Following the A.I.G. Money

How the Fed Failed to Tell Obama About The Bonuses
By David Cho and Michael D. Shear
Copyright by The Washington Post
Thursday, March 19, 2009; Page A01
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/18/AR2009031804210.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter


Federal Reserve officials knew for months about bonuses at American International Group but failed to tell the Obama administration, according to government and company officials, exposing problems in a relationship that is vital to addressing the financial crisis.

As pressure mounted on AIG employees to return the bonuses, new details emerged yesterday about what the Fed, the Treasury Department and the White House knew regarding the payments and when. AIG executives said the Fed was informed three months ago by the company that it would pay $165 million by March 15 to employees working at its most troubled division. The Treasury and White House said they learned of the payments from Fed officials only days before they were due.

Close coordination between the Fed and the administration is now more important than ever as they near the launch of two signature programs to rescue the financial system, which together could reach $2 trillion and are aimed at reviving consumer lending and purchasing soured assets and loans from ailing banks.

Treasury Secretary Timothy F. Geithner, a central figure in the decision to bail out AIG last fall as president of the Federal Reserve Bank of New York, said in an interview yesterday that he had not been aware of the size of the bonuses and the timing of the payments.

"I was stunned when I learned how bad this was on Tuesday [March 10]," Geithner said. "I shouldn't have been in that position, but it's my responsibility and I accept that."

Two days later, Geithner told the White House. The last-minute disclosure irked some of the president's senior advisers, but they refuse to point fingers now, saying the timing had little impact on the outcome or the president's public statements this week.

"Would I have liked an earlier warning system on this? Yeah," said David Axelrod, a senior White House adviser. "Would it have markedly changed things? Probably not. The legal constraints are the legal constraints."

One source familiar with the discussions said the company had provided details about the bonuses to senior Treasury officials at least a month ago. A Treasury spokesman said last night that was not true.

Democrats and Republicans in Congress are increasingly questioning how Geithner could not have known about the bonuses, given his past role in AIG's bailout, which has totaled more than $170 billion.

"I'm sick and tired of hearing the administration and the Secretary of the Treasury say, 'I just found out about it,' " Rep. Paul E. Kanjorski (D-Pa.) said yesterday.

The dispute over AIG's payouts represents the most pressing controversy confronting the administration as it addresses the financial crisis. Some private firms say the furor has made them wary of joining the federal initiatives to help save the economy. Government officials add that the newly charged political environment will make it difficult to ask Congress for more rescue funds.

When the government rescued AIG in mid-September, no one was more central to the decision than Geithner.

AIG officials met with Geithner and then Treasury Secretary Henry M. Paulson Jr. in New York on Sept. 14 to warn them of the dire threat posed by the derivative business developed by AIG's Financial Products unit. Executives told the two men the firm needed help but had at least a week before it faced collapse, sources said.

Paulson left for Washington. But Geithner stayed up all night with officials at the New York Fed to examine AIG's situation. He discovered not only an enormous number of complicated trades, estimated at $2 trillion, but that AIG had backed retirements funds across the nation. He also realized that a collapse of AIG was imminent, and that the fallout would ripple across the banking system, sources familiar with the episode said.

Geithner, with Paulson and Fed Chairman Ben S. Bernanke, decided to lend the company $80 billion in exchange for an 80 percent ownership equity stake.

About a month later, Geithner redesigned the bailout package for AIG, which raised the total to about $123 billion.

During this period, Geithner's primary concern was keeping the financial system from collapsing, not what firms were paying their employees, a source said. Other staff members at the Fed and Treasury were in charge of the compensation issues and only briefed Geithner, two sources said. Once nominated for the Treasury post in December, Geithner recused himself from affairs related to specific firms.

AIG executives said they disclosed in a quarterly filing late last year to federal regulators that employees at Financial Products would receive retention bonuses but the filings, with the Securities and Exchange Commission, did not detail how much individuals would be paid or the dates of the payments. The company revealed those details in meetings with New York Fed officials in January, AIG chief executive Edward M. Liddy said at a congressional hearing yesterday.

"What we've assumed is that, in our discussions with the Federal Reserve, that they were properly communicating with others," Liddy said. "It appears that we need to improve upon that process."

While declining to answer questions about the AIG bonuses, Fed spokeswoman Michelle Smith said in a statement: "The Fed and Treasury officials have coordinated closely on all aspects of the U.S. government's support for AIG during this extraordinary period."

The Fed officials did not anticipate the political firestorm that would erupt over the bonuses, a senior government official said. "They clearly underestimated the matter," the source said.

AIG executives say the Fed had been intimately involved in reviewing the contracts before the first dime was paid. The payments, which were due by March 15, were ready to be distributed last Tuesday, a senior AIG executive said. But the firm didn't get the go-ahead from government officials to make the payments until late last week.

"We weren't authorized until Thursday night," the AIG executive said. "We were negotiating with the Treasury and the Federal Reserve. Treasury indicated that they needed it cleared by the White House, as well. We hit the go button for the payments on Friday."

