American International Group, the “too big to fail” Wall Street insurer propped up by pledges of $170 billion in government aid, is giving $165 million in bonuses and retention pay to employees with the grudging consent of the Obama administration, government and company sources said Saturday.
Treasury Secretary Timothy F. Geithner had contacted AIG Chief Executive Edward Liddy on Wednesday to object after learning that the payments were due today to members of AIG Financial Products, a division that had created trillions of dollars in murky financial obligations.
The financial products division’s dealings, including guarantees on hundreds of billions of dollars of subprime mortgage bonds, were so complicated -- with financial tentacles extending around the world -- that the government feared the entire financial system might collapse if AIG didn’t stand behind them.
AIG and administration sources said Saturday that after going over the insurer’s legal obligations, Geithner agreed that the employees might win punitive damages if their contracts were broken.
An even bigger problem, they added, was that financial products employees who are denied payments could quit and that AIG’s losses -- the insurer took the deepest bath in red ink in American history last quarter, losing $61.7 billion -- could spiral enormously if the only people who understand the company’s convoluted dealings are not around to “unwind” the damage they have caused.
The employees are “de-risking actively,” said Nicholas J. Ashooh, head of communications for AIG. “If you don’t have the right people at financial products, you could lose a multitude of this amount in an afternoon.”
In his initial call to Liddy, Geithner asked the AIG boss to renegotiate the bonuses, according to an Obama administration official who was not authorized to comment publicly and spoke on condition of anonymity.
AIG said there were two categories of payments: One was for senior executives, the other for 2008 retention bonuses for employees that the company agreed to pay before the federal bailout, the official said. AIG said the retention bonuses were legally required to be paid despite the bailout, a view the Obama administration concluded was correct after a review of the contracts.
Breaking those contracts would have led to greater costs for taxpayers, the official said.
The economic stimulus legislation that President Obama signed into law last month includes strict new limits on bonuses and other compensation to executives of companies that received money from the $700-billion Troubled Asset Relief Program. But the provision specifically excludes any bonus payments “required to be paid pursuant to a written employment contract executed on or before February 11, 2009.”
Given that exemption, the administration’s hands were tied, the official said. But the government will be seeking to recover the bonus money as it restructures the terms of AIG’s bailout. The company has committed to working to develop a way to do that, the official said.
Ashooh said the bonuses and retention payments were part of a plan put in place to retain key employees after Joseph Cassano, the former head of the financial products division, left the company in February 2008.
In a letter Saturday to Geithner, first reported by the Washington Post, Liddy acknowledged that their conversation “was a difficult one for me.” He said he had been brought in to steer AIG -- with no bonus agreement for himself -- by then-Treasury Secretary Henry M. Paulson after the government acquired nearly 80% of the insurer’s stock.
“My only goals are to have AIG repay, with interest, to the maximum extent possible, the assistance the American taxpayers have given it and to continue AIG’s main insurance companies as strong, thriving businesses and contributors to the economy,” Liddy said in the letter. “My only stake is my reputation.”
AIG said the company had scaled back compensation as much as it legally could, reining in the pay of senior management by 40% last year.
In a five-page white paper explaining the financial products division bonuses, the company said about $55 million of retention pay was paid in December and about $93 million of additional retention pay will be eliminated because of losses at the financial products division, in accordance with the terms of the employee retention plan.