AIG chief fails to quell growing ire over bonuses

The chief executive of bailed-out American International Group Inc. tried Wednesday to defuse public outrage over bonuses paid to key employees whose complex dealings fell apart and helped cause the company’s breakdown and fuel the worldwide financial crisis.

But his efforts appeared to be too little, too late.

Edward M. Liddy, brought in last fall by federal officials to run the giant insurer as the government was pumping billions of dollars into the conglomerate, told a congressional subcommittee that he had asked employees who received $165 million in bonuses to return half the money. Some, Liddy said, volunteered to return their entire bonus.

“Getting half of the money back is not the answer,” Rep. David Scott (D-Ga.) told Liddy during the contentious hearing before a subcommittee of the House Financial Services Committee. “The answer is getting all the money back.”

Lawmakers continued to fume over the retention bonuses to employees at AIG’s Financial Products division, where the risky credit-default swaps and other intricate insurance products were created. House Democrats announced their plans to vote today on legislation to tax the bonuses almost completely out of existence.

Rep. Paul Kanjorski (D-Pa.) warned Liddy that the decision to award the bonuses had produced such a backlash that it could hinder the government’s ability to deal with the continued financial crisis.

“Do you realize that the actions that you take at AIG, and took in this precise case . . . may have jeopardized our ability to get a majority of this Congress to support further largess to provide funds to prevent a recession, depression or meltdown?” Kanjorski said.

Liddy defended his decision to pay the bonuses, saying they were required by contract. He said officials at the Federal Reserve knew about the contract beginning in November.

He called the payments “distasteful” but noted that the company had agreed to them before he took the job in September, when the Federal Reserve gave AIG an initial bailout. The government, which owns 80% of the company, now is on the hook for up to $182 billion in loans and other aid -- by far the most to any single company.

Given the need for employees to continue working to restructure AIG and unwind the company’s exposure to about $1.6 trillion in derivatives and other guaranteed payments to avoid its collapse, Liddy said he decided the bonuses needed to be paid.

“I know $165 million is a very large number,” Liddy said. “In the context of $1.6 trillion and the money already invested in us, we thought that was a good trade.”

Liddy said he knew the public would be upset by the decision but didn’t realize how much.

In response to a request from Rep. Barney Frank (D-Mass.), the committee’s chairman, Liddy said he would turn over the names of those receiving bonuses, but only if the names were kept confidential because employees had been threatened since news of the bonuses broke over the weekend.

“All the executives and their families should be executed with piano wire around their necks,” Liddy quoted one threat.

Frank, however, wouldn’t agree to keep the names confidential. He said he would take threats against AIG employees into consideration but that his committee might vote to subpoena the information anyway.

The government’s leverage in demanding details about individual employee bonuses was strengthened Wednesday when a New York judge ordered Bank of America Corp. to disclose similar information in a legal dispute with New York Atty. Gen. Andrew Cuomo.

New York State Supreme Court Judge Bernard J. Fried ordered Bank of America to divulge details about $3.6 billion in bonuses that Merrill Lynch & Co. paid out just before the company’s sale to BofA was completed in December.

Cuomo is investigating whether shareholders and directors were fully informed that Merrill would suffer a $15.8-billion fourth-quarter loss at the time the bonuses were approved.

Bank of America declined to hand over the employee information unless Cuomo agreed not to release it publicly, a condition that he refused. The Charlotte, N.C., company maintained that the bonuses were an employee confidentiality issue and that turning over the details could help competitors poach its best employees.

Fried rejected those arguments, writing that Cuomo had “the authority to decide whether the information he gathers as part of his investigation should be kept secret or public.”

A Bank of America spokesman said the company “will of course comply with the order of the court and turn over the information requested.”

Cuomo hailed the judge’s decision and turned up his rhetoric against AIG.

“Let the sun shine in,” Cuomo said. “AIG should take heed and immediately turn over the list of bonus recipients we have subpoenaed.”

Liddy said he shared the anger of the public over the bailout of the insurance giant. That ire flared this week over revelations that the retention bonuses were going to employees of the same division that led to the company’s downfall.

Adding to bonus outrage, federally run mortgage financing giant Fannie Mae plans to pay four top executives a total of $4.4 million in bonuses as part of an employee-retention program, according to a report in the Washington Post.

Fannie Mae, which suffered $59 billion in losses last year, has requested $15 billion in taxpayer assistance and has said it expects to need plenty more.

Wednesday’s congressional hearing came a day after Treasury Secretary Timothy F. Geithner said AIG would be required to pay the $165 million from corporate operating funds as part of the final terms of a previously announced $30-billion line of credit from the government. In addition, the credit line would be reduced by the same amount.

The Obama administration has said it determined that the bonuses could not be blocked because of AIG’s existing contracts to pay them. But President Obama has ordered his administration to explore all legal means to recoup them, and Geithner said his department was still looking at ways to recover some of them.

Liddy said that Wednesday morning he asked employees who received more than $100,000 in retention bonuses to return at least half of the money. The bonuses ranged from $1,000 to more than $6.4 million, with 73 people getting at least $1 million each.

“My fear is the damage is done,” Liddy said. “That we will get the bulk of that money back, they will return it, but they will return it with their resignations.”

But several lawmakers said they didn’t understand why that would be so bad given that the Financial Products division had caused the problems that led to AIG’s downfall.

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jim.puzzanghera @latimes.com

walter.hamilton@latimes.com

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Times staff writer Janet Hook in Washington contributed to this report.

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Firestorm grows

Now, virtually all of the AIG bailout is coming into question. A1

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When did they know?

Treasury officials in November had approved AIG bonuses. A18