Geithner said the Fed did not tell him about the bonuses until March 10. He immediately huddled with his senior staff, examining options, but ultimately concluded that the government could not change contracts for work that had already been done.

He confronted Liddy over the phone March 11, demanding that he renegotiate the bonus contracts. Some minor changes were made, but the bulk of the bonuses were paid. Company and Treasury officials say they will seek changes to bonuses promised for work done this year.

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Obama learned of the bonuses March 12, the day before they were paid out, from Axelrod, whom Geithner had briefed on the situation. The president was "aggravated" and "a little bit disbelieving," Axelrod said in an interview yesterday.

For the new administration, the bonuses were a distraction from what senior aides called the main focus: getting the economy working and people back to work. "People are not sitting around their kitchen tables thinking about AIG," Axelrod said. "They are thinking about their own jobs."

Obama's top economic aides -- including Geithner -- sought to identify any recourse. The task was made more difficult Friday, when millions of dollars were disbursed. Their message to the president when the group assembled for their first extended conversation about AIG in the Roosevelt Room on Sunday was not optimistic: They told him they had "done and will do what we legally can," Axelrod said.

But Obama made clear at that meeting that he was unwilling to throw up his hands. He instructed Geithner and the others to seek legal ways that the government might recover the bonuses. And he made plans to tell the public what he thought the next day.

That decision ran counter to the belief among some in his inner circle that the bonus issue while an outrage was a small problem compared with the economic issues confronting his young presidency. "The first and most important job we have is to get this economy moving again," Axelrod said. "As galling as this is, it doesn't go to the main issue."

Over the following days, Obama came out swinging, denouncing the bonuses while expressing "complete confidence" in Geithner. Yesterday, he continued the effort, saying that "I don't want to quell anger. I think people are right to be angry. I'm angry."






AIG chief urges staff to return bonuses
By Tom Braithwaite and Andrew Ward in Washington and Saskia Scholtes in New York
Copyright The Financial Times Limited 2009
Published: March 18 2009 15:39 | Last updated: March 19 2009 00:09
http://www.ft.com/cms/s/0/ca794ce4-13ce-11de-9e32-0000779fd2ac.html


Edward Liddy, chief executive of AIG, on Wednesday tried to soothe anger against the bailed-out insurance group by urging employees to give back the $165m in bonuses that have sparked a political firestorm.

He told legislators he had asked employees of AIG Financial Products – the arm that brought the group to the brink of collapse – to “step up and do the right thing”. The concession came as President Barack Obama defended Timothy Geithner, Treasury secretary, amid criticism of the administration’s handling of the controversy.

Mr Obama said he had “complete confidence” in Mr Geithner as the Treasury chief faced calls to quit from at least two Republican legislators. Republicans want to know why he did not challenge the bonuses before approving $30bn of fresh federal aid to AIG this month. Congressman Connie Mack said Mr Geithner “should either resign or be fired for the good of the country”.

The president praised Mr Geithner for tackling the crisis with “intelligence and diligence”, arguing that he faced the toughest challenge of any Treasury secretary since Alexander Hamilton after the Revolutionary War. “Nobody’s working harder than this guy,” said Mr Obama.

The resignation calls were echoed by protesters at a Congressional hearing into the AIG bail-out, while Republican members pressed Mr Liddy for information about Mr Geithner’s role in waving through the bonuses. The Obama administration has published a timeline of events that shows Mr Geithner learning of the pay-outs on March 10, phoning Mr Liddy on March 11 and informing the White House on March 12. It stressed that Mr Geithner had no part in drafting the bonus deal.

The controversy took a new turn on Wednesday when it emerged that Fannie Mae, the US mortgage financier taken over by the government in September, was planning to pay executive retention bonuses of as much as $611,000 for 2009. Fannie issued a vigorous defence of the bonuses, arguing the scheme was specifically designed to sustain mortgage agencies’ ability to function.










International Herald Tribune Editorial: The gift that keeps on giving
copyright by The International Herald Tribune
Published: March 17, 2009
http://www.iht.com/articles/2009/03/17/opinion/edaig.php


After four bailouts totaling some $170 billion, the American International Group has finally answered some of the questions about where the money went. Unfortunately, the answers have only succeeded in raising many more questions.

On Saturday, the word came out that A.I.G. planned to pay $165 million in bonuses to executives and employees in the very division that caused the problems that led to the federal bailouts. Taxpayers have every right to be outraged, and President Obama was right to acknowledge that outrage on Monday, when he vowed to try to stop the payments.

Mr. Obama’s tough talk, however, contrasted with comments made by his top economic adviser, Lawrence Summers, and by the Treasury Department. They had already expressed dismay but said that legally they could do nothing to stop the bonuses, which, in fact, had already mostly been paid on Friday.

