STEVE INSKEEP, host:
In an effort to understand the AIG bonuses, we called up Steven Thel. He's a professor at Fordham Law School and a former federal enforcement attorney at the Securities and Exchange Commission.
You're a lawyer, right?
Professor STEVEN THEL (Fordham Law School): Yes.
INSKEEP: And one thing that a lawyer learns to do is argue both sides of a given case, right?
Prof. THEL: That's correct.
INSKEEP: Let's try to do that here. Let's try to understand what it was that AIG was thinking when it paid the bonuses, and then we'll try to figure out what the case might be against that. And the first thing we've got here is this document called AIGFP, which is AIG Financial Products Division, employee retention plan. What does that say about why they paid the bonuses?
Prof. THEL: AIG takes the position that they are legally obligated to pay the bonuses under the plan, that it would in fact violate Connecticut statues if they didn't pay these, and that they need to keep these employees because they are unwinding their very complicated derivative positions and that without these employees, they wouldn't be able to do that, and in fact parties might be unwilling to do work with AIG if they couldn't count on these employees to continue working at AIG.
INSKEEP: Oh, two different points are made there. One is that this is the brain power and maybe these are the guys who on some level screwed up, but they're the only ones who know these really complicated transactions that are continuing to develop as the market changes and they're the only ones who can manage them to a conclusion. Is that right?
Prof. THEL: That's the position AIG is taking, that's right.
INSKEEP: Now, the other thing here has to do with AIG refusing to pay. There's a clause in here that says, you know, if we default, if we refuse to pay these bonuses, there are people that we do business with, they can say you're no longer a trustworthy insurance company and now give us all of our money back; it could cost AIG many billions. Is that plausible?
Prof. THEL: Well, I think that it's not plausible, but what is plausible is, is that if those people go away, these employees are not available, these counter-parties will simply refuse to do business with AIG. And they may be looking for an excuse to that, especially if they're entitled to unwind their derivatives and get a substantial payment up front.
INSKEEP: Counter-parties - that's just people that AIG is doing business with - they might say, look, you got rid of the sales guy, you got rid of the guy that I know and I'm going to use this as an excuse to pull out.
Prof. THEL: That's right.
INSKEEP: And AIG, I guess, can say that even if the risk is not huge of that, that this is trillions of dollars in investments, and we're talking about $165 million. That starts to seem like a small payment to avoid that risk.
Prof. THEL: That's right.
INSKEEP: Does that make sense to you as a lawyer? Let's go to the other side of the argument here.
Prof. THEL: Where a couple of questions come up on the other side of the argument - and the big one was why did they make this retention agreement committing to pay people the same kind of compensation in the future that they've gotten in the past - turns out to have been a terrible mistake. And in the past, while bonuses might have been discretionary, AIG has now made an agreement that binds them to pay those bonuses.
INSKEEP: Presumably they knew at this point that AIG was in a little bit of trouble, and it seems from this document they knew that they were going to unwind that business of derivatives, as they say. They were going to gradually get out of it.
Prof. THEL: That seems to be the case, that both that they did know it was a problem and that the reason they did this was they wanted to keep people on for this unwinding process.
INSKEEP: And in fact, although we do not have the underlying contract, we just have AIG's statement, we also have now a statement by New York Attorney General Andrew Cuomo, who's looking into this, who says that the language said that they were guaranteed the very same payments from 2007 to 2008 regardless of the performance of the company. Is that unusual? Because we have heard of a lot of corporate instances where somebody gets a bonus even if the deal goes bad?
Prof. THEL: Sure. People enter into contracts to pay bonuses however the company does, and we often find that when companies hire new employees. But for a company to promise hundreds of employees that their compensation would be at least what it was in the past is unusual.
INSKEEP: I want to raise another fact here. AIG said, in part, they must pay these employees because they are essential. Otherwise some of these transactions could totally fall apart. Andrew Cuomo, the New York State Attorney General, says that - and let me just get this in front of me so to get it right - bonuses of $1 million or more were paid to 11 employees who had already left the company. Does that change the argument that these were essential employees who had to be kept on the job no matter what?
Prof. THEL: Well, I think it's very hard to make that case. Then you have to ask why did the company make the payments, because it wasn't to keep an employee, it wasn't fear that not having this employee would mean it would damage the business, and then the question is simply why not go ahead and litigate.
Now, they could have had a fear that they would lose in litigation, but it's certainly shocking, given the press that we're having and AIG's explanation of why it's going ahead and making retention payments to people who aren't being retained.
INSKEEP: Steven Thel is a lawyer and professor at Fordham Law School. Thanks very much.
Prof. THEL: Thank you.
INSKEEP: And AIG's chief executive testifies before Congress today. It's MORNING EDITION from NPR News.
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