WASHINGTON — Obama
administration officials and Republicans alike were nearly universal in
condemning the $165 million in bonuses that the
American International Group, which has received more than $170
billion in taxpayer bailout money from the
Treasury and Federal Reserve, is to pay executives in the business
unit that brought the company to the brink of collapse last year.
“There are a lot of terrible
things that have happened in the last 18 months, but what’s happened at
A.I.G. is the most outrageous,” said
Lawrence H. Summers,
President Obama’s chief economic adviser, during an appearance Sunday
on ABC’s “This Week With
George Stephanopoulos.” “What that company did, the way it was not
regulated, the way no one was watching, what’s proved necessary — is
The payments to executives
in A.I.G.’s financial products unit are in addition to $121 million in
previously scheduled bonuses for the company’s senior executives and 6,400
employees across the sprawling corporation. Last week, Treasury Secretary
Timothy F. Geithner pressured A.I.G. to cut the $9.6 million going to
the top 50 executives in half and tie the rest to performance.
The payment of so much
money at a company at the heart of the financial collapse that sent the
broader economy into a tailspin will almost certainly fuel a popular
backlash against the government’s efforts to prop up Wall Street.
Word of the bonuses last
week stirred such deep consternation inside the Obama administration that
Treasury Secretary Timothy F. Geithner told the firm they were
unacceptable and demanded they be renegotiated, a senior administration
official said. But the bonuses will go forward because lawyers said the
firm was contractually obligated to pay them.
Austan Goolsbee, staff director of the president’s Economic Recovery
Advisory Board, on Sunday detailed Mr. Geithner’s reaction.
“He stepped in and berated
them, got them to reduce the bonuses following every legal means he has to
do this,” Mr. Goolsbee said on “Fox News Sunday.” “I don’t know why they
would follow a policy that’s really not sensible, is obviously going to
ignite the ire of millions of people, and we’ve done exactly what we can
do to prevent this kind of thing from happening again.
Mr. Summers suggested that
the government’s ability to require the bonuses be scaled back was
restricted by preexisting contracts, even though he did not specify what
those restrictions may be.
“We are a country of law,”
said Mr. Summers, one of several economic officials to hit the
Sunday-morning talk show circuit. “There are contracts. The government
cannot just abrogate contracts. Every legal step possible to limit those
bonuses is being taken by Secretary Geithner and by the Federal Reserve
Mr. Goolsbee explained it
this way: “I think the root of the problem has been some of the people
have things written in their contract that say, ‘Look, you sell this much
life insurance, you get a bonus of X,’ and it’s in their contract and that
part can’t be changed.”
Mr. Summers also appeared
CBS’s “Face the Nation,” remaining consistent in his core message
about the bonuses: “It is outrageous. The whole situation at AIG is
outrageous. What taxpayers are being forced to do is outrageous.”
Mitch McConnell, the Republican minority leader, worried about the
message the bonuses send to other companies receiving bailout money. “If
you’re going to take the government as a partner, the message here, I’m
afraid, to any business out there that’s thinking about taking government
money, is “Let’s enter into a bunch of contracts real quick, and we’ll
have the taxpayers pay bonuses to our employees,’ ” he said on “This
But Mr. McConnell, a
Republican from Kentucky, also criticized the Obama administration.
“For them to simply sit
there and blame it on the previous administration or claim contract — we
all know that contracts are valid in this country, but they need to be
looked at,” he said. “Did they enter into these contracts knowing full
well that, as a practical matter, the taxpayers of the United States were
going to be reimbursing their employees? Particularly employees who got
them into this mess in the first place. I think it’s an outrage.”
A.I.G., nearly 80 percent
of which is now owned by the government, has defended its bonuses, arguing
that they were promised last year before the crisis and cannot be legally
canceled. In a letter to Mr. Geithner, Edward M. Liddy, the
government-appointed chairman of A.I.G., said at least some bonuses were
needed to keep the most skilled executives.
“We cannot attract and
retain the best and the brightest talent to lead and staff the A.I.G.
businesses — which are now being operated principally on behalf of
American taxpayers — if employees believe their compensation is subject to
continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr.
Geithner on Saturday.
Still, Mr. Liddy seemed
stung by his talk with Mr. Geithner, calling their conversation last
Wednesday “a difficult one for me” and noting that he receives no bonus
himself. “Needless to say, in the current circumstances,” Mr. Liddy wrote,
“I do not like these arrangements and find it distasteful and difficult to
recommend to you that we must proceed with them.”
