TOPICS > Economy

Obama, Congress Blast AIG Plans for Employee Bonuses

March 16, 2009 at 6:00 PM EDT
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AIG plans to pay millions in worker bonuses, a move that has angered lawmakers who have given the insurer bailout billions. Lawmakers weigh the options in dealing with AIG.
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JIM LEHRER: The anger over insurance giant AIG dominated the public discourse in Washington and elsewhere today. President Obama and members of Congress attacked new bonuses paid by the company after it received federal help to stay in business.

Ray Suarez has our lead story report.

RAY SUAREZ: The president led the wave of condemnation over the way AIG is spending $170 billion in taxpayer money.

BARACK OBAMA, President of the United States: 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. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?

RAY SUAREZ: The storm erupted Saturday, when the company disclosed the $165 million in bonuses paid out yesterday. That figure is part of a larger payout, valued at $450 million in bonuses and other incentives. Much of the money went to a unit that lost $40 billion last year insuring securities tied to high-risk mortgages.

AIG’s new CEO, Edward Liddy, said he finds it distasteful, but the bonuses were legally promised before the company accepted funds from the Federal Reserve. But President Obama said the real issue is about fundamental values.

BARACK OBAMA: All across the country, there are people who are working hard and meeting their responsibilities every single day without the benefit of government bailouts or multimillion-dollar bonuses. They are, in some cases, mortgaging their homes and doing a whole host of things just in order to keep things afloat. All they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules.

RAY SUAREZ: In Albany, New York State Attorney General Andrew Cuomo said he hopes to enforce those rules by issuing subpoenas about the bonuses.

AIG also reported using $90 billion in federal aid to reimburse U.S. and European banks for mortgage losses and other transactions. Of that, nearly $13 billion went to Goldman Sachs, and $12 billion went to cities and towns under investment agreements with the company.

In Congress today, lawmakers on both sides of the aisle vented their frustration. Senate Majority Leader Harry Reid.

SEN. HARRY REID (D-NV), Senate Majority Leader: These executive bonuses are beyond even outrageous. I don’t know what a term is that is more definitive than outrageous, but outrageous does the trick.

RAY SUAREZ: Republican Jeff Sessions also lambasted AIG, but he said the government shared the blame.

SEN. JEFF SESSIONS (R), Alabama: If your government — our government — had acted properly, we would have allowed this company to go forward in a controlled, orderly process, through reorganization under Chapter 11, and we wouldn’t have this bonus embarrassment.

RAY SUAREZ: The rescue of AIG last September was the first and is so far the biggest by the federal government. But the company has continued to post massive losses, more than $60 billion in the fourth quarter alone. And AIG has become the focus of the growing public anger over financial rescues in general.

That’s reflected in a new poll by Andrew Kohut of the Pew Research Center for the People and the Press in Washington.

ANDREW KOHUT, President, Pew Research Center: As much as 48 percent of the public is saying they are angry about the government bailing out companies because of their own poor performance.

RAY SUAREZ: So has this sentiment about the financial crisis begun to accumulate in a way that’s affecting the way the public feels about President Obama?

ANDREW KOHUT: Even though Obama’s ratings are still high, although a little bit less high than they were a month ago, the public ultimately is frustrated by many aspects of the financial rescue and trying to deal with these economic problems, and the president will begin to pay some price for that.

RAY SUAREZ: The president made clear today he’ll try to make AIG pay a price. He said he’s asked Treasury Secretary Geithner to use every legal avenue to block the bonuses.

Government exploring its options

Rep. Barney Frank
D-Mass.
[P]eople are looking, well, can the federal government, as the regulator cancel this? But there's another theory where I think we have more rights. We're the owners of that company, de facto, and probably legally.

JIM LEHRER: And to Judy Woodruff.

JUDY WOODRUFF: The letter from AIG that sparked all the outrage was blunt. That was where new chief executive Edward Liddy spelled out to Treasury officials why he believed the bonuses must be paid.

He wrote, "Quite frankly, AIG's hands are tied. Outside counsel has advised that these are legal, binding obligations of AIG and there are serious, as well as business consequences for not paying. Retaining key traders and risk managers is critical to our goal of repayment. Having contractual commitments is at the heart of what we do in the insurance business."

The question now: Can the government find a way legally to prevent those bonus payments?

We get reaction from both sides of the aisle on Capitol Hill. Rep. Barney Frank is the chairman of the House Financial Services Committee and a Democrat. And Rep. Scott Garrett is a Republican from New Jersey, who also sits on the Financial Services Committee.

And for the record, we invited Edward Liddy of AIG to appear, as well, but he declined our request.

Gentlemen, thank you both for being with us.

