AIG Challenged Over Retention Bonuses

After announcements that American International Group had adopted voluntary restrictions on executive compensation that eliminate management bonuses this year, a Maryland congressman is demanding that the company provide more disclosure concerning retention bonuses it is paying to retain senior officials.

In a letter, Rep. Elijah Cummings, D-Md., accused AIG of “disingenuous sleight of hand” by disavowing the payment of performance bonuses to senior executives in 2008, but then continuing to provide retention bonuses previously announced in September.

He said AIG was doing this by having the approximately 130 top officials involved agree to delay receiving their retention payments–with a first installment postponed from this month until April 2009, and the second installment moved from December 2009 to April 2010.

An AIG representative, Joe Norton, confirmed receipt of the letter, but said AIG would have a comment at a later date.

Mr. Norton also cited a joint statement issued Oct. 16 by AIG Chief Executive Officer Edward Liddy and New York Attorney General Andrew Cuomo, in which Mr. Liddy agreed to several actions, including close scrutiny of AIG compensation programs.

In that statement, Mr. Norton said, Mr. Cuomo noted specifically that “these actions are not intended to jeopardize the hard-earned compensation of the vast majority of AIG's employees–including retention and severance arrangements–who are essential to rebuilding AIG and the economy of New York.”

In his letter, Rep. Cummings cited the $85 billion loan the government provided in September “to keep AIG afloat.” That program has since been superseded by another agreement that increased the total cash available to AIG up to $150 billion but reduced the interest cost and further diluted the stake that private shareholders have in the company.

“Against this background–and given the massive layoffs occurring at other major financial entities, including Citibank–the American taxpayers have a right to know why senior executives at AIG, who are frankly lucky to still have their jobs, need to receive additional bonus payments of any kind to retain them at AIG,” Rep. Cummings said.

He asked in the letter that AIG disclose:

o Which executives in which AIG divisions are receiving the retention payments, and how much they are receiving.

o The base salaries of executives receiving the retention payments.

o Information as to whether all executives are delaying receipt of their payments until next April or, if any executive is not delaying receipt of the payments, which executives are receiving payments this month and how much each executive is receiving.

“Why is it necessary for any AIG executive to receive a retention payment–and why is it necessary that these be scheduled for April 2009 and April 2010?” Rep. Cummings asked. He also wants to know what will be the source of the retention payments provided in 2009 and 2010.

Late last month, AIG announced it had adopted voluntary restrictions on executive compensation that eliminate management bonuses this year and set Mr. Liddy's pay at $1. The company said there will be no 2008 annual bonuses and no salary increases through 2009 for AIG's top-seven officer Leadership Group, and no salary increases through 2009 for the 50 next-highest executives, in addition to other bonus, severance and retention award restrictions.

AIG's spending has been under scrutiny since September, when it gave the government a 79.9 percent interest in the company to stay liquid and obtain government loan guarantees now totaling $150 billion.

AIG said it is also developing a funding structure to ensure that no taxpayer dollars are used for annual bonus or future cash performance awards for AIG's “Senior Partners”–the top 60 members of management.

Mr. Liddy said AIG's senior executives recognize the company's obligation to taxpayers. “We are extremely grateful for the assistance we have received, and we know we have an obligation to use that assistance to help AIG recover, contribute to the economy and repay taxpayers,” he said.

“This action by the senior management team demonstrates not only that we understand our obligation to taxpayers and shareholders, but also that we are committed to the future success of this organization,” he added.

Under the voluntary restrictions announced last month:

o Mr. Liddy–who joined AIG on Sept. 18, after the government bailout was arranged–will receive an annual base salary of $1 for 2008 and 2009. His initial compensation will consist entirely of equity grants, “showing his confidence in AIG and its team,” the company said.

o Mr. Liddy will not receive an annual bonus in those years, although he may be eligible for a special bonus for extraordinary performance payable in 2010.

o Mr. Liddy will not be eligible for severance payments.

o Paula Rosput Reynolds, vice chair and chief restructuring officer, who joined AIG in October, will receive no salary or bonus whatsoever in 2008. In 2009 and beyond, other than her base salary, any compensation she receives will be tied directly to the progress of the restructuring efforts.

o The other five members of AIG's top-seven officer Leadership Group will not receive annual bonuses for 2008 or salary increases through 2009.

o AIG's Senior Partners will not earn long-term performance awards in 2008. They will not receive salary increases in 2009, and their 2008 and 2009 annual bonuses will be limited.

