Affected companies are Citigroup, Bank of America, AIG, GM, and Chrysler. Executives from the latter two companies' financing arms are also included.

The program will lead to pay cuts of up to fifty percent for each firm's top twenty-five earners.

The plan will hit executives at some companies harder than others. At the financial products division of A.I.G., the locus of problems that plagued the insurer and forced its rescue with more than $180 billion in taxpayer assistance, no top executive will receive more than $200,000 in total compensation, and officials in that unit will not receive any other compensation, like stocks or stock options. Some bonuses previously promised will be paid in the coming year, and it is not clear how much of those will be awarded.

But at other companies, the cuts may mean less. Many executives at Bank of America and Citigroup are expected to reap multimillion-dollar pay packages.

For executives at all seven companies, new restraints will also be imposed on perks. Any executive seeking more than $25,000 in special perks - like country club memberships, private planes, limousines or company-issued cars - will have to apply to the government for permission.

Yes, a Washington bureaucrat will be rationing executive limousines. The horror!

U.S. to Order Pay Cuts at Firms That Got Most Aid [NY Times]

RELATED:

Judge To BoA: "I'm Glad You Think $91,000 Is Not A Lot Of Money"
Welcome To The New Gilded Age, Fueled By Your Money

(Photo: suburbandollar / CC BY 2.0)

Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount. The estimates of loss vary. Treasury estimates that approximately $23 billion of the initial loans made will be subject to "much lower recoveries." Approximately $5.4 billion of the loans extended to the old Chrysler company are highly unlikely to be recovered. ... Because Treasury has not clearly articulated its objectives, it is impossible to know if this prospect, indeed, represents a failure of Treasury's strategy.

The report makes a number of recommendations to improve the prospects of the automakers (and, you know, get them to pay us back), including the idea that the government should "use its role as a significant shareholder in Chrysler and GM to ensure that these companies fully disclose their financial status and that the compensation of their executives is aligned to clear measures of long-term success."

The Congressional Oversight Panel has a lot of good ideas, and its head, Harvard's Elizabeth Warren, has been an active critic of mishandling of taxpayer largess. Despite its impressive COP acronym, however, the panel can't actually make the government — or the carmakers that we sort of own — do anything. But don't worry. The agency is empowered to "hold hearings, review official data" and, of course, "write reports." So, expect a lot more 200-page door-stoppers and C-SPAN bloviating before this whole thing runs its course.

The Use of TARP Funds in Support and Reorganization of the Domestic Automotive Industry [Congressional Oversight Panel]
Full Report (221-page PDF) [Congressional Oversight Panel]

From the WSJ:

The bank isn't offering to repay all of its $45 billion in aid from the Troubled Asset Relief Program, as several other banks have done. Instead, BofA is suggesting it could start with the $20 billion of additional aid supplied in January when the bank was hesitating to complete its takeover of loss-ridden Merrill.

Repaying this would mean BofA would no longer be considered an "exceptional" aid recipient — a designation that has put it under a microscope by Congress and regulators, with its pay packages subject to review by the federal "pay czar."

In a somewhat ironic twist, Bank of America is also trying to get out of a loss-sharing agreement it has with the government, but according to the WSJ, there is a dispute about... well... it sounds like an early termination fee to us:

In addition to giving Bank of America extra TARP money, the government agreed in January to absorb a chunk of losses on a $118 billion pool of assets owned by BofA and Merrill. The bank would be on the hook for the first $10 billion in losses, and the U.S. would cover 90% of the remainder....

If the bank wanted to end the arrangement, an "appropriate fee" was required. The Treasury and the Federal Reserve are asking the bank to pay between $300 million and $500 million to end this plan and pushing executives to consider a number on the high end of that spectrum, said a person close to the situation. The bank is now considering the request.

What's the word for this? Oh yes, schadenfreude.

BofA Seeks to Repay a Portion of Bailout [WSJ]
(Photo:e. wilder)

From the NYT:

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

These early returns are by no means a full accounting of the huge financial rescue undertaken by the federal government last year to stabilize teetering banks and other companies.

Of course, there is still a chance that those billions will just help to offset the huge losses incurred in other bailouts. Only time will tell.

As Big Banks Repay Bailout Money, U.S. Sees a Profit [NYT]
(Photo:Great Beyond)

It would be interesting to research this, but I would estimate that they constitute far more than 20% of the complaints about banks received by Consumerist. How does this affect you? As banks have fewer viable competitors, it becomes less likely that disgruntled customers will switch their banking to one of those competitors. This means less friendly customer service, stricter policies, and higher deposit-related fees. The Washington Post took a look at the current state of the nation's largest banks and how they've changed in the last year.

In Santa Cruz, Calif., Wells Fargo, Bank of America and J.P. Morgan Chase hold three-quarters of the deposit market. Each firm was given tens of billions of dollars in bailout funds to help it swallow other banks.

The rest of the market, which consists of a handful of tiny community banks, cannot match the marketing power of the bigger banks. Instead, presidents of the smaller companies said, they must offer more personalized service and adapt to technological changes more quickly to entice customers. Some acknowledged it can be a tough fight.

