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Obama pushes for return of AIG bonuses

The U.S. government owns 80% of the giant insurer but faces steep legal hurdles in getting the $165 million back.

March 17, 2009|Jim Puzzanghera and Tom Hamburger

WASHINGTON — Reflecting rising public outrage, President Obama ordered his aides Monday to "pursue every legal avenue" to challenge $165 million in bonuses paid to employees of bailed-out American International Group Inc. But trying to get the money back could lead to a legal quagmire.

Contracts that include bonuses to retain key employees are difficult to break, legal experts said. And such an action could lead to lawsuits against the giant insurer -- and indirectly against the government, which owns almost 80% of AIG after repeated infusions of taxpayer funds that now approach a total of $180 billion.

To get around possible litigation, the Obama administration is trying to attach conditions to the latest of still-pending bailout money to force AIG to repay the bonus money to taxpayers.

But that still would mean that about 400 employees in the company's Financial Products division -- the unit that concocted the risky derivatives activity that helped bring the company to its knees last fall -- would keep bonus checks ranging from $1,000 to $6.5 million.

"This is a corporation that finds itself in financial distress due to recklessness and greed. Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay," Obama said. "I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?"

New York Atty. Gen. Andrew Cuomo, whose office has been investigating AIG's executive compensation packages, is trying another approach in pursuit of the bonus money.

He said Monday he would issue subpoenas to the company for a list of recipients and for an accounting of whether they were involved in the activities that precipitated what has become the largest single federal bailout so far.

He's trying to determine whether AIG committed fraud in agreeing to the bonuses early last year despite growing multibillion-dollar losses that would have prevented them from being paid.

"We want the facts. We want the names and we want the amounts," Cuomo told reporters after AIG rebuffed his request to turn over the information voluntarily. "Nobody is trying to micromanage anyone's business. But we do want fairness and we want to prevent the absurd use of taxpayers' dollars."

AIG spokeswoman Christina Pretto said the company was in contact with Cuomo's office and would "respond appropriately to the subpoena." The company also has said it would work with federal officials to repay the bonus money.

Some members of Congress also were harsh, if not over the top. Sen. Charles Grassley (R-Iowa) suggested that AIG executives follow "the Japanese example" by publicly apologizing and doing "one of two things: resign or commit suicide."

Obama's sharp comments were a reversal from Saturday, when administration officials said they had carefully reviewed AIG's contracts and determined they could not block the bonuses without risking greater financial losses for taxpayers.

They had expected that the bonuses would be paid by Sunday to employees of AIG's Financial Products unit. Cuomo said AIG officials told him the payments were made Friday.

The bonus plan adopted by AIG late in last year's first quarter was aimed at retaining 400 key employees of the Financial Products division at the company past certain dates. At the time, the company was backing about $2.7 trillion worth of derivatives, according to AIG.

But the insurer was starting to struggle as many of the subprime mortgages it was in effect insuring began defaulting. The first indication of trouble came with a $5.3-billion quarterly loss in the final three months of 2007 and was followed by a growing sea of red ink last year, starting with a $7.8-billion loss in the first three months.

The company sought federal aid in September as it was unwinding the deals its specialty unit had made. The government took its first step, pledging billions in cash, to respond to what it saw as a broader threat to the worldwide financial system, where AIG was a major player.

Chief Executive Edward M. Liddy said last week that the company was trying to reduce compensation in the Financial Products division, where seven employees received more than $3 million each in retention bonuses.

Liddy said the company also used contract employees in the unit, and the 25 highest-paid contract employees have agreed to reduce their remaining salary this year to $1. He didn't disclose the total number of contract employees. Their salaries run as high as $500,000 a year, with the average about $270,000. In addition, salaries this year for an unspecified number of associate vice presidents and other officers in the division will be reduced by 10%.

It would be difficult, if not illegal, for the government to force the employees to return bonus money the company was contractually obligated to pay, employment law experts said.

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