Filed Under:Markets, Regulation/Legislation

Watchdog Report Questions AIG Bailout, Compensation

NU Online News Service, Jan. 26, 3:06 p.m. EST

A new report by a federal-watchdog agency questions whether the U.S. government will be able to recover over the short term—if ever—the investment it has made in American International Group.

The report by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) was also highly critical of AIG’s compensation policies, and the agency suggests that even after AIG exits the government-aid programs, that its regulators should keep a close eye on its compensation policies.

AIG officials in New York declined comment.

The report says, “Because companies generally have shown little or no appetite for reforming executive-compensation practices, the economy remains at risk that compensation could play a material role in the event of a future crisis.”

It adds, “Although Treasury’s complete plans for exiting investments [like AIG, GM and Ally] remain unclear, if Treasury’s plan is to sell this stock at or above the break-even price, it may take a significant amount of time for markets to rebound to that level.”

The report explains, “Market conditions have slowed Treasury’s progress. Treasury did not sell any of its shares in GM in 2011, or any of its shares in AIG in the latter half of 2011.”

The report also demands that Treasury develop an end game for investments in companies like AIG in light of the fact that “market conditions” make it unlikely that the government can recover its investments in these firms shortly.

“In light of market conditions, Treasury should develop a concrete exit plan for each of these investments,” the report says.

The report also acknowledges that the government may never fully recover its investment in AIG.

It notes that last month, the Congressional Budget Office increased its estimated cost of the Troubled Asset Relief Program by $15 billion to $34 billion, due to a reduction in the market value of the investments in AIG and GM.

“Even though Treasury and CBO estimate a loss on these investments, we may not know for some time how much of a loss taxpayers will ultimately take,” the CBO report said last month.

The SIGTARP report says the watchdog agency was told by Treasury Department officials that it will need to sell its 1.455 billion shares in AIG at a price of $28.73 a share for taxpayers to break even on the investment.

AIG stock has been volatile with a high in 2011 of $61.18 per share on Jan. 7, 2011, and a low of $20.07 on Nov. 25, 2011, the report says.

The report also questions whether the czar appointed to monitor and control the executive-compensation policies of the 25 largest recipients of government financial aid, including AIG, acted in the public interest in approving the large salaries provided the executives of these companies.

Moreover, the Special Inspector General implies that AIG, among other large recipients of aid, were dismissive of his criticisms.

For example, the report says that, “Only AIG, GM, and Ally remain under the Office of the Special Master for TARP Compensation’s oversight, and CEOs at AIG and GM told SIGTARP that they would not maintain OSM’s practices once their company exits TARP.”

The report suggests that AIG’s proposed pay for its top-25 employees was excessive, and “did not reflect the unprecedented nature of AIG’s taxpayer-funded bailout and the fact that taxpayers owned a majority of AIG.”

In 2009, the report says, AIG wanted cash salary raises ranging from 84 percent to 550 percent for one group of employees, and 20 percent to 129 percent for another group.

“AIG proposed high-cash salaries even though some of the employees would also be paid significant retention payments,” the report says.

According to the report, Ken Feinberg, who was then serving as special master and is now overseeing payments to people affected by the Gulf Coast oil spill, “told SIGTARP that in his 2009 discussions with AIG, AIG believed that its common stock ‘was essentially worthless.'"

Feinberg told SIGTARP that he was reminded by Treasury officials that Treasury did not want AIG to go belly up, that stock salary would jeopardize AIG, and that the amounts at issue were relatively small compared to the government’s exposure in AIG, the report says. “However, Feinberg said that no one trumped his decisions,” the report notes.

The report states, “The integrity of our financial system remains at risk, with many former TARP recipients now designated as systemically important financial institutions (SIFIs) that continue with compensation structures that may encourage risk taking.”

The report says that the “implicit guarantee that came from the government’s unprecedented intervention resulted in moral hazard, and companies continue to engage in risky behavior.”

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