Obama administration officials and Republicans alike were nearly universal in condemning the $165 million in bonuses that the American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, is to pay executives in the business unit that brought the company to the brink of collapse last year.
are a lot of terrible things that have happened in the last 18 months,
but what's happened at A.I.G. is the most outrageous," said Lawrence H. Summers, President Obama's chief economic adviser, during an appearance Sunday on ABC's "This Week With George Stephanopoulos." "What that company did, the way it was not regulated, the way no one was watching, what's proved necessary - is outrageous."
payments to executives in A.I.G.'s financial products unit are in
addition to $121 million in previously scheduled bonuses for the
company's senior executives and 6,400 employees across the sprawling
corporation. Last week, Treasury Secretary Timothy F. Geithner pressured A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.
payment of so much money at a company at the heart of the financial
collapse that sent the broader economy into a tailspin will almost
certainly fuel a popular backlash against the government's efforts to
prop up Wall Street.
Word of the bonuses last week stirred such
deep consternation inside the Obama administration that Treasury
Secretary Timothy F. Geithner told the firm they were unacceptable and
demanded they be renegotiated, a senior administration official said.
But the bonuses will go forward because lawyers said the firm was
contractually obligated to pay them.
Austan Goolsbee, staff director of the president's Economic Recovery Advisory Board, on Sunday detailed Mr. Geithner's reaction.
"He stepped in and berated them, got them to reduce the bonuses
following every legal means he has to do this," Mr. Goolsbee said on
"Fox News Sunday." "I don't know why they would follow a policy that's
really not sensible, is obviously going to ignite the ire of millions
of people, and we've done exactly what we can do to prevent this kind
of thing from happening again.
Mr. Summers suggested that the
government's ability to require the bonuses be scaled back was
restricted by preexisting contracts, even though he did not specify
what those restrictions may be.
"We are a country of law," said
Mr. Summers, one of several economic officials to hit the
Sunday-morning talk show circuit. "There are contracts. The government
cannot just abrogate contracts. Every legal step possible to limit
those bonuses is being taken by Secretary Geithner and by the Federal
Mr. Goolsbee explained it this way: "I think the
root of the problem has been some of the people have things written in
their contract that say, 'Look, you sell this much life insurance, you
get a bonus of X,' and it's in their contract and that part can't be
Mr. Summers also appeared on CBS's
"Face the Nation," remaining consistent in his core message about the
bonuses: "It is outrageous. The whole situation at AIG is outrageous.
What taxpayers are being forced to do is outrageous."
Sen. Mitch McConnell,
the Republican minority leader, worried about the message the bonuses
send to other companies receiving bailout money. "If you're going to
take the government as a partner, the message here, I'm afraid, to any
business out there that's thinking about taking government money, is
"Let's enter into a bunch of contracts real quick, and we'll have the
taxpayers pay bonuses to our employees,' " he said on "This Week."
But Mr. McConnell, a Republican from Kentucky, also criticized the Obama administration.
them to simply sit there and blame it on the previous administration or
claim contract - we all know that contracts are valid in this country,
but they need to be looked at," he said. "Did they enter into these
contracts knowing full well that, as a practical matter, the taxpayers
of the United States were going to be reimbursing their employees?
Particularly employees who got them into this mess in the first place.
I think it's an outrage."
A.I.G., nearly 80 percent of which is
now owned by the government, has defended its bonuses, arguing that
they were promised last year before the crisis and cannot be legally
canceled. In a letter to Mr. Geithner, Edward M. Liddy, the
government-appointed chairman of A.I.G., said at least some bonuses
were needed to keep the most skilled executives.
"We cannot attract and retain the best and the brightest talent to
lead and staff the A.I.G. businesses - which are now being operated
principally on behalf of American taxpayers - if employees believe
their compensation is subject to continued and arbitrary adjustment by
the U.S. Treasury," he wrote Mr. Geithner on Saturday.
Mr. Liddy seemed stung by his talk with Mr. Geithner, calling their
conversation last Wednesday "a difficult one for me" and noting that he
receives no bonus himself. "Needless to say, in the current
circumstances," Mr. Liddy wrote, "I do not like these arrangements and
find it distasteful and difficult to recommend to you that we must
proceed with them."
