WASHINGTON–Treasury Secretary Tim Geithner and Federal Reserve Board Chairman Ben Bernanke today both disclosed to Congress that their agencies examined possible legal action to stop payment of the bonuses to American International Group's Financial Products Group but retreated from the idea.

Both also said in testimony before the House Financial Services Committee that they were counseled by their legal staffs as well as AIG's legal staff that such legal action could backfire.

At the same time, Secretary Geithner said he is working with the Department of Justice to determine "what legal avenues may be available to recoup retention bonuses that have already been paid."

He told members of the committee Treasury will also impose on AIG a contractual commitment to pay the Treasury, from the operations of the company, the amount of the retention awards just paid.

Finally, he said, Treasury will deduct from the $30 billion in recently committed capital assistance an amount equal to the amount of those payments.

In his testimony, Secretary Geithner related that when he found out March 10 that the bonuses were scheduled to be paid soon, "I called Ed Liddy [AIG chairman and chief executive officer] and asked him to renegotiate these payments."

He explained, Mr. Geithner said, "that the contracts for the retention payments were legally binding and pointed out the risk that, by breaching the contracts, some employees might have a claim under Connecticut law to double payment of the contracted amounts."

In his testimony, Chairman Bernanke said that when he was informed the payments would soon be made, "my reaction…was that, notwithstanding the business purposes that might be served by this action, it was highly inappropriate to pay substantial bonuses to employees of the division that had been the primary source of AIG's collapse."

He then asked that the AIG-FP payments be stopped but was informed "they were mandated by contracts agreed to before the government's intervention."

When he asked "that suit be filed to prevent the payments," Mr. Bernanke said that "legal staff counseled against this action, on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail; legal action could thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees."

He said he was also told the company had been instructed to pursue all available alternatives and that the Federal Reserve Bank of New York "had conveyed the strong displeasure of the Federal Reserve with the retention payment arrangement."

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U.S. Financial Officials Say They Backed Off AIG Bonus Hunt

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