THE STASH MARCH 25, 2009
His resignation letter to AIG CEO Ed Liddy is certainly a fascinating document. On one level I'm open to the guy's claim that there were honest, hard-working people at AIG FP who had nothing to do with the credit default swaps that nearly leveled the company (basically insurance for assets backed by subprime real estate loans).* On the other hand, however honest and hard-working some of these people were, and however far removed they were from the lousy decisions made at AIG FP, it's just not politically tenable for employees of the unit behind its parent company's problems to receive hundreds of millions of dollars in bonus money while the parent receives a government bailout now worth around $200 billion.
I guess I ultimately blame Liddy. If the AIG FP people had thought about how this would look to the outside world, it's hard to believe they wouldn't have grasped the problem immediately. But, then, it's not their job to think about how it might look from the outside. That's Liddy's job. And yet, as the writer points out, he either didn't think about it or did and just didn't deal with the obvious upshot. This strikes me as the key passage in the letter:
My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That’s probably why A.I.G. management assured us on three occasions during that month that the company would “live up to its commitment” to honor the contract guarantees.
That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts “distasteful.”
That may also be why you authorized the balance of the payments on March 13.
At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts--until several hours before your appearance last week before Congress.
Liddy needed to preempt the problem by renegotiating the bonuses in a way that would have been less offensive to the people paying them (I suggested a model here). Instead, every action he took seemed to reassure the AIG FP employees that there was nothing to worry about. It sounds like the letter-writer is basically blaming the right person.
*I say this without knowing how productive these people's efforts were in economic terms, which is a separate question entirely.