AIG & Bonuses

I was having a conversation with my dad, and he said "I can't believe the same guys who lost all that money are getting bonuses." I told him maybe it wasn't.

In 1987, I was working for a trading unit run by Lawrence Schulman, which had until recently been its own company but it had lost money, almost gone bankrupt, and then been bought by First Options, which in turn was bought by Continental Bank, which had recently been bailed out by the US Government after the Savings & Loan crisis. In the crash of 1987, First Options effectively went bankrupt, mostly because two foreign traders had been allowed to put three large trades on as speculation, which between them lost $90M. The customers couldn't pay that money, so First Options was liable for it. Some internal regulators didn't do their jobs in that they let these customers put on those three trades, but everyone else had been doing their job fine. These numbers sound small compared to today's numbers, but it was 1987 and this could have put several hundred people out of work and had a big impact on options and futures trading.

As it happened, I had been rather bored in the months running up the crash because the traders had been too busy trading to give me work, so I'd written a new program on my own initiative that combined all the positions my unit had into one chart so I could see our risk all in one place instead of just per trader. I showed my program to Larry about a week before the crash. He liked it and asked the clerks to run it every day.

Larry, it has to be said, was an incredibly talented trader and a very smart guy. He was trying to make a bigger organization by training other people to trade for him. But on the day of the crash, he pulled all of his traders out of the pits, took the output of my new program and went into the pit and traded for the whole unit. He made $18M in one day. At the end of the day, he and the traders sat up all night splitting his trades back into their various accounts.

The next day we found out about the $90M loss. Actually, here' how I found out. I walked into the office and my boss's boss's boss, Jennet Lingle, was sitting in our office and they said "Joanna, do you know any rich people?" All the richest people I knew were sitting there in the room. It was bizarre. I mean realize that the crash was bizarre too from the inside. It was like as if gravity suddenly turned off. It had been a very weird few weeks. Anyway, the problem was our group had this $18M position, but the company was bankrupt, so they wanted to sell it to someone. If the bank just took it over and liquidated it, it would be worth a lot less.

In the end, Continental Bank chose to bail out First Options, but it was a very close call. They took days to decide, during which of course everyone was in a panic. I don't think they would have done it if it weren't for the $18M Larry had just made -- that made it look like the company was only $70M in the red. By the end of the year, our unit had made about $20M over the whole year. The position that looked like it was worth $18M settled closer to $14M, but we had had a very good year already before the crash.

Now, back to bonuses. At the time, I was making $23K. Even then, that was very low for a programmer. But I had been told I'd also get 1% of whatever the unit made. One other person who was not a trader was promised that -- the head clerk. Also, some of the traders were promised fractions of a percent because they stayed late and helped train the new traders. The traders, meanwhile, were promised 50% of what they made as a bonus. Actually, most of them were promised 40%, but Larry got 10% of what everyone else made, and so 50% of his own. Back to my salary, before the crash we had been doing very well and made $4M and Larry was very pleased with himself, and asked me if I wanted my bonus in cash or a BMW. I already didn't believe in owning private transportation, so it was a weird question. But the point is that he'd probably expected my "salary" to be 1/2-1/3 of what I really got paid.

So, when bonuses came out after the crash, Larry got more than $5M. We knew, because the pay checks only could have six figures on them and so he got six pay checks. I should have gotten $180K, almost eight times my salary. But the company made a decision -- no executive bonuses. Apparently, because I wasn't a trader, I was an executive.

Larry could have personally given all the traders and me and the other woman our promised share of the unit bonus and still had $4M, but he didn't. So I quit. Weirdly, no one else did.

Anyway, so what do I think when I hear about people getting million-dollar bonuses? Well, I think they did whatever their job was, not that they are the same ones who lost the money, because probably the guys who lost money wouldn't get anything. Though I don't know, maybe AIG is more screwed up than First Options was. Really, no trader should ever get 40% of what they make for their company, because what happens in years where they lose? I think one or two years after I left a lot of the traders lost money, and then they all just quit rather than stay and work off the deficit and get no bonuses. But I also think as I thought of Larry that the people who got a lot of money should obviously be thinking about how that makes them & the company look. But probably, like Larry, at least some of them don't care. They will in the worst case quit their jobs, take a few years off, and then there will always be someone willing to hire guys with experience. Even experienced losers are viewed as more valuable than people who don't have any experience.

I didn't quite tell all this much to my dad, but I did tell him that only two guys lost all the money for First Options. Dad said "if that's why these guys are getting paid, why don't they just tell us so we don't get so angry?" I don't know the answer to that either.