It is frustrating enough to try to figure out which part of that mixed message reflects the administration’s true position. But the bigger issue is that the bonuses are something of a distraction. Seen by themselves, the payments are huge, but they are less than one-tenth of 1 percent of the money already committed to the A.I.G. bailout.

Which brings us to the second disclosure of recent days. It was common knowledge that most of the A.I.G. bailout money had been funneled to the company’s trading partners — banks and other financial firms that would have lost big if A.I.G. were allowed to fail. On Sunday, after much prodding by Congress and the public, A.I.G. finally released the partners’ identities, along with amounts paid thus far to make them whole.

The largest single recipient was Goldman Sachs ($12.9 billion). The amount — hardly chump change even by Wall Street standards — appears to contradict earlier assertions by Goldman that its exposure to risk from A.I.G. was “not material” and that its positions were offset by collateral or hedges. If so, why didn’t the hedges pay up instead of the American taxpayers?

Other recipients include 20 European banks that received a total of $58.8 billion and Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion) and Citigroup ($2.3 billion).

Altogether, the disclosures account for $107.8 billion in A.I.G. bailout money. Which leaves us wondering about the rest of the money. Another $30 billion was added to the A.I.G. bailout pot this month and must be accounted for as soon as it is spent. That leaves some $32 billion unaccounted for. Where did it go?

Taxpayers also need to be told the precise nature of the banks’ dealings with A.I.G. Appearing on “60 Minutes” on Sunday, Ben Bernanke, the Federal Reserve chairman, described A.I.G. as a company “that made all kinds of unconscionable bets.” Well, on the other side of those bets are the banks that received the bailout money. Is it possible that both sides are trying to play an unseemly game to their own advantage?

Congress must investigate, and the new disclosures give them enough to get started. Untangling all the entanglements is not only essential to understanding how the system became so badly broken, but also to restoring faith that government is up to the task of fixing it.






Financial Times Editorial Comment: Rage at AIG bonus pay-out is no excuse
Copyright The Financial Times Limited 2009
Published: March 20 2009 20:22 | Last updated: March 20 2009 20:22
http://www.ft.com/cms/s/0/22366be8-157c-11de-b9a9-0000779fd2ac.html


Politicians acting in haste rarely act wisely, least of all when guided by rage. In response to outrage over retention bonuses paid to employees of AIG – the failed insurer, now mostly owned by the government, which has received tens of billions in public support – the US House of Representatives rushed to pass a punitive tax aiming to claw the bonuses back. It would apply to all groups receiving help under the government’s financial stability plan, not just AIG. A similar measure is before the Senate.

The outcry over these bonuses is entirely understandable, though less than fully thought through. Understandable or otherwise, the response smacks more of banana republic than good government.

The country is furious at the idea of rewarding the very people, in AIG’s now notorious financial products arm, who helped sink both their company and the wider economy. Yet these bonuses were paid not as a reward for past performance, which would indeed be absurd, but to retain people deemed necessary to the unwinding of its mistakes. That reasoning offends against the principle of fairness, but if one is more interested in stabilising the economy than striking back at supposed culprits, it should not be dismissed out of hand.

In AIG’s case, the US government is now the de facto owner. As such it has rights and responsibilities, and it should attend more conscientiously to both. The Treasury should decide whether the bonuses are necessary to retain people essential to the success of its stabilisation plan. If they are, much as one may recoil at the idea, the bonuses should be paid: the cost pales in comparison to the vastly larger sums at stake. If not, the people who received them – those who have not already left, that is – should be told to return them or be fired. The government is within its rights as a new owner to set new terms for its employees.

The legislative blunderbuss about to be discharged by Congress, on the other hand, is likely to blow up in taxpayers’ faces. It forbids the case-by-case judgments on pay which are necessary to ensure that the stabilisation plan succeeds. And it expresses the tyrannical principle that Congress can use the tax code to void contracts that the executive branch has consented to, after the fact and with retrospective force. The measure is constitutionally dubious, as Congress well knows. All these considerations have been set aside for the purpose of venting the country’s anger. It is an abdication of responsibility.

Barack Obama, asked whether he approves of this law, has declined to answer. It would have been better if things had not come to this pass, he says. Quite so, and indeed there are lessons here about the conditions that must be attached to future assistance. But things have come to this pass – and the administration must resist this bad new law.






Senators push for bonus clawback
By Tom Braithwaite and Andrew Ward in Washington
Copyright The Financial Times Limited 2009
Published: March 20 2009 18:16 | Last updated: March 20 2009 23:28
http://www.ft.com/cms/s/0/bdbc541c-157a-11de-b9a9-0000779fd2ac.html


Senators are preparing a final push next week to impose a punitive tax on bonuses at bailed-out financial institutions such as AIG, the troubled insurance group.

But as Wall Street braces itself for a draconian clampdown on its pay culture, the legislation could yet stall amid criticism that it might undermine the government’s financial rescue programme and even violate the constitution.

