First Collective Quarterly Loss in Recorded History for S&P 500

[The Minsky Moment]

The impression is that the management - the same management that ran these companies into the ground - is, in effect, drafting these contracts to itself while wearing its (collective) "management" hat, and then gratefully accepting such deals while wearing their (individual) "employee" hats, in effect looting the corpse (or better, the body in a coma on public taxpayer life support) while the looting is good, knowing that if they get the axe chances of further employment on such lucrative terms elsewhere is slim to none in this economy.

The top 60 executives are not getting any bonuses.  This is all about the levels below the guys who set the strategy.

[Malthus]

You could fire all these guys, but then you would just have to hire a bunch of new guys to run the same portfolio.  After search and transition costs were paid, would the Treasury still be ahead net?  And then what you have done is replace all the people who actually know the portfolio intimately, which a bunch of people who know nothing and have to start from scratch.

Or you could simply say to these guys "you are not getting a bonus. If you don't like that, find a job elsewhere that pays better".

And then you get sued for breach of contract and lose.

I would not be so certain of that. I suspect there may be a strong element of self-dealing involved in the drafting of these contracts.

But in any event, the outcome of a breach of contract case is one thing and the sense of having a retention bonus is another.

[Malthus]

The impression is that the management - the same management that ran these companies into the ground - is, in effect, drafting these contracts to itself while wearing its (collective) "management" hat, and then gratefully accepting such deals while wearing their (individual) "employee" hats, in effect looting the corpse (or better, the body in a coma on public taxpayer life support) while the looting is good, knowing that if they get the axe chances of further employment on such lucrative terms elsewhere is slim to none in this economy.

The top 60 executives are not getting any bonuses.  This is all about the levels below the guys who set the strategy.

Again, there is a strong element of collegial relationships among the managerial class - they may not be themselves personally benefitting directly from some company looting, just as the guys sitting on the Board of Directors may not get a personal kickback in the form of a brown paper bag full of dollars for rubber-stamping management; that's not how it works. More like one hand washing the other.

Edit: this is a case where I would really be tempted to relate war stories. Suffice it to say I've been involved in cases where this exact scenario has come up - more than once.

[viper37]

From what I've seen, this thing is hurting the US less than it's hurting others.

I'm entering into my 3rd record year here, things have never been so good since 1998, wich was the absolute best year before 2 years ago.

[The Minsky Moment]

I would not be so certain of that. I suspect there may be a strong element of self-dealing involved in the drafting of these contracts.

There is the same element of self-dealing that is inherent in the broken corporate governance system, which as you point as a system wide problem.  I am not aware of any court that has ever invalidated an employee contract on that basis though. It would open up a huge can of worms to do so.

But in any event, the outcome of a breach of contract case is one thing and the sense of having a retention bonus is another.

Well part of problem here relates to the terminology.  Would it seem so bad if the payments were called "deferred compensation"?  Because in substance that is really what is going on here.  Companies like to call these kinds of payments "bonuses" because in good times it makes them look magnanimous, and in not so good times, they can cut them without making it sound like they are cutting regular pay.  When these sorts of policies are being formulated, no one thinks about what it might look like in the event the company suffers horrific catastrophic losses and gets taken over by the government.   

[garbon]

When these sorts of policies are being formulated, no one thinks about what it might look like in the event the company suffers horrific catastrophic losses and gets taken over by the government.  

Shame on them!

[Malthus]

There is the same element of self-dealing that is inherent in the broken corporate governance system, which as you point as a system wide problem.  I am not aware of any court that has ever invalidated an employee contract on that basis though. It would open up a huge can of worms to do so.

Hell, considering how many worms have ALREADY been unleashed by this clusterfuck, a few more would hardly be noticed! 

Indeed, almost ANYTHING which would shake up corporate governance would at this point be a good thing. The problem appears that you in the US are using public funds in effect to prop up and underwrite the very practices which brought the whole system to the brink of disaster (if not over), without apparently making any fundamental changes to the system.

Well part of problem here relates to the terminology.  Would it seem so bad if the payments were called "deferred compensation"?  Because in substance that is really what is going on here.  Companies like to call these kinds of payments "bonuses" because in good times it makes them look magnanimous, and in not so good times, they can cut them without making it sound like they are cutting regular pay.  When these sorts of policies are being formulated, no one thinks about what it might look like in the event the company suffers horrific catastrophic losses and gets taken over by the government.   

These are not so good times. Why are they not cutting them, if allegedly they can?

[The Minsky Moment]

There is the same element of self-dealing that is inherent in the broken corporate governance system, which as you point as a system wide problem.  I am not aware of any court that has ever invalidated an employee contract on that basis though. It would open up a huge can of worms to do so.

Hell, considering how many worms have ALREADY been unleashed by this clusterfuck, a few more would hardly be noticed! 

Indeed, almost ANYTHING which would shake up corporate governance would at this point be a good thing. The problem appears that you in the US are using public funds in effect to prop up and underwrite the very practices which brought the whole system to the brink of disaster (if not over), without apparently making any fundamental changes to the system.

