More on AIG bonuses

Hi all,

As usual, many of you had interesting comments on my March 19th note on the AIG bonus scandal. Louise (my former wife) replied: “Thank you for the thoughts.  I just can’t buy these arguments.” She no doubt reflects widely held attitudes about these bonuses, corporate remuneration more generally, greed and excessive risk taking by financial sector players, and the government’s role in the mess (at least I hope that there is public anger over that too). My Bulgarian friend Nedialko Dumanov (a banker) raised questions in his reply that give me a second shot at explaining my own outrage. His note and my reply are followed by some additional comments by some of you. Thanks so much.


Hi Warren,

First for AIG bonuses – it is a crime. Bonuses for bringing a company to bankruptcy! Retention bonuses – it is funny. If these managers were wise and smart why does the company need hundreds of billions governmental aid?! How could people who produced huge loss could be valuable employees?!

Where is the free market economy? What about competition and comparative advantages of countries? Why should companies who did not performed well and made huge losses be given hundreds of billions, which they will waste as they did with the previous billions?!! It is terribly stupid to give money to someone who has proved that he can not manage them properly!

If I had US dollars I would sell them immediately.

Nedialko [Bulgaria]


Dear Nedialko,

The retention bonuses were not for AIG management. They were for employees expected to leave AIG’s sinking ship to work for competitors who were thought to be vital to efforts to contain the losses the products they created were causing. As a shareholder of a company I would want to pay what it takes to employ people who increase the long run profits of the company by more than they are paid (thus increasing the value of my shares). If their remuneration takes the form of part salary and part performance bonus, that might work even better. However, the use of bonuses has clearly gone wrong in some, maybe many, cases by focusing too much on short term performance and by creating incentives to fudge the accounting. The remuneration of top management sometimes seems grossly excessive as well.

When AIG reported a $11.5 billion in annual losses for 2007, it also announced the resignation of Joseph Cassano (the guy most responsible for those losses) as head of AIG’s Financial Products division, “saying an auditor had found a "material weakness" in the CDS portfolio. But amazingly, the company not only allowed Cassano to keep $34 million in bonuses, it kept him on as a consultant for $1 million a month. In fact, Cassano remained on the payroll and kept collecting his monthly million through the end of September 2008, even after taxpayers had been forced to hand AIG $85 billion to patch up his fuck-ups. When asked in October why the company still retained Cassano at his $1 million-a-month rate despite his role in the probable downfall of Western civilization, CEO Martin Sullivan told Congress with a straight face that AIG wanted to "retain the 20-year knowledge that Mr. Cassano had." (Cassano, who is apparently hiding out in his lavish town house near Harrods in London, could not be reached for comment.)”[1]

What can and should be done about such abuses? I believe in letting supply and demand set the price (remuneration package) as long as competition is unimpeded. Imposing limits/caps on what the market can pay when supply and demand would set a higher price is rarely successful. If a firm wants someone and is not able to pay the salary/bonus needed to get him or her, it is hard to prevent the two from finding some other (equivalent but less efficient) way to reach a deal. Babe Ruth and Steve Jobs are unique and worth paying almost anything to get. But such cases are extremely rare. There are dozens of very talented men and women who are able to do outstanding jobs at leading Citibank, GM, or Microsoft. It is very unlikely that one of them is so uniquely qualify relative to the others to be worth $34 million per year. So what has gone wrong in the market?

Managements sometimes appear to be enriching themselves at the expense of owners. Something is wrong with my rights, or the use of them, as a shareholder to evaluate and control management (and employee) remuneration. Corporate governance needs strengthening. There may be other sources of this problem as well. Let’s see what we can learn from the current experience.

Within weeks of its first public disclosure of losses in February 2008 AIG’s compensation committee offered retention bonuses to several hundred Financial Products division employees. Later AIG’s new, government appointed boss, Edward Liddy, argued, as I stated in my previous note, that these employees were important for negotiating the unwinding of Credit Default Swaps they had created. Without them, he argued, the liquidation of the Financial Products division could cost tax payers much more. I am in no position to evaluate the veracity of Mr. Liddy’s claim, but it seems plausible to me that the guys who made the deals are the best ones to undue them.