On Thursday the House of Representatives overwhelmingly passed a bill to impose a 90 per cent tax on the bonuses of employees earning more than $250,000 (€184,000, £173,000) at companies that received more than $5bn in bail-out money.

Originally aimed at AIG, which has taken $170bn in taxpayer money and paid $165m in bonuses, the measure would also affect other institutions including Citigroup, JPMorgan and Goldman Sachs.

The Senate is working on similar legislation involving a 70 per cent tax on bonuses at a broader range of institutions – half to be paid by employees and half by companies – but it remains uncertain whether it has enough support to force its way through a crowded legislative agenda.

A Democratic aide to the Senate leadership said senators were divided between those wishing to push through fast-track legislation and others backing a slower process, including committee hearings, which could see momentum fade as the initial wave of anger over the AIG bonuses subsidies.

President Barack Obama has voiced broad support for congressional efforts to reign in Wall Street pay but stopped short of endorsing legislation to impose retro­active bonus taxes.

“I understand Congress’s frustrations,” he told Jay Leno, the chat-show host. “But I think that the best way to handle this is to make sure that you’ve closed the door before the horse gets out of the barn.”

Recriminations intensified on Friday over the AIG bonuses as Democrats traded blame for an affair that threatens serious damage to the Obama administration.

The White House was again forced to defend Tim Geithner, the beleaguered Treasury secretary, as fresh doubts emerged over when he first learned of the AIG bonuses and why he did not try to stop them.

Maxine Waters, a Democratic congresswoman, expressed exasperation at the administration’s handling of the controversy, saying: “Maybe the president is not up to speed on what is going on.”

The Treasury department acknowledged that Mr Geithner had been questioned on the bonuses in a congressional hearing a week before the White House had previously said he first learned of them. There was also mounting scrutiny of the administration’s role in watering down a provision in the stimulus bill last month that could have blocked the payouts.

Republicans tried to keep the focus on Democratic infighting to mask their own party’s turmoil over the bonus saga, as they struggled to reach consensus over the tax proposals.

The mooted legislation offends the anti-tax principles of many conservatives but Republicans are reluctant to be seen blocking measures to recoup bonuses that have caused a wave of populist anger.

“At least some Republicans made clear that they are not going to allow this to go ripping through the Senate,” said Tom Mann, a senior fellow in governance issues at Brookings Institution, the think-tank. “At the very least they will use their procedural [tools] to hold off any votes for a period of time and use that as a medium for blaming the Democrats for what they did or failed to do earlier.”

Critics say a retroactive tax on bonuses is unfair and potentially counter-productive if it discourages other institutions from participating in government attempts to rebuild the financial system. Supporters of the committee route argue that such a controversial piece of law should be considered with a cool head after the political passion has died down.

The Democratic leadership in the Senate has a very short window to push through a vote before the Easter recess. Bankers will be hoping that the Senate has not, by then, imposed on them an involuntary Lenten fast by taking away their bonuses.









Congress seeks to claw back AIG bonuses
By Andrew Ward in Washington
Copyright The Financial Times Limited 2009
Published: March 17 2009 18:57 | Last updated: March 17 2009 19:48
http://www.ft.com/cms/s/0/9600d072-1315-11de-a170-0000779fd2ac.html



Congressional leaders were on Tuesday considering moves to claw back the $165m of bonuses paid by AIG, the troubled insurance group, as fresh details of the payouts stoked anger on Capitol Hill.

Senior Democrats proposed emergency legislation to recoup the money through special taxes on bonus recipients and called for the government to “exercise its ownership rights” over the group.

Outrage was fuelled by new revelations on Tuesday that at least 73 employees of AIG’s Financial Products subsidiary – the business responsible for the group’s heaviest losses – received bonuses of $1m or more in recent days.

Some bonuses were as high as $6.4m and several recipients no longer work for AIG despite the payments having been made as “retention” bonuses.

The details were revealed by Andrew Cuomo, the New York attorney-general, who on Monday issued AIG with subpoenas demanding information on the bonuses.

“Last week, AIG made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing a taxpayer bailout,” said Mr Cuomo. “Something is deeply wrong with this outcome.”

Harry Reid, Senate majority leader, was among those backing legislation to recoup some of the bonuses. He said: “Recipients of these bonuses will not be able to keep all of their money – and that’s an understatement.”

In a letter to Edward Liddy, chief executive of AIG, Mr Reid and nine other Senate Democrats said they were ready to take the “difficult but necessary step” of imposing a “steep tax” to recover “nearly all” of the bonus payments.

Barney Frank, chairman of the House financial services committee, urged Congress and the Obama administration to take a more hands on role through the government’s 80 per cent stake in AIG.

“I think we should look at it from the standpoint of us as the owner,” he said. “And then say, as owner, ‘No, I’m not paying you the bonus. You didn’t perform. You didn’t live up to this contract.’”

Republicans on Tuesday stepped up criticism of the Obama administration for its failure to stop the bonuses, as the White House struggled to contain fallout from the controversy.