And, Chairman Frank, to you first. Mr. Liddy in that letter said, among other things, he said the company was legally bound to pay these obligations to their employees. How do you see it? Do you think they were legally bound or not?

REP. BARNEY FRANK (D), Massachusetts: Well, Judy, I'm trying to get over my surprise that he didn't accept your invitation, so I may be a little flustered.

But the answer is, I don't know, and we're going to look into this. We have been aware, obviously, of this problem.

The Committee on Financial Services has had a hearing scheduled with Mr. Liddy as a witness for some time. It's going to be Wednesday morning, our Committee on Capital Markets. Mr. Garrett is the senior Republican, I believe, on that subcommittee. And we're going to be pressing that. The staff that I have and others are now looking at this.

And I think one of the things we have to be clear, you know, there were two possible ways in which the federal government could cancel the bonuses. In the recovery legislation that we passed, my colleague, Sen. Dodd, put some very tough rules in there to prevent this kind of thing from happening in the future. He said anybody who takes this kind of money in the future can't do these things, but that wasn't in there in the past, partly, by the way, because this grant did not come from any congressional vote, or at least not one for 75 years. This came under authority that the Federal Reserve had without congressional voting on the asset relief program back in 1932.

But people are looking, well, can the federal government, as the regulator, in effect, cancel this? But there's another theory where I think we have more rights. We're the owners of that company, de facto, and probably legally. We have 80 percent of the equity.

So I do believe the federal government as the -- effect, as the owner can say, "These bonuses may have been promised for performance, but I think we can look at the performance," as the president was quoted in the show was saying, it's hard to argue that this is pay for performance.

And when Mr. Liddy says partly it's legally binding, partly it's to retain people, looking at the record, these do not sound like people I would be that eager to retain.

JUDY WOODRUFF: So you're saying there may be a way out there for the federal government...

REP. BARNEY FRANK: We have not given up on looking on that, the federal government, as the owner of the company, to defend itself.

Legalities of AIG contracts

Rep. Scott Garrett
R-N.J.
For those of us who were opposed to the Fed getting involved and they did, for those of us who were opposed to both TARP II and TARP I, we all should have seen that this was coming down the road.

JUDY WOODRUFF: Rep. Garrett, do you think AIG was legally bound here?

REP. SCOTT GARRETT (R), New Jersey: It would seem that they would be legally bound. And just going on -- I don't think I've ever seen Barney flustered, actually, at anything coming before him. So I don't think this surprises him.

And, actually, that's, I guess, really the main point here, is that none of this should have surprised any of us. For those of us who were opposed to the Fed getting involved and they did, for those of us who were opposed to both TARP II and TARP I, we all should have seen that this was coming down the road, that companies have contractual obligations with their employees, and that the federal government, be it through the Fed initially or through TARP after that fact -- and those were TARP legislation that were passed by both houses of Congress, by the House and the Senate, with no strings attached, with no caveats, say, "You can't take it if this situation," then this was really out there for us to understand.

And it was actually out there also for Secretary Geithner to understand coming into this, as well. The letter that you referenced, I believe, was just today. And in that letter, it references a conversation with Secretary Geithner a week ago.

So it's only now that it's making headlines that the president is coming back and basically second-guessing his own treasury secretary on this. Why Secretary Geithner didn't raise this when he first understood it is beyond me.

JUDY WOODRUFF: So you're saying -- go ahead, Congressman Frank.

REP. BARNEY FRANK: Well, I just want to disagree with one point. Remember, this was not under TARP, this initial thing. And under the TARP I, the bill that we passed at the request of the Bush administration in October, I guess, by the time we got to it, we did have some restraints.

They weren't as good as they'd like them to be, because we ran into some resistance in part from people in the Senate who were working with the secretary of the treasury, Mr. Paulson, who resisted them.

The current TARP legislation, any new money comes with very strict restrictions, but this preceded that. This was money that the Federal Reserve came to us in September and said, "We are announcing that we are lending $80 billion to the AIG," and it had nothing to do with Congress now.

It is a statute that was passed 70-some-odd years ago that I believe should be changed. It gives them too much power that really hasn't been used for a long time, and that is something we'll ultimately do.

JUDY WOODRUFF: Well, just...

REP. BARNEY FRANK: We can restrict things going forward, and we have.

JUDY WOODRUFF: Just quickly, though, Congressman Frank, to Rep. Garrett's point, that this should have been anticipated and maybe even headed off by the administration?

REP. BARNEY FRANK: No, not by this administration. First of all, you know, I am struck when I deal with some of my Republican colleagues that the world appeared to have been created on January 20, 2009. In fact, this was the product of Mr. Paulson, Bush's secretary of treasury, Mr. Bernanke, Bush's appointee to the head of the Fed. And I think they tried to do a good job, but let's not put it all on Tim Geithner.

