Report Scores Treasury 'Failure' To Halter AIG Bonuses

AIGFP's disastrous financial activities brought AIG to the brink of failure necessitating the multi-billion-dollar government bailout that included TARP monies.

The SIGTARP reported noted that "considerable Congressional and public outcry resulted from AIG making $168 million in retention and award payments to a large group of its employees in March 2009."

In October 2008, after the government's September arrangements for a bailout of the company, SIGTARP said Federal Reserve Bank of New York officials began looking at AIG companies decentralized compensation and bonus plans involving more than $1.75 billion

However, "although they learned of the size of the impending payments and their timing among other things, it is unclear whether FRBNY officials knew that thousands of dollars in payments would go to non-essential AIGFP support employees, such as kitchen and mailroom employees," the report stated.

The SIGTARP investigation found that "Treasury invested $40 billion of taxpayer funds in AIG, designed AIG's contractual executive compensation restrictions and helped manage the government's majority stake in AIG for several months, all without having any detail information about the scope of AIG's very substantial and very controversial executive compensation obligations."

"Treasury's failure to discover the scope and scale of AIG's executive compensation obligations, in particular at AIGFP, potentially resulted in a missed opportunity to avoid the explosively controversial events and created considerable public and Congressional concern over the retention payments," SIGTARP concluded.

The investigators said that while they saw no indication that Treasury Secretary Timothy Geithner "had personal knowledge of the AIGFP bonuses until March 10, 2009, three days before they were paid, this too suggests a failure of communication."

The report said, "In light of the political sensitivities associated with the bailout of AIG, both as President of FRBNY and subsequently as Secretary of Treasury, it was necessary that Secretary Geithner be informed by his staff, in a timely manner, of such sensitive and significant information."

When Treasury agreed to an additional $30 billion in support to AIG, it had a possible opportunity "to compel renegotiation of the AIGFP retention payments," said the report.

The failure to adequately inform Mr. Geithner is "a failing at both FRBNY and Treasury to identify adequately the significance of an issue that has been identified as one…'not easy for the Fed and Treasury to defend' and to inform their leadership."

The report recommended that Treasury take steps to work with Federal Reserve officials to understand AIG compensation and in general to take greater ownership and set policies for oversight.

Concerning the legality of the bonus distributions, the report found that the AIGFP retention payments were consistent with the law, and not governed by executive compensation restrictions that were placed on AIG executives as part of the government's TARP assistance agreement.

"Several legal opinions concluded that the payments were contractually required," SIGTARP found.

The report recounted that after public outcry AIG asked for a return of the payments, but "although AIG received a commitment from some employees to repay a portion of the retention awards, collection has been incomplete due to certain employees leaving AIG and reported concerns of employees who remain at AIG regarding the status of future payments under the AIGFP retention plan."

The SIGTARP report was released in advance of a congressional hearing today by the House Committee on Oversight and Government Reform, which is looking into the bonuses at AIG.

Rep. Edolphus Towns, D-N.Y. the committee chairman in advance of the hearing released an advance text of opening remarks where he demanded, "What is the justification for giving bonuses to people who drove their own firms off a cliff and very nearly crashed the US economy? Wasn't there something seriously out whack here?"

Mr. Towns noted that the SIGTARP "found that AIG's compensation used to be weighted toward long-term incentives that were payable only at retirement, the classic "golden handcuffs. But in 2007, when losses began to mount, AIG's new management decided to "update" their compensation plans. The golden handcuffs were replaced by golden envelopes. The era of instant gratification had arrived at AIG. Long-term incentives were rejected in favor of short-term gains."

The congressman said that "what infuriates people is when bosses at bailed out companies – virtual wards of the state – continue to rake in millions – in effect, our millions. It just doesn't seem right that the people who caused this tragedy should be so richly rewarded.