Some of the fiercest Republican attacks were focused on Timothy Geithner, Treasury secretary, reinforcing the impression that Republicans are trying to make him a scapegoat for the controversy.

”Where was the secretary of the Treasury… before this money was paid out?” asked Richard Shelby, the top Republican on the Senate banking committee. “Why did Treasury not step in and… try to block it?”

The bonus saga threatens broader damage to the administration by raising doubts about Mr Obama’s ability to hold Wall Street accountable and hardening resistance on Capitol Hill to additional aid for banks.

“Going forward, the American people need to have complete certainty that taxpayer money is not wasted in this way again,” said Mitch McConnell, Republican leader in the Senate.

The angry mood on Capitol Hill was best captured by Chuck Grassley, the top Republican on the Senate finance committee. In a radio interview, he said AIG executives should “follow the Japanese example” and “come before the American people and take that deep bow and say, ‘I’m sorry’, and then either do one of two things: resign or go commit suicide.”





Obama urges action to stop AIG bonuses
By Alan Beattie in Washington and Julie MacIntosh in New York
Copyright The Financial Times Limited 2009
Published: March 15 2009 19:04 | Last updated: March 16 2009 16:41
http://www.ft.com/cms/s/0/31bafc52-1192-11de-87b1-0000779fd2ac.html


President Barack Obama on Monday said he had asked Timothy Geithner, US Treasury secretary, to use “every single legal avenue” to block the $165m in bonuses paid by the troubled insurance group AIG, a day after the company revealed that European banks had benefited heavily from its massive government rescue.

“This is a corporation that finds itself in financial distress due to recklessness and greed,” Mr Obama said. “Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165m in extra pay.”

Mr Obama also said the bonuses underscored the need for overall financial regulatory reform.

Lawrence Summers, Mr Obama’s senior economic adviser, said on Sunday that AIG’s behaviour was “outrageous”. But he added that the administration’s ability to force the company to cut the bonuses was limited.

AIG on Sunday night published a list of counterparties to its financial derivatives contracts after weeks of congressional pressure.

It showed that European banks including Société Générale, Deutsche Bank and Barclays were involved in many deals and thus benefited heavily from the government rescue operation, which totals around $160bn.

“We are a country of law,” Mr Summers told ABC television. “There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by [Treasury] secretary [Tim] Geithner and by the Federal Reserve system.”

Mr Summers’ comments followed a letter from AIG to Mr Geithner, a copy of which was obtained by the Financial Times.

In the letter, Edward Liddy, appointed to run the company in the autumn, said that it had no option but to pay the bonuses, which were part of a $450m programme, to senior managers at AIG Financial Products, the division whose derivatives trading got the institution into trouble.

“You really do need these people, because they are the ones who know these contracts,” said Nick Ashooh, a spokesman for AIG. He said the bonus agreements were put in place well before AIG fell into difficulties.

Barney Frank, chairman of the House financial services committee, told NBC’s Today program on Monday morning that it might be appropriate to fire some of AIG’s employees: “These people may have a right to their bonuses but they don’t have a right to their jobs forever.”

The administration and the Federal Reserve, who led the rescue operation for the troubled institution, have come under increasing criticism from Congress for failing to publish a list of the counterparties.

Ben Bernanke, Fed chairman, in a rare TV interview with CBS broadcast Sunday night, said: “I slammed the phone more than a few times on discussing AIG.”

Having argued that such a move could destabilise the financial system by raising speculation about the health of the institutions holding the contracts, the Fed has come round to supporting such publication.

But the large number of foreign banks benefiting from the rescue could reawaken criticism.

Mr Summers added that the episode underlined the need for reform of regulation to resolve crises in large institutions that had the capacity to threaten the stability of the financial system.







New York Times Editorial: Following the A.I.G. Money
Copyright by The New York Times
Published: March 14, 2009
http://www.nytimes.com/2009/03/15/opinion/15sun1.html?ref=opinion


The bailouts of American International Group are also rescues of its trading partners — banks and other financial firms — that would have lost out if the insurer had been allowed to fail. But even after four bailouts between last September and this March, no one knows with certainty who those partners are or how much of the bailout money, now totaling $160 billion, has gone to make them whole.

A.I.G. has not said who they are, and neither have government officials in charge of the A.I.G. bailouts — mainly Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke — despite repeated inquiries from Congress. (The Wall Street Journal, citing confidential documents, reported recently that about $50 billion in 2008 bailout money from A.I.G. went to at least two dozen firms, including Goldman Sachs, Merrill Lynch, Bank of America and European banks.) Late last week there was talk that more official information was forthcoming, but no one has seen it yet.

The secrecy is unacceptable. Taxpayers have a right to know how their tax dollars are being spent. Equally important, understanding how the financial crisis happened is crucial to ensuring that it does not happen again. To that end, Congress and the public alike need to know which firms are on the receiving end of the bailouts, how they came to require a government lifeline, and what responsibility they bear for the financial mess.

