TOPICS > Economy

Government Furor Continues Over AIG Bonuses

BY Admin  March 17, 2009 at 3:40 PM EST

AIG building; File photo

U.S. Senate Banking Committee Chairman Chris Dodd, D-Conn., said Tuesday that taxing the larger bonus package, valued at $450 million, “is worth pursuing as an idea.”

Nearly 80 members of the House of Representatives signed a letter to Treasury Secretary Timothy Geithner urging him to “immediately intervene to suspend” the payments, echoing President Barack Obama’s charge Monday that Geithner “pursue every single legal avenue to block these bonuses.” AIG has received some $170 billion in government rescue funds.

“Recipients of these bonuses will not be able to keep all of their money,” declared Senate Majority Leader Harry Reid.

Among the calls echoing on Capitol Hill, House and Senate Democrats were calling for new legislation to tax up to 100 percent of the big bonuses awarded by companies that were rescued by taxpayer money.

New York Attorney General Andrew Cuomo provided new details on the bonus payments Tuesday, saying the company last week had paid bonuses of $1 million or more to 73 employees, including 11 who no longer work for the failed insurance giant, the Associated Press reported.

Among the core issues in the bonus dispute is that much of the $165 million paid out to AIG executives went to a unit that lost $40 billion dollars last year insuring securities tied to high-risk mortgages.

The Wall Street Journal reported that subsequent legal damages for failing to pay the bonuses may be an issue, and could result in the government being forced to pay even more in the future.

While the payments have infuriated Washington, many compensation experts who work with large firms agree that disregarding contractual obligations presents a bad precedent. “It is very, very dangerous for the government to try to tell AIG not to perform on contractual obligations,” says Aliza Herzberg, lead partner for the employment practice group at Olshan Grundman. “They saved AIG to save insurance contracts, and while bonus contracts are very different, it’s a very slippery slope.”

AIG’s government-appointed chief executive Edward Liddy has cited the need to retain top talent as a reason for the large bonuses. In some cases, the company’s supporters say, those responsible for creating complicated derivatives that lost the company billions of dollars will be needed to help unwind those very financial instruments.

Some lawmakers, however, disagreed with employee retention as a reason for the bonus payments.

“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,” said Rep. Barney Frank, D-Mass., on Monday’s NewsHour. “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.”

On Tuesday, the Wall Street Journal reported that rather than trying to regain bonus money paid to AIG employees, the administration may use the next installment of AIG bailout money – $30 billion approved March 2 – as leverage to renegotiate bonus contracts going forward.

“If you start ignoring contracts left and right, people don’t have a lot of reason to stick around,” says Stephen Lindo, head of the law firm Willkie Farr & Gallagher’s Executive Compensation and Employee Benefits Department. “We don’t want to ignore the people who made horrible blunders,” Lindo adds, “but some people are standing by an organization in deep distress and if they leave, people [will] hire these people away.”

Republicans, meanwhile, said President Obama and his administration should have put more pressure on AIG executives to reject the bonuses. The complaints have stirred new questions about how Treasury Secretary Geithner is faring amid the financial storm blowing through the country.

“I don’t know if he should resign over this,” said Sen. Richard Shelby, R-Ala., according to the AP. “He works for the president of the United States. But I can tell you, this is just another example of where he seems to be out of the loop. Treasury should have let the American people know about this.”