More alarming than the public’s reaction to AIG’s retention bonuses was the reaction to how AIG used the $173 billion received from the government. Serious questions have been raised about the need to bailout AIG (actually its separate Financial Products division, as its insurance units are fine) in the first place, but the reason, justified or not, was that its failure could spread losses to other creditor financial institutions causing a cascading domino of failures the economy could not easily absorb. Thus it should not be surprising that much of AIG’s bailout cash went to honor its obligations to other financial institutions. At the top of the list of beneficiaries was good old Goldman Sachs. However, it was the large payments to foreign banks (Societe Generale, Deutsche Bank, UBS, Barclays, BNP Paribas) that drew the most criticism. U.S. entities, including the U.S. government in a very big way, receive hundreds of billions of dollars of financing from foreign banks, governments and others every year. If these foreign lenders suspected that their repayments were in doubt—that, for example, American banks (or the likes of AIG) would discriminate against and not fully honor their obligations to foreign lenders, the American financial system would collapse. It really would be another great depression. The American government would be forced into default on its huge debt as no one would be willing to buy it or hold what is already out there. No one would finance stimulus packages, bailouts, or wars in Iraq and Afghanistan, much less the regular parts of the budget that exceed tax revenue.

The congress that (perhaps) foolishly authorized the funding for these bailouts in the first place began stomping its feet (rather too late) demanding its (our) money back. Fine, but to seek to deny payment to people who had already done the work they promised to do or to tax it all away after the fact was a series and damaging over reaction, though tax payers did seem to want to punish AIG employees even if it cost them more in higher taxes because of higher bailout costs. “White House Chief of Staff Rahm… Emanuel said that although the anger of the public and Congress is understandable, ‘everybody woke up the next day, took a deep breath and realized, let’s not govern out of frustration.’”[2] Thank God for that.

I urge you to read Robert J. Samuelson’s column "American Capitalism Besieged", in today’s Washington Post. Here are two quotes from his op-ed piece:

“Schumpeter, one of the 20th century’s eminent economists, believed that capitalism sowed the seeds of its own destruction. Its chief virtue was long-term — the capacity to increase wealth and living standards. But short-term politics would fixate on its flaws — instability, unemployment, inequality….

“But Schumpeter’s question remains. Will capitalism lose its vitality? Successful capitalism presupposes three conditions: first, the legitimacy of the profit motive — the ability to do well, even fabulously; second, widespread markets that mediate success and failure; and finally, a legal and political system that, aside from establishing property and contractual rights, also creates public acceptance. Note that the last condition modifies the first two, because government can — through taxes, laws and regulations — weaken the profit motive and interfere with markets.

“The central reason Schumpeter’s prophecy [that capitalism would not survive] remains unfulfilled is that U.S. capitalism — not just companies, but a broader political process — is enormously adaptable. It adjusts to evolving public values while maintaining adequate private incentives.”

Best wishes,



Yeah, this is a lot of hot air, and it’s largely stupidity if not outright demagoguery.  If someone pays me a “bonus” to ensure that I stick around and I do stick around, they damn well better pay up.  If AIG management thought it prudent to make such commitments to employees contingent on nothing else but the always implicit avoidance of bankruptcy, then they have to live with it.  If the current shareholders — now largely the U.S. government — think that was irresponsible, they can fire or otherwise penalize those managers.  That horse, however, has largely left the barn since the government asked Mr. Liddy to come out of retirement to keep AIG from careening into bankruptcy.  Instead of having AIG-FP folks commit hara-kiri, as Sen. Grassley so obscenely suggested, America would do better to have a few dozen members of Congress fall of their own swords, very real swords.  And if they don’t have swords, a quick jump from the top of a House or Senate office building would suffice.

[Kelly Young, Washington DC]


Hi Warren

I think you are right about what you said.   But the distaste for the actions that Congress has had to face over the last few months trying to control what has happened I think has frustrated so many of the Members.  Had the Treasury for example gone up to Congress early and laid out the issues it was facing to Members like my old boss Chuck Grassley and explained it to him I don’t think you have had him go off the way he did.  Here you have one of the tight fisted guys I have ever met… and the stories I could tell you about that would make you laugh for weeks.  As it doesn’t make a difference if it’s his money or the governments money (he has returned over $100,000) a year from his office budget which we often told him by doing that it is then used for those that go over their budgets each year, it has never made a difference to him, he did not spend the money. 

