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Treasury officials explicitly allowed AIG bonuses

Executives could get up to 3.5 times their base salary without approval, records of a $40-billion November deal show. It also let the firm set aside as much money for 2008 bonuses as it did in 2006.

March 19, 2009|Ralph Vartabedian and James Oliphant

LOS ANGELES AND WASHINGTON — In frantically rushing to the rescue of American International Group Inc. last fall, Treasury Department officials negotiated a $40-billion deal that explicitly allowed the company to set aside tens of millions of dollars for executive bonuses and richly reward individual senior executives without restrictions or any concern that the government might interfere.

Now, the legal agreement and other deals that came before it are making it difficult, if not impossible, to quench the political outrage over last week's $165 million in payments to wealthy executives at a company that exists only because of taxpayer bailouts.

Treasury officials said Wednesday that they were trying to work out new limits on executive compensation at companies taking federal assistance, but those rules will not necessarily do anything to limit bonuses and compensation deals that were grandfathered in under the early bailout rules -- no matter how high the political heat is turned.

Although the Obama administration has maintained that Treasury Secretary Timothy F. Geithner did not learn of the bonuses until this month, it has carefully avoided disclosing how long the agency itself was in the dark. White House spokesman Robert Gibbs said he could not detail when administration officials below Geithner learned of the existence of the AIG commitments.

But the record shows that on Nov. 25, Treasury Department officials signed a securities agreement to provide $40 billion to AIG in exchange for preferred stock and rights to buy common stock. In that 586-page document, the agency explicitly allowed AIG to pay individual executives as much as 3.5 times their base salary without any approval.

The agreement also allowed AIG to set aside as much money for such bonuses for 2008 as it had in 2006, a year when the insurance giant was raking in vast amounts of profit from a financial bubble that would later maim the world economy.

Compensation experts say those amounts were very generous, even for a healthy company.

"It is an outrage at a couple of levels," said Richard Ferlauto, director of corporate governance and pension investments for the American Federation of State, County and Municipal Employees. "It is a huge amount of money. The bonuses are too pervasive. And a retention bonus means people stay. Some of these people took the money and left."

Almost certainly those limits were put in place because they were needed to satisfy executive compensation agreements that were made before AIG got into financial trouble by mid-2008, said one official knowledgeable about the restrictions. Some senior Treasury officials must have been aware that large executive bonus payments were looming, said the official, who spoke on condition of anonymity because he was not authorized to make a public statement.

The deal cut by Treasury could mean there will be more of the same. The AIG transaction allows a bonus pool for this year that would be as big as the pool for 2007, when it was still profitable.

"None of this made any sense," the official said. "Didn't anybody think of requiring the company to be profitable before shoveling this money out the door?"

The Nov. 25 agreement contained a wide range of other restrictions covering such matters as golden parachutes, stock repurchases, dividend payments, severance payments, lobbying and other general expenses.

Undoing these legal deals will be difficult, as was demonstrated Wednesday by the problems facing Sen. Christopher J. Dodd ( D-Conn.), who watered down restrictions in legislation at the behest of the Treasury Department in February.

Those restrictions were contained in the economic stimulus bill and would have limited bonuses to one-third of base pay, both in the future and retroactively.

But Dodd, chairman of the Senate Banking Committee, said Wednesday that Treasury officials approached him in February and asked that he take out the retroactive provision.

A Treasury official, speaking on condition of anonymity, acknowledged that staffers in the department told Dodd that the government would be sued if it tried to break a legal deal.

Dodd said he acceded to the department's request, which made the limits on bonuses prospective only. What's more, the prospective rules will not begin until the Treasury Department issues its formal rule that will implement the legislation. Treasury officials are now working on that rule.

In addition to the $40-billion assistance to AIG, the department has agreed to provide an additional $30 billion, but a formal securities contract has not been reached. Geithner is trying to include new language in that agreement that would recover the $165 million in bonuses that have been paid out so far. But that may require some kind of voluntary agreement not only by AIG but by the executives.

On Wednesday, officials were scrambling to explain how they let the bonuses get paid in the first place.

"I don't believe anyone had any idea, I certainly didn't, that a month and a half later from February we would be sitting here talking about AIG and the bonuses that they are receiving for their retentions, these $165 million," Dodd said in a televised interview. "So that was never a part of the consideration."

Dan Pedrotty, director of investments at the AFL-CIO, said hourly auto workers were being forced to give up their contract rights, while top AIG executives are holding on to multimillion-dollar bonuses.

"This company would not be inexistence were it not for the American taxpayers," Pedrotty said. "So it really doesn't pass the laugh test."

--

ralph.vartabedian@latimes.com

joliphant@tribune.com

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