From what is known, it certainly does not appear that A.I.G’s trading partners were entirely innocent victims of extraordinary circumstances. A.I.G. was a key player in a type of unregulated derivative called a credit default swap. Such swaps are often defined as a form of insurance because the seller guarantees payment to investors in case their investments go bust. They are not safe insurance in any familiar sense, however, because A.I.G. was not required to set aside reserves in the event of a claim. That is why, when the bubble burst and defaults rose, A.I.G. was unable to make good, provoking the bailouts.

Still, the trading partners knew, or should have known, how dangerous the swaps were. And that is not necessarily the whole story. In the manic years of this decade, credit default swaps took off as a way to bet on the likelihood of default by a firm or an investment portfolio, without having to own any financial interest in the firm or portfolio. That is definitely not insurance, it is gambling. The reason it is not illegal gambling is that, in 2000, Congress specifically exempted credit default swaps from state gaming laws.

The result? Eric Dinallo, the insurance superintendent for New York State, has said that some 80 percent of the estimated $62 trillion in credit default swaps outstanding in 2008 were speculative.

It is unknown how much of the credit default swaps between A.I.G. and its partners were for speculation. That is a question that demands an answer. Also unknown is how much had been wagered on the demise of A.I.G. By intervening to prevent the insurer’s failure, the government prevented those bets from having to be paid. Who was let off the hook?

It is not enough to simply know more about A.I.G., its trading partners and their activities. What is needed is transparency going forward. Banks resist the idea of requiring that all trading in credit default swaps be conducted on exchanges, in the open and subject to full regulatory scrutiny. It is an idea, however, that is long overdue.





A.I.G. Paying $165 Million in Bonuses After Federal Bailout
By EDMUND L. ANDREWS and PETER BAKER
Copyright by The New York Times
Published: March 15, 2009
http://www.nytimes.com/2009/03/16/business/16aig.html?_r=1&hp


WASHINGTON — The American International Group, which has received more than $170 billion in taxpayer bailout money from the Treasury and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.

Word of the bonuses last week stirred such deep consternation inside the Obama administration that Treasury Secretary Timothy F. Geithner told the firm they were unacceptable and demanded they be renegotiated, a senior administration official said. But the bonuses will go forward because lawyers said the firm was contractually obligated to pay them.

Austan Goolsbee, staff director of the president’s Economic Recovery Advisory Board, on Sunday detailed Mr. Geithner’s reaction.

“He stepped in and berated them, got them to reduce the bonuses following every legal means he has to do this,” Mr. Goolsbee said on “Fox News Sunday.” “I don’t know why they would follow a policy that’s really not sensible, is obviously going to ignite the ire of millions of people, and we’ve done exactly what we can do to prevent this kind of thing from happening again.

The payments to A.I.G.’s financial products unit are in addition to $121 million in previously scheduled bonuses for the company’s senior executives and 6,400 employees across the sprawling corporation. Mr. Geithner last week pressured A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.

The payment of so much money at a company at the heart of the financial collapse that sent the broader economy into a tailspin almost certainly will fuel a popular backlash against the government’s efforts to prop up Wall Street. “There are a lot of terrible things that have happened in the last 18 months, but what’s happened at A.I.G. is the most outrageous,” said Lawrence H. Summers, President Obama’s chief economic adviser, during an appearance Sunday on ABC’s “This Week With George Stephanopoulos.” “What that company did, the way it was not regulated, the way no one was watching, what’s proved necessary — is outrageous.”

Mr. Summers suggested, however, that the government’s ability to require the bonuses be scaled back was restricted by preexisting contracts, even though he did not specify what those restrictions may be.

“We are a country of law,” said Mr. Summers, one of several economic officials to hit the Sunday-morning talk show circuit. “There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system.”

Mr. Summers also appeared on CBS’s “Face the Nation,” remained consistent in his core message about the bonuses: “It is outrageous. The whole situation at AIG is outrageous. What taxpayers are being forced to do is outrageous.”

Sen. Mitch McConnell, the Republican minority leader, worried about the message the bonuses send to other companies receiving bailout money. “If you’re going to take the government as a partner, the message here, I’m afraid, to any business out there that’s thinking about taking government money, is “Let’s enter into a bunch of contracts real quick, and we’ll have the taxpayers pay bonuses to our employees,’ ” he said on “This Week.” Mr. McConnell, a Republican from Kentucky, also criticized the Obama administration.

“For them to simply sit there and blame it on the previous administration or claim contract — we all know that contracts are valid in this country, but they need to be looked at,” he said. “Did they enter into these contracts knowing full well that, as a practical matter, the taxpayers of the United States were going to be reimbursing their employees? Particularly employees who got them into this mess in the first place. I think it’s an outrage.”

A.I.G., nearly 80 percent of which is now owned by the government, has defended its bonuses, arguing that they were promised last year before the crisis and cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.

