This is what AIG would say in response to John Carney’s argument for ripping up the bonus contracts: If the retention bonuses aren’t made, the world economy would go into meltdown.
Hard as that is to believe, that’s their argument.
In an internal memo, which was posted over at Firedoglake, the insurance firm argues that failure to pay the bonuses would essentially be a form of default, which could trigger massive payments to the company’s existing counterparties.
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.
And there’s this:
Departures also have regulatory ramifications. As an example, the resignation of the senior managers of AIGFP’s Banque AIG subsidiary would allow the Commission Bancaire, the French banking regulator, to appoint its own designee to step in and manage Banque AIG. Such an appointment would constitute an event of default under Banque AIG’s derivative and structured transactions, including the regulatory capital CDS book ($234 billion notional amount as of December 31, 2008), and potentially cost tens of billions of dollars in unwind costs. Although it is difficult to assess the likelihood of such regulatory action, at a minimum the disruption associated with significant departures related to a failure to honour contractual obligations would require intensive interactions with regulators and other constituents (rating agencies, counterparties, etc.) to assure them of the ongoing viability of AIGFP as well its commitment to honouring counterparty contracts and claims.
What a lovely mess. We believe these things could be worked out, so that they could break certain contracts without automatically triggering this chain reaction — especially since for all intents and purposes AIG is basically in bankruptcy. At a minimum, just this example is a great glimpse into the financial and regulatory ball of yarn that we’re now trying to undo. Again, what a mess.
Here’s the full memo: