If anything, the political stakes in the current struggle are even greater than financial ones. In the year since the government committed more than a trillion dollars of taxpayer money to rescue the financial system, AIG remains the proxy for everything the public hates about the bailout and Wall Street’s culture of entitlement and greed. Benmosche’s insistence that FP’s traders receive retention contracts strikes many as outrageous given the billions spent to fix a mess created by traders at the same desks. And AIG suffers from the Goldman Sachs backlash, because Goldman, at the peak of the crisis, when Hank Paulson was Treasury secretary and Geithner was head of the New York Fed, was paid 100 cents on the dollar for its credit-default swap contracts, $13 billion, money it would have lost had the government allowed the firm to go under. A year later, Goldman is set to pay as much as $22 billion in bonuses. For Geithner, everything goes back to Goldman, the original sin. “Everyone is watching Goldman,” one person close to Geithner says. “The pay problem is really a Goldman problem.”
Essentially, the perception, fostered by the Goldman-AIG deal, that Treasury is on the side of Wall Street money, ties its hands with regard to AIG—it can’t let them win again. Geithner already knows what happens. “Tim did get his head chopped off by the bonuses paid in March,” this person close to him told me. “He doesn’t want to go back there.”
The FP traders see the matter entirely differently. In early 2008, as AIG began to founder, they were offered incentives to stay. They argue that their payments weren’t “bonuses” but rather contractual guarantees to remain in their jobs under tough conditions, when some of them could have jumped ship to more stable firms. But Feinberg argues that, in the current environment, perception is reality: The world has changed, even if their contracts hadn’t. “This is not about trying to get even. It’s about realizing the reality,” says a senior Treasury official. “Take the sports analogy. You could be defensive coordinator of a football team, and if your offense can’t score points, you’re not getting any playoff money.”
The company is scheduled to pay another $198 million in retention payments to some 240 remaining FP employees in March 2010. Right now, according to AIG executives and Treasury sources close to the talks, the issue is that Feinberg wants FP’s traders to return the rest of the retention money that was pledged to be returned in March of this year under pressure from Cuomo. FP executives say the contracts are outside Feinberg’s jurisdiction. Feinberg counters that he could use the contracts as a factor when determining a trader’s base salary for next year as indicated in the statute set by Congress. In theory, if an FP employee is due to receive $1 million on March 15, 2010, Feinberg has the authority to compensate by cutting their salary to $1. Of course then, the employee could simply quit.
Senior AIG executives contend that an exodus of traders over punitively reduced contracts risks blowing up the $1.1 trillion derivatives portfolio still left to be unwound, destroying the taxpayers’ $180 billion investment in the company and potentially dragging the fragile economic recovery back into the abyss. “I’m trying desperately to prevent an uncontrolled collapse of that business,” then-CEO Ed Liddy testified last March. “The financial downside for taxpayers is potentially very large and it’s very real.” The AIG executives see Feinberg’s efforts to save a few million in retention payments, given the billions at stake, as a terrible business decision. “I just don’t understand why you would treat people this way,” one AIG executive says. “It’s economic and financial terrorism on the government’s own investment, by the government.”
Feinberg, along with everyone in the Obama White House, recognizes the risks. “I’m concerned about that. I don’t want to see that happen,” Feinberg said as we pulled up to Lincoln Center. But privately, Feinberg has indicated to Treasury officials that he’s not sure the FP employees are as crucial as they say. When the crisis erupted last fall, AIG hired McKinsey and Blackstone to study the portfolio and devise a strategy to wind down the trades. If a mass of FP traders leave, advisers might be able to stabilize the positions in time to bring in new traders. “You could triage it,” a former senior FP trader told me. Essentially, as long as someone managed risks to interest-rate and foreign- exchange moves, traders could be hired to continue the unwind.
Ever since populist outrage erupted in March, FP traders are not waiting to see what happens. Andrew Goodstadt, a partner with Thompson Wigdor & Gilly, which represents some twenty current and former FP employees, told me they are prepared to sue the firm if their retention contracts aren’t upheld in March. “We are set to litigate,” Goodstadt told me. “The employees’ view is that they’re going to get paid, either March 15 or through litigation,” an FP executive says. “Everyone will walk out the door on March 16,” adds another. “Anyone capable of running the place, why would they stay? It’s a hostile environment.”