American International Group (AIG) is seeking more bonus money for its executives. You might remember AIG because as a taxpayer, you've given it $180 billion in your money to keep it from collapsing last fall and your money went to pay $165 million in bonuses to 400 employees of its catastrophically money losing Financial Products unit with another $200 million in the works for 2009. Of course, AIG is trying to deflect public outrage for its latest $2.4 million in executive bonuses onto the new comp cop, Kenneth Feinberg.
This might be good politics but it turns out that since the bonuses were approved before Feinberg started his job, they're outside of his jurisdiction. Do the AIG executives deserve bonuses? I think they certainly do -- as long as AIG is making a profit it should have the right to pay bonuses to its executives out of that profit. There's just one little problem -- AIG lost $99 billion in 2008 and $4.4 billion in the first quarter of 2009. That's a monumentally lousy performance which does not warrant a bonus.
But wait! There's more. Another ward of the state, Citigroup (C) has concluded that AIG is worthless. According to Bloomberg, Citi's Joshua Shanker said, "Our valuation includes a 70 percent chance that the equity at AIG is zero." He cited the continuing risks posed by AIG's credit-default swaps, and its sale of assets at low prices. Setting aside the irony of this conclusion coming from Citi -- whose equity is similarly worth very little -- this does not provide a good basis for rewarding AIG executives.
Larry Summers has defended these bonuses by saying you can't just abrogate contracts. But those contracts were made before the U.S. became the majority owner of AIG -- with 78 percent of its shares -- and its board has an obligation to look after the shareholders. So it seems to me that the U.S. has every right to use its new-found control to renegotiate those contracts so executives get bonuses if the company earns a profit.
If the AIG executives don't like it, they can leave. It's not as if they're generating enough profit to justify paying themselves any bonus. If they are so talented, they should have no problem finding another company eager to hire them.
And if there are no financial services firms eager to pay for their skills at destroying huge companies -- that's how free markets should work.
I think the comp cop should draw a line in the sand and stop paying millions in taxpayer money as bonuses to executives of companies that lose billions of dollars.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG and Citi shares.