I’m at the Rayburn Office Building for the House Financial Services Committee hearing on AIG. I’m delivering 20,000 signatures from readers, with their comments, calling for more transparency in the bank bailout. When we started our series of chats with experts last week, the issue of AIG bonuses hadn’t erupted, nor had it become evident much of the money that supposedly went to AIG to help encourage lending had in fact gone to foreign banks.
The fact that the bonuses existed, however, seems to have been well known by everyone who could read a newspaper, a group that does not include Secretary of the Treasury Timothy Geithner and Robert Gibbs:
Reid unhappy with bonuses for AIG execs
Senate Majority Leader Harry Reid (D-Nev.) is not happy with reports that employees at insurance giant AIG, which has received $152 billion in federal funds to stay afloat, are slated to receive more than $500 million in bonuses.
[]
AIG officials defend the payments, which could cover thousands of employees, are a way to prevent top talent from leaving the firm, which has lost more than $37 billion in the first nine months of 2008 alone.
The FDL team has a group of lawyers and other writers who have followed the AIG situation closely. Last night we submitted a memo to the Financial Services Committee about questions we’d like to see answered today. We hope you, and the Committee find it informative:
TO: HOUSE FINANCIAL SERVICES COMMITTEE
FROM: FDL Research Team
DATE: Wednesday, March 18, 2009
RE: AIG Hearing
________________________________________________________________________
In November 2007, Joseph Cassano, head of AIG’s Financial Products division, said on a conference call with Wall Street that he didn’t expect AIG to lose a single dollar.
http://www.forbes.com/2008/09/28/croesus-aig-credit-biz-cx_rl_0928croesus.html
One week later, AIG was forced to write down the value of its CDS by $5 billion because of "mark-to-market" accounting rules. The markets froze, and they had to take another $20 billion write-down the following summer.
Nevertheless, according to the white paper written by AIG to justify its payment of bonuses to AIGFP, in the first quarter of 2008 AIGPF adopted a retention plan "that provided guaranteed payments to employes if they worked through specific payment dates." It was implemented "because there was a significant risk of departures among employees at AIGFP, and given the $2.7 trillion of derivative positions at AIGFP at that time, retention incentives appeared to be in the best interest of all AIG stakeholders."
What did Cassano know about the losses that AIGFP would soon incur at the time he said that he didn’t expect AIG to lose a single dollar? And when these bonus contracts were being written in early 2008, was it done in order to lock the company into paying exorbitant salaries because they knew revenues would be falling as the markets for CDS froze?
From AIG’s 2007 10-K, filed 2/28/08:
As of December 31, 2007, controls over the AIGFP super senior credit default swap portfolio valuation process and oversight thereof were not effective. AIG had insufficient resources to design and carry out effective controls to prevent or detect errors and to determine appropriate disclosures on a timely basis with respect to the processes and models introduced in the fourth quarter of 2007. As a result, AIG had not fully developed its controls to assess, on a timely basis, the relevance to its valuation of all third party information. Also, controls to permit the appropriate oversight and monitoring of the AIGFP super senior credit default swap portfolio valuation process, including timely sharing of information at the appropriate levels of the organization, did not operate effectively.
As a result, controls over the AIGFP super senior credit default swap portfolio valuation process and oversight thereof were not adequate to prevent or detect misstatements in the accuracy of management’s fair value estimates and disclosures on a timely basis, resulting in adjustments for purposes of AIG’s December 31, 2007 consolidated financial statements. In addition, this deficiency could result in a misstatement in management’s fair value estimates or disclosures that could be material to AIG’s annual or interim consolidated financial statements that would not be prevented or detected on a timely basis.
Solely as a result of the material weakness in internal control over the fair value valuation of the AIGFP super senior credit default swap portfolio described above, AIG management has concluded that, as of December 31, 2007, AIG’s internal control over financial reporting was not effective based on the criteria in Internal Control — Integrated Framework issued by the COSO.
