest them for fraud and be done with it.

[Realization]

As a matter of principal and a precautionary measure, we should start investigations of all the employees concerned in the AIG unit involved in this mess. Having been a major part of the screw up and having greatly benefited from it, they have a responsibility to help with the clean up - at a modest salary. If they quit, as opposed to being fired for incompetence, it should be understood that they will be investigated and prosecuted. If they work against AIG, their names should be made public and information made available to the press along with an increased level of prosecution.

If it is necessary to make examples, so be it. The Chinese concept is "Kill the chicken to frighten the monkey." Quite legal and necessary in this case.

And AIG should get out in front by actions showing how it realizes the extent of the problem and everyone from the top down is working hard and sacrificing to solve it. No fancy entertainment, no expensive renovations, cheap travel (pool air miles and use economy), brown bag lunches...­.. So some is theater - image is important. As owners, taxpayers should expect some style and performance.

[crazylikeafox]

"Sorkin argues that if we do not pay $165 million in performance bonuses to executives at the failed insurer, we risk chipping at the very foundations of the rule of law"

Let's risk it.

[JustSayMaybe]

Considering what little respect "the rule of law" has received in recent years, I don't know that there's much damage left to do. It wouldn't be chipping away at the foundations, in any case - it's more akin to skimming the whip cream off the top. The foundation is already set in sand, permitting the bending and shrugging off of rules as these rulers of the universe saw fit. Now they've all dug themselves too deep, and they want to complain that we, the taxpayers who are saving them from the unemployment so many of us face, are changing the rules? I have some very impolite words for all these people, that I would love to scream in their faces.

[ssfahrer]

This is NOT being "anti-labor" or "pro-big money". If you want to change a CONTRACT, you MUST RENEGOTIATE IT. Neither side can just walk away (after signing said contract) without suffering legal repercussions. For example, if the AIG executives had NOT fulfilled THEIR END OF THE DEAL, they would have received NO BONUS from them. Sounds fair enough to me (and it should to you). Since they did, they were entitled to the bonus money as stated in said contracts.

It's just like if GM had UNILATERALLY reduced the assembly line worker's pay even $ 1.00 per hour WITHOUT negotiation-- don't you think that someone would have hauled GM's A$$ into court faster than you could say "Jack Robinson"???? GM couldn't do it-- neither could AIG-- WITHOUT NEGOTIATION. Case closed!

[DesertDogAlpha]

Good post, but an inconvenient truth for the pitchforks and torches folks.

[swamijie]

So, how is it that the car companies have to go to the UAW and say "...take this new, 'RENEGOTIATED' contract or we go bankrupt because there will be no safety net..." but AIG and these other financial institutions aren't forced to do the same? How come the people who bought down the economy at AIG, FP weren't handed a new contract that basically gave them $1.00 in retention compensation and weren't forced to sign it under threat of the parent corporation going bankrupt and these people getting nothing but unemployment otherwise, as was done to the auto workers?

[mbaty]

The American people should be getting outraged--­retroactiv­ely. This amazing astounding corruption has been going on for a long time, and Mr. Sorkin's respective articles only illustrate the point that those who serve as mouthpieces for the elite are serving only their vested interests.
But I believe that outrage will turn to action, and the American people will create something new that transcends red-herring titles like "Socialism" and "Capitolis­m." These are divisive terms designed to stimulate fear and ignorance, having little bearing on the facts of real life. What we want is to be alive, to have liberty, and to be able to pursue our happiness. We have the resources, we have the know-how. We have to make it a reality. We have to get angry. And we have to have compassion, yes, even on those who have decieved and manipulated us, even those who would continue to "rob us blind" if given the chance. And we have to make sure they don't have the chance again.

[ClarcKing]

Reading a bit of Mr. Sorkin's article I am disturbed by the underhanded representations. I don't think the anti-labor rhetoric is justifiable in light of all that has gone on the last 20 years. All the money in this society has gone in only one direction: straight up. Meanwhile 80% of Americans pay 80% percent of the interest built in and on top of their purchases. Ten percent of the population lives off this interest. Where did Mr. Sorkin go to school to have acquired and shared his fascist perspective so cleverly. Why are we even talking of bailouts and its disbursements? The U.S. is in the middle of a monetary financial derivative debt based Global economic collapse. It can't be fixed with confidence or bailouts. This deadly economic engine is accelerating the contraction of the population's capacity to sustain itself. Unless and until the U.S. leadership and its' population realizes this fact the American people are headed to their doom. Mr. Bernanke should resign. The Fed must be put into bankruptcy and create the U.S. National Bank now. All life sustaining sectors of the population's physical economy must be maintained and increased wherever possible. This is the necessary perspective from now on.

[DesertDogAlpha]

5 percent of the people pay 75 percent of the income taxes. 50 percent pay less than 3 percent of the total. They need to pay up for what they want. And they need to stop being foolish with credit.

[kanester]

There are a few problems with Sorkin's analysis:

- Sorkin really doesn't have that much real-world experience. Most of his writings mouth
current business (non)thinking.