Wells Fargo is "really, really good at the way they cross-sell and get their tentacles around you," said Richard Hofstetter, president of Lighthouse Bank, whose only branch is in Santa Cruz. "Their customers have multiple areas of their financial life involved with Wells Fargo. If you have a checking account and an ATM and a credit card and a home-equity line and automatic bill payments . . . to change that is a major undertaking."

Have you been forced to change banks due to a merger or failure? Do you feel that you could easily change your banking to a different institution if you experienced problems where you are now?

Banks 'Too Big to Fail' Have Grown Even Bigger [Washington Post]

(Photo: Earth2Kim)

Using a whiteboard, markers, and a delicious gravy metaphor, Paddy Hirsch of American Public Media's Marketplace explains.

Where's the toxic waste? [Marketplace]

RELATED:
Here's Where Your Overdraft Fees Are Going: Banks Are Paying Government Back For Bailouts
US Bancorp Blasts TARP As Giant Bait And Switch On America
Banks Want Taxpayer Aid To Buy Toxic Assets From Themselves
JPMorgan Chase Wants To Repay Bailout Money

That's how I imagine the meeting went where AIG decided to award more bonuses to executives next week.

You may recall that their previous round of bonuses were wildly unpopular with the public. This next round are actually bonuses delayed from 2008, seeing how 2008 was such a banner year for AIG.

In November, AIG's top seven executives, including Chairman Edward M. Liddy, agreed to forgo their bonuses through 2009. Then, in March, facing pressure from Treasury Secretary Timothy F. Geithner and other government officials, the company restructured its corporate bonus plans for the remaining top 50 executives. As part of this agreement, the senior executives were to receive half their 2008 bonuses — which totaled $9.6 million — in the spring, with another quarter disbursed on July 15 and the rest on Sept. 15. The last two payments would depend on whether the company made progress in revamping its business and paying back bailout money to taxpayers.

AIG plans to run the bonuses by Kenneth Feinberg, the Obama administration's compensation czar. Even though they don't technically need to. Maybe they're afraid of more taxpayers with torches if they don't.

AIG Seeks Clearance For More Bonuses [Washington Post]

(Photo: me and the sysop)

Citi is changing its compensation in order to continue to pay its workers the same amount without breaking any rules:

"Citi continues to examine ways to ensure its employee compensation practices are competitive in this very challenging market environment," Citi said in a statement Wednesday. "Any salary adjustments are not intended to increase total annual compensation, rather to adjust the balance between fixed and variable compensation."

Citi boosting salaries to offset lower bonuses [AP]
(Photo:cmorran123)

The Wall Street journal says American Express Co., Bank of New York Mellon Corp., Capital One Financial Corp., Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. are all paying back the Treasury Department for money it floated them via Troubled Asset Relief Program bailout funds.

Many banks needed the government's help last October, when the financial system was teetering on the edge of collapse. As market conditions have begun to stabilize, banks have been able to raise tens of billions of dollars from private sources and have begun looking to escape from under the government's thumb.

While some big banks will be allowed to repay, the Treasury doesn't believe things have improved enough that the money won't be needed elsewhere. Treasury Secretary Timothy Geithner has said he plans to reuse returned TARP funds to assist other firms, including smaller banks, including those that have already received an initial TARP infusion.

To be allowed to pay back the money, banks had to prove they could raise private sector funds without Federal Deposit Insurance Corp. backing, as well as continue to lend without TARP funds.

Bottom line: Some TARP bailouts were calculated government gambles that are now paying off, having helped banks regain their financial health.

Nine Banks to Repay TARP Money [Wall Street Journal]

(Photo: afagen)

"These funds are inherently vulnerable to bribery, fraud, conflicts of interest and collusion. There is an old adage, that where there is money to be made, fraud is not far behind, like bees to honey," FBI director Robert Mueller told an afternoon gathering of business executives.

Law enforcement agencies faced a similar scenario after Hurricane Katrina, with a task force created in the wake of the 2005 storm so far convicting 246 people of fraud and other crimes related to relief funds in Mississippi and Louisiana, Mueller said.

Given the trillions and trillions of dollars involved in the government's current moves to stem the economic crisis, "from the purchase of troubled assets to improvements in infrastructure, health care, energy and education — even a small percentage of fraud would result in substantial taxpayer losses," said Mueller, a former U.S. attorney who had specialized in white-collar crime litigation while a lawyer in private practice.

It's a not-so-surprising yet still chilling horror story from one of the nation's top law enforcement authorities. Mueller goes on to say that the FBI doesn't have the resources to track down "every criminal threat," meaning he's worried that some fraud will never be discovered.

FBI Director Anticipates New Crime Wave Of Financial Fraud [Morning Star] (Photo: peasap)

As the Washington Post reported last week, the U.S. government will control about 60% of the company during the reorganization. The plan is to try to get GM up and running again by the end of summer as a smaller, leaner auto manufacturer:

The GM plan as detailed by U.S. officials is for a quick sale process that would allow a much smaller GM to emerge from court protection in as little as 60 to 90 days.

[...]