…
AIG is actively engaged in the development and implementation of a remediation plan to address the material weakness in controls over the fair value valuation of the AIGFP super senior credit default swap portfolio and oversight thereof as of December 31, 2007. The components of this remediation plan, once implemented, are intended to ensure that the key controls over the valuation process are operating effectively and are sustainable. These components include assigning dedicated and experienced resources at AIGFP with the responsibility for valuation, enhancing the technical resources at AIG over the valuation of the super senior credit default swap portfolio and strengthening corporate oversight over the valuation methodologies and processes. AIG management continues to assign the highest priority to AIG’s remediation efforts in this area, with the goal of remediating this material weakness by year-end 2008.
The retention plan was set up in the first quarter of 2008. The AIG people knew there were problems, and were trying to fix them.
Some other questions:
1) Take us through the timeline of how these bonus contracts came to be and why.
2) Is there a standard policy or boilerplate language for determining bonuses at AIG? Were those policies followed in the case of the Financial Products division?
3) Is there a standard time to sign contracts like this? What is that time? Were these contracts signed at that time, or were they “bespoke?”
4) Where are the opinion memos from AIG outside counsel and from Treasury?
5) Did Treasury do due diligence on the AIG contracts? Was Treasury aware of the terms prior to agreeing to payout?
6) Was TeasSec Geithner aware of the terms of the AIG contracts while he was distributing funds as head of the NY Federal Reserve?
7) When was President Obama informed of these terms?
8) What are the jurisdictional limitations of these contracts?
9) Are any of the people who negotiated these bonus contracts on behalf of AIG also beneficiaries of these bonuses?
10) Were these bonus contracts approved by or even referred for review to AIG’s audit committee or oversight committee?
11) How closely is knowledge concentrated in one person? How much of a paper trail have those individuals been required to keep? Are there any redundancies in institutional knowledge of these deals in case of death or illness of the deal originators?
12) Would you be prepared to submit to the committee a list of each employee who received one of these deals with an explanation of why it was and would be essential to retain each employee?
13) What is the overlap in people on the list of those contracts with the list of AIG counterparties?
14) Did Liddy, AIG’s current CEO, and before that an employee at Goldman Sachs, ever have any contacts with the current Goldman CEO, Blankfein, or anyone else at Goldman, about AIG or the $20 billion in bonds that Goldman would have lost out on if AIG collapsed?
15) Did Liddy still own any Goldman stock whose value would have been protected by the government’s AIG takeover? Did/does he have any kind of severance package or personal holdings in Goldman stock that made the propping up of GS by AIG in his own interest?
16) How much of this has been a means to use AIG as a pass-through for
17) funds to Goldman Sachs and others? Is AIG, in effect, a shell for
18) underplaying CDSs at this point? (Because, if so, the public deserves
19) substantial transparency above and beyond the little bit we’ve gotten.)
20) How many of the counterparties who could terminate contracts are among the list released this weekend?
21) How many counterparties are getting Fed or Treasury money in their own right?
22) How many are foreign banks getting such money from their own government?
23) What is the supervisory structure in the hedging operation? How much oversight do the supervisors have over the winding down activities? How much knowledge do they have of those hedging strategies? What is the plan to get out of these hedging strategies and how long will it take?
24) What is the supervisory structure over the "bespoke" strategies? How much oversight do the supervisors have over the winding down activities? How much knowledge do they have of those strategies? What is the plan to get out of these strategies and how long will it take? Why is AIG still in them? Who are the counterparties to these strategies?
25) Why would counterparties cease trading with AIG just because its traders left? What are ways to mitigate this risk, if it is even remotely real?
26) Name the ways the recipients of bonuses might trigger any default operation (such as the one described in the French context). What efforts has AIG taken to mitigate this risk? Is there any evidence these traders will in fact trigger such default operations? What are the legal means of preventing this?
27) Why has AIG been paying off in-full obligations that weren’t even in default?
28) Has AIG been paying off any naked CDSs? Has it demanded proof of whether a CDS was naked or equity backed? How many of the CDSs it sold were of the naked variety? How many are still on its books?
29) Why did AIG say it could not release the names of those it paid off? And then why did it then do so? Were any of the payouts to banks for obligations held by third parties (like hedge funds)? Did it demand this information? If not, why not?
