I stayed up late tonight to watch the US Financial Services Committee Hearing on the AIG Bonus Case. Nothing beats getting the answers direct from the horse's mouth. It was obvious that President Obama did not do his homework when he made hostile remarks on the payment of AIG Bonus. If he had understood the situation, he would not have said what he said.
Firstly, few people know that the current AIG CEO, Hank Liddy, was newly appointed about a year ago, when AIG required bailout money. More importantly, Mr. Hank Liddy came out of retirement from managing a large American Insurance firm, to steer AIG as a national service, for the pay of US$1 (One Dollar) per annum, for the two years of 2008 and 2009.
Thus, Mr. Liddy is a noble man of high integrity, a Government appointee who was entrusted to protect the Government's Bailout Money sent into AIG.
Under the circumstances, why would such a professional man of more than 37 years of business management experience pay out bonuses to people considered to have caused the collapse of AIG?
I reserved my judgement right from Day One when I heard the "AIG Bonus Scandal". In my mind, if a Government Appointee decided to pay the bonus, it must have been done in good faith, after careful consideration of the consequences of a public outcry.
Here, my instincts was to trust this new CEO, although at that time, I did not know Mr. Liddy's pay. Had I known his pay, I would have even stood firmly behind him from Day One, even if I had not known the full facts of the case.
Why? Because, it is an important management principle that you stand firm behind the man you use, and support him, if you know for sure that he has not in any way, compromised himself with a lack of professionalism or integrity.
No one top manager will make similar decisions in times of uncertainty and high risk. Thus, if we use a CEO, we must respect his right to make a decision on behalf of the firm, and whilst we may not necessarily agree with the decision, we must accept it. We may take action to minimize such decisions by setting new ground rules of communication and approval process, but we should accept what has already been done. This should be applicable, even if an error of judgment was made, for "To err is human", and in fact, "One man's food is another man's poison", and thus, what is viewed as an error by some, may be the right decision by others.
Obviously, this is not the case with the present American leadership, who seems more interested in winning popular votes than in "Doing the Right Thing".
Instead of finding out why a Government appointee CEO would pay out bonus, all kinds of indignant remarks were made to embarass the CEO publicly, and remove his credibility beyond all doubt. Worse, this stoking of fire by the President of United States has resulted in death threats to Mr. Liddy and his family, by people who are possibly of low mentality, more driven by emotions than rationality.
Why should Mr. Liddy be defended? Was he right or wrong in his decision? As I have said, even if in our opinion he was wrong, had I been the President, I would have stood behind him and said that
Why do I believe that Mr. Liddy did the right thing in paying out the bonus?
There has been a lot of public misinformation, and I see that the media is not turning around in its paradigm at present.
First, there was no performance bonus paid out. This was stated categorically by Mr. Liddy. What was paid out was Retention Bonus.
Now, hold on to your horses. You might be thinking, "Yeah right! Why should we pay out Retention Bonus?"
Let's consider the case with an open mind and reserve judgment after hearing all the important facts.
Other than its normal insurance business which is profitable, AIG has been saddled with the following challenges causing losses from the moment Mr. Liddy took over (possibly late 2007 or early 2008, I am not sure): -
The Retention Bonus contracts were signed by the previous management, and Mr. Liddy has stated that he was not in favour of such contracts, i.e. he would not have made such contracts if he was the CEO. However, he was left with legacy legal commitments that he had to decide whether to honour or not.
He did seek legal advice, and he was adviced to honour the contracts. However, as Mr. Andrew Cuomo, Attorney General has brilliantly pointed out (a compliment to him that I learned something new, not being a lawyer myself), a contract is INSTRUCTIVE, but not DETERMINATIVE, i.e. whilst we should generally comply with the terms of a contract, there could be mitigating circumstances not to fulfil it. Very good advice. Fair enough.
The next two statements by Mr. Liddy is what makes me vote in favor of his decision: -
AIG and its employees subscribe to a philosophy of high integrity in honouring contracts.
To some, especially in times of huge public outcry, this philosophy may not mean much as people expect the employees to be understanding and to write off contractual bonus, due to a much more noble objective, i.e. it is taxpayer's money, bailing out the firm.