By preparing to take a 60 percent stake in a reorganized GM, the Obama administration is gambling that the automaker can compete with the likes of Toyota Motor Corp after its debt is cut by half and its labor costs are slashed under a new contract with the United Auto Workers union.

[...]

In the case of GM, the goal of restructuring is to allow it to return to profitability if U.S. industry-wide auto sales
recover even slightly to near 10 million on an annual basis.

Until now, GM had counted on a recovery to the 16-million-unit mark the industry last saw in 2007 in order to stop losing money, officials said.

For a great overview of the history of GM, from its huge success over half a century ago to the management (and design) failures that plagued it over the past three decades, check out "GM: Death of an American Dream" from last November's Fortune magazine.

"GM to file for bankruptcy, Chrysler sale cleared" [Reuters]

...The Public-Private Investment Program provides subsidies to private investors to encourage them to buy legacy loans from banks. The goal is to encourage buyers to bid more than they are currently willing to pay, and hopefully close the gap with the prices at which the banks are willing to sell.

Allowing banks to buy their own assets under the PPIP is a terrible idea. In short, it allows a bank to sell half of its toxic loans to Treasury – at a price set by the bank.

Banks Aiming to Play Both Sides of Coin [WSJ - subscribers only]
Banks Want to Use Government Money to Buy Assets from Themselves [Seeking Alpha]

(Photo: columbuscameraop)

While President Obama has said he has no interest in running GM or Chrysler, into which the government has poured more than $20 billion combined, he has said officials have an interest in protecting the taxpayers' investment. Nevertheless, federal officials are preparing to be deeply involved in the companies well after they emerge from their respective bankruptcies.

"I don't think that we should micromanage," Obama has said. "But I think that like any investor, the American taxpayer has a right to scrutinize what's being proposed and make sure that their money is not just being thrown down the drain."

"U.S. Involvement in GM Won't End With Bankruptcy" [Washington Post]
(Photo: jm3)

So what was the argument about? Davidson takes issue with Warren's "point of view," and wants her to "put aside [her] pet issues" until the financial crisis is over. When she's not keeping an eye on the bailout, Warren is a Harvard law professor who teaches contract law, bankruptcy, and commercial law. She's extremely interested in debt and its affect on the American family — a topic about which she has co-authored several books.

This concerns Davidson because he is worried that Warren, who he introduces as someone who is on Fresh Air a lot for her work on "credit and bankruptcy and financial stuff," is in "opposition to the banks." Davidson maintains that TARP has "one problem to solve" which is not to "look at 30 years of inequity to the American family or the other issues that she happens to care passionately about."

Warren defends herself, claiming that the debt crisis and the banking crisis are the same thing, and that you can't have a healthy banking system without considering the American consumer.

The Colombia Journalism Review has a partial transcript of the interview, or you can listen to the entire thing here:

ADAM DAVIDSON: What it feels to me is what you are missing is that - I think we put aside your pet issues. We put them aside. We put them aside until this crisis is over.

ELIZABETH WARREN: The cr- What you're saying makes no sense. Now come on. [interpolate Davidson sputtering and attempting to interrupt throughout.] It makes no sense. On an emergency basis, on one day, one week, one month, there's no doubt in my mind we've got to step in, we've got to make sure we have a functioning banking system. I think I've said that like nine times now. Of course we've got to have a functioning banking system.

DAVIDSON: Wait a minute. I want to make you go further. I want to make you madder before I -

ELIZABETH WARREN: No no no. [Davidson snickers] We're now at what - we're now seven, eight months into this. And it's the second part of what you said. We can't do anything about the American family until this crisis is over? This crisis will not be over until the American family begins to recover. [More Davidson sputtering.] This crisis does not exist independently -

DAVIDSON: That's your crisis.

ELIZABETH WARREN: No it is not my crisis! That is America's crisis! If people cannot pay their credit card bills [Davidson tries to interrupt] if they cannot pay their mortgages -

DAVIDSON: But you are not in the mainstream of views on this issue. You are not -

ELIZABETH WARREN: What, if they can't pay their credit card bills the banks are gonna do fine? Who are you looking at?

ELIZABETH WARREN: Who says a bank, a bank is going to survive - Who is not worried about the fact that the Bank of America's default rate has now bumped over 10%? That's at least the latest data I saw. So the idea that we're going to somehow fix the banks and then next year or next decade we're going to start worrying about the American family just doesn't [Davidson talking over] make any sense.

...

DAVIDSON: The American families are not - These issues of crucial, the essential need for credit intermediation are as close to accepted principles among every serious thinker on this topic. The view that the American family, that you hold very powerfully, is fully under assault and that there is - and we can get into that - that is not accepted broad wisdom. I talk to a lot a lot a lot of left, right, center, neutral economists [and] you are the only person I've talked to in a year of covering this crisis who has a view that we have two equally acute crises: a financial crisis and a household debt crisis that is equally acute in the same kind of way. I literally don't know who else I can talk to support that view. I literally don't know anyone other than you who has that view, and you are the person [snicker] who went to Congress to oversee it and you are presenting a very, very narrow view to the American people.

ELIZABETH WARREN: I'm sorry. That is not a narrow view. What you are saying is that it is the broad view to think only about trying to save the banks [Davidson sputters] and say "Hey! the American economy will recover at some point and we'll worry about the families [Davidson talking over]." I think that is the narrow view and I think I have the broad view. The broad view is that these two things are connected to each other. And the notion that you can save the banking system while the American economy goes down the tubes is just foolish.

You can listen to NPR's reaction to the backlash here. The conclusion was that NPR should have treated Ms. Warren with the same level of respect that they gave to another recent interviewee — Tim Geithner.

So, bad manners aside, who is right?

So That's Why the Press Won't Cover Elizabeth Warren! [CJR]
Hear: Elizabeth Warren Checks In [NPR Planet Money]
Hear: Follow Suit [NPR Planet Money]

The banks declined to comment, but Reuters says sources told them that they've all submitted applications to repay the TARP money.

Earlier Tuesday, JPMorgan Chief Executive James Dimon told shareholders he expects regulators will let a few strong banks repay TARP funds within weeks.

"We believe we can and should be able to repay TARP," Dimon said during remarks at his bank's annual meeting. "We believe the government will allow a few well-capitalized banks to repay TARP in the next couple of weeks."

Banks discuss TARP repayment with U.S.: Fed official [Reuters]
(Photo:epicharmus)

The American International Group disclosed Thursday that it paid its dollar-a-year chief executive, Edward M. Liddy, compensation worth about $460,000 in 2008 to cover costs he incurred after taking over the company during its emergency rescue by the Federal Reserve.

The company said in a regulatory filing that the payments covered $38,368 for a New York apartment for Mr. Liddy, who lived in Chicago before coming out of retirement to lead A.I.G. through its restructuring. An additional $162,686 was paid for legal counseling, $47,578 to cover commercial airfare between New York and Chicago, and $31,348 for car services.

The company also said it paid $180,431 to reimburse Mr. Liddy for the taxes he owed on those amounts.

Interim CEOs are pricey, but Liddy's actually a bargain compared to his predecessor — a guy who held the position for 3 months and was eligible for compensation valued at $37.6 million for 2008. Before you get too upset about that, the NYT points out that $24 million of that value was in AIG stock that the guy didn't even accept. Whoops! Always get cash, buddy.

A.I.G. Discloses Payments to Its $1-a-Year Chief [NYT]

"The agreement from Chrysler's principal banks is an exceptional accomplishment in line with the President's firm commitment that all stakeholders sacrifice to make this deal succeed," a Treasury official told BW.

The whole operation now hinges on a partnership with Fiat. More details should be available on Thursday, the government's deadline for reaching an agreement.

Bankruptcy for Chrysler Likely Averted as Banks Cave on Deb [BW]

The trouble with Paulson came in December, when Merrill Lynch's projected fourth quarter losses began to skyrocket. Lewis met with Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Bank of America's CFO, and other officials to discuss whether or not Bank of America could invoke an escape clause in their contract that protected them from a material adverse event. (This is called the "MAC" clause.)

From Mr. Cuomo's letter:

Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced:

[W]e wanted to follow up and he said, 'I'm going to be very blunt, we're very supportive on Bank of America and we want to be of help, but' —as I recall him saying "the government," but that mayor may not be the case -"does not feel it's in your best interest for you to call a MAC, and that we feel so strongly," —I can't recall if he said "we would remove the board and management if you called it" or if he said "we would do it if you intended to." I don't remember which one it was, before or after, and I said, "Hank, let's deescalate this for a while. Let me talk to our board." And the board's reaction was of"That threat, okay, do it. That would be systemic risk."

Lewis advised the board of the threats made by the Treasury and they agreed to go ahead with the merger in order to avoid any systemic threat to the financial system. The letter goes on to say that while Paulson corroborates Lewis' story, he claims to have made the threat at the request of Fed Chairman Ben Bernanke.

Further, Lewis also claims that he didn't disclose this information to shareholders at the request of Paulson and Bernanke... a charge that Bernanke apparently denies.

You can read Cuomo's letter and examine the documents he's provided to the Senate:

Cuomo's Letter (PDF)

Exhibit A: IN RE: EXECUTIVE COMPENSATION INVESTIGATION BANK OF AMERICA -MERRILL LYNCH (PDF)

Exhibit B: MINUTES OF SPECIAL MEETING OF BOARD OF DIRECTORS OF BANK OF AMERICA CORPORATION December22,200 (PDF)

Exhibit C: MINUTES OF SPECIAL Meeting OF Board OF Of DIRECTORS OF BANK OF AMERICA CORPORATION December 30. 2008 (PDF)

Exhibit D: Email To Ken Lewis (PDF)

Yesterday, a report from Bloomberg described the likelihood of liquidation at 95%.

Chrysler LLC has a 95 percent probability of entering bankruptcy as time dwindles before its April 30 deadline to cut debt and complete an alliance with Italy's Fiat SpA, an industry analyst said.

The likeliest outcome of a Chrysler filing for court protection would be the purchase of some factories and brands by automakers including Fiat, said Michael Robinet, head of global forecasting for CSM Worldwide Inc. in Northville, Michigan.

"Nobody has a good idea about what's going to" exist of the third-largest U.S. automaker once it goes into bankruptcy, Robinet said in a speech today in Detroit.

The bleak news came after lenders rejected an offer by the Treasury department that would have reduced Chrysler's debt. Now a new offer is on the table. The latest word on the deal comes from the Wall Street Journal:

The Treasury now proposes that the banks and other lenders accept as payment 22% of the $6.9 billion they are owed plus a 5% equity stake in Chrysler, said several people familiar with the matter.

That's up from an earlier Treasury proposal that the banks and other lenders accept 15% of what Chrysler owes them and receive no Chrysler stock.

Chrysler's lenders, including JP Morgan Chase, and Citigroup, rejected the first offer and proposed that Chrysler pay back 65% of it's debt as well as offer a seat on its board.

Banks Get New Offer for Debt in Chrysler [WSJ]
Chrysler Bankruptcy Now 95% Certain, CSM Analyst Says (Update1) [Bloomberg]
(Photo:Ralph Krawczyk Jr)

From the Wall Street Journal:

GM Chief Financial Officer Ray Young - who told reporters that the auto maker had no plans to meet the June 1 interest payment - may have done investors a favor by reminding everyone of the harsh reality ahead.

"People should be getting the sleep out of their eyes and seeing it's over," said Marilyn Cohen, president of retail bond investment manager Envision Capital. "I would imagine they're going to file any minute...Not making a payment - it's going to show them that this time, they mean it."

Later this week, GM will also announce its plans to idle fifteen plants in North America for at least a week (but likely most of the summer) and going through with other planned cutbacks sooner than originally planned.

As GM Plans Bond Payment Miss, Last Vestiges Of Hope Fade Away [WSJ]
GM Said to Idle 15 Assembly Plants in May-July Period [Bloomberg]
GM Said to Speed Cutbacks to Lower Break-Even Point [Bloomberg}

Photo: JM3

We love the concept, but wonder if it was such a good idea to name a pimped-up wheelchair after an animal known to chase and devour humans, especially those on bikes.

But even scarier: according to GM's vice president of research and development and strategic planning, this electric rickshaw "doesn't need air bags or other traditional safety devices, and includes safety belts for 'comfort purposes' only". Right.

2009 New York Auto Show: Riding in the GM/Segway PUMA [Consumer Reports]

"The people who are subsidizing the activities of the banks through their tax dollars are the same people who are furnishing the high profits through consumer lending," Ms. Warren told the WSJ. "In a sense, we're asking taxpayers to pay twice."

The article called out Bank of America for raising interest rates on their credit card customers, and Citibank for offering $5,000 loans — and not disclosing in the advertising that the interest rate was (brace yourselves for this) 30% .
Citibank said that the interest rates on the loan mentioned in the article "compare competitively to similar offers in the market," and Bank of America said that "To continue to offer competitive products and services and responsibly lend in this current environment, we must adjust our pricing."

Meanwhile, consumer advocates, including our own Consumers Union, have been keeping an eye on Pacific Capital Bancorp, a bank that accepted TARP funds and is issuing so-called tax-refund anticipation loans. These loans can come with an interest rate that exceeds 100%.

A spokesperson for that bank said that they were not using TARP funds specifically to issue RALs, but that the funds did allow the bank to be healthy enough to lend a "variety of loans."

Wells Fargo and U.S. Bancorp were called out for offering "checking account advance" loans that carry an interest rate of 120%. These loans allow customers to borrow against presumably forthcoming direct deposits.

Bailed-Out Banks Face Probe Over Fee Hikes [WSJ]
(Photo:frankieleon)

The maximum bonus for any employee will be $1.5 million, the regulator said. Freddie's bonuses are going to 80 percent of its employees, while Fannie's are going to 61 percent of its employees.

Ninety-two Freddie employees will receive $100,000 or more in 2009 and 121 Fannie employees will get bonuses of $100,000 or more. The FHFA declined to name the recipients, citing privacy concerns.

At Fannie Mae, chief operating officer Michael Williams is in line for a $1.3 million bonus, according to regulatory disclosures. Deputy chief financial officer David Hisey is slated for $1.1 million, while executive vice presidents Thomas Lund, responsible for the mortgage business, and Kenneth Bacon, responsible for housing and community development, are each in line for $1 million.

The director of the Federal Housing Finance Agency, the housing regulator that approved the bonuses, says that they are needed to keep the klutzes who ruined our housing market from ruining something new.

And you thought AIG's $165 million in bonuses were bad...

Fannie, Freddie Budget $210 Million On Bonuses, Draw Lawmakers' Fire [The Washington Post]

If you're tired of rate chasing the latest high interest savings account and you don't think the stock market is anything more than a Ponzi scheme, a third option you might consider is helping out America by buying some government bonds. (I'm not advocating that you buy bonds, but you should know how they work)

When it comes to government bonds, you can separate them into two types: bonds and securities. The basics of a bond are simple. A bond pays out interest at a certain interval until it matures. You can often redeem a bond, recoup your investment, before it matures. A security, for the purposes of government debt, is similar except that you can't redeem the security, you must sell it (you cannot sell a government bond).

