In case the media storm passed you by, Jake DeSantis was an executive at the troubled insurance giant AIG. He, like many others at the firm was asked to give back the bonus recently paid to him. He didn’t agree, has resigned as a result and written a letter (email?) that made its way to the New York Times. To be precise, an after-tax amount of $742,006.40 was deposited in his bank account on March 16th. This payment was a “retention bonus”, I suspect of $1 million before tax and the money, I assume, came out of the tens of billions of dollars given to AIG by the people of the United States to help shore up the company. AIG are in big trouble at least partly because of their involvement in ‘credit default swaps’, which if the last story I posted is to be relied upon were mainly handled out of AIG’s London office.
I think it is fair to say that under a “business as usual” scenario, Jack would have trousered his $0.75 million as would many of his chums and the world would have carried on spinning. Unfortunately for Jack, Obama and others in government voiced concern about these bonus payments, in my opinion quite rightly wondering why the taxpayers should not only bail out their essentially failed business but also fund large bonuses to the executives who managed the firm over a cliff.
In his letter, Jake covers various points relating to the crisis in general, the problems in AIG, the behaviour of his Chief Executive Mr. Edward Liddy and so on. I think it is worth examining, as best we can from the text, what he seems to be saying and perhaps why he is saying it.
One very important (but understandable) omission from the information we do have is just how much money AIG deposited in his bank account before March 16th 2009, during those “11 years of dedicated, honorable service”. I appreciate this may not have any direct relationship to this particular ‘retention bonus’ but the way I look at things it does have a big influence on how I would expect him to be behaving right now. Judging by my own standards of course, not the standards of bankers generally. I mean if he’s received large bonuses and salary from AIG for the last 11 years then he’s laying claim to a lot less of the moral high ground than he might wish us to believe. Sure, he might have a case as regards this one off situation but if you take a wider view, as I think you should (and employers also should), then perhaps this is a case of eleven you win, one you lose?
At this point it is perhaps worth me giving an opinion about how to look at money so you can see where I’m coming from. Money is like petrol in the tank of your car. You need to drive the car a certain amount each month for the family to do what they are used to doing (basics like rent/mortgage, food, school fees, phone bills, birthday presents, etc) so you need enough petrol in the tank each month to travel those kilometres, lets say you need 10 litres a month. For most people it is a delicate balancing act, and pretty hard work, to make sure that someone is giving you at least 10 litres of fuel each month as a salary for working your nuts off. You might be unlucky and have to accept less, in which case you have to trim your travel needs, you might be lucky and get a bit more in which case you can either travel more or keep some spare fuel in the tank for a rainy day.
I don’t know what percentage of workers get bonuses. I imagine it is extremely low, so for the vast majority of employed people the monthly routine doesn’t change much at all, they get 11 litres a month, they use 10 of them, after 10 months they may have saved a spare month of fuel then again there might have been a few unexpected journeys and they had to use some of the spare fuel. Whichever way you look at it, the chances of these people ever filling a 60 litre tank is pretty slim, they have very little or no ‘reserve fuel’ and if the 10 litres a month stops coming in they have a very real problem very quickly. If they have no rich aunts to leave a fortune and they don’t win the lottery then life might start looking a bit like a treadmill.
For some people though, primarily those fortunate enough to have stumbled into a profession where plenty of money can be made for their employer relatively easily, the outlook is far less gloomy. Being paid considerably more than you need each month or being paid bonuses, in some cases both. When this happens you can suddenly paint a very different picture. If you get paid say 30 litres a month when you only use 10, it doesn’t take very long at all to be running always with a full tank and have even more set aside in a reserve tank. If you’re given an annual bonus of say 150 litres you’re in a similar position. If either or both of these situations are repeated over a period of years, you’re sitting on your own little refinery because some of your spare fuel is by now being used to generate new fuel of its own! You have enough fuel to meet your basic needs for years into the future even if salaries and bonuses stop coming in. Therefore, your ‘oh shit!’ horizon is way off in the far far distance, not next month or the month after as it is for many people.