This usually wins public support EXCEPT the one taking the pay cut. Except for a minority few, most people who are vociferous and enraged by the AIG Bonus would fight to get their bonus if they were on the opposite side of the fence. As the saying goes, "It is easy to say, but not so easy to do."
Anyway, I agree that there is some basis to the public outcry, but as a man of high principle, I do believe that contracts should be honoured, especially if the other party has honoured his.
So, the biggest and most important question is,
"Has the receipient of the bonus honoured his part of the contract?"
Again, most people has misjudged performance of the receipients. They think that just because these receipients are in the Financial Products Division, they are the ones responsible for the collapse of AIG.
This is about as correct as saying that the person who invented the share market is evil if the world loses money in the share market.
But let's not even go there, because Mr. Liddy did not argue on this ground. Mr. Liddy explains that these people were paid for honouring their contracts in that they helped AIG mitigate its contractual risks and saved it from much deeper losses.
In the one year that Mr. Liddy has managed the firm, he has relied on these people to reduce the risks of losses in AIG as follows: -
This makes perfect sense to me, and I would have done the same as CEO of AIG. If the receipients are the key people who solved billions of dollars, and even a trillion dollars of potential losses for AIG in the past one year, don't they deserve to get their contractual pay?
Shouldn't we pay key people who continue to support the firm from collapsing some decent amount of money equivalent to market rate? In fact, talent should be rewarded, and it would seem that the receipients are the talent in mitigating the huge risks.
Mr. Liddy explained that right now, the damage is done. Today, some people want to leave, and some of the expertise for unwinding these complicated "Assets" (should be called liabilities), or more correctly, these contractual obligations of high risks, will be gone.
With more than US$1.6 trillion of such Toxic Assets left with AIG, who is going to do the job for Mr. Liddy?
We can all talk about noble objectives and sacrifices, but hey, unless you come from a rich family or have earned financial freedom, you still need to be paid fairly. Worst, these people who have stayed behind to solve the problems have been crucified and death threats abound towards them.
America! The very heroes that you should be worshipping, to safeguard your money, should they be successful in unwinding the balance of the US$1.6 trillion of Toxic Assets, you have chased away, with public criticism and even death threats! Such immaturity of understanding is beyond comprehension.
There is a saying for this - "Penny wise, pound foolish."
Now, let's see if the taxpayers' money can be safeguarded without some of these key people. Who would want to join a firm that insists that there will be no bonus for a long, long, long time to come? Who, in his right mind, would want to stay in such a firm?
The Core Competency, i.e. the Insurance Business will be destroyed in no time with such a precedence. Those who can't perform will stay as they cannot go any where, whilst those who have the talent will leave because they are hot commodities in the employment market.
It is not a question of finding a job for the talented but one of the right pay. But with lower pay and absolutely no future, the taxpayers have just lowered the bar significantly for the talented to leave. And some have left, to prove my point of the mobility of the Talented. Well done, America! Sigh ........
In fact, Mr. Liddy explained that in his judgment, payment of US$165 million is a lot of money, but worth it, in view of the US$1.6 trillion of Toxic Assets to manage down.
What about the people leaving? The argument by the Government and Media is that the strategy to retain these people did not work. That's the wrong argument.
The correct argument is, "How many good people can we retain as a result of showing the honourable fulfilment of a contractual Commitment to people who did contribute to the well being of AIG (despite the loss, which arguably could have been much greater without these people), and thus, created the feeling of Hope amongst the morale of the employees?"
To look at the few who left is extremely myopic leadership. Sigh again.
Most people do not realize that AIG's Strength, and for that matter, the strength of any financial institution, is in its people. The assets of tables, chairs, computers, and filing cabinets to keep the insurance contracts are useless and minimal at best. If you do not retain AIG as an intact insurance business because you withhold proper remuneration, then, the American Taxpayer will get a lot less than it would get if the business was intact with all its key people.
It is the key people that is valuable in AIG. Here, before you crucify me, let me point out that I am not talking about the people who caused the damage, but the thousands and thousands who made AIG the global brand name that has been so well respected until recently.
For the US Government to invest US$100 billion and then not pay proper remuneration whether bonus or salary increments, is like putting the money into a furnace. How do you expect AIG to make a profit and retain its Distinctive Competencies and Competitive Advantages against other Global Insurance Firms if you don't pay for talent? The ignorance of the US Government is bewildering!