30) Do any of AIG’s divisions have any direct exposure to what AIGFP was doing or is their exposure limited to that of the parent holding company?
31) How many new staff and regulators have been added to the AIGFP unit to learn and monitor its activities?
32) The White Paper says those who got bonuses were either still at the company, had been “terminated without cause,” or had left "for good reasons." Cuomo says that 11 people getting over $1 million in bonuses (in one case over $4 million) are no longer there. So, were these people wrongfully terminated (knowing they’d still get these payouts) or did they leave "for good reasons," and what were those "good reasons" in each of the 11 cases?
33) After focusing on contractual issues in the first paragraph and a half, the White Paper says, “In addition to this and other legal obstacles, business requirements necessitate payment.” What are the "other legal obstacles"? Are they laid out in the White Paper? If not why?
34) Has anyone from Treasury read the terms and conditions of the Credit Default Swaps of AIG?
The response is probably that there are too many of them. Recognizing that probably a lot of them are based on the International Swaps and Derivative Association form, this is the next question:
1) Has anyone from Treasury read the terms and conditions of the bespoke credit default swaps? (These are the forms that are particularized to a specific customer. They are likely the dangerous ones.)
2) Does AIG have a computerized system for managing its CDSs and its interest rate swaps? (This is designed to figure out if we really need the traders that are there, or if we could hire some new ones to take over.)
3) Are any of the employees who are getting retention bonuses employees of Banque AIG? (This is designed to figure out if the threat of mass walk-outs triggering defaults is real.)
4) Is the Banque AIG provision in all of the ISDA or bespoke contracts?
Now, with regards to the proposed tax penalties to recoup bonuses:
1) Doesn’t so hyper-specifically targeting such an oppressive tax on such few individual set a horrible precedent?
2) If you enlarge the target class, doesn’t that punish unintended targets?
3) Isn’t such a punitive and specifically targeted tax really effectively a bill of attainder?
4) Doesn’t such a proposal offend the concept of equal protection at least in spirit? (Except for the criteria of having a history of discrimination, this is pretty much what creating a "suspect class" is all about.)
5) Supposedly some, if not most, of the individuals are in foreign countries, how will the tax work as to them?
6) Once given this new “special tax” tool, who else might be a target of this strategy?
Related posts:
- Hilda Sarkisyan Faces the Cameras, Representatives on Capitol Hill
- Mike Stark on Capitol Hill: Know Your Birthers
- AIG: First Credit Default Swaps, Now Insurance Companies
- Who Benefits from Financial Innovation? Not You, Silly Taxpayer
- Goldman Sachs: Insurance Stocks Would Drop 36% by 2019 with House Public Option
Spotlight
Support this site!
Subscribe to the newsletter
Advertise on Firedoglake
Send
us your tips
Make us your homepage
About Firedoglake
Advanced search
Go get them Jane!!
Great Job!!
Most of the statements just bluster — though Sherman’s contention that if they’d known what would happen they would have insisted on receivership.
Got to go to work, will catch up on comments after I get there.
Can you say smoke, mirrors and pixie dust?
Binomial Expansion Technique (p.5).
OK, class, there will be a quiz in the morning.
hearing is live on cspan radio. here is the direct realplayer link (should be ok for dial up):
http://play.rbn.com/?url=cspan…..proto=rtsp
Jane,
Thanks so much to you and the FDL team. This is a great letter and spot on questions. If not one of these almost 60 questions is asked, is there money to run them in an ad campaign? 20 of those questions are key.
If none of those are asked. Something is rotten.
How did all of this go undetected by the corporate arm of the IRS?
am actually choked up reading Jane’s questions -
in the face of Wall St and their MSM minions wanting to keep us all in the dark with their “too complex, too arcane” for public to grasp bs, it really is a lot for the average person to grok
that said – the average jane and joe can follow the thread of those questions – simply fabulous
proud to be a signee & a pup
thank you jane & fdl team
What a bunch of preening peacocks. The mock outrage is so transparent. Plutocrats berating fellow plutocrats. Business as usual. Let the kabuki playout in all it’s ignominious glory..
