Saturday, November 28, 2009

Show Me the Money

Who decides what a trader is worth: His bosses? The government? The public? Inside the tug-of-war over pay at AIG, where compensation has become a proxy for a whole lot more.

AIG was saved by the federal government. Of course, it was saved for the benefit of the at-large economy and not for its own sake, but the fact remains that the government saved it. Despite that fact, executives and board members chafe at the pay restrictions imposed by Kenneth Feinberg, federal pay czar. Robert Benmosche, whom I met when he joined Metlife, is now CEO of AIG. He is chafing at Feinberg's rules, and perhaps his very presence.

Feinberg is familiar with emotionally charged disputes about money. As the special master of the 9/11 victim fund, Feinberg ruled on the dispensation of $7 billion to victims’ families. “The 9/11 fund was much more emotional and tragic,” he said. “There you’re dealing with dead bodies and burn victims and families that had their husbands and wives and sons incinerated. No, there’s no comparison.”

But in other ways, there are parallels. His true power as pay czar is not only to set specific compensation guidelines for the seven largest firms still using TARP money but also to inform Masters of the Universe what the taxpayers ultimately think they’re worth. It is a painful ego check many of them can’t stomach. “This is about money, but don’t pooh-pooh money,” he says. “In our society, money is a surrogate for worth, integrity, self-respect, power, and so there’s a lot of emotion associated with this. That’s a very important point. Contrary to what many people think, it’s not just about compensation and how much will be earned. It’s not just dollars and cents.”

Benmosche demanded $10.5 million as his compensation. Money matters greatly to him, in pretty much the way Feinberg defines it above.

On his first official day on the job in August he told the FP traders, “I think you are all worth every dime that you’re owed in these plans,” he said, according to a person present. “If it had been my son or daughter and they had come home and told me the story of what was going on here, I would have been outraged.”

He does not understand the populist revulsion against his ilk.

Next he took on Attorney General Andrew Cuomo, who’d threatened to release names of FP employees who received retention payments. “What [Cuomo] did is so unbelievably wrong,” Benmosche told a group of insurance workers, according to Bloomberg News. “He doesn’t deserve to be in government, and he surely shouldn’t be the attorney general of the State of New York. What he did is criminal. You don’t create lynch mobs to go out to people’s homes and do the things he did.”

Arrogance drips off his words and attitude. Arrogance was obvious when I met him, and that goes back a dozen years.

The AIG board was not happy that Benmosche was potentially inciting a political fight with Washington. A week after his Cuomo remarks, Benmosche apologized to the directors at a board dinner in New York, telling them he had no idea his comments were being recorded. Since then, AIG has muzzled Benmosche and declined to make him available for this piece.

He apologized for being recorded, not for saying what he said.

If anything, the political stakes in the current struggle are even greater than financial ones. In the year since the government committed more than a trillion dollars of taxpayer money to rescue the financial system, AIG remains the proxy for everything the public hates about the bailout and Wall Street’s culture of entitlement and greed. Benmosche’s insistence that FP’s traders receive retention contracts strikes many as outrageous given the billions spent to fix a mess created by traders at the same desks. And AIG suffers from the Goldman Sachs backlash, because Goldman, at the peak of the crisis, when Hank Paulson was Treasury secretary and Geithner was head of the New York Fed, was paid 100 cents on the dollar for its credit-default swap contracts, $13 billion, money it would have lost had the government allowed the firm to go under. A year later, Goldman is set to pay as much as $22 billion in bonuses. For Geithner, everything goes back to Goldman, the original sin. “Everyone is watching Goldman,” one person close to Geithner says. “The pay problem is really a Goldman problem.”

Speaking of arrogance. Blankfein apologized and Goldman donated chunks of money purportedly to help small businesses and others, but filled with empty promises and large tax deductions.

Senior AIG executives contend that an exodus of traders over punitively reduced contracts risks blowing up the $1.1 trillion derivatives portfolio still left to be unwound, destroying the taxpayers’ $180 billion investment in the company and potentially dragging the fragile economic recovery back into the abyss.

That would be bad.

Feinberg, along with everyone in the Obama White House, recognizes the risks. “I’m concerned about that. I don’t want to see that happen.” But privately, Feinberg has indicated to Treasury officials that he’s not sure the FP employees are as crucial as they say. When the crisis erupted last fall, AIG hired McKinsey and Blackstone to study the portfolio and devise a strategy to wind down the trades. If a mass of FP traders leave, advisers might be able to stabilize the positions in time to bring in new traders. “You could triage it,” a former senior FP trader told me. Essentially, as long as someone managed risks to interest-rate and foreign- exchange moves, traders could be hired to continue the unwind.

Is anyone indispensable?

Inside AIG, senior executives came to believe that Treasury was manipulating the debate to deflect populist rage from blowing back on the government’s participation in the bailout.

Congress is good at grandstanding and pomposity, and the amount of demagoguery has been reaching very high levels. And surely Treasury is trying to cover its ass. For AIGers to charge bad faith is incredibly pompous and hypocritical.

Of course, there has been a lot of posturing by Andrew Cuomo and populist groups, fanning the ire of people outraged by remaining pockets of affluence seeming immune to the wretchedness of the recession and the financial crisis.

Inside FP, conspiracy theories have taken hold. Depending on who you talk to, there’s a feeling that Feinberg is a political puppet for the socialist politics of the Obama White House. “Who is truly controlling Feinberg? Our understanding is that it’s Rahm Emanuel,” one FP executive says. Another, more bizarre idea has it that Michelle Obama and Valerie Jarrett have convinced the president to redistribute wealth and make an example out of AIG. “Does Michelle Obama have a social agenda?” one FP employee asked.

Anyone mention the grassy knoll?

It’s the moral-hazard problem writ on a truly gigantic scale: Goldman, Morgan, Merrill, et al., took risks—for what was dealing with AIG but a risk—and didn’t ultimately have to pay any of the costs. AIG should not be a place to get rich, after all that’s happened. But the AIG FP traders are right that, in some sense, they’re stand-ins for the sins of an entire class.

Feinberg told me he doesn’t see binary choices. His job is to weigh competing interests and “come up with a fair number.” The problem is that fairness from a Wall Street point of view is very different from how most Americans think of the word. Part of Feinberg’s job is to bring them into harmony. “The companies will stay in business, they’ll thrive, and the taxpayer will get all, or some, of their loan back,” he says.

And for AIG, that question is a $180 billion gamble. The FP traders are well aware of their leverage in letting everyone know the stakes. “As a trader,” one senior FP executive says, “you’re only as good as the hand you have.”

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