For him to be voting for some of these bail outs goes completely against his grain.  Then to find out from the press that a company like AIG was giving out those size bonus’s to people that ran the company into the ground and at the same time expecting billions in tax payers money because they are too big to go under it does not make since to reward them.  They should be I am sure in his mind feel lucky they still have jobs.  They should want to stay and help revive their own reputations.  Who would or should hire people that did what they did to that company.  I think that is some of the feelings going around the hill.   Sort of what is the next shoe to drop, what are we going to be surprised by tomorrow.   I think they have had it up there in dealing with these kinds of issues …finding out about them after the fact.  I have seen Senator Grassley several times take on an issue such as this one when he feels someone or some group is stonewalling him on information.  But when he gets the information and understands that the taxpayers are getting the best they can for whatever the issue is then you will see that they will someone that will work with them.  It’s a matter I think of being blindsided and frustrated so yes maybe Congress does deserve some of the blame.  But when they are asked to do what they are doing they do have a right to know all the facts and when they are not given them they react the way they are.  Their phones are ringing off the hook from their constituents yelling at them for what the government is doing by propping up these failed companies with their tax dollars.  Many of them don’t feel its right.  So they are squeezed the whole issue. 

So yes maybe they are wrong for saying all that and reacting the way they do, but much of that could have been dealt with had they not been blindsided by issues like this.  There are 500+ members that feel they voted and did the right thing without knowing they were approving issues like this.   And know its coming back to bite them in the butt too.

Ed  [Redfern, Washington DC]


I read with great interest, Warren.
And I understand the outrage at the, well, outrage. Politicians love their TV time and soapboxes. And America reacts tot he transparency of big payouts, something you and I knew but that, in our transparent culture, is coming to light for many more for whom the dollar figures seem extraordinary.
But I keep coming back to this:  if the US taxpayer is paying, bailing out, contributing, then we get a say in how and why the money is spent and accounted for…I am not seeing that accountability. The CEO of Fannie Mae waves his huge salary for a year (probably not going to change his lifestyle. And considering the robber baron CEO who came before him, the decimation of their business, and the struggles of their current and laid off employees, the big wigs taking a hit seems fair to me). But then four others get 1/2 million dollar bonuses.  Now? 
These stories are so rampant, the big paydays are still coming for some, and the US taxpayer is paying for it and thus taking the hit.
I understand the demagoguery that’s happening and question that, of course. But I don’t think it’s just the optics that seems off about what’s going on behind the scenes.
On another note, hope you are well!

David [Singleton, Washington DC]


Hi Warren,
Welcome home.

I agree with you on this, even though I am a member of the proletariat. Although I’m not sure that they were all retention bonuses. I read somewhere recently that up to half went to people who have already left AIG, and many of these people are non-US citizens who live, consume and invest abroad. That doesn’t smell right, in my opinion.

All best,

Ken [Weisbrode, Florence, Italy]


Thanks, Warren.  I love all of this talk about government taxing the bonuses away.  First, not being a tax lawyer, I question Government’s ability to impose a tax on money that has already been earned and paid (which would make it a wealth tax, as opposed to an income tax).  Second, I question whether the targeting of such a specific group of individuals with a law (when they have broken no existing law) is not a Bill of Attainder (an area of Constitutional law with which I admittedly know little, but the idea is that the Government can not target specific individuals with its laws).
The most depressing trend in all of this had been the willingness on the part of Obama and the vast majority of the Congress to disregard legal boundaries such as the idea that contractual rights should not be cavalierly thrown aside because they yield a distasteful result.  This trend is also seen in the idea that bankruptcy judges should be given a power to alter mortgages that were not made with the understanding that their terms could be unilaterally altered by a judge (which would have affected the calculus of those making the loans).  This reminds me of the story of Argentina which, around the turn of the last century, was recognized as one of the most potentially economically potent countries in the world but pissed it away through populism (in a parallel to our circumstances, Juan Peron actually alleviated economic problems at one point by prohibiting evictions).  Mitt Romney said that he feared this country would become the "France of the 21st Century."  I am worried that, if we don’t watch our step and get back to disciplined respect for property, we will become the Argentina of the 21st century.
Later- Jim [Colt, Washington DC]


I agree.  A knee jerk political response to a case of business judgment.   Retention is a legitimate risk as an ongoing concern.  No on going concern means the fed loans default.
I’m not sure why we thought the political DC and NY States Attorney would act any differently.  The dog spots are still in the same place.
Dan [Mariottini, Washington DC]



Can employees quit after receiving retention bonuses? If so, they are not retention bonuses.

Regarding the rule of law: When Condi Rice ordered Stanford Social Science dean John Shoven to cut a department; he arbitrarily cut the Food Research Institute. I asked the new dean, Wally Falcon, how Stanford could do that inasmuch as the Institute was established with Herbert Hoover’s money for a specific contractual purpose. "We have our lawyers," he said!    

I’m sure there is a way to abrogate AIG contracts if the government really wants to. How about a retention-bonus tax to be applied when the employees don’t have to stay, have "defrauded the public," or a tax on "excess" bonuses for bailed out executives. I know this is a slippery slope, but I though we would see more creativity out of government lawyers.

