AIG Counsel: Paying Bonuses Kept Insurance Market Stable

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

A lawyer for American International Group told a Connecticut legislative committee yesterday that attempts to cancel controversial AIG Financial Products unit bonuses would cause marketplace confusion.

Patrick Shea, counsel to AIG, also testified that under Connecticut state law AIG's Financial Products unit faced contractual and legal obligations to pay the $165 million in retention bonuses.

Also testifying was an AIG human resources executive who said threats have been made against AIG employees because of the bonuses.

The payments have been attacked because AIG FP involvement in credit default swaps that lost billions forced the company to seek U.S. taxpayer rescue funds to stay afloat. Had the contracts been cancelled, Mr. Shea said there would have been a marketplace backlash that the government intervention aimed to prevent.

The Connecticut Banks Committee co-chairmen said they called for a hearing to gain an understanding of all facts surrounding the bonuses so the legislature could make informed decisions on any action it decides to take.

Republicans on the committee criticized the hearing for its disorganization and unclear purpose.

Mr. Shea, the author of a legal opinion on the impact of Connecticut law on paying the retention bonuses, said AIG FP was under contractual obligation to pay the bonuses and they were protected by Connecticut law because the bonuses were not discretionary, and therefore there was a promise to pay as long as an employee stayed with the company and performed in a way that did not result in termination with cause.

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

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

Mr. Shea said if one assumes commercial impracticability, then AIG would not have had to honor any of it contracts, and could have torn up all of its obligations, which would have caused the confusion and disruption in the market that the bailout was intended to avoid.

Stephen Blake, head of human resources for AIG FP, testified that the retention bonuses helped the company keep the necessary people to wind down AIG FP.

He said the employees at AIG FP who are receiving bonuses did not create the credit default swaps at the heart of the liquidity crisis. He noted AIG FP employees agreed to stay with the company to unwind its business with the knowledge that they "are working themselves 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 retention payments.

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

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

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

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

Mr. Blake noted historical bonus programs, which were performance-based, were developed by former AIG Chairman and CEO Maurice Greenberg.

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

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

At one point, Rep. William Hamzy, R-Bristol, asked Mr. Blake if he 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, at 10 of 3, and I don't know the scope either."