So if the AIG does not have a good faith basis for breaching its obligations here, it is exposing itself to claims for double the amounts due plus attorneys fees. This seems a decent argument for paying the bonuses. Another of AIG's arguments is actually dangerous, for AIG and its transactional counterparties:
AIGFP’s derivatives portfolio stands at about $1.6 trillion and remains a significant risk. Failure to pay the required retention payments therefore could have very significant business ramifications.
For example, AIGFP is a party to derivative and structured transactions, guaranteed by AIG, that allow counterparties to terminate in the event of a “cross default” by AIGFP or AIG. A cross default in many of these transactions is defined as a failure by AIGFP to make one or more payments in an amount that exceeds a threshold of $25 million. In the event a counterparty elects to terminate a transaction early, such transaction will be terminated at its replacement value, less any previously posted collateral. Due to current market conditions, it is not possible to reliably estimate the replacement cost of these transactions. However, the size of the portfolio with these types of provisions is in the several hundreds of billions of dollars and a cross-default in this portfolio could trigger other cross-defaults over the entire portfolio of AIGFP.
If any counterparty were to even consider triggering a default because AIG failed to pay these bonuses, it seems extremely likely to me that the federal government would wash its hands of AIG altogether and that would be the end of that. In fact, not a single counterparty would even contemplate such an act and it was irresponsible and counterproductive of AIG to even raise the issue.
It is possible they considered that argument superior to this one:
AIGFP’s books also contain a significant number of complex – so-called bespoke – transactions that are difficult to understand and manage. This is one reason replacing key traders and risk managers would not be practical on a large scale. Personal
knowledge of the trades and the unique systems at AIGFP will be critical to an effective unwind of AIGFP’s businesses and portfolios. In this current environment, any perceived disruption in AIGFP’s ability to conduct business, such as one that would result from the departure of a number of key employees, could also cause parties to limit or cease trading with AIGFP. Obviously, this would adversely affect its ability to continue to cost-effectively hedge its positions.
Whether there is merit to this arguent or not, it simply will not sell publically. To argue that the very people who put you in this mess are critical to managing the mess simply will not sell. That is why the "threat" of regulatory takeover is also not a weighty argument from AIG. Indeed, after this, it seems likely that there will be many demands for such a regulatory takeover. (The ironic part of the threat is AIG's express reference to having foreign government step in. In fact, many are demanding that foreign government bear a share of the AIG debacle.)
So what can the federal government do here? With respect to these particular bonuses, my own view is very little. The government, it is true, is an 80% shareholder of AIG and could , one assumes replace management almost immediately and stop the bonuses. But it looks like the legal case for paying them is strong. Short of forcing AIG into liquidation, I am not sure what legal recourse there is here.
In terms of the larger picture, it is time for the government to drop its timidity about stepping in forcefully regarding the financial crisis and do what it must, particularly with insolvent institutions - take them over and start the hard bargaining with the counterparties involved in the toxic assets transactions.
Speaking for me only