- Sorkin is scared. He's seeing (at his young age) the end of his world. That means there
is a lot of life left for him in which he'll have to do some honest work.

- "It will makes things worse" if we eliminate "trust" by breaking these contracts. Ceglowski's
pointing to Sorkin's take on "renegotiating" (breaking) UAW contracts says it all about how
much he values contract law.

L'il Andrew, trust in business has left the building. Besides, "worse" is still coming ... see Newsweek's investigation on just how solvent AIG's insurance side of the business really is. At first glance, they seem to have about 20 percent LESS assets than reinsurance debt.

[Robert Cantor]

Nice! also, Sorkin is ignorant of contract law. All you have to do is present a reasonable case for bad faith and the whole contract is up for review. Bad faith is suggested by the wording and timing of the bonus guarantees.

[itolduso]

There is no fairness for one man until there is fairness for all men.

[itolduso]

Funny thing how the importance of honoring contracts fluctuates according to whom the contract is written to protect. Air traffic controllers, blue collar workers, writers, artists, musicians, pilots, independent truck drivers, school teachers, ect., ect., ect., have seen their pensions dumped and/or reduced, promised health care benefits disappear, salaries & hours reduced & positions eliminated- terms and territories changed (at great cost to them) and Intellectual Propert rights stolen, in short, they've been left with little recourse when their contracts were treated as though they were written in pencil (in some cases, in disappearing ink) and now, when white-collar and corporate contracts are in question-we are told that nothing can be renegotiated or changed without threatening the very foundations of our society. Is it just another volley in our long-running 'class war', or could it finally be our "let them eat cake" moment? vive le revolution!

[mountainweb]

As long as the taxpayers get their money back then this idiot can continue to support the law of greed and corruption as well as the brain dead concept of rewarding people regardless of success or failure.

[Chicagofan1]

Sorkin is absolutely right.
Look at the big picture. The outcomes from the legally bound contracts are based on how fair or good the contract was. Each case is very different but if we will start breaking the LAW... tomorrow if might be YOU who will be the victim of broken contract.
GM was RENEGOTIATING their contracts with Union. What we are doing to AIG is trying to BREAK it.
The problem is that we as society need to get better education and starting to read and understand contracts (or higher an attorney) to do that for us. 100 senators did not even read the contract. We are responsible for whatever the outcome will be by putting our signature down.
President took the responsibility for what was done under his radar. Good for him and for us. We have to be accountable. Law is the Law and must be obeying. No questions about it. Next time READ the contract before signing it.

[rfshunt]

Ah, I see.

When your contractual agreement is with blue collar working class people, you can RENEGOTIATE it to screw them out of pay and benefits and it's all just peachy and fine.

But a contract with millionaire bankers, well now, that's just beyond the legal reach of negotiation.

Thanks for educating us poor slobs to are just too ignert to "higher" an attorney to splain it to us.

[ssfahrer]

I don't think Mr Sorkin said that! But I dare you to TRY it before you DENY it....

[robbor]

Right On!! - great opinion piece, Tx!

[dmargoliss]

"fish scale" means cocaine. The youth of america knows this because in March, 2006 Ghostface Killah of the Wu-Tang clan released an album entitled "Fish Scale" in which the rapper and alleged former drug dealer equates the cognomen "fish scales" with high quality cocaine in reference to the idea that his trafficking of the drug necessitates large scales, the type of which are commonly used by fisherman to way their catch. Kids know this because, for one thing, Rolling Stone Magazine told them:

"Fishscale" is apparently slang for uncut coke -- and the perfect title for an ambitious disc with almost no filler.
Jonathan Ringen

The clear reference to the drug cocaine during the only moment of good humour in the entire commercial is a clear and discernable glorification of the drug in contrast to the goals of the venture. For our tax dollars and charitable contributions to fund a PSA which glorifies cocaine is damaging to our communities who wish to fight addiction without the constraints of contradictory messages. It is my belief that the writer/s of the commercial intentionally put the reference in as a joke to sneak by their superiors. I believe this because the mathematical probability of the word "fishscale" being included in the word salad by random choice is very low, especially since it is not only the inclusion of words themselves but their placement in the word salad at the point when the mother smiles that makes them so pernicious.

[Sundialsvc4]

"The rule of law" should, quite simply, begin here:

(1) What you did ... and what a whole lot of people did to aid-and-abet you ... is either "crime" or "high crime."

(2) You are under arrest.

(3) Your contracts, being illegal, are null-and-void. Your bonuses, being the indirect consequences of criminal activity, have, along with your salary and all your assets, been seized.

"The rule of law" means not only that law exists and that it is enforced "sometimes," but that it is enforced uniformly "all the time."

And let us not forget the plaintiffs ... all 305 million of US.

Let's be careful not to allow either Bernie Madoff, or AIG, or even "Secretary 'G'" to become scapegoats or sacrificial-lambs. The fundamental problem that we are dealing with here is "crime," and it must be treated accordingly. This crime is much, much bigger than any specific example of it.

[KillTheMessenger]

I am very grateful that you never made judge. Your "law" sounds very much like "Off with his head. We can bring in the witnesses later."