Bailout

Why do AIG?s executives suddenly covet its stock?

By Felix Salmon

Paul Smalera asks — but, sadly, doesn’t answer — the big question surrounding AIG’s bonus compensation: why on earth are the company’s executives specifically asking for it to be paid in worthless AIG stock, when they already got permission from the special paymaster to pay bonuses with a special ?basket? of stock that reflected the value of four profitable AIG divisions?

It’s certainly true that AIG executives know something we don’t: they know, for instance, the contents of the SEC filing which won’t be made public until 2018. But AIG is saddled with enormous obligations to the government, which have already been restructured at least once, and no one has ever indicated that they can be repaid in full. So long as the government ends up incurring a loss on its AIG bailout — and everybody expects there to be some kind of a loss on the deal — AIG stock should be worthless, no?

I understand that there’s some tiny possibility that AIG will be able to pay the government back in full, and that therefore AIG stock has a small amount of option value. But I don’t think that explains the desire of AIG executives to be paid in stock with a high probability of being worthless and only a small probability of ending up in the money. It certainly seems as though here’s something very fishy going on here. Smalera has one theory:

If AIG does end up spinning off its profitable units, it might be able to construct the IPOs in such a way as to grant executives valuable stock in the new companies in exchange for their worthless AIG shares.

I don’t buy it: the probability of such a scheme working out is, again, too low. But I have to admit I don’t have a better idea.

Full post as published by Macroprudential on January 12, 2010 (boomark / email).