At this stage, I would summarise that this is a very sad situation aggravated by politics and lack of communication. In fact, Mr. Liddy consulted with the Federal Reserve before making the necessary payments. Obama's Government is now embarrassed for shooting itself in the foot.
Up to now, this blog article serves only to help alleviate the death threats on Mr. Liddy and the AIG people. However, let us proceed further with some learning points: -
Firstly, few people know that the current AIG CEO, Hank Liddy, was newly appointed about a year ago, when AIG required bailout money. More importantly, Mr. Hank Liddy came out of retirement from managing a large American Insurance firm, to steer AIG as a national service, for the pay of US$1 (One Dollar) per annum, for the two years of 2008 and 2009.
Thus, Mr. Liddy is a noble man of high integrity, a Government appointee who was entrusted to protect the Government's Bailout Money sent into AIG.
Under the circumstances, why would such a professional man of more than 37 years of business management experience pay out bonuses to people considered to have caused the collapse of AIG?
I reserved my judgement right from Day One when I heard the "AIG Bonus Scandal". In my mind, if a Government Appointee decided to pay the bonus, it must have been done in good faith, after careful consideration of the consequences of a public outcry.
Here, my instincts was to trust this new CEO, although at that time, I did not know Mr. Liddy's pay. Had I known his pay, I would have even stood firmly behind him from Day One, even if I had not known the full facts of the case.
Why? Because, it is an important management principle that you stand firm behind the man you use, and support him, if you know for sure that he has not in any way, compromised himself with a lack of professionalism or integrity.
No one top manager will make similar decisions in times of uncertainty and high risk. Thus, if we use a CEO, we must respect his right to make a decision on behalf of the firm, and whilst we may not necessarily agree with the decision, we must accept it. We may take action to minimize such decisions by setting new ground rules of communication and approval process, but we should accept what has already been done. This should be applicable, even if an error of judgment was made, for "To err is human", and in fact, "One man's food is another man's poison", and thus, what is viewed as an error by some, may be the right decision by others.
Obviously, this is not the case with the present American leadership, who seems more interested in winning popular votes than in "Doing the Right Thing".
Instead of finding out why a Government appointee CEO would pay out bonus, all kinds of indignant remarks were made to embarass the CEO publicly, and remove his credibility beyond all doubt. Worse, this stoking of fire by the President of United States has resulted in death threats to Mr. Liddy and his family, by people who are possibly of low mentality, more driven by emotions than rationality.
Why should Mr. Liddy be defended? Was he right or wrong in his decision? As I have said, even if in our opinion he was wrong, had I been the President, I would have stood behind him and said that
- We must trust the CEO we use, or don't use him at all.
- We must give the CEO proper authority to decide if we are to entrust him with the responsibility to safeguard our investments; in this case, the taxpayers' money.
- We will take appropriate action to ensure that proper channels are consulted with to prevent such mistakes from happening again.
Why do I believe that Mr. Liddy did the right thing in paying out the bonus?
There has been a lot of public misinformation, and I see that the media is not turning around in its paradigm at present.
First, there was no performance bonus paid out. This was stated categorically by Mr. Liddy. What was paid out was Retention Bonus.
Now, hold on to your horses. You might be thinking, "Yeah right! Why should we pay out Retention Bonus?"
Let's consider the case with an open mind and reserve judgment after hearing all the important facts.
Other than its normal insurance business which is profitable, AIG has been saddled with the following challenges causing losses from the moment Mr. Liddy took over (possibly late 2007 or early 2008, I am not sure): -
- Notional Derivatives amounting to US$2.7 trillion (US$2,000 billion).
- Regulatory Capital Trades of US$350 billion, and
- Credit Default Swaps of US$80 billion.
The Retention Bonus contracts were signed by the previous management, and Mr. Liddy has stated that he was not in favour of such contracts, i.e. he would not have made such contracts if he was the CEO. However, he was left with legacy legal commitments that he had to decide whether to honour or not.
He did seek legal advice, and he was adviced to honour the contracts. However, as Mr. Andrew Cuomo, Attorney General has brilliantly pointed out (a compliment to him that I learned something new, not being a lawyer myself), a contract is INSTRUCTIVE, but not DETERMINATIVE, i.e. whilst we should generally comply with the terms of a contract, there could be mitigating circumstances not to fulfil it. Very good advice. Fair enough.