Trying to come back to Jake for a second. From my experience an annual salary in the USA of $200,000 is considered to be an extremely good one. The average annual income in the US for 2007 was around $50,000. If a family had annual costs of double the average income, one assumes they would be really enjoying themselves. So let’s assume Jake has acquired some of the expensive tastes most financiers seem to have and his equivalent need of my 10 litres a month is $90,000 a year, $7,500 a month. This bonus he’s giving back is enough fuel to cover his basic needs for 100 months (eight years)!
This brings us back to the missing information – how much fuel has he already got in his reserve tanks from his 11 years with AIG? Is it reasonable to assume that a man getting a $1,000,000 bonus just for staying with the company might have been a high earner for at least some of the last 11 years? I think it probably is. So just how much of a problem for him is losing this bonus? Moves his ‘oh shit’ horizon eight years closer but if it was already at 25 years before this bonus then so what?
These lines also suggest that he was doing very nicely thank you in the previous years:
I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million.
The profitability of the businesses with which I was associated clearly supported my compensation.
It might therefore be expected that he wouldn’t like the idea of a massive reduction in salary:
Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.
Unfortunately it’s not clear for how long he’s been working for $1 a year or whether this is some new idea just introduced. It sounds from the part about “sense of duty to people coming to AIG’s aid” that this has been imposed very recently. I suspect therefore that the gravy train of high salary + high bonus has come unhitched so they all jumped on a more politically correct $1 salary + high bonus train instead (for the short term). Or at least that was the plan until Obama got involved. Either way, we’re back to the question of how much fuel he’s got in his tanks already. I’m sure we’d all be happy to work for €1 a year if I we were getting paid huge bonuses and had massive reserves of fuel.
So, he accepts the $1 a year proposal because he can easily afford to and because he knows he’s in for a whopping bonus. Then the brown stuff hits the fan and his bonus is gone as well, so he gets the hump and resigns.
Last financial point is to ask whether donating it to a charity helping victims of the crisis is really the most appropriate thing to do? As I see it, the money belongs to the government. Fair enough, there was a series of government & management cock-ups that ended up with it being paid to him but this is surely little more than an erroneous transfer from the people of the USA to Jake. I’m sure the charity will put it to good use but I’d return to sender.
Financial considerations – sympathy factor 0/10
He worked hard to get where he is today. Good for him, but so did plenty of other less fortunate people. Sympathy factor – 2/10
He feels like he’s been screwed by his boss and by the government. You’re having a laugh aren’t you? Especially coming from America, land of hire ’em and fire ’em. Sorry, but we all get screwed by our bosses and politicians no matter what’s in our contracts. Sympathy factor – 1/10
I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.
Neither was I involved in it mate and I bet the workers at that car plant that got laid off wouldn’t even know a credit default swap if it slapped them in the face. Interesting to note that you DID have a handful of colleagues in your part of AIG who WERE responsible for causing the problems. Wonder how much money a handful of people can lose? Sympathy factor – 0/10
I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.
Once more, HOW MUCH MONEY WERE YOU PAID IN THE 11 YEARS LEADING UP TO THIS HEART BLEEDING PROBLEM OF YOURS? Sympathy factor – 0/10 (subject to revision if we ever find out how much he earned)
I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldn’t disagree.
Hmmm. Becoming clearer.
I’m sure he’s a decent enough guy. It’s patently obvious that he’s been royally screwed-over by all concerned and has written this letter at that moment when red-eyed rage has died down but anger and a desire for revenge are still running through his veins. There are plenty of barbs hidden between the lines and a strong feeling of injustice that he wasn’t personally involved in credit default business so why should he be punished.
Life’s a bitch. The guy needs to step back a little and see the picture from a few other viewpoints, then perhaps we won’t feel so bad about it all. Might even dig deeper and give last years bonus to that charity as well!
This kind of investigation needs to be taking place in far more companies than just AIG. Certainly in any and every company that has received a bail-out of any size, financial services company or otherwise.
What’s Brown doing about this? Nothing?