AIG Blasted In Retention Bonus Brouhaha As Critics Line Up To Demand Recovery

American International Group–as well as the politicians responsible for supervising its federal bailout–struggled to respond to a firestorm of criticism leveled against the beleaguered company last week, generated by a brouhaha involving retention bonuses as well as controversy over its payments to various counterparties here and abroad.

Public rage–channeled through Congress, the White House and the media–focused primarily on $165 million in bonus payments to employees of AIG's Financial Products unit, which has been blamed for undermining the company's solvency and nearly taking down the entire financial system with reckless credit default swaps to cover subprime mortgage-based securities.

"For the American public, AIG now stands for Arrogance, Incompetence and Greed," said Rep. Paul Hodes, D-N.H.

AIG Chairman and Chief Executive Officer Edward Liddy–appointed by the Bush administration to run AIG after its bailout last fall–said last week that he agreed to pay the bonuses only because "I am trying to prevent an uncontrolled collapse" of the Financial Products unit while it reconciles its controversial derivatives business.

Mr. Liddy–in sworn testimony before the Capital Markets Subcommittee of the House Financial Services Committee–announced that in an effort to sooth public anger at the AIG bailout, he has asked the employees of AIG Financial Products "to step up and do the right thing."

Specifically, he said he had asked those who received retention payments of $100,000 or more to return at least half of those funds. In response, he said, some had already stepped forward and offered to give up 100 percent of their payments.

He said he understood the reason for public anger at the bonus payments after the government agreed to provide AIG with $173 billion in cash to keep it solvent.

However, he asked for patience, arguing that the only way for the government to get its money back was to continue the course he has undertaken at AIG.

He also said AIG is working with federal agencies and New York Attorney General Andrew Cuomo to get as many employees as possible who received the payments to return them. "Obviously, we are meeting today at a high point of public anger. I share that anger," he said.

Mr. Cuomo–in a letter to Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee–reported that under contracts written in March 2008:

o 73 individuals received bonuses of $1 million or more.

o 11 of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million.

o The top recipient received more than $6.4 million.

o 22 individuals received bonuses of $2 million or more, and combined they received more than $72 million.

Earlier in the week, President Barack Obama ordered Treasury Secretary Tim Geithner to "pursue every legal avenue" to block payment of the bonuses. "This is a corporation that finds itself in financial distress due to recklessness and greed," said President Obama. "How do they justify this outrage to the taxpayers who are keeping the company afloat?"

At the same time, Mr. Cuomo launched his own inquiry, demanding that AIG reveal all material information about the bonuses to determine whether they "may be considered fraudulent conveyances under New York law."

Prior to his congressional testimony, Mr. Liddy had said AIG was bound by contract to pay the bonuses and would face "serious legal as well as business consequences for not paying." He added that the firm cannot attract top talent "if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."

Mr. Geithner said Treasury was working with the Justice Department to determine "what avenues" could be employed to recoup taxpayer dollars used to pay the AIG bonuses.

He also said that, to ensure taxpayers are compensated for any monies "we cannot recover," the government will "impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of the [$165 million] retention awards just paid."

Moreover, he added, "we will deduct from the $30 billion in assistance an amount equal to the amount of these payments," referring to the most recent commitment of additional government aid.

At the same time, Mr. Geithner said that in criticizing the bonuses paid to AIG executives, Americans should not "lose sight" of the fact that under current law, federal officials don't have the authority to take control of troubled financial institutions that aren't banks.

Even the tough guidelines on executive pay put into the economic stimulus bill by Sen. Chris Dodd, D-Conn., "allow for the payment of contracts signed before the act went into effect," Mr. Geithner noted.

"This situation dramatically underscores the need to adopt, as a critical part of financial regulatory reform, an expanded 'resolution authority' for the government to better deal with situations like this," Mr. Geithner wrote in a letter to congressional leaders.

"Such a resolution authority" for regulating financial institutions like AIG, whose failure would pose a significant risk to the financial system, he said, should include a comprehensive and broad set of tools that would enable the government to regulate AIG in a way that will protect taxpayer interests and innocent customers.

Mr. Geithner also said that he had received a commitment from Mr. Liddy that the company would work to "scrap or cut" hundreds of millions of dollars in additional bonus payments due this year and in the future. He added that the AIG CEO has "committed himself to do this on terms that are consistent with the executive compensation guidance for firms receiving government aid mandated by provisions of the stimulus act enacted by Congress last month."

Maurice Greenberg, AIG's former CEO, said the executives who recently received bonuses do not deserve them because they lost money for the company.

In a March 17 interview on "The Charlie Rose Show," Mr. Greenberg said there was no reason to provide an incentive to retain these executives because they have nowhere to go, and if they did leave they "could have been replaced very quickly."

In the House, Rep. Steve Israel, D-N.Y., introduced legislation to impose a 100 percent tax on the bonuses. In a statement, he said that "if we can't kill the bonuses, we'll tax the bonuses."

In the Senate, Sen. Max Baucus, D-Montana, who chairs the Senate Finance Committee, said at a hearing that he is drafting legislation to claw back "some" of the bonus money. The tax could be as high as 91 percent, sources said.

"We are looking at tax options that will reclaim the outrageous bonuses paid by AIG," Sen. Baucus said, adding that the measure will be unveiled shortly. "What's the highest excise tax we can impose that will stand up in court?"

Sen. Dodd, chair of the Senate Banking Committee, said that the American people are "outraged–and I am as well," adding that "the chairman of the Federal Reserve has said that the government's efforts to prevent AIG from failing outright are akin to a neighbor smoking in bed and setting the house on fire."

"With these bonuses, what we are seeing is the folks responsible picking the pockets of the firefighters and stealing the hubcaps off the fire truck. It's outrageous," he added.

Sen. Charles Grassley, R-Iowa, was even more animated. He told Cedar Rapids, Iowa, radio station WMT that AIG executives should "follow the Japanese example and come before the American people and take that deep bow and say, 'I am sorry,' and then either do one of two things: resign or go commit suicide." He later apologized for his reference to suicide.

In his congressional testimony, Mr. Liddy said that "as a businessman of some 37 years, I have seen the good side of capitalism. Over the last few months, in reviewing how AIG had been run in prior years, I have also seen evidence of its bad side."

In his comments, Mr. Liddy portrayed the problems at AIG in the starkest terms as he sought to cool outrage in Congress and across the country over the bonuses, which AIG insisted it must pay to meet contractual obligations. "Mistakes were made at AIG on a scale few could have ever imagined possible," he said.

The most critical of those was the creation of a credit default swap portfolio, "which eventually became subject to massive collateral calls that created a liquidity crisis for AIG," he said.

Specifically, he testified, although AIG has wound down more than $1 trillion in the portfolio of AIG Financial Products–which he characterized as "the unit that is at the root of our financial problems"–he said that portfolio remains very large, at some $1.6 trillion, "and it continues to contain substantial risk." (For more on the controversy over AIG's payments to counterparties, see page 21.)

"The financial downside for taxpayers is potentially very large and very real, and that's why we're winding this business down," he explained.