Secondly, the Federal Reserve did this. I suppose the Federal Reserve could have conditioned this in September. The argument being made now is, well, but these predated even what the Fed did. That's why I think the legal authority that we should try to use is, we now have given that company so much money -- mostly the Federal Reserve -- without a congressional authorization, we now own the company.

And it's as owners of the company we have greater power to say, "You guys did not earn those bonuses," then does the federal government intervene in that relationship.

JUDY WOODRUFF: So let's come back to the bonuses themselves. Congressman Garrett, would you argue that these employees who worked in this so-called financial products division should get no bonuses? I mean, how does one decide what their compensation should be?

REP. SCOTT GARRETT: Well, I presume the president and CEO Liddy would argue that it's in their contract as to what their compensation formula would be. It was probably based upon how much they were able to -- sales that they actually made, not on the end result, which would probably, obviously -- I think Barney and I will both agree -- is the wrong way to write a contract, as far compensation. It shouldn't be what you just get upfront; it should be whether those contracts actually work out at the end of the day.

But that was the -- apparently, and we'll learn more in the committee -- that was apparently the terms of the contract that these employees had. Both of us agree also on the fact that, if we were writing the contract, we wouldn't have written it that way and going forward that we should do something about it going forward. But that's, at this point in time, somewhat water under the bridge.

REP. BARNEY FRANK: Well, let me -- Judy, can I give you a point of agreement? Because this is part of the problem. It's what we call the perverse incentive, and that is, in a lot of bonuses, even at the top level, it's a "heads they win, tails they break even," that if at any point in this transaction they make some money, they get a bonus, but if it loses money, they don't get it.

I think that's contributed to systemic risk. We will be dealing with that going forward.

But I do think, as the owner of the company, we can say, "You know what?" And I haven't seen the contract. I want to look at them. But you were going to get a bonus for this or that performance. I mean, even in those companies, you don't get a bonus for breathing. There has to be some performance.

And I think it is possible to argue as the owners that the performance did not, in fact, meet reasonable standards. I don't know that; that's the line we're going to pursue.

The case for new executives

Rep. Scott Garrett
R-N.J.
[AIG] can't pay the money back without the best and the brightest. The question mark that I think all of us have and all of America has, are these people ... really the best and the brightest that they did not see this coming

JUDY WOODRUFF: Well, let me come back to both of you. And I'll turn to Congressman Garrett for this. One of the other points that Mr. Liddy made in that letter...

REP. SCOTT GARRETT: Sure.

JUDY WOODRUFF: ... he said, "Retaining key traders and risk managers is critical to our goal of repaying American taxpayers," the money that they deserve, the money the government has given us. In other words, he's saying, "We can't do business and raise the money that we owe the government back without the best and the brightest."

REP. SCOTT GARRETT: Well, he's right on that last point. He can't pay the money back without the best and the brightest. The question mark that I think all of us have and all of America has, are these people that were AIG before, in this particular division, not the rest of it -- the insurance company and what have you -- but these particular people, are they really the best and the brightest that they did not see this coming, that they got us -- they got their company in the red for this, and now they've got all American taxpayers in the red, as well?

But I go back to my original point, as well. These are things that some of us were saying before, that if you get the government and if you get the American taxpayer on the hook initially, well, it's awfully hard to pull ourselves out of the fact.

And that's why some of us were saying no to the initial. Some of us were raising the flag as well for the Federal Reserve, as well for all the activities they were doing, questioning their expansive powers and saying that we should be reining them in, as well.

Unfortunately, it seems the way the Congress works is, it's only after the fact that we actually get to hear and have the hearing and get to the point and say...

REP. BARNEY FRANK: Well, no, that's not true.

REP. SCOTT GARRETT: ... and then do something. Well, we haven't done anything about this yet.

REP. BARNEY FRANK: No, excuse me. But we had a hearing in July. We did have a hearing in our committee in July on the Fed's use of these powers, after -- and one of the things that we should understand is the Fed was motivated here by the negative reaction when they let Lehman Brothers go under completely. They did withhold, and Lehman Brothers went under. A number of people think that allowing Lehman Brothers totally to fail had a lot of negative effects.

And then, in July, we did have a hearing before members of the committee, Mr. Garrett and others, with the Fed. There, frankly, the questions were kind of milder than I thought that they would be at the time.

But the other thing I would say about this to Mr. Liddy's point, the key point, in fact, I would think there's an argument for not only not -- for not retaining them.

