U.S. News

Tuesday, March 17, 2009

Obama seeks to stop AIG bonuses

Joining a chorus of outrage, President Obama vowed yesterday to use "leverage" from more than $170 billion in federal aid and "every single legal avenue" to try to block bonuses being paid to executives at insurance giant American International Group.

But the White House did not immediately explain how it might stop the $165 million in bonuses, or why it didn't restrict the payments before giving AIG the latest round of taxpayer support.

Several banking specialists, however, said yesterday that AIG was on shaky ground in insisting that the bonuses must be paid, noting that the company probably would be in bankruptcy without the federal bailout - and thus in no position to follow through on the bonuses that were included in contracts negotiated last spring.

The retention bonuses were sent on Friday, mostly to executives at AIG Financial Products, the unit that put the company at the brink of bankruptcy with risky bets on securities linked to the housing bubble.

"This is a corporation that finds itself in financial distress due to recklessness and greed," Obama said at an event to announce more aid for small businesses. "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?"

Obama said that Treasury Secretary Timothy Geithner is trying to resolve the matter with AIG's CEO, Edward Liddy. "This is not just a matter of dollars and cents. It's about our fundamental values," the president said.

White House spokesman Robert Gibbs said that Geithner will redouble efforts to find any way to block the bonuses or recoup them, possibly by adding restrictions to the pending $30 billion government loan to AIG.

New York State Attorney General Andrew M. Cuomo yesterday issued a subpoena for the names of the executives slated to receive the bonuses after AIG refused to release them voluntarily. An AIG spokeswoman told the Associated Press, "We are in contact with the attorney general and will of course respond to his request."

Obama's pledge yesterday stood in contrast to comments a day earlier by his chief economic adviser, Lawrence Summers, who said that the government could not simply order the company to violate the contracts.

While Obama sought to insulate himself and his ambitious economic agenda from the populist anger at AIG, reporters repeatedly pressed Gibbs to explain why Obama had not followed through on an earlier pledge to crack down on excessive compensation to executives at companies that receive taxpayer bailouts. Announcing new limits on executive pay on Feb. 4, Obama said he would "not tolerate" executives who take big compensation packages at the same time they receive government bailouts, declaring, "We're going to be demanding some restraint in exchange for federal aid."

During the contentious briefing, Gibbs did not directly answer why pay restrictions were not already required in the latest loan. Instead, he said Obama wants Geithner "to exhaust all legal remedies in looking backwards to see what steps could be taken to block these bonuses."

AIG's Liddy, who took charge of the company after the bonuses were arranged, said in a letter Saturday to Geithner that while he finds the payments "distasteful," the company's hands were tied by the contracts: "Given the trillion-dollar portfolio at AIG Financial Products, retaining key traders and risk managers is critical to our goal of repayment."

Word of the bonuses over the weekend prompted a series of tirades on television talk shows and news programs. Critics put the bonuses in contrast to workers in many industries who are being pressured to accept major cuts in pay and benefits or are losing their jobs.

The US government owns nearly 80 percent of AIG and has de facto control, but has stopped short of taking it over. The US strategy is to keep the company afloat in hopes of avoiding a further economic meltdown that some believe would come if such a massive institution went bankrupt. On Sunday, the company disclosed the firms that it paid after the government bailout, which started with an $85 billion emergency loan from the Federal Reserve last fall.

Representative Barney Frank said yesterday that the government may not be able to stop the bonuses to AIG executives, but could try to kick them out of their jobs. "People may have a right to a bonus, but they don't have a right for a job forever," the Newton Democrat and chairman of the House Financial Services Committee said at a home foreclosure event in New Bedford. Frank said the government should look at legal avenues to overturn the bonuses and take a close look at the executives.

In a later interview, Frank said he wasn't sure whether the government could actually fire individuals at AIG involved in the matter since they have contracts with the company, but planned to raise the issue at a congressional hearing tomorrow.

Republicans also seized on the issue. Senator Richard Shelby, an Alabama Republican who led opposition to the bailout, said yesterday on ABC that "a lot of these people should be fired, not awarded bonuses."

Two banking specialists questioned AIG's stance that it was contractually obligated to award the bonuses, noting AIG would be in no position to pay the bonuses if it had been put into bankruptcy, which almost certainly would have happened without the $170 billion.

William Black, a former federal banking regulator, said the bonuses would be stopped immediately "if the company was put into bankruptcy."

Cornelius Hurley, a former assistant general counsel at the Federal Reserve Board, agreed AIG should be put through bankruptcy. "If they were in bankruptcy, any executive coming forward to ask for his bonuses would be laughed at," said Hurley, the director of Boston University's Morin Center for Banking and Financial Law. A bankruptcy judge "would say, 'Go to the end of the line and there is zero chance that you are going to recover.' "