AIG employees starting to return bonuses, CEO says

Published 11:10 pm Wednesday, March 18, 2009

The head of battered insurance giant AIG told Congress on Wednesday that “we’ve heard the American people loudly and clearly” in their rage over executive bonuses, and he appealed to employees to return at least half the money.

Testifying under oath at a congressional hearing as intense as any in recent memory, Edward Liddy said some workers already have stepped forward to give money back.

The company became the target of a political firestorm after the disclosure over the weekend that it had paid $165 million in “retention bonuses” to its employees at the same time it was accepting bailout funds from U.S. taxpayers. Some of the payments were made to the same traders and executives whose risky financial behavior caused the company’s near collapse.

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Meanwhile, President Barack Obama said Wednesday he wants legislation to give the federal government vast new powers over financial institutions like AIG to protect the public.

Obama, speaking to reporters at the White House, said the powers would be similar to those now exercised over banks by the Federal Deposit Insurance Corporation. It would be part of the administration’s broader package of new finance regulatory steps, he said.

Since AIG is an insurance company and not a bank, it is not subject to the same oversight.

“We’ve got a big mess that we’re having to clean up,” the president said. “Nobody here drafted those contracts” that resulted in the bonuses being paid out to AIG employees, he added.

Obama also defended his administration — and specifically Treasury Secretary Timothy Geithner — against questions about its handling of the AIG fiasco.

“Nobody here was responsible for supervising AIG and allowing themselves to put the economy at risk by some of the outrageous behavior that they were engaged in,” Obama said.

Now, however, “the buck stops with me,” he said. “And my goal is to make sure that we never put ourselves in this kind of position again.”

Liddy told a House Financial Services subcommittee that, while the bonuses were a legal obligation of the company that is now 80 percent owned by the federal government, he had “asked those who have received retention payments in excess of $100,000 or more to return at least half of those payments. Some have already stepped up and returned” 100 percent.

He provided no further details.

Under questioning, Liddy said he allowed the bonuses because he believed to do otherwise “could have brought down the whole corporation. … We thought it was wiser to err on the side of caution.”

Asked if AIG could survive without additional government money, Liddy said, “I believe we are adequately capitalized, particularly with the ability to draw down on the additional $30 billion” in bailout money in the pipeline. Survival “is very much a function of what happens with the capital markets around the globe. If investment values, if asset values continue to go down, it will be a problem for everybody in the life insurance industry.”

Responding to a question, Liddy also said the Federal Reserve knew in advance of the bonus payments and acquiesced in them.

Fed Chairman Ben Bernanke has been publicly critical of the bonuses, as have Obama, Geithner and congressional leaders from both parties.

Despite Liddy’s announcement that employees were stepping forward to return bonus money, he ran into a wall of criticism from committee members.

Rep. Barney Frank, D-Mass., chairman of the Financial Services Committee, demanded that the company submit to Congress a list “of people who received the bonuses, whether they paid them back or not.” If the names were not provided “without restriction,” Frank warned, he would ask the committee to vote to subpoena them.

Liddy said he would “comply with the law:” but was “concerned about the safety of our people.”

He said he would give the names of the bonus recipients only on the basis of confidentiality. He read aloud threats that AIG employees had received, including one that suggested that all bonus recipients should be “executed with piano wire around their necks.”

Another one read: “If the government can’t do this properly, we the people will take it in our own hands and see that justice is done. I’m looking for all the CEOs’ names, kids, where they live, etc.”

Frank said he would consult with security officials, but that his request for the names would stand.

Rep. Scott Garrett of New Jersey, the senior Republican on the subcommittee, complained that the administration still has no strategy for disentangling itself from the insurance giant.

“Part of me wants to say to some of the loudest critics, ‘What did you expect and why weren’t you asking more questions before?’ I would argue that the real outrage now is the $170 billion of taxpayer money that’s been pumped into this company and to what effect,” he said.

Rep. Gary Ackerman, D-N.Y., said there was a “tidal wave of rage” throughout the country.

Meanwhile, the agency that oversees AIG said that, while its criticism of the company’s practices had sharpened over the past five years, it had failed to recognize the extent of the risk posed by the exotic financial instruments the insurance company offered, many of them tied to a housing market that had long been rising.

Scott Polakoff, acting director of the Office of Thrift Supervision, said regulators failed to accurately predict what would happen to AIG’s so-called credit default swaps — a form of insurance — if housing values collapsed, as they have. “There are a lot of people walking around who failed to understand how bad the real estate market had gotten,” he said.

AIG is under fire for $220 million in retention bonuses paid to employees in its troubled financial products division. The most recent payment of $165 million began to be paid last Friday.

The retention payments — ranging from $1,000 to nearly $6.5 million — were put together in early 2008, long before then-Treasury Secretary Henry Paulson asked Liddy to take over the company. Liddy, the retired former chief of Allstate Insurance Co., is not getting a bonus and is drawing only $1 a year in salary.

“No one knows better than I that AIG has been the recipient of generous amounts of governmental financial aid. We have been the beneficiary of the American people’s forbearance and patience,” he said. He also said that “we have to continue managing our business as a business — taking account of the cold realities of competition for customers, for revenues and for employees.”

The clamor over compensation overshadowed AIG’s weekend disclosure that it had paid out more than $90 billion of the federal aid to foreign and domestic banks, including some that had multibillion-dollar U.S. government bailouts of their own.