People tend to defend their own handiwork. It is a human trait not to want to admit error. So having -- the argument that the people who made these mistakes -- and maybe they were understandable mistakes. Maybe other people would have made them. I don't know that; I'm skeptical.

But having the people who made the mistakes and the decisions that turn out badly be the ones to undo them isn't necessarily the best course. It is often the case that fresh faces have to come in because they don't have a vested intellectual interest in defending this. And I think the argument for retention is weakened by that, that it might be better, in many cases, to start with new people.

JUDY WOODRUFF: And, Chairman Frank, on Congressman Garrett's point earlier, essentially that the treasury secretary, Tim Geithner, isn't really being tough enough here, does he have a point?

REP. BARNEY FRANK: Well, no, he didn't say that. He said that he shouldn't have been surprised. He said that he knew this on Wednesday. Well, if, in fact, they were legally binding, they were legally binding Wednesday as well as now. Again, I think that...

REP. BARNEY FRANK: Excuse me, Scott. Please don't interrupt. There's an element of partisanship here.

REP. BARNEY FRANK: There's an element of partisanship here. These were decisions made when Paulson was the secretary of the treasury, Bush was the president for months. Blaming Tim Geithner who's been in power a very short period of time is really this kind of revision of history that's not helpful.

Initial AIG rescue necessary

Rep. Barney Frank
D-Mass.
[A]s far as being tough under Secretary Geithner's rule... we now have the banks in the TARP program, which is controlled more by Congress, telling us they're going to quit because we're too tough. And I welcome that.

JUDY WOODRUFF: Let come back to Congressman Garrett on this larger point here.

REP. SCOTT GARRETT: Sure.

JUDY WOODRUFF: And that is, would you revisit the decision in the first place for the federal government to bail out, to rescue AIG? I want to make sure we're not confusing the decision about bonuses with the overall decision to give them $160 billion.

REP. SCOTT GARRETT: No, I would certainly -- if we had the thing to do over again, try to revisit. Now when we revisit, of course, American taxpayers are already on the hook.

Remember the idea that when they engage themselves in this activity, the idea was, if we don't do certain actions, we would see a calamitous result afterwards. We would see the stock market go from, you know, 10,000 or 12,000 all the way down to 10,000 or 9,000 or 8,000. Well, those things happened anyway.

They said, if we didn't take some of these actions, the credit market would seize up and it would seize up for months at a time. Well, that's occurred anyway. They said that the securitization market would seize up, as well. That's occurred anyway.

So all the doom and gloom that they talked about, starting with Secretary Paulson's comments arguably during the Bush administration, but carried right through to now with the doom and gloom that continues out there, has continued to occur anyway. The one caveat on it is that the American taxpayer is now on the hook.

And so, yes, we have to put the best and the brightest back into AIG. Why? Because we put in so many tens of billions of dollars in American taxpayers that it's basically -- you know, you're throwing good money after bad. But they're doing it now because they want to get some of that money back.

All of these things should be revisited to examine it. And, you know, it was President Obama who chose Secretary Geithner to be his treasury secretary.

And, no, it wasn't just last Wednesday that Secretary Geithner should have known about these things. That's when the Liddy letter referenced it, but as Secretary Geithner, he was probably one of the three peoples in the room when Bernanke and Paulson and Geithner sat down and planned these things during the last administration.

If he didn't know how executive compensation packages worked, then I have a real question there. And why President Obama is second-guessing him now, I have a question there.

REP. BARNEY FRANK: The partisanship, I guess, was best underlined by Mr. Garrett saying Mr. Paulson "arguably during the Bush administration." I didn't know it was open to argument that Secretary Paulson was in the Bush administration or that President Bush was in power until January 20th. It's not arguable.

This was a Bush administration initiative. Yes, the Obama administration has inherited it. Yes, we have got some work to do to change it. But as far as being tough under Secretary Geithner's rule and because of some of the things we've done, we now have the banks in the TARP program, which is controlled more by Congress, telling us they're going to quit because we're too tough.

And I welcome that. I take a lot of pride in that. We changed the law in the recovery bill to make it easier for them to give the TARP money back, because under the Bush administration it was too hard to do that.

And, yes, we've had banks saying, "Oh, you won't let us go to these hotels or to the golf tournament. You're telling us to restrict this compensation. We're going to give the money back." I welcome that. Let me repeat right now here: Bring the money, please. We'll be very nice to you when you bring it back.

JUDY WOODRUFF: All right, gentlemen, we could go on, but we are going to leave it there. And I want to thank both of you. Chairman Barney Frank, Congressman Scott Garrett, we appreciate it.

REP. SCOTT GARRETT: Appreciate the chance. Thanks.