And Another Thing …

In the piece by Steven Davidoff about the AIG contract that I cited in my last post, he also writes:

“This was not a boilerplate contract. Rather, it was highly negotiated. And it was highly negotiated to pay retention fees at high levels without regard to performance. This is obviously shocking. But it makes me wonder: perhaps one area of direction here should be actually looking at who negotiated this and why?

It strikes me that the A.I.G. financial products division received an unbelievably sweet deal. Did its managers slip it under the radar? Did the managers act in good faith? And who at A.I.G. signed off on this and did they focus on the risks and rewards? Yet more avenues for possible litigation.”

I hope the Obama administration is looking very hard at this question. The introduction to the contract says that one of its aims is to “recognize the uncertainty that the unrealized market-valuation losses in AIG-FP’s super-senior credit derivative and originally-rated AAA cash CDO portfolios have created for AIG-FP’s employees and consultants.”

That certainly suggests that AIG-FP was aware that there might be significant losses, as does the fact that they got their compensation locked down in a way that made it independent of their profits or losses. (Unless their bonus pool exceeded the amount guaranteed in the contract — then they got to keep more!) And hard as it is to imagine that AIG’s general management had somehow overlooked the signs of trouble in the subprime market in early 2008, it’s even harder to imagine that whatever whoever signed off on this would not have asked: why does AIG-FP want this? How bad do they think it’s going to get?

I imagine it would be worth scrutinizing the public comments of AIG executives between the first quarter of 2008, when this contract was written, and September, when it collapsed. But that’s only one point. I hope that every law enforcement agency with anything resembling jurisdiction goes over everything about AIG-FP with a fine-tooth comb. There are more than enough peculiar aspects to this story to warrant it.

There’s nothing like legal liability and high-profile prosecutions and lawsuits to put the fear of God in people. And the Masters of the Universe badly need a little fear of God right now.