NEW YORK (Reuters) - Employees at the center of American International Group Inc’s financial debacle got lavish million-dollar pay packages, including retention bonuses, even as rivals had to tighten their belts.
The rich compensation has ignited fury across America.
With millions out of work, many question why taxpayers should foot the $180 billion tab for AIG’s bailout if the traders who made bad bets can take home $1 million checks.
AIG says the money was needed to keep employees in its financial products unit, to unwind complicated derivatives contracts. But Wall Street recruiters say the market for such talent is soft.
Derivatives traders are typically well rewarded, and AIG financial products traders were among the best paid in the business. But as the firm racked up $11 billion in paper losses in the fourth quarter of 2007, many must have worried that the big bucks would evaporate.
Instead, their bosses agreed to freeze compensation levels, ensuring they wouldn't earn any less, according to documents posted on the Web by the U.S. lawmakers at: here
It was a starkly different picture at some other firms, according to hiring firms. The average salary and bonus for derivatives traders at the vice-president level fell as much as 50 percent last year to between $400,000 and $600,000, according to Options Group data.
The company paid $220 million in 2008 retention bonuses to about 400 employees. The awards were not divided evenly, but at least 18 percent of the group got $1 million or more each, in addition to base salary.
AIG, once the world’s largest insurer, said it needed to prevent an exodus of traders after losses in a credit default swaps portfolio were discovered, avoiding a gap in oversight for the firm’s then-$2.7 trillion in trading positions.
The argument is hard for many to swallow.
“What are you retaining them for? The model is broken. It’ll eventually be reinvented, but not tomorrow, and in the mean time you have very very highly paid people sitting around making little animals with paperclips,” said Christopher Low, chief economist at FTN Financial.
Low acknowledged that the employees could help with the unwinding of the FP unit’s derivative contracts, but said, “I don’t think you need a full staff for that.”
Then there is the thorny issue of why AIG agreed to pay top dollar to keep traders even though it appears many would have been hard put to quickly find jobs elsewhere.
“Demand is not as hot as usual,” said Michael Karp, Chief Executive of the Options Group, a Wall Street recruiting and compensation firm. It takes longer for traders to find new jobs, with firms more cautious about making salary and bonus commitments, Karp added.
Paul Sorbera, president of Alliance Consulting, a financial-executive recruitment firm, said there has also been contraction in the sector.
“There have been some lay-offs, and some have underperformed and been let go,” he said, adding that a strong performance record stands for a lot right now.
Still, there may be some truth to AIG’s assertion that it could have been in a pickle without its traders -- at least until the books of trades they oversaw were unwound, limiting the chance they could take proprietary information to another firm and possibly use it to bet against the $1.6 trillion in trades still held by AIG.
“What are you going to do, let everyone walk out the door?,” said Sorbera. “Some of them (traders) would have been uniquely qualified to the organization, they know a lot of the legacy issues with the portfolios, so their is value in the firm keeping them around,” he added.
After this week, traders at AIG may have more reason to leave than stay. The group, as of last month, employed about 370 in offices in Connecticut, London, Paris, Hong Kong, Tokyo and India.
Under pressure from Capitol Hill, AIG Chief Executive Edward Liddy this week asked many recipients to return at least half the value of the awards. Many have also been asked to take sharp cuts in compensation for 2009.
The U.S. House of Representatives also voted to reclaim 90 percent of the bonuses already paid by levying a special tax. Similar legislation is to be considered in the Senate.
Workers at AIG Financial Products’ Wilton, Connecticut-headquarters have also come in for ridicule and scorn, having to dodge picketers outside the workplace. Others have received death threats, CEO Liddy said earlier this week.
It may only get uglier. Working Families of Connecticut, a political party, is planning a bus tour on Saturday that will take demonstrators past the homes of financial products employees.
Billed the “Lifestyles of the rich and famous,” the group says the field trip is intended to send the message that “We’re all mad at AIG.”
Reporting by Lilla Zuill; additional reporting by Kristina Cooke; Editing by Tim Dobbyn
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