“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 Mr. Geithner on Saturday.

Still, Mr. Liddy seemed stung by his talk with Mr. Geithner, calling their conversation last Wednesday “a difficult one for me” and noting that he receives no bonus himself. “Needless to say, in the current circumstances,” Mr. Liddy wrote, “I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”

An A.I.G. spokeswoman said Saturday that the company had no comment beyond the letter. The bonuses were first reported by The Washington Post.

The senior government official, who was not authorized to speak on the record, said the administration was outraged. “It is unacceptable for Wall Street firms receiving government assistance to hand out million-dollar bonuses, while hard-working Americans bear the burden of this economic crisis,” the official said.

Of all the financial institutions that have been propped up by taxpayer dollars, none has received more money than A.I.G. and none has infuriated lawmakers more with practices that policy makers have called reckless.

The bonuses will be paid to executives at A.I.G.’s financial products division, the unit that wrote trillions of dollars’ worth of credit-default swaps that protected investors from defaults on bonds backed in many cases by subprime mortgages.

The bonus plan covers 400 employees, and the bonuses range from as little as $1,000 to as much as $6.5 million. Seven executives at the financial products unit were entitled to receive more than $3 million in bonuses.

Mr. Liddy, whom Federal Reserve and Treasury officials recruited after A.I.G. faltered last September and received its first round of bailout money, said the bonuses and “retention pay” had been agreed to in early 2008 and were for the most part legally required.

The company told the Treasury that there were two categories of bonus payments, with the first to be given to senior executives. The administration official said Mr. Geithner had told A.I.G. to revise them to protect taxpayer dollars and tie future payments to performance.

The second group of bonuses covers some 2008 retention payments from contracts entered into before government involvement in A.I.G. Indeed, in his letter to Mr. Geithner, Mr. Liddy wrote that he had shown the details of the $450 million bonus pool to outside lawyers and been told that A.I.G. had no choice but to follow through with the payment schedule.

The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken. The official noted that even a provision recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place.

But the official said the administration will force A.I.G. to eventually repay the cost of the bonuses to the taxpayers as part of the agreement with the firm, which is being restructured.

A.I.G. did cut other bonuses, Mr. Liddy explained, but those were part of the compensation for people who dealt in other parts of the company and had no direct involvement with the derivatives.

Mr. Liddy wrote that A.I.G. hoped to reduce its retention bonuses for 2009 by 30 percent. He said the top 25 executives at the financial products division had also agreed to reduce their salary for the rest of 2009 to $1.

Ever since it was bailed out by the government last fall, A.I.G. has been defending itself against accusations that it was richly compensating people who caused one of the biggest financial crises in American history.

A.I.G.’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall.

A.I.G. had set up a special bonus pool for the financial products unit early in 2008, before the company’s near collapse, when problems stemming from the mortgage crisis were becoming clear and there were concerns that some of the best-informed derivatives specialists might leave. It locked in a total amount, $450 million, for the financial products unit and prepared to pay it in a series of installments, to encourage people to stay.

Only part of the payments had been made by last fall, when A.I.G. nearly collapsed. In documents provided to the Treasury, A.I.G. said it was required to pay about $165 million in bonuses on or before Sunday. That is in addition to $55 million in December.

Under a deal reached last week, A.I.G. agreed that the top 50 executives would get half of the $9.6 million they were supposed to get by March 15. The second half of their bonuses would be paid out in two installments in July and in September. To get those payments, Treasury officials said, A.I.G. would have to show that it had made progress toward its goal of selling off business units and repaying the government. The financial products unit is now being painstakingly wound down.

Senator Bob Corker, Republican from Tennessee, was one of the few officials on Sunday to temper his public reaction to the A.I.G. bonuses, saying he wanted more information.

“I do think it’s important to know whether these are commission payments for products that brokers have sold, or whether this is, in fact, a bonus,” he said on “Fox News Sunday.” “And I think those are two very different things.”

Mr. Corker added that the reaction to the bonuses might serve some good: “These entities that are receiving government money, unfortunately receiving government money, our money — I do think they have to play by a different set of rules, and hopefully that will cause institutions across this country not to want to take government money and quickly move away from us because of us getting under the hood like this.”

Mary Williams Walsh contributed reporting from Washington and A.G. Sulzberger contributed reporting from New York.







At A.I.G., Good Luck Following the Money
By GRETCHEN MORGENSON
Copyright by The New York Times
Published: March 14, 2009
http://www.nytimes.com/2009/03/15/business/15gret.html?hp


WE return this week to the subject of the American International Group, the giant insurer that has received $170 billion in taxpayer guarantees, because the clamor over its rescue continues to grow. Of concern to those on both Capitol Hill and Main Street is the secrecy surrounding the $50 billion funneled to A.I.G.’s counterparties since it nearly collapsed last fall.