Thank you very much for taking the time to sign and leave your comments — very proud to be here with them.
If anyone wants to look up what these people actually said at the time and how it compares with what they’re saying now, would be good to know.
I’ll take Number Six, please.
ABC this morning said that Geithner knew about the “contracts” on Tuesday, Obama knew on Thursday, the checks were in the mail on Friday.
We should cancel the checks.
great questions. thanks for being there jane. wish we had sent you with a nice, not too subtle, piece of jewelry in the shape of a pitch fork.
I think all transactions over $10,000 are checked by the TerraClause. So the banks prolly still hold them. You know, like they hold our checks for 10 days before they are cashed.
Regular people folks. Just like us. Hold the checks.
Gosh selise, I know I have never met you face-to-face but I have to tell you, I like how you think and admire all your work to keep us and our elected leaders on task .
Torch earings would complete the set.
I suspect that if any of those questions are asked it will be after the cameras are off. Lots of grandstanding and pomposity with little or nothing actually done. This is just a show to distract from the real screw job that’s going on. Keep fighting the good fight Jane blessed be.
posted this before, but it’s appropriate for today: Dilbert on the Bailout Hearings
checks ? will not be surprised to find out these were wire transfers (Cassano gets a toaster for using ‘direct deposit’) and further willing to bet no one asked why they were transfered to non london addy’s like switzerland and the caymans – geesh !
Notice that’s about when St. Denis started thinking about packing it in.
***From deep inside the super secret left wing blogging basement wearing my best PJ’s, satin robe, sipping cappuccino and smoking a cigarette in long scrimshaw holder***
We love you Jane, Dahling!
LOL!
on Chapters 7, 11, or 13 ?
damn. i’ve been mostly out of the loop for a few days, but this is too tempting not to give it a bit of a try while i’m here.
The bonuses apparently went into accounts via direct deposit, hence no hold is possible.
On whether this is 1789, 1848 or 1917.
wo is that ADORABLE,BRILLANT blonde??????
hey handsome,hope you are pain free
Great work, Jane. Keep it up.
yup,Glenn Beck makes10 millionbucks a year,tells you a lot what we value in this society
So who will get the Oscar for Best Kabuki In A Leading Role? Best Kabuki In A Supporting Role?
Once upon a time there was this shrewd County Administrative Officer who proposed a budget which included installing escalators at the county building for the old, lame and fat. There was an uproar. You could not find any talk anywhere about anything but the dumb escalators. They were defeated! Yay for stairs and elevators!
However, a lot of foolish pork went into the spending plan without notice.
I am from the south, which means I am more aware than your average resident of New Haven of how personalizing an issue can divert attention, like a magician will invite you to notice something which is not at play in the trick. We are to think of evil AIG banker bailout bunksters and their millions. Meanwhile, there are billions in bilge sloshing around below deck.
I am just curious, is all. There seems to be more bootlicking going on in these comment sections than you find even on Faux Noise. I’m wondering just why that is. Nowhere else do I see anybody so lauded so treacly so often. If there is a ploy involved, it should be published. Give the rest of us a chance at the cream!
started reading waxman aig hearing transcript from last october. blech. too much bs kabuki, one hearing at a time is almost more than i can stand. here’s the link for anyone with more fortitude than i have today:
http://oversight.house.gov/story.asp?ID=2211
this is also such a thing as a reversal for direct deposits.
altho i’m sure all who received these have probably transferred their bonus’ to bank accounts recently opened on pluto for just this reason. (pluto has a “no give back policy)
thanks – i’m reading the joseph cassano consulting letter first
back to radio silence
So, according to WSJ, AIG is covering the banks who made possible hedge fund bets on a housing bubble burst. Are these entities really that distinct? Did they not after all collude?
If you think it butter…. but it not. It’s scamon!
Good Morning:
Late to the party. Got my pointy hat and party favors and I’m ready to watch the show.
