NU Online News Service, Mar. 27, 1:24 p.m.EDT

A lawyer for American International Group told a Connecticutlegislative committee yesterday that attempts to cancelcontroversial AIG Financial Products unit bonuses would causemarketplace confusion.

Patrick Shea, counsel to AIG, also testified that underConnecticut state law AIG's Financial Products unit facedcontractual and legal obligations to pay the $165 million inretention bonuses.

Also testifying was an AIG human resources executive who saidthreats have been made against AIG employees because of thebonuses.

The payments have been attacked because AIG FP involvement incredit default swaps that lost billions forced the company to seekU.S. taxpayer rescue funds to stay afloat. Had the contracts beencancelled, Mr. Shea said there would have been a marketplacebacklash that the government intervention aimed to prevent.

The Connecticut Banks Committee co-chairmen said they called fora hearing to gain an understanding of all facts surrounding thebonuses so the legislature could make informed decisions on anyaction it decides to take.

Republicans on the committee criticized the hearing for itsdisorganization and unclear purpose.

Mr. Shea, the author of a legal opinion on the impact ofConnecticut law on paying the retention bonuses, said AIG FP wasunder contractual obligation to pay the bonuses and they wereprotected by Connecticut law because the bonuses were notdiscretionary, and therefore there was a promise to pay as long asan employee stayed with the company and performed in a way that didnot result in termination with cause.

Because of the way the bonuses were structured, Mr. Shea said hebelieves AIG FP would have been subject to double damages underConnecticut wage law if it sought a way to not pay the bonuses.

Co-Chair Rep. Ryan Barry, D-Manchester, asked if AIG could haveused "commercial impracticability"–when an unexpected event renderscontractual duty impractical–to get out of paying the contracts,since the federal government had absorbed four-fifths of thecompany, and AIG would have been bankrupt without theassistance.

Mr. Shea said if one assumes commercial impracticability, thenAIG would not have had to honor any of it contracts, and could havetorn up all of its obligations, which would have caused theconfusion and disruption in the market that the bailout wasintended to avoid.

Stephen Blake, head of human resources for AIG FP, testifiedthat the retention bonuses helped the company keep the necessarypeople to wind down AIG FP.

He said the employees at AIG FP who are receiving bonuses didnot create the credit default swaps at the heart of the liquiditycrisis. He noted AIG FP employees agreed to stay with the companyto unwind its business with the knowledge that they "are workingthemselves out of a job at the end of the day."

Their one incentive to stay with the company, Mr. Blake said,was AIG's promise in 2008, before the bailout, to make retentionpayments.

As a result of the fallout from the public outrage over thebonuses, Mr. Blake said, employees have been the recipients ofthreats against them and their families. AIG CEO Edmund Liddy hasalso received threats, Mr. Blake said.

Executives of the company have also resigned as a result of thefallout, Mr. Blake said, which hurts the efforts to unwind AIGFP.

Mr. Blake said the bonuses were put in place as a time-basedretention mechanism. At the time they were developed, in the firstquarter of 2008, he said AIG FP was an ongoing business, not inrunoff as it is today.

But Committee Co-Chair Sen. Bob Duff, D-Norwalk, blasted thebonuses as being developed after it was already known the economywas souring and the AIG "ship was sinking."

Mr. Blake noted historical bonus programs, which wereperformance-based, were developed by former AIG Chairman and CEOMaurice Greenberg.

The retention bonuses developed in 2008, he added, also had aperformance-based aspect to them, but that resulted in no paymentsdue to AIG FP going into runoff.

Republicans on the committee repeatedly objected to the mannerin which the hearing came about, saying they were kept out of theloop by the Democratic co-chairs. Several Republicans said theywere unaware of the scope of the hearing, its purpose, and how itwas decided who would be subpoenaed.

At one point, Rep. William Hamzy, R-Bristol, asked Mr. Blake ifhe knew what the scope of the hearing was supposed to be. When Mr.Blake said he did not know, Rep. Hamzy said, "I sit here today, at10 of 3, and I don't know the scope either."