The Treasury Department failed to monitor “explosively controversial” bonuses American International Group (AIG) paid to executives before committing to pump another $30 billion into the insurer, said the chief watchdog of the US financial rescue programme.
There was a “failure of communication” between Treasury and Federal Reserve Bank of New York officials regulating the bailed-out company, Neil Barofsky, special inspector for the Troubled Asset Relief Program, said yesterday in a report. Barofsky is scheduled to testify today at a House Oversight and Government Reform Committee hearing held by Chairman Edolphus Towns, a New York Democrat.
In March, AIG awarded about $165 million to employees in the unit blamed for the insurer’s near-collapse. President Barack Obama called the bonuses an “outrage” and House lawmakers voted to levy a 90 per cent tax on the awards. The New York-based insurer has said the pay is needed to keep staff to unwind money-losing derivative trades that regulators said could destabilise the global financial system.
Treasury’s failure “created considerable public and congressional concern over the retention payments,” Barofsky said in the report. “There is nothing to indicate that Treasury Department officials took any independent steps to assess broadly the amount or scope of AIG’s compensation obligations.”
Treasury Secretary Timothy Geithner may not have known about the bonuses until March 10, three days before they were handed out, Barofsky said. AIG got access to a $30 billion facility from Treasury a week earlier, part of its third revised rescue. The Treasury previously invested $40 billion in the insurer. Meg Reilly, a spokeswoman for Treasury, didn’t return a call.
AIG’s Rescue
Officials at the New York Fed learned of the AIG bonus program in October, while Geithner was still president of the bank. The New York Fed gave AIG its first $85 billion lifeline in September 2008. The value of AIG’s bailout has ballooned to $182.3 billion.
Kenneth Feinberg, Obama’s special master on compensation, told AIG to reduce a $198 million payment yet to be paid to the Financial Products derivatives unit, according to the Barofsky report. Feinberg didn’t specify how much the payments should be reduced, Barofsky said.
Earlier retention payments went to Financial Products staff including $7,700 to a kitchen assistant and $87,500 for an administrative assistant, according to the report.
“It is unclear whether Federal Reserve Bank of New York officials knew that thousands of dollars in payments would go to non-essential AIG Financial Products support employees, such as the kitchen and mailroom assistants,” Barofsky said.
Bonuses Not Repaid
Of the $45 million in bonuses that AIG executives pledged in March to return, less than half has been repaid, according to the report. Employees were asked by former Chief Executive Officer Edward Liddy to return some payments amid a public backlash that included death threats to AIG employees. About $19 million had been returned as of Aug. 31, Barofsky said. AIG told Barofsky it could be difficult to recover funds from recipients who are no longer with the company.
“Employees have until the end of the year to fulfill their commitments to return a portion of their March 2009 payment,” Christina Pretto, an AIG spokeswoman, said yesterday in a statement. The insurer expects the workers to honor their commitments, she said, and they have made “considerable progress” in winding down the unit.
As of March, Financial Products employees had lost about $790 million in potential future compensation because of losses on the operation’s trades.
Contractually Binding
Barofsky said AIG committed to payments before the company accepted a rescue and that the agreements are “contractually binding.” Feinberg, who has authority to limit compensation for the company’s highest paid workers, has indicated he’ll demand a return of retention awards from “individuals subject to special master review,” Barofsky said.
Feinberg is threatening to reduce the pay packages he does control at AIG to improve his position winning concessions, the New York Times said today, citing an unidentified person close to the talks. Feinberg didn’t immediately return a call seeking comment.
Feinberg, who formerly oversaw the September 11th Victim Compensation Fund, is expected to announce his decisions for seven firms’ 25 top-paid employees later this month. In addition to compensation at AIG, Citigroup Inc. and Bank of America Corp., he’s overseeing pay at Chrysler Group LLC, Chrysler Financial Corp., General Motors Co. and GMAC Inc.