The next two statements by Mr. Liddy is what makes me vote in favor of his decision: -
AIG and its employees subscribe to a philosophy of high integrity in honouring contracts.
To some, especially in times of huge public outcry, this philosophy may not mean much as people expect the employees to be understanding and to write off contractual bonus, due to a much more noble objective, i.e. it is taxpayer's money, bailing out the firm.
This usually wins public support EXCEPT the one taking the pay cut. Except for a minority few, most people who are vociferous and enraged by the AIG Bonus would fight to get their bonus if they were on the opposite side of the fence. As the saying goes, "It is easy to say, but not so easy to do."
Anyway, I agree that there is some basis to the public outcry, but as a man of high principle, I do believe that contracts should be honoured, especially if the other party has honoured his.
So, the biggest and most important question is,
"Has the receipient of the bonus honoured his part of the contract?"
Again, most people has misjudged performance of the receipients. They think that just because these receipients are in the Financial Products Division, they are the ones responsible for the collapse of AIG.
This is about as correct as saying that the person who invented the share market is evil if the world loses money in the share market.
But let's not even go there, because Mr. Liddy did not argue on this ground. Mr. Liddy explains that these people were paid for honouring their contracts in that they helped AIG mitigate its contractual risks and saved it from much deeper losses.
In the one year that Mr. Liddy has managed the firm, he has relied on these people to reduce the risks of losses in AIG as follows: -
- Notional Derivatives has been brought down from US$2.7 trillion to US$1.6 trillion.
- Regulatory Capital Trades (whatever that is) has been brought down from US$350 billion to US$230 billion, and is expected to be brought down much further within the year.
- Credit Default Swaps (CDS) which had caused massive losses for AIG has been brought down from US$80 billion to US$10 billion.
This makes perfect sense to me, and I would have done the same as CEO of AIG. If the receipients are the key people who solved billions of dollars, and even a trillion dollars of potential losses for AIG in the past one year, don't they deserve to get their contractual pay?
Shouldn't we pay key people who continue to support the firm from collapsing some decent amount of money equivalent to market rate? In fact, talent should be rewarded, and it would seem that the receipients are the talent in mitigating the huge risks.
Mr. Liddy explained that right now, the damage is done. Today, some people want to leave, and some of the expertise for unwinding these complicated "Assets" (should be called liabilities), or more correctly, these contractual obligations of high risks, will be gone.
With more than US$1.6 trillion of such Toxic Assets left with AIG, who is going to do the job for Mr. Liddy?
We can all talk about noble objectives and sacrifices, but hey, unless you come from a rich family or have earned financial freedom, you still need to be paid fairly. Worst, these people who have stayed behind to solve the problems have been crucified and death threats abound towards them.
America! The very heroes that you should be worshipping, to safeguard your money, should they be successful in unwinding the balance of the US$1.6 trillion of Toxic Assets, you have chased away, with public criticism and even death threats! Such immaturity of understanding is beyond comprehension.
There is a saying for this - "Penny wise, pound foolish."
Now, let's see if the taxpayers' money can be safeguarded without some of these key people. Who would want to join a firm that insists that there will be no bonus for a long, long, long time to come? Who, in his right mind, would want to stay in such a firm?
The Core Competency, i.e. the Insurance Business will be destroyed in no time with such a precedence. Those who can't perform will stay as they cannot go any where, whilst those who have the talent will leave because they are hot commodities in the employment market.
It is not a question of finding a job for the talented but one of the right pay. But with lower pay and absolutely no future, the taxpayers have just lowered the bar significantly for the talented to leave. And some have left, to prove my point of the mobility of the Talented. Well done, America! Sigh ........
In fact, Mr. Liddy explained that in his judgment, payment of US$165 million is a lot of money, but worth it, in view of the US$1.6 trillion of Toxic Assets to manage down.
What about the people leaving? The argument by the Government and Media is that the strategy to retain these people did not work. That's the wrong argument.
The correct argument is, "How many good people can we retain as a result of showing the honourable fulfilment of a contractual Commitment to people who did contribute to the well being of AIG (despite the loss, which arguably could have been much greater without these people), and thus, created the feeling of Hope amongst the morale of the employees?"
To look at the few who left is extremely myopic leadership. Sigh again.
Most people do not realize that AIG's Strength, and for that matter, the strength of any financial institution, is in its people. The assets of tables, chairs, computers, and filing cabinets to keep the insurance contracts are useless and minimal at best. If you do not retain AIG as an intact insurance business because you withhold proper remuneration, then, the American Taxpayer will get a lot less than it would get if the business was intact with all its key people.
It is the key people that is valuable in AIG. Here, before you crucify me, let me point out that I am not talking about the people who caused the damage, but the thousands and thousands who made AIG the global brand name that has been so well respected until recently.
For the US Government to invest US$100 billion and then not pay proper remuneration whether bonus or salary increments, is like putting the money into a furnace. How do you expect AIG to make a profit and retain its Distinctive Competencies and Competitive Advantages against other Global Insurance Firms if you don't pay for talent? The ignorance of the US Government is bewildering!
At this stage, I would summarise that this is a very sad situation aggravated by politics and lack of communication. In fact, Mr. Liddy consulted with the Federal Reserve before making the necessary payments. Obama's Government is now embarrassed for shooting itself in the foot.
Up to now, this blog article serves only to help alleviate the death threats on Mr. Liddy and the AIG people. However, let us proceed further with some learning points: -
- Check Your Facts First - As a leader of the world, President Obama should check his facts properly first before making remarks, what more, stoking the fire. It is not good for the President of United States to be embarrased in this manner.
- Do not Be Emotional - As the President, it is important to manage the indignation of the nation rather than stoke it further merely to win public support. Here, an excellent leader can sell ideas and explain the Right Thing to the public. Many Presidents have done that in the past. The truth will prevail.
- Trust the man you use, or don't use him at all. If you use him, empower him, and live with the consequences. Nothing is worse than a leader who leaves his next in command out to burn on the streets. Of course this principle does not apply when it comes to People who are Unprofessional and Dishonest.
- Be a Proper Spouse.
The last point, I need to elaborate. Although the US Taxpayers have been dragged unwillingly into bailouts after bailouts (via the Government) which I myself oppose, the Taxpayers (and Government) are now married to AIG, Citigroup, etc., for better or for worse, till death do us part.
The Government (Taxpayers) may seek a divorce settlement at any time, but if it is not seeking a divorce, then, it should do its best to be a good spouse, irrespective of the circumstances under which it got married.
At present, the Government behaves very badly towards its spouse, who is in serious trouble and in need of help. WHY it needs help is no longer relevant. What is important is whether the Government decides to help or not. The Government has a right not to help.
If the Government decides to help and get married to the partner, then, it should treat its married partner with respect, irrespective of who has more money.
If the Government decides to help and get married to the partner, then, it should treat its married partner with respect, irrespective of who has more money.
Has society degraded in morals to the extent that a person who marries a poor person be allowed to treat the poor person like dirt, to be humiliated and punished (verbally and psychologically)?
I hope President Obama will wake up from his mistake, and be a more balanced leader in this respect. You can decide not to help, but if you do help, please do so graciously. You will find it more rewarding in the long term because people in need, have longer memories than elephants.
Having bashed President Obama, the Administration, the Media and the layman and made almost everyone an enemy, I would like to say that although I don't agree with President Obama's Financial Policies, which tantamounts to excessive printing of money, I admire him for his Desire and Work Commitment, and most of all his Energy Level to drive action to resolve massive problems not encountered since the Great Depression.
If only he can stop being angry at Wall Street and businesses that collapse, stop being petty, and focus on the solutions, I think he will get much better, more effective results.
If only he can stop being angry at Wall Street and businesses that collapse, stop being petty, and focus on the solutions, I think he will get much better, more effective results.
The most important thing that the US Government hasn't understood is Executive Compensation. By setting all kinds of ceiling caps on remuneration, the whole business world is laughing at the ignorance of the Administration. True, we must not overpay. And we should only pay for performance. But when the President gets involved in who gets what bonus, we know that he has overdone himself. This, is my last food for thought.
Having said all the above, I would put in a prayer for all those who are suffering right now from the current economic turmoil. Unfortunately, it is going to get a lot worse. However, even in very dificult times, a level headed decision usually yields more favorable result than an angry reaction with a stinging vengeance.
Best wishes,
Ooi
Posts
No comments:
Post a Comment