I don’t think this changes the larger issue. But I’d be very curious to hear more about this, from TPM Reader EC …
You’re missing the point on AIGFP’s bonuses. The reason the government has no bargaining power is that failure to pay the bonuses — which, like it or not, AIG is contractually obligated to pay — would constitute a “cross-default” under AIG’s derivative contracts. Cross-default is considered an “event of default” under the standard ISDA Master Agreement (see sec. (5)(a)(vi)), which means that failure to pay the bonuses would allow AIG’s counterparties to terminate the CDS contracts and demand a full payout from AIG. With a derivatives portfolio of over $1.5 trillion, this is no small deal. Venting over AIGFP’s bonuses is fine, but urging the government to take an action which would result in hundreds of billions in losses to AIG (and thus the taxpayer) just because it would make you feel better is bad policy. Don’t let cheap populism become expensive populism.
If that’s the case, I cannot think of a business rationale for having the whole thing wired to explode if the CDS seller doesn’t get his bonus other than a time bomb set by the sellers.
Late Update: TPM Reader KJ, who’s a knowledgeable player in the industry, ain’t buying it …
I’m by no means an expert on the ISDA Master Agreement, but I think EC overstates the risk. The cross-default provision is not about employment agreements or other non-material contracts, it’s about derivative transactions and other funding arrangements. So if for example, AIG defaulted on repaying its loan under a credit agreement, that would likely trigger a cross-default under its ISDA Master Agreement. The idea that an alleged breach of its bonus plan or an employment agreement could trigger its default under its swap arrangements is, well, laughable. The link below gives a nice summary of the cross default features.
And TPM Reader BK, who has even more on-point industry expertise, is even more sure …
This is simply not true. The bonuses are owed to AIG’s employees, not its counterparties. AIG’s employees are not parties to its ISDA agreements.
Furthermore conditions such as the payment of bonuses are not anywhere near what a “cross default” is. A “cross-default” would be if AIG failed to satisfy its obligations to Counterparty A, then Counterparty B could claim it was in default even if technically it wasn’t.
The contractual obligations that AIG are under are employee contracts…not ISDAs.
There’s no doomsday scenario here. The worst that can happen to AIG is that its
employees could sue it to obtain their promised bonuses.
Late Finance Scammers Bleeding Us Dry Update: Whether it’s true or not is one thing. But Marcy Wheeler posted the white paper AIG used to convince Geithner that the bonuses had to be paid. And I think she’s right, that this is what AIG is arguing — that refusing to pay these bonuses could constitute a “default event” that would leave the US taxpayer on the line for as much as hundreds of billions of dollars. (Here’s the actual white paper.) Whether that’s true or not is another matter. But that does seem to be what they’re telling us: pay us a billion or our counter-parties a trillion. You decide.
Further Clarifying Update: As TPM Reader JG points out, there’s an extra step in there. AIG isn’t arguing that refusing to pay the bonuses will constitute a ‘default event’ but that failing to pay the bonuses will lead to the AIGFP worthies quitting and that will amount to a ‘default event’. JG picks up the thread in mid-nonsense …
So, in short, we’re being told that if AIG doesn’t pay these bonuses the AIGFP personnel are going to bolt and that the whole firm is going to collapse because these people are, in fact, irreplaceable. Second, the firm is going to collapse because without these brilliant minds, nobody will trade with AIGFP and thus its risky positions will remain risky and become even riskier. Finally, they trot out a really unlikely scenario of the French appointing some kind of administrator and that constituting some kind of cross-default for AIG France. What counter party, in their right mind, would claim a cross-default and file a lawsuit seeking full payment simply because AIG failed to pay bonuses to some of its employees? It’s absurd.
Josh Marshall is editor and publisher of TalkingPointsMemo.com.