Great list of questions, Jane! Very good. I hope the gasbags on the panel will use them.
from the aig agreement w/ cassano – march 11, 2008:
You will provide consulting services to the Company as reasonably
requested by the Company for a period of nine months, commencing on April l, 2008 and the Company will pay you a consulting fee of one million dollars ($1,000,000.00) per month. You will be solely responsible for making all payments required to be made to any taxing authority with respect to the payments described in this paragraph. The Company may terminate the consulting agreement if the General Counsel and I (or my successor) both determine, in good faith, that you are not satisfactorily performing your duties under the consulting agreement or have breached your duties under this agreement.
This is excellent work. I think they’ve seriously “misunderestimated” public response to this.
This is all way beyond me, but I salute those for whom it is not.
I would call your attention to the following at Raw Story. (SHOCKER: SENATE STRIPPED MEASURE THAT WOULD HAVE RESTRICTED BONUSES FROM BAILOUT;
Hedge fund ‘vultures’ could reap billions from AIG)
“Tim” knew, “everyone” at WH knew. Prohibitions against the bonuses were stripped from the enabling legislation during conference; interesting to know who stripped the big no. Bet it was Reid, but who knows, someone does; wonder if the truth will out.
Blessings to all
Now good loans where “cut” with bad loans, them packaged as investments rated by raters who did not have data to make proper ratings, then marketed same all over the world. “CDS” Then hedge funds bet that these investments would fail. They did and the hedge funds where paid. Because of the regulatory failure to insure these CDS as was required AIG got caught holding the bag and now AIG’s bailout because of fear of World Wide financial collapse is used as a tactic to make the US taxpayer the sucker, holding the brown paper bag, empty wet and shredded in one corner as the evenings dinner, a “roast” is now covered with dirt maggots, ants and bacteria festering the decomposition process. Then while looking at your meal faint with starvation, you ponder how we got here?
It will be part of language submitted by a lobbyist that the pols failed to read!
I did not sign Jane’s petition, because it says that there must be no more money until regulations are in place. Getting good regulations in place, given how obstructionist the Senate Republicans and Blue Dogs are, could take a year, and it might be necessary to bail someone else out before then. So there’s going to have to be money in the short term, even before new regulations are finalized.
We should focus instead on getting trustworthy people (that is, not Geithner) in charge of dispensing any new money. Geithner needs to spend more time with his family. I’d like to see Summers go as well, but he has a less important role than the Secretary of the Treasury in handling the funds; he mainly just gives (bad) advice. Seeing him out would be a bonus.
One reason I favored Obama over Clinton in the primaries, besides foreign policy issues, was that I expected Clinton to bring back her husband’s financial people (Summers, Rubin, etc.) and I thought that the Clintonites shared responsibility with the Bushies for creating our financial mess. But Obama brought them back anyway. It’s not too late, though; he can salvage his presidency by canning them.
Seconded.
Thanks to Jane & everyone at FDL. That is such an awesome set of questions and I almost understand them all which is even more awesome. I’m sure I wouldn’t understand a word of this without my visits to FDL.
I signed the petition and I am glad I did.
My interest is getting to the bottom of this bailout crap and challenging the double standards about money, contracts, and our laws. Everything else is windowdressing. Even complaining about Obama. This is bigger than Obama. I just hope he is still listening to what is really going on.
Because of those questions I understand what ”getting to the bottom” of this really means. I will not consider the matter resolved until those questions are answered, regardless of what Congress says or {cough, cough} does.
We own AIG. And tell me how Goldman Sachs is not running our economy now and pulling strings everywhere. There are no ”firewalls” in social dynamics. There should be investigations top to bottom, just because it’s our money and we need assurances that all is well (but it’s not, clearly). It’s not anger: it’s honesty, fairness, and common-sense. Make the rules for everyone or RE-write the rules for the little people.
Oh, and fellas, yeah, you Wall Street guys, playing some shell game with the bonus money won’t work. It’s about more than the bonuses and the people are coming, the people are seeing the truth.
Thanks again, Jane. Awesome.
May it do some good. At least those questions aree more than most of the Congress or the Administration are willing or likely to ask…