In addition to Mr. Liddy foregoing any severance payments, there will be restrictions on severance payments to members of this management group, which exceed government Troubled Asset Relief Program severance restrictions.

“We believe these actions demonstrate that we are focused on overcoming our financial challenges so AIG can return value to taxpayers and shareholders,” Mr. Liddy said.

Meanwhile, AIG will receive $40 billion from the U.S. Treasury's Troubled Asset Relief Program in exchange for four million shares of AIG Series D Preferred Stock. The transaction also includes a warrant for the Treasury to buy a number of shares of common stock of AIG equal to 2 percent of the issued and outstanding shares, or just under 53.8 million shares. The warrant has a 10-year term.

AIG said proceeds will be used to reduce outstanding borrowings under the original $85 billion loan extended by the Federal Reserve Bank of New York in September. The maximum capacity of that credit agreement will be reduced from $85 billion to $60 billion, AIG noted.

The Series D Preferred Stock, at $5 par value per share, will pay a dividend of 10 percent annually, according to the company.

An AIG representative said that Mr. Liddy intends to go to Washington, once the company makes progress on selling assets and paying off its debt to the government, to lower the 10 percent dividend on preferred shares taxpayers are receiving. Mr. Liddy also believes the 79.9 percent stake the government has in the company is too high because it chokes out investment from the private market, the representative said.

The representative stressed that any action taken by Mr. Liddy on this matter would be after progress is made on selling assets and paying off the government debt.

“We are starting to announce some small assets sales,” the representative said, but he added these were not ones that would make good progress toward paying down the debt.

AIG also announced that a federally financed operation has been launched to help it deal with its debt problems. Maiden Lane III (MLIII), a financing entity created by the Federal Reserve Bank of New York, was designed to purchase multisector credit debt obligation exposure, on which AIG has written credit default swap contracts.

The creation of ML III was announced last month, along with a separate entity, Maiden Lane II, which will hold residential mortgage-backed securities (RMBS) from AIG's securities lending collateral portfolio.

An AIG representative said ML II has not yet been set up by the Federal Reserve.

In announcing ML III, AIG said the financing entity “will purchase up to approximately $70 billion of multisector CDO exposure on which AIG has written CDS contracts. Approximately 95 percent of the write-downs that AIG Financial Products (AIGFP) has taken to date in its CDS portfolio were related to multisector CDOs.”

AIG also announced that ML III reached agreements with AIGFP's CDS counterparties to purchase approximately $53.5 billion principal amount of CDOs.

To date, AIG said $46.1 billion of such CDOs have been purchased and, in connection with the CDO purchase, the CDS transactions have been terminated.

According to a regulatory filing last week, “settlement on the remaining $7.4 billion notional amount of CDS is contingent upon the ability of the related counterparty to obtain the related multisector CDOs and thereby settle with ML III and terminate such CDS with AIGFP.”

ML III has $5 billion in equity funding from AIG, and up to approximately $30 billion from the FRBNY, of which approximately $15.1 billion has been funded to effect purchases of CDOs, the company explained.

The company announced that for an undisclosed amount it is selling its interest in Canada-based Tenaska Marketing Ventures, Tenaska Gas Storage and Tenaska Marketing Canada (collectively TMV).

Affiliates of AIGFP have owned 50 percent of TMV's holding companies since April 2007. That interest will now be sold back to Tenaska, which owns the other 50 percent of TMV's holding companies and serves as manager TMV.

Ms. Reynolds said “AIG has benefited from its investment in TMV. That investment, however, does not fit with our strategic insurance focus and the businesses in which we intend to remain as we restructure.”

In addition, the company announced it will sell AIG Private Bank Ltd., its Switzerland-based subsidiary, to Aabar Investments PJSC, a global investment company based in Abu Dhabi, for $254 million plus $83 million in assumed debt. The Zurich-based firm provides banking and structured wealth management solutions to private and institutional clients.

An AIG representative, David Monfried, said this deal will be “smaller compared to others that I expect we'll be announcing down the line.”

In September, the company announced the sale of AIG-Financial Products' 50 percent interest in London City Airport to Stamford, Conn.-based Global Infrastructure Partners of New York and London for an undisclosed amount. Some reports said the price may have been as high as $750 million.

“…[G]iven the massive layoffs occurring at other major financial entities…the American taxpayers have a right to know why senior executives at AIG, who are frankly lucky to still have their jobs, need to receive additional bonus payments of any kind to retain them at AIG.”

Rep. Elijah Cummings, D-Md.