Now that we live in bailout nation, why does the A.I.G. rescue rub so many the wrong way? Here is a hypothesis: Even as investors, employees, communities and taxpayers have been battered by the crippled financial system, A.I.G.’s counterparties were saved from losses on deals they struck with the insurer.

Add the fact that the government has resisted revealing these companies’ identities or how much federal money they received, and it’s easy to see why resentment boils. As a result of the A.I.G. rescue, taxpayers own almost 80 percent of the company. (Friday evening, as this column was going to press, rumors were swirling that A.I.G. might be releasing a list of all of its counterparties.)

Representative Carolyn B. Maloney, Democrat of New York, said she had twice asked for a full accounting from Ben S. Bernanke, the chairman of the Federal Reserve, which arranged the A.I.G. rescue. She has not received it.

“They have told others it is proprietary information,” Ms. Maloney said in an interview. “But we are the proprietors now. Taxpayers own the store, and we should be able to see the books.”

A.I.G., at one time the world’s largest insurer, sold contracts to these sophisticated counterparties that theoretically protected them from losing money if the debt they had purchased defaulted. Known as credit default swaps, the contracts offer the same kind of protection a homeowner receives from an insurance policy against fires and other unforeseen calamities.

The arrangements behind the deals produced fees for A.I.G. while the firms buying the contracts got peace of mind. No one thought A.I.G. might have to pay hundreds of billions of dollars in claims. Until, that is, A.I.G. came under financial pressure last year.

When the government stepped in to rescue A.I.G., its main and very reasonable concern was that a collapse of the insurer would drag down with it other big financial companies that were its customers. So the government shoveled taxpayers’ money into A.I.G., beginning with an $85 billion loan last September.

Then the rescuer went mum.

Officials at the Fed, who continue to oversee the A.I.G. rescue, have taken the position that the terms of the insurers’ contracts are confidential and that it would be wrong for the government to break those promises by naming recipients of taxpayer money. Another concern may have been that disclosures of A.I.G.’s counterparties might make investors and depositors uneasy about the well-being of the firms getting the money.

According to people briefed on the situation who were granted anonymity because they were not authorized to talk about it, the counterparties that taxpayers have bailed out include Goldman Sachs, Merrill Lynch and two French banks, Calyon and Société Générale. Along with other unidentified entities, the counterparties have received 30 percent of the $170 billion allocated to A.I.G. (Goldman has said that it had insulated itself from any financial damage that might have resulted from an A.I.G. collapse.)

Even A.I.G.’s own independent directors haven’t been told which of the counterparties were paid, according to a person with direct knowledge of the matter who requested anonymity because of confidentiality agreements.

SUCH secrecy raised hackles because the insurance claims were paid off in full, even though widespread defaults on the underlying debt have not occurred. Why, many people wonder, did the Fed make A.I.G.’s counterparties whole on losses that have not happened yet? Why didn’t it force these financial companies to close out the contracts at a discount, making them take what is known on Wall Street as a “haircut”?

Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn., and an expert in insurance, speculated that the United States was afraid that A.I.G.’s foreign bank counterparties would suffer large hits to their capital cushions, the amount they must set aside in case of losses.

“If somebody takes away the A.I.G. guarantee, all of a sudden the banks’ capital ratios look bad,” he said. “It might have stretched some of these banks.”

Still, Mr. Arvanitis said, it is not clear that the government had to pay out 100 percent of the contracts’ value to all the counterparties. Healthier institutions could have been persuaded to take a haircut, he said. “That is what tough negotiators do,” he added.

The government installed Edward M. Liddy as chief executive of A.I.G. when the company was bailed out. A former chief executive of Allstate, Mr. Liddy was also a director at Goldman Sachs before he joined A.I.G.

And in January, the Fed appointed three trustees to oversee the insurer. Their job is to maximize the company’s ability to repay amounts owed to the government and to ensure that A.I.G. is managed “in a manner that will not disrupt financial market conditions,” according to the Fed.

The trustees are Jill M. Considine, former chairman of the Depository Trust Company and a former director of the Federal Reserve Bank of New York; Chester B. Feldberg, a former New York Fed official who was chairman of Barclays Americas from 2000 to 2008; and Douglas L. Foshee, chief executive of the El Paso Corporation and chairman of the Houston branch of the Federal Reserve Bank of Dallas.

The trustees have already rankled a big A.I.G. shareholder. The American Federation of State, County and Municipal Employees pension plan, which owns 18,000 shares of A.I.G. common stock, had put forward a shareholder proposal on executive pay that it hoped would be put to a vote at the company’s annual meeting in May.

The proposal asked the company to adopt a policy requiring senior executives at A.I.G. to retain a significant percentage of the shares they received as compensation until two years after they left the company. Such a policy would help reward performance based on long-term value creation for shareholders, the pension plan said.

But Richard Ferlauto, the director of corporate governance and pension investment at Afscme, said A.I.G. trustees have indicated they oppose the proposal. But Kevin F. Barnard, a lawyer at Arnold & Porter who represents the trