Professor Steve Diamond appeared yesterday on KTVU’s morning show, interviewed by anchor Ross McGowan, discussing how the U.S. missed opportunities to renegotiate contracts with AIG’s executives and avoid awarding them the hugely controversial $165 million in bonuses that have outraged the country. Watch the video clip here.
Treasury officials could have used a number of mechanisms to renegotiate or even break the contracts before the payouts were made, Diamond argued on the show. Among the choices: Forcing the company into bankruptcy or arguing that the bonuses were a "fraudulent conveyance," a legal claim that executives were taking money out of the company to prevent creditors from being repaid.
Diamond noted that the Treasury Department did renegotiate the contracts of AIGs CEO and CFO as a condition of investing $40 billion in AIG in return for an issue of preferred stock, but somehow we forgot about the traders in the derivatives operation based in Connecticut and London.
This is a little bit like taking over the Yankees, and renegotiating George Steinbrenner’s contract, but forgetting about A-Rod and of course A-Rod is the top earner in the organization, Diamond said. If you don’t go after the top earners in the organization, you are letting money go out the door.
Diamond said that the Connecticut Wage Act, which has been cited by AIG leaders as the reason they are legally obliged to pay bonuses to many of the employees, does not automatically apply here. These bonuses are really not wages in the ordinary sense, he said.
Moreover, under Connecticut law, whether the refusal to pay bonuses violates that Act is a matter of fact, for a jury. So what Mr. Liddy (AIGs new CEO) should have been advised to do, in Diamond’s opinion, is to decline to pay the bonuses, and if the recipients of the bonuses saw fit, they could come forward in Connecticut courts, in front of a jury of their peers to claim the bonuses and defend what they’ve done in this situation,where of course they lost $100 billion of shareholders money last year.
