The AIG / Citibank double standard

Imagine there’s a bomb ticking in the basement of your neighbour’s home. Who would you want to defuse it? The bomb squad from the local police force, or some guys and gals who answered an online posting on Workopolis.com? Maybe better metaphor is Hannibal Lechter — who better to help the authorities find a serial killer than the one you’ve already got in custody?

That’s how I feel about the “stay bonuses” that were put in place for the propeller heads at AIG (AIG:NYSE). Who is going to keep these things from blowing the finance world to smithereens? The CDS bomb squad, of course (or maybe the Terrorists who created them). Without these stay bonuses, most of the smart folks would have bolted. Letting these Hannibals of the derivatives industry loose will accomplish nothing more than putting them across the street at a competitor firm, knowing exactly what the weaknesses in AIG’s book are.

Down in Washington, however, there is no such rationalization. New York’s Senator Charles Shumer didn’t dismiss suicide, at least not the physical type (via CNN):

“My colleagues and I are sending a letter to [AIG CEO Edward] Liddy informing him that he can go right ahead and tell the employees that are scheduled to get bonuses that they should voluntarily return them,” Sen. Charles Schumer said on the Senate floor. “Because if they don’t, we plan to tax virtually all of [the money] … so it is returned to its rightful owners, the taxpayers.”

Schumer’s comments came the same day New York Attorney General Andrew Cuomo confirmed in a letter to Congress that AIG paid 73 employees bonuses of more than $1 million each.

Boiled down, U.S. politicians seem to be of the view that since AIG is still in business merely due to the good graces of the U.S. Treasury, then traditional Wall Street bonuses are no longer in order. And if you are granted anything with a seventh figure in it, then don’t be surprised if the tax code gets a new line with your name on it.

Where was this “without us you’d be dead” attitude when Citibank (C:NYSE) awarded CEO Vikram Pandit 2008 compensation of US$10.8 million (US$7.73MM of which was in the form of a signing bonus last January)? I recognize that Mr. Pandit has waived any further bonuses until Citi is profitable, but if he can pull that off he’ll find himself making US$40-50 million thereafter. At least that’s what the Old Citibank would have paid a CEO over the past few years. Citi’s bailout number is only US$45 billion, but they’d be broke if not for the U.S. government. But no outrage over Mr. Pandit’s US$10.8MM? Why the double standard?

GMAC is probably another player that couldn’t have survived without a rushed banking licence and US$5 billion of federal capital. And then there’s Bank of America’s bailouts. Where’s the Senate bill to tax Merrill’s traders at 100%? If the Treasury hadn’t put them together with BofA, and greased the skids while the shareholder vote took place, Merrill Lynch wouldn’t have made it to December 31st.

Senator Shumer — if you’re going to apply this standard fairly, AIG’s bonuses are just the tip of the iceberg.

MRM

Here is the Seeking Alpha link.