An A.I.G. spokeswoman said Saturday that the
company had no comment beyond the letter. The bonuses were first
reported by The Washington Post.
The senior government official,
who was not authorized to speak on the record, said the administration
was outraged. "It is unacceptable for Wall Street firms receiving
government assistance to hand out million-dollar bonuses, while
hard-working Americans bear the burden of this economic crisis," the
Of all the financial institutions that have been
propped up by taxpayer dollars, none has received more money than
A.I.G. and none has infuriated lawmakers more with practices that
policy makers have called reckless.
The bonuses will be paid to
executives at A.I.G.'s financial products division, the unit that wrote
trillions of dollars' worth of credit-default swaps that protected investors from defaults on bonds backed in many cases by subprime mortgages.
bonus plan covers 400 employees, and the bonuses range from as little
as $1,000 to as much as $6.5 million. Seven executives at the financial
products unit were entitled to receive more than $3 million in bonuses.
Liddy, whom Federal Reserve and Treasury officials recruited after
A.I.G. faltered last September and received its first round of bailout
money, said the bonuses and "retention pay" had been agreed to in early
2008 and were for the most part legally required.
told the Treasury that there were two categories of bonus payments,
with the first to be given to senior executives. The administration
official said Mr. Geithner had told A.I.G. to revise them to protect
taxpayer dollars and tie future payments to performance.
second group of bonuses covers some 2008 retention payments from
contracts entered into before government involvement in A.I.G. Indeed,
in his letter to Mr. Geithner, Mr. Liddy wrote that he had shown the
details of the $450 million bonus pool to outside lawyers and been told
that A.I.G. had no choice but to follow through with the payment
The administration official said the Treasury
Department did its own legal analysis and concluded that those
contracts could not be broken. The official noted that even a provision
recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place.
the official said the administration will force A.I.G. to eventually
repay the cost of the bonuses to the taxpayers as part of the agreement
with the firm, which is being restructured.
A.I.G. did cut other
bonuses, Mr. Liddy explained, but those were part of the compensation
for people who dealt in other parts of the company and had no direct
involvement with the derivatives.
Mr. Liddy wrote that A.I.G.
hoped to reduce its retention bonuses for 2009 by 30 percent. He said
the top 25 executives at the financial products division had also
agreed to reduce their salary for the rest of 2009 to $1.
since it was bailed out by the government last fall, A.I.G. has been
defending itself against accusations that it was richly compensating
people who caused one of the biggest financial crises in American
A.I.G.'s main business is insurance, but the financial
products unit sold hundreds of billions of dollars' worth of
derivatives, the notorious credit-default swaps that nearly toppled the
entire company last fall.
A.I.G. had set up a special bonus pool
for the financial products unit early in 2008, before the company's
near collapse, when problems stemming from the mortgage crisis were
becoming clear and there were concerns that some of the best-informed
derivatives specialists might leave. It locked in a total amount, $450
million, for the financial products unit and prepared to pay it in a
series of installments, to encourage people to stay.
of the payments had been made by last fall, when A.I.G. nearly
collapsed. In documents provided to the Treasury, A.I.G. said it was
required to pay about $165 million in bonuses on or before Sunday. That
is in addition to $55 million in December.
Under a deal reached
last week, A.I.G. agreed that the top 50 executives would get half of
the $9.6 million they were supposed to get by March 15. The second half
of their bonuses would be paid out in two installments in July and in
September. To get those payments, Treasury officials said, A.I.G. would
have to show that it had made progress toward its goal of selling off
business units and repaying the government. The financial products unit
is now being painstakingly wound down.
Senator Bob Corker,
Republican from Tennessee, was one of the few officials on Sunday to
temper his public reaction to the A.I.G. bonuses, saying he wanted more
"I do think it's important to know whether these are
commission payments for products that brokers have sold, or whether
this is, in fact, a bonus," he said on "Fox News Sunday." "And I think
those are two very different things."
Mr. Corker added that the
reaction to the bonuses might serve some good: "These entities that are
receiving government money, unfortunately receiving government money,
our money - I do think they have to play by a different set of rules,
and hopefully that will cause institutions across this country not to
want to take government money and quickly move away from us because of
us getting under the hood like this."
- 201 Executive Compensation
- 208 Regulation