OK but put on your common law attorney hat for a second.  You have Guy 1 who has a contract that entitles him to payment of a sum certain in Q1 of this year.  He is not on the Board of Directors, has no contact with the BOD or the comp committee, and never even had contact of any of those people.  How do you prove self-dealing?

If the theory is that anyone who works in company where there are executive directors can be vicariously deemed to be part of a civil conspiracy to self deal, not only would you be creating a pretty far-out legal doctrine wholly without precedent, but you would basically be saying that every employee contract negotiatiated by a corporate entity is provisional and subject to ex post modification by a common law court upon application by the US government.

As nice it would be to see the courts stick to the bad guys, the subjective pleasure and schadenfreude that could be obtained is not really worth taking a cannon shot to the integrity of private contract, and the rule of law in general.

These are not so good times. Why are they not cutting them, if allegedly they can?

They are cutting them.  But they can't claw back retroactively on that which has already accrued.

[Oexmelin]

Is there difference in nature between this and reopening a collective agreement for a union ?

[The Minsky Moment]

Is there difference in nature between this and reopening a collective agreement for a union ?

Collective bargaining agreements can only be modified in bankruptcy.  The agreements can also renegotiated under the threat of bankruptcy.  But where there is no Union, the company would have to bargain with each individual employee separately.

[MadImmortalMan]

Or you could simply say to these guys "you are not getting a bonus. If you don't like that, find a job elsewhere that pays better".

What are the chances that masses of disgruntled financial types from insolvent companies would find alternative lucrative jobs in this economy? Is there someone out there just dying to hire them?

My impression of the financial sector is that it is laying off folks in droves, even senior positions.

I think the main problem is contractual obligations. They can't not pay the bonus because they'd be sued for it. Stupid to call it a bonus, though.

[Oexmelin]

Collective bargaining agreements can only be modified in bankruptcy.  The agreements can also renegotiated under the threat of bankruptcy.  But where there is no Union, the company would have to bargain with each individual employee separately.

Thanks. It seems the tone is far from the same in these two cases though either because support for their plight is higher in management for the bonus-holders or because these bonus-holders are not held at gun-point by «it's either that or we close shop»...

[The Minsky Moment]

Collective bargaining agreements can only be modified in bankruptcy.  The agreements can also renegotiated under the threat of bankruptcy.  But where there is no Union, the company would have to bargain with each individual employee separately.

Thanks. It seems the tone is far from the same in these two cases though either because support for their plight is higher in management for the bonus-holders or because these bonus-holders are not held at gun-point by «it's either that or we close shop»...

Well let's say AIG's financial whizzes were unionized.  They might collectively agree to modify their agreement to give up money in return for helping the company and getting some long-term job security. 

But they aren't unionized -- they are all at-will employees subject to getting the boot the second their usefulness to the company is at an end.  What happens is that skilled non-unionzed labor that knows it can put into that position, and thus often negotiates a form of security in terms of guaranteed payments up front, or upon termination.  Not likely they will give that up when there is no mechanism for collective action.

[Berkut]

So we can blame this on UAW then?

[Malthus]

There is the same element of self-dealing that is inherent in the broken corporate governance system, which as you point as a system wide problem.  I am not aware of any court that has ever invalidated an employee contract on that basis though. It would open up a huge can of worms to do so.

Hell, considering how many worms have ALREADY been unleashed by this clusterfuck, a few more would hardly be noticed! 

Indeed, almost ANYTHING which would shake up corporate governance would at this point be a good thing. The problem appears that you in the US are using public funds in effect to prop up and underwrite the very practices which brought the whole system to the brink of disaster (if not over), without apparently making any fundamental changes to the system.

OK but put on your common law attorney hat for a second.  You have Guy 1 who has a contract that entitles him to payment of a sum certain in Q1 of this year.  He is not on the Board of Directors, has no contact with the BOD or the comp committee, and never even had contact of any of those people.  How do you prove self-dealing?

If the theory is that anyone who works in company where there are executive directors can be vicariously deemed to be part of a civil conspiracy to self deal, not only would you be creating a pretty far-out legal doctrine wholly without precedent, but you would basically be saying that every employee contract negotiatiated by a corporate entity is provisional and subject to ex post modification by a common law court upon application by the US government.

As nice it would be to see the courts stick to the bad guys, the subjective pleasure and schadenfreude that could be obtained is not really worth taking a cannon shot to the integrity of private contract, and the rule of law in general.

These are not so good times. Why are they not cutting them, if allegedly they can?

They are cutting them.  But they can't claw back retroactively on that which has already accrued.

The issue is much simpler here in Canada, as there is nothing here to constitutionally prevent legislation with retroactive effect modifying contractual rights - which I imagine would be a government "taking" requiring compensation under the Fifth Amendment to your Constitution.

There is thus no need to play russian roulette of unintended consequences with the common law. The fair and rational thing would be for the government to craft a legislative response to the crisis, requiring in effect a bankruptcy like review of certain dodgy transactions entered into by the management of companies requiring massive government bailouts - but unfortunately the drafters of your Constitution did not anticipate such massive public "givings", only public "takings".