Here are the seven types of public debt and each differs slightly:

1. Treasury Bills (T-Bills) - T-Bills mature in a year or less and don't pay interest. Instead, you pay less than the face value of the bond and get the face value when it matures.
2. Treasury Notes (T-Notes) - T-Notes mature in 2-10 years and pay interest every 6 months. The 10 year T-Note is what a lot of financial websites quote when they're discussing treasury rates.
3. Treasury Bonds (T-Bonds) - T-Bonds mature in 10-30 years, pay out interest every 6 months, and issued quarterly.
4. Treasury Inflation-Protected Securities (TIPS) - TIPS are inflation-indexed bonds, pegged to the CPI, and have 5-, 10-, and 20-year maturities. The interest rate it pays is fixed, it's the principal that gets adjusted every six months based on the CPI (though it never falls below your initial investment.
5. I Bonds - These bonds have a maturity of 30 years and the interest rate is calculated based on a fixed rate and an inflation rate pegged to the CPI.
6. EE/E Bonds - These bonds are sold at 50% of their face value and accrue interest every six months, with a final maturity in 30 years. They are designed to reach face value (so 2x in value) in 17 years.
7. HH/H Bonds - Series HH bonds are no longer offered (as of August 31st, 2004) but I wanted to include them for completeness' sake. They're just like EE/E bonds except they were to reach face value in 20 years.

The Treasury Bills, Notes, Bonds, and TIPS are all marketable securities; you can sell them on the secondary market. The I, EE/E, and HH/H bonds are not, you can only redeem them.

Whew! Now you know a little more about the various products of the Treasury. Whether you want to buy any of them is up to you (and there's more to it than that but I didn't want to overwhelm you) but now you know, and knowing is half the battle. If you want a deeper look at Treasury products, I wrote a comprehensive post about Treasury bonds & securities that explains more.

Jim writes about personal finance at Bargaineering.com.

(Photo: blitzcat)

Jake DeSantis writes:

DEAR Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. 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.

After 12 months of hard work dismantling the company - during which A.I.G. reassured us many times we would be rewarded in March 2009 - we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. 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.

You and I have never met or spoken to each other, so I'd like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute's generous financial aid enabled me to attend. I had fulfilled my American dream.

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. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.'s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. 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.

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country's call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn't defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. That's probably why A.I.G. management assured us on three occasions during that month that the company would "live up to its commitment" to honor the contract guarantees.

That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts "distasteful."

That may also be why you authorized the balance of the payments on March 13.

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts - until several hours before your appearance last week before Congress.

I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. It's now apparent that you either misunderstood the agreements that you had made - tacit or otherwise - with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds.

You've now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.'s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.'s promises and are not inclined to return the money as a favor to you.

The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to "name and shame," and his counterpart in Connecticut, Richard Blumenthal, has made similar threats - even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press.

So what am I to do? There's no easy answer. 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.

That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.'s or the federal government's budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.

On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less - in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients.

This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear.

Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the company's diverse businesses - especially those remaining credit default swaps. I'll continue over the short term to help make sure no balls are dropped, but after what's happened this past week I can't remain much longer - there is too much bad blood. I'm not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that I'll leave under my own power and will not need to be "shoved out the door."

Sincerely,

Jake DeSantis

Dear A.I.G., I Quit! [NYT]

The lawsuit contends in part that the federal government owes A.I.G. nearly $62 million in foreign tax credits related to eight foreign entities, with names like Lumagrove, Laperouse and Foppingadreef, that were set up or controlled by financial products, often through a unit known as Pinestead Holdings.

United States tax law allows American companies to claim a credit for any taxes paid to a foreign government. But the I.R.S. denied A.I.G.'s refund claims in 2008, saying that it had improperly calculated the credits. The I.R.S. has identified so-called foreign tax-credit generators as an area of abuse that it is increasingly monitoring.

The remainder of A.I.G.'s claim, for $244 million, concerns net operating loss carry-backs, capital loss carry-backs, a general refund claim and claims for refunds of other tax-related payments that A.I.G. says it made to the I.R.S. but are now owed back. The claim also covers $119 million in penalties and interest that A.I.G. says it is due back from the government.

So, to review: A.I.G. ruined our economy, used our bailout cash for bonuses, and now, they're suing us with our own money because we don't like their offshore tax havens. Can we load this company into a cannon and shoot it into the sun yet?

A.I.G. Sues U.S. for Return of $306 Million in Tax Payments [The New York Times]
(Photo: Thanks to Michael!)

Apparently, Countrywide had paid $342 million in premiums to insure the loans, but AIG still has not compensated them for $43 million in losses.

Why did Countrywide insure the loans? Well, it apparently improved their credit rating — and was just another step in the process that turned garbage loans into fancy securities.

From the LA Times:

Critics complained that Countrywide systematically steered borrowers into loans they could not afford, then bundled the loans and sold them for profit as securities. By insuring the loans, Countrywide was able to improve the ratings it received from rating agencies, making the securities more attractive to mortgage bond investors.

