by twolf1

So, late Saturday/early Sunday, we learn that AIG, already recipient of some $170 billion of US government coin, is set to pay out $165 million in something called “retention bonuses” to the people in the financial products unit, the very division that brought the insurance giant to its knees. Cue the righteous indignation.

Righteous, but also rightful—this dispersal is outrageous. But while most behind the microphones, on the opinion pages, and in the halls of Congress will declare this the height of hubris, or a simple “screw you” to the American people, they will be missing a slightly more nefarious conclusion:

These are not retention bonuses–this is protection money.

I had a drink with a friend last week–she works for the NYSE in Europe–and she commented that in her 15 years in the market, the march of "progress" has been about who can come up with the next gimmick, the next algorithm that is slightly more nuanced, complicated, and arcane than the previous. Anything that can give you an edge over your competitors. She said you can see similar growth curves repeated in each of the derivatives as they came along: a slow growth start, then a rapid, steep climb, and then a rapid leveling off, followed by everyone rearranging the deck chairs while they scramble for the next hot gimmick. CDOs, CDSs fall into this pattern.

Do not assume that Edward Liddy, the government appointed chairman of AIG, fully understands what went on within the financial products unit, do not assume he understands their "gimmick," but assume that he knows that something is up and that these bonus babies know what it is.

Many more expert than I believe these “smartest guys in the room (AIG edition)” cooked the books—I’d say that’s more than possible–but even if they didn’t, Liddy likely fears that without these guys, it might be impossible to sort out what the hell they did.

Libby also worries that they will take this "expertise" somewhere else, and that Somewhere Else, inc., will then have a competitive advantage over AIG, since they will know not only the game last played, and how to play it better, they will know where AIG is on solid ground, and where it is not.

And, worst fear of all: the disgruntled AIG employees will not land a new job, and to make a little cash, or in order to boost their personal stock, or simply out of sheer vindictiveness they will start talking to friends, regulators, and/or the press.

AIG is paying to prevent this from happening. Retention = protection, pure and simple.

Obviously, this not a legal opinion on my part–just an opinion. I would assume that Treasury Secretary Tim Geithner can read between the lines, and that he knows what Liddy is really saying here, and that the legalities (such as they are) are little more than window dressing. I assume Geithner has no interest in this all becoming a public bloodbath any more than Liddy does.

One heck of a racket, indeed.

We’ll be delivering our petition to Congress telling them to put a stop to this legalized racketeering on Wednesday morning when Barney Frank’s House Financial Services Committee holds a hearing on AIG at 10am ET. You can sign it here and leave your comments for Congress.