While lawmakers are vowing to investigate huge bonuses paid by American International Group—the struggling mega-insurer that has received more than $170 billion in government rescue funds—they admit it's not clear the government has the authority to stop them, or recoup the bonus money.
"We need to find out when [the bonuses] are legally recoverable. We can't just violate legal obligations, I understand that," said House Financial Services Chairman Barney Frank on “Fox News Sunday.” "But I do want to understand at what point those legal obligations were incurred. We need to find out who said we're going to give these bonuses no matter what. And I do think it's inappropriate for those people to stay in power in those companies."
On Saturday, the Washington Post reported that AIG planned to pay out hundreds of millions in bonuses to employees of the financial products division—the same unit that underwrote many of the risky subprime mortgages that sparked the current recession. Another $121 million will be paid to senior executives and other company employees.
The administration defended its efforts to limit the bonuses, arguing that the Treasury Department and Federal Reserve took every legal step possible but were unable to stop the company.
“What the Obama administration has done, based on the advice of attorneys, is done everything it can to, within the law and within the tradition of upholding law that we have in this country, to limit these bonuses,” said top White House economic aide Larry Summers on ABC’s “This Week.” “Obviously, this whole area is something we're going to have to look at, as we think about regulation in the future.”
On Wednesday, Treasury Secretary Timothy Geithner reportedly told AIG that its bonus payments were unacceptable, and urged them to cut the $9.6 million going to top company executives.
In a letter to Geithner dated Saturday, AIG Chief Executive Edward Liddy wrote that “AIG's hands are tied." The bonuses, said Liddy, were promised last year and AIG was legally bound to pay them. Liddy also warned that some bonuses were necessary to retain the most skilled employees.
“We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Geithner on Saturday.
That reasoning didn’t satisfy lawmakers, who believe the payments will fuel the growing voter backlash to Wall Street bailouts.
"The message here, I'm afraid, to any business out there that is thinking about taking government money is 'Let's enter in a bunch of contracts real quick and we'll have the taxpayers pay bonuses to our employees,'" Senate Minority Leader Mitch McConnell (R-Ky.) said on ABC's "This Week." "This is an outrage."
This isn’t the first time regulators have threatened to “claw back” bonuses and other perks enjoyed by AIG and other financial services firms receiving government rescue funds.
Senate Banking Committee Chairman Chris Dodd, (D-Conn.), included a last-minute amendment in the stimulus bill, which sought government reimbursement for “excessive” bonus awards and banned future bonuses for “highly paid employees.”
In January, Congress slammed Citigroup for upgrading to a new $50 million, 12-seat corporate jet after accepting $45 billion in taxpayer funds, leading the company to then refused delivery of the plane. And after Northern Trust — another recipient of government rescue funds — threw lavish parties at a Southern California golf tournament last month, Sen. John F. Kerry (D-Mass.) proposed a bill prohibiting banks that receive government funds from hoting, sponsoring or paying for events. Northern Trust later returned $1.6 billion in government funds.
Last fall, New York State Attorney General Andrew Cuomo threatened legal action if AIG did not limit its executive compensation packages. After being pressured by Cuomo, AIG agreed to freeze salaries, restrict bonuses, severance and retention award restrictions. The top executives, including Liddy, agreed to forgo bonuses this year. Last week, AIG agreed to restructure bonuses for another nearly 50 high-ranking officers at the company last week.
AIG's financial products unit is already under investigation by the U.S. Department of Justice, the Securities and Exchange Commission and U.K.'s Serious Fraud Office. The House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises has a hearing scheduled for Wednesday to investigate the firm's impact on the global financial system.
Congress is also pushing AIG to disclose the names of its counterparties, who, according to reports, ended up with much of the AIG bailout money. Rep. Carolyn Maloney (D-N.Y.), chairwoman of the Joint Economic Committee, and other lawmakers recently requested a list of the companies that were on the other side of AIG’s toxic credit default swaps, widely assumed to be the largest financial services companies in the U.S. and Europe. The Fed and AIG have declined to release the counterparties’ names, claiming it is proprietary information.
The Wall Street Journal has reported that Goldman Sachs and Deutsche Bank were among financial institutions that have received some of the at least $50 billion in bailout funds AIG has paid out to its counterparties.
Since last fall, the Treasury Department and Federal Reserve have spent more than $170 billion propping up the insurer. The government currently owns nearly 80 percent of the company.
Two weeks ago, regulators suggested that the company may require additional government support if markets continue to spiral downwards. Some analysts believe that at least another $60 billion will be required to help AIG, bringing the total government investment in the company close to a staggering quarter of a trillion dollars.
Some regulators and Wall Street believe that the global financial system could not withstand the sudden collapse of the company, which could cause a domino effect across many different sectors of the economy. AIG provides insurance to more than 30 million policy holders and 100,000 different entitles, including small businesses, cities, pension plans, and Fortune 500 companies. If AIG fell, banks, financial firms, and other AIG trading partners would have to write down the value of their securities—a loss that some fear could make those companies insolvent, as well.
But earlier this month, lawmakers questioned the impact AIG’s fall would have on average Americas.
“I just hope that in the days ahead, the Fed is going to come clean as to why this is so essential,” said Sen. Ron Wyden (D-Ore.). “Insurance companies in Oregon don’t take these kinds of risks, and people want to know how we got into this situation and, specifically, what’s being done to turn it around.”
“This amount of money that’s going into AIG, there is no upside now,” said said Sen. Bob Corker (R-Tenn.), who sits on the Senate Banking Commitee. “This is all just like gone money.”
Regulators admitted that they shared the congressional outrage, but warned of the dire consequences of not acting aggressively.
“If there’s a single episode in this entire 18 months that has made me more angry, I can’t think of one than AIG,” Bernanke told the Senate Budget Committee after getting an earful about the latest rescue of American International Group. “It’s a terrible situation, but we’re not doing this to bail out AIG or their shareholders, certainly. We&rsuo;re doing this to protect our financial system and to avoid a much more severe crisis in our global economy.”