Countrywide sues AIG unit over its failure to cover loan losses [LA Times]

Mr. Cuomo says:

I have received the list of AIG FP employees who received retention payouts. Mr. Liddy testified in Congress yesterday that he intended to comply with our subpoena and expressed concern for employee safety. Mr. Liddy has in fact now complied with the subpoena. We are aware of the security concerns of AIG employees, and we will be sensitive to those issues by doing a risk assessment before releasing any individual's name. The Attorney General's Office is a law enforcement agency and is experienced in making these assessments.

As we perform our review, we will simultaneously be working with AIG over the next few days to determine which employees received payments and which chose to return the money they received.

The Attorney General's Office will responsibly balance the public's right to know how their tax dollars are spent with individual security, privacy rights, and corporate prerogative.

At this moment, with emotions running high, it is important that we proceed diligently, with care, reflection, and sober judgment.

We thank AIG for their compliance.

Do you think these names should be made public, or it enough that the Attorney General knows who they are?

ATTORNEY GENERAL CUOMO ANNOUNCES SIGNIFICANT DEVELOPMENT RELATED TO AIG [NY AG]

March 16, 2009

Edward M. Liddy, Chairman & CEO American International Group, Inc.
70 Pine Street New York, NY, 10270

Re: AIG Compensation Investigation

Dear Mr. Liddy:

The Office of the New York Attorney General has been investigating compensation arrangements at AIG since last Fall. We were disturbed to learn over the weekend of AIG's plans to pay millions of dollars to members of the Financial Products subsidiary through its Financial Products Retention Plan. Financial Products was, of course, the division of AIG that led to its meltdown and the huge infusion of taxpayer funds to save the firm. Previously, AIG had agreed at our request to make no payments out of its $600 million Financial Products deferred compensation pool.

We have requested the list of individuals who are to receive payments under this retention plan, as well as their positions at the firm, and it is surprising that you have yet to provide this information. Covering up the details of these payments breeds further cynicism and distrust in our already shaken financial system.

In addition, we also now request a description of each individual's job description and performance at AIG Financial Products. Please also provide whatever contracts you now claim obligate you to make these payments. Moreover, you should immediately provide us with a list of who negotiated these contracts and who developed this retention plan so we can begin to investigate the circumstances surrounding these questionable bonus arrangements. Finally, we demand an immediate status report as to whether the payments under the retention plan have been made.
We need this information immediately in order to investigate and determine:

(l) whether any of the individuals receiving such payments were involved in the conduct that led to AIG's demise and subsequent bailout;
(2) whether, as you claim, such individuals are truly required to unwind AIG Financial Product's positions;
(3) whether such contracts may be unenforceable for fraud or other reasons; and
(4) whether any of the retention payments may be considered fraudulent conveyances under New York law.

Taxpayers of this country are now supporting AIG, and they deserve at the very least to know how their money is being spent. And we owe it to the taxpayers to take every possible action to stop unwarranted bonus payments to those who caused the AIG meltdown in the first place.

If you do not provide this information by 4:00 p.m. today, we will issue subpoenas and seek, if necessary, to enforce compliance in court.

Andrew M. Cuomo
Attorney General of the State of New York
cc: AIG Board of Directors

Re: AIG Compensation Investigation (PDF) [Office of the Attorney General of New York]

The bonuses will be paid to executives at American International Group's Financial Products division, the unit that wrote trillions of dollars' worth of credit-default swaps that protected investors from defaults on bond backed by subprime mortgages.

Of all the financial institutions that have been propped up by taxpayer dollars, none has received more money than A.I.G. and none has infuriated lawmakers more with practices that policy makers have called reckless.

Mr. Liddy, whom Federal Reserve and Treasury officials recruited after A.I.G. faltered last September and received its first round of bailout money, said the bonuses and "retention pay" had been agreed to in early 2008 and were for the most part legally required.

The company told the Treasury that there were two categories of bonus payments, with the first to be given to senior executives. The administration official said Mr. Geithner had told A.I.G. to revise them to protect taxpayer dollars and tie future payments to performance.

The second group of bonuses cover some 2008 retention payments from contracts entered into before government involvement in A.I.G. that the company says it is legally obligated to fulfill. The official said Treasury concluded those contracts could not be broken.

Indeed, in his letter to Mr. Geithner, Mr. Liddy wrote that he had shown the details of the $450 million bonus pool to outside lawyers and been told that A.I.G. had no choice but to follow through with the payment schedule.

Six fair-minded chaps, including Mr. Liddy, have declined the bonuses. Others will get between $1,000 and $6.5 million. Seven execs in the financial services unit will get around $3 million.

Don't worry, though, AIG, which has taken $180 billion of our dollars so far, will do its best to reduce its taxpayer-funded bonuses next year to only $70 million.

A.I.G. to Pay $100 Million in Bonuses After Huge Bailout [The New York Times]

(Thanks to Chris!)

The letter is very direct. Here it is:

March 9, 2009

Kenneth D. Lewis Chairman, Chief Executive & President
Bank of America Corporation
100 Tryon Street Charlotte, North Carolina 28201
c/o Cleary Gottlieb Steen & Hamilton

Re: Bonus Information

Dear Mr. Lewis:

We write to demand on behalf of taxpayers that Bank of America immediately disclose individual bonus data for all individuals at Merrill Lynch and Bank of America who received 2008 bonus awards of $1 million or more.

We believe that as a matter of transparency and disclosure, taxpayers have a right to know where their tax dollars go once received by TARP recipients. Accordingly, all TARP recipient institutions should disclose individualized executive bonus information to taxpayers.

As you know, late last year Merrill Lynch moved up its planned date to allocate bonuses and then richly rewarded many of its executives. Merrill Lynch did this knowing full well that they were going to suffer huge losses for the fourth quarter and the year. At the time of the bonus awards, Merrill was in the process of being acquired by Bank of America, a TARP recipient. Moreover, Merrill Lynch also knew at the time that they had received a credit line of billions of dollars, in TARP funds.

As a result of Merrill's huge losses, taxpayers were forced to help Bank of America acquire Merrill by providing billions of additional TARP funds as well as insurance against losses from Merrill's toxic portfolio. In short, the combined Bank of America-Merrill Lynch entity received $45 billion in taxpayer funds as well as $188 million in taxpayer-funded insurance.

Despite this massive infusion of taxpayer money, Merrill Lynch paid out bonuses totaling approximately $3.6 billion and Bank of America distributed a pool of more than $3.3 billion.

Taxpayers who are footing the bill obviously demand accountability and want to know who received these funds and why.

Our mutual goal is to stabilize and enhance our country's financial institutions and system. The taxpayers of this country have given mightily to that cause. They deserve to know where their money is going and how it is being spent. Furthermore, we all agree that trust and confidence in our financial system must be restored. Transparency and disclosure are the building blocks of that trust and confidence.

Your refusal to reveal compensation information fuels distrust and cynicism at a most sensitive time.

Very truly yours,

Andrew Cuomo
Attorney General of the State of New York

Barney Frank
Attorney General of the
Chairman, House Financial
Services Committee
U.S. House of Representatives

CUOMO - FRANK LETTER TO KENNETH LEWIS REGARDING BONUSES PAID AT MERRILL LYNCH/BofA [New York Attorney General]

The New York Times says:

"A.I.G. exploited a huge gap in the regulatory system," Mr. Bernanke said. "There was no oversight of the financial products division. This was a hedge fund, basically, that was attached to a large and stable insurance company." And this quasi-hedge fund, Mr. Bernanke went on, to nobody's surprise, made irresponsible bets and took huge losses.

"We had no choice but to try to stabilize the system because of the implications that the failure would have had for the broad economic system," Mr. Bernanke said.

Fed Chief Says Insurance Giant Acted Irresponsibly [NYT]

"Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high," Treasury said in its announcement.

So far, the government has spent $150 billion to keep AIG afloat.

If you'd like to read the statement by the Treasury Department, click here.

AIG suffers $62B loss, bailout revamped [CNNMoney]

From the WSJ:

In a campaign to begin Wednesday, Cessna Aircraft Co. will run an ad that says, "Pity the poor executive who blinks," and gets rid of the company jet. "One thing is certain: true visionaries will continue to fly."
...
"We think it's time the other side of the story be told, and that support be given to those businesses with the good judgment and courage to use business aviation to not only help their businesses survive the current financial crisis, but more quickly forge a path toward an economic upturn," said Jack Pelton, Cessna's chairman and CEO.

Another advertisement (shown below) reads, "Timidity didn't get you this far. Why put it in your business plan now?" (We assume that question is rhetorical.)

The backlash is hurting Cessna where it counts, the company recently laid off 4,500 workers because of the sudden drop in demand. Gulfstream Aerospace's spokesperson also defended the use of private jets.

"Do you really want a major executive to show up three hours late to a big meeting because of flight delays?" said Robert Baugniet, director of corporate communications for General Dynamics Corp.'s Gulfstream Aerospace, which makes some of the higher-end jets.

Cessna Fights Back On Private-Jet Trend [WSJ] (Thanks, Daniel!)
Cessna Launches Campaign to Counter Business Aircraft Misinformation (Press Release)

• No "severe limits on executive pay for companies receiving government aid."

• Bank executives will stay, shareholders will not be wiped out.
• There will be "a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks." The FDIC might provide guarantees to investors.
• A program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans will be expanded from $200 billion to up to $1 trillion.
• A review of the capital levels of all banks, including projections of future losses, to determine how much additional capital each bank should receive.
• Next week, the New York Times says a separate $50 billion program to help homeowners facing foreclosure refinance into fixed rate loans will be announced.

There will be, however, restrictions on banks using bailout funds to acquire other banks, as well and restrictions on lobbying. The $500,000 pay cap is still in place, but applies only to very senior executives. Some argued that it should be extended to all employees of banks receiving funds.

Bloomberg also notes that TARP will be renamed:

Geithner will also give the $700 billion Troubled Asset Relief Program a new name: the Financial Stability Plan.

Whatever makes you feel better, we suppose.

Geithner Said to Have Prevailed on the Bailout [NYT]
(Photo:The Joy Of The Mundane)