Monday, March 16, 2009


There is a good summary of the events surrounding the AIG Retention Bonuses on Naked Capitalist's blog. Theoretically these (or the form) whould be filed as an Exhibit to AIG's filings with the SEC.

A retention bonus is different from a performance bonus which constitutes the contingent portion of an executives regular compensation package.

Retention Bonus Agreements are frequently issued in connection with corporate takeovers. They are a contractual tool for inducing employees "at will" not to leave in the event of a change of control.

An employee "at will" is an employee who is not otherwise contractually bound to stay. In short, a retention agreement says if you stay for a specified period and are not otherwise terminated for "good cause", you will be paid the following sum.

The amount payable under the bonus can be a cash lump sum or some other contingent amount. The point of the agreement is not to create rewards for good performance. It is designed to induce someone to stay. Whether these types of arrangements are subject to Employee Protection laws is a question for the experts. However, many of these employees are working in London where the laws protecting employees are generally more stringent than in the US.

Like everything else in corporate America, these tools can be and often are abused. The summary in the Naked Capitalism blog indicates that these AIG Retention Agreements smell as foul as everything else in AIG.

Ponder me this:

When TYPICAL BANK WALL STREET USA decides that it does not like the terms of the financing it promised to provide to good old Henry the drunken buyout king before the markets tanked what does it do?

It plays hard ball and says the draw down conditions are not satisfied even though they may well be.

Henry threatens litigation and maybe commences action.

What happens in the end, they compromise and settle.

Why is it everyone thinks Uncle Sam needs to keep leaning over?

Is it the same reason some genius decided that AIG should pay 100 percent on the dollar to its derivative counter parties?

Perhaps all the bondholders holding the paper of the American companies now bloated with junk leverage should insist that they all be paid in full in the name of the sanctity of contract?

Fencing over contracts is the American way.

If I were Timmy Geithner, I would do the following for starters:

1. Get a private sector law firm to immediately provide a third party assessment of the terms and liabilities associated with a breach of these pieces of paper. They should consider the possibility of punitive damages in the various jurisditions as well as claims for tortious interference with contract.

2. Write a letter to AIG ordering them to suspend all payments or risk the possibility of any further bailout injections by the US government. This gives AIG the ability to claim some sort of force majeure defense if and when it comes up in court. This would also set up some sort of defense against allegations of dealing in "bad faith".

3. Instruct the IRS to immediately monitor the US payees to ensure that all applicable taxes are being paid and (in the process determine if all prior taxes were paid).Ask the Inland Revenue Service in England to do the same.

4. Instruct AIG to wind down AIG Financial Products pronto. There are plenty of Wall Street derivative jocks who would be happy to unwind AIG's positions for a fraction of the pay. It is clear that the people working at AIG were the "worst and the dumbest" not the "best and the brightest" as they would have us believe.

5. Tell the three trustees holding Uncle Sam's AIG shares to wake up or take a hike.

6. Remind AIG CEO Liddy that he was put there by Uncle Sam.

7. Start thinking about Chapter 11 for AIG. The market now knows who has AIG exposure so the ominous contagion risk has dissipated.

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