LAGUNA BEACH AND NORTH CAROLINA — 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.