An A.I.G. spokeswoman said
Saturday that the company had no comment beyond the letter. The bonuses
were first reported by The Washington Post.
The senior government
official, who was not authorized to speak on the record, said the
administration was outraged. “It is unacceptable for Wall Street firms
receiving government assistance to hand out million-dollar bonuses, while
hard-working Americans bear the burden of this economic crisis,” the
Of all the financial
institutions that have been propped up by taxpayer dollars, none has
received more money than A.I.G. and none has infuriated lawmakers more
with practices that policy makers have called reckless.
The bonuses will be paid
to executives at A.I.G.’s financial products division, the unit that wrote
trillions of dollars’ worth of
credit-default swaps that protected investors from defaults on
bonds backed in many cases by subprime mortgages.
The bonus plan covers 400
employees, and the bonuses range from as little as $1,000 to as much as
$6.5 million. Seven executives at the financial products unit were
entitled to receive more than $3 million in bonuses.
Mr. Liddy, whom Federal
Reserve and Treasury officials recruited after A.I.G. faltered last
September and received its first round of bailout money, said the bonuses
and “retention pay” had been agreed to in early 2008 and were for the most
part legally required.
The company told the
Treasury that there were two categories of bonus payments, with the first
to be given to senior executives. The administration official said Mr.
Geithner had told A.I.G. to revise them to protect taxpayer dollars and
tie future payments to performance.
The second group of
bonuses covers some 2008 retention payments from contracts entered into
before government involvement in A.I.G. Indeed, in his letter to Mr.
Geithner, Mr. Liddy wrote that he had shown the details of the $450
million bonus pool to outside lawyers and been told that A.I.G. had no
choice but to follow through with the payment schedule.
official said the Treasury Department did its own legal analysis and
concluded that those contracts could not be broken. The official noted
that even a provision recently pushed through Congress by Senator
Christopher J. Dodd, a Connecticut Democrat, had an exemption for such
bonus agreements already in place.
But the official said the
administration will force A.I.G. to eventually repay the cost of the
bonuses to the taxpayers as part of the agreement with the firm, which is
A.I.G. did cut other
bonuses, Mr. Liddy explained, but those were part of the compensation for
people who dealt in other parts of the company and had no direct
involvement with the derivatives.
Mr. Liddy wrote that
A.I.G. hoped to reduce its retention bonuses for 2009 by 30 percent. He
said the top 25 executives at the financial products division had also
agreed to reduce their salary for the rest of 2009 to $1.
Ever since it was bailed
out by the government last fall, A.I.G. has been defending itself against
accusations that it was richly compensating people who caused one of the
biggest financial crises in American history.
A.I.G.’s main business is
insurance, but the financial products unit sold hundreds of billions of
dollars’ worth of derivatives, the notorious credit-default swaps that
nearly toppled the entire company last fall.
A.I.G. had set up a
special bonus pool for the financial products unit early in 2008, before
the company’s near collapse, when problems stemming from the mortgage
crisis were becoming clear and there were concerns that some of the
best-informed derivatives specialists might leave. It locked in a total
amount, $450 million, for the financial products unit and prepared to pay
it in a series of installments, to encourage people to stay.
Only part of the payments
had been made by last fall, when A.I.G. nearly collapsed. In documents
provided to the Treasury, A.I.G. said it was required to pay about $165
million in bonuses on or before Sunday. That is in addition to $55 million
Under a deal reached last
week, A.I.G. agreed that the top 50 executives would get half of the $9.6
million they were supposed to get by March 15. The second half of their
bonuses would be paid out in two installments in July and in September. To
get those payments, Treasury officials said, A.I.G. would have to show
that it had made progress toward its goal of selling off business units
and repaying the government. The financial products unit is now being
painstakingly wound down.
Senator Bob Corker,
Republican from Tennessee, was one of the few officials on Sunday to
temper his public reaction to the A.I.G. bonuses, saying he wanted more
“I do think it’s important
to know whether these are commission payments for products that brokers
have sold, or whether this is, in fact, a bonus,” he said on “Fox News
Sunday.” “And I think those are two very different things.”
Mr. Corker added that the
reaction to the bonuses might serve some good: “These entities that are
receiving government money, unfortunately receiving government money, our
money — I do think they have to play by a different set of rules, and
hopefully that will cause institutions across this country not to want to
take government money and quickly move away from us because of us getting
under the hood like this.”
Mary Williams Walsh
contributed reporting from Washington and A.G. Sulzberger contributed
reporting from New York.