You are hoping that Obama will come to his senses? These are his senses!


Jim [Roumasset, Hawaii]

P.S. Do you think Larry Summers has lost a step or two? He used to be more articulate. Maybe getting beat up by Harvard women cost him. "Names will never hurt me," indeed!


Nice to hear from you. I have a somewhat different view on the government’s actions.

First, it is very much the pot calling the kettle black for members of Congress and the president to criticize the financial practices, compensation, and perks of the financial companies when they can’t control their own government’s ridiculous spending, debt, and complete failure to properly handle the idiot beggars at its door.

They dare to propose suing companies as shareholders when they sit there with sovereign immunity as they attempt to impose slavery through the financial practices of the government and Federal Reserve. And then they dare to use force (taxation) to steal what they failed to properly supervise through their police power when they made those ridiculous bailout packages initially.

As I mentioned elsewhere previously, I don’t think there should have been any bailouts, stimulus, or anything else. Those banks, however large, should have been allowed to crumble like the World Trade Centers by their own ignorance instead of at the hand of terrorists.

The banks had no business financing all that crap, and without government assistance they would have probably renegotiated the mortgage loans on their own or otherwise tried to either salvage the business or cut loose the losses by simply forgiving loans and issuing 1099s for debt forgiveness, in which case the owner of the home would have a house to protect, would owe taxes to the government on the debt forgiveness, and the shareholders in the banks could sue the directors if they so choose, as it is their responsibility to look after the managers of their company, and unlike voters, they are voluntary participants in the ‘company.’

Now, instead, the government has ‘extended a helping hand’ by destroying the government’s financial credibility (as no reasonable person could expect the debt to be repaid, which means the fuse is lit for a complete meltdown).. Banks that were deceptive and greedy in their loan practices, leading along simpler people without the sophistication to understand monetary policy.. Weakened by the crisis, the government is breathing new life into bullies so that they can continue to financially abuse people while driving up the federal debt on which people also pay taxes. I don’t think the crisis is over. I think it has just begun.

I think the next great act of terrorism is going to come from militias in the United States, not from Muslims, who, of course, were not so greatly affected by the financial ‘crisis.’ When the Muslims hit, they killed their victims. Others were merely angry observers. What the financial community, government, and fed have done has inflicted great injury while leaving the victims alive, hurt, scared, and of course angry, often with little or nothing to lose. Good luck making peace with that group before they take out Washington once and for all.

Congratulations, Wall Street and Washington! You have worked a miracle! You have given radical Muslims and the extremist right-wing neo-Nazis a reason to work together to blow Washington D.C. off the map!

David [Garland, Richmond VA]


[1] Matt Taibbi, "The Big Takeover" March 19, 2009

[2] Michael D. Shear and Paul Kane, "Obama Looks for Calm in a Firestorm" The Washington Post, March 22, 2009, Page A10

Author: Warren Coats

I specialize in advising central banks on monetary policy and the development of the capacity to formulate and implement monetary policy.  I joined the International Monetary Fund in 1975 from which I retired in 2003 as Assistant Director of the Monetary and Financial Systems Department. While at the IMF I led or participated in missions to the central banks of over twenty countries (including Afghanistan, Bosnia, Croatia, Egypt, Iraq, Israel, Kazakhstan, Kenya, Kosovo, Kyrgystan, Moldova, Serbia, Turkey, West Bank and Gaza Strip, and Zimbabwe) and was seconded as a visiting economist to the Board of Governors of the Federal Reserve System (1979-80), and to the World Bank's World Development Report team in 1989.  After retirement from the IMF I was a member of the Board of the Cayman Islands Monetary Authority from 2003-10 and of the editorial board of the Cayman Financial Review from 2010-2017.  Prior to joining the IMF I was Assistant Prof of Economics at UVa from 1970-75.  I am currently a fellow of Johns Hopkins Krieger School of Arts and Sciences, Institute for Applied Economics, Global Health, and the Study of Business Enterprise.  In March 2019 Central Banking Journal awarded me for my “Outstanding Contribution for Capacity Building.”  My recent books are One Currency for Bosnia: Creating the Central Bank of Bosnia and Herzegovina; My Travels in the Former Soviet Union; My Travels to Afghanistan; My Travels to Jerusalem; and My Travels to Baghdad. I have a BA in Economics from the UC Berkeley and a PhD in Economics from the University of Chicago. My dissertation committee was chaired by Milton Friedman and included Robert J. Gordon.

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