Rage against the insurer

We the people got what we wanted. Most of the top executives at AIG’s financial products arm have agreed to pay back their bonuses. So, too, have many of the derivative business’ rank and file employees. So, that’s settled then, right? Not so fast. There may still be a consequence of the AIG clawback.

Staffers at the AIG black-box operation whose massive wagers in the credit default swaps market necessitated a $170bn US government lifeline are leaving in droves. Many are quitting at the group’s Wilton, Connecticut office, including one whose letter of resignation to chief executive Ed Liddy made the New York Times op-ed page. In London, where the bulk of the CDS bets were put on the books, at least two top dogs running Banque AIG left Wednesday. And insiders at AIG are bracing for resignations en masse – some even speculate the entire division’s employees in London will walk. A spokesman declined to comment.

 

Who cares, one might ask. These are the villains that nearly put the global financial system in the junkyard and then had the gall to proceed with paying themselves millions of dollars in bonuses. Even erstwhile compatriots on Wall Street and in the City share sympathies with the torch and pitchfork brigade. After all, if it hadn’t been for the $165m that AIG was contractually obligated to pay the derivatives folks two weeks ago, Congress wouldn’t have passed a law taxing bonuses at big recipients of government bailout money by 90%. So news that the AIG bankers are handing back a chunk of money takes the pressure off everyone.

But the story is not over. While some of the $165m may boomerang back to the taxpayer, what about the $170bn the government has pumped into AIG? Retrieving this will depend on how well AIG can unwind the remaining $1.6 trillion in trades to which the financial products division committed.

These aren’t simple IOUs. Some have durations of up to 90 years. They encompass many geographies, jurisdictions and asset classes. Many have models attached that were engineered in computer programming languages that are no longer even taught in universities. This is going to be a big, complicated task.

Of course there must be lots of unemployed bankers and traders willing to replace the fleeing bonus-takers of AIG. Perhaps – but the perquisites aren’t compelling: a low base salary and no bonus. Meantime, incredible public scrutiny has put the image of AIG employees somewhere between that of a child molester and a journalist.

And the career path for those who agree to take a chisel to the derivatives book? Well, spend a few years winding down the portfolio and if you’re lucky you get to be the last guy to turn out the lights. There is, in short, no career upside and no money in this trade. Outrage has clawed back a few million dollars in less than two weeks. But taxpayers better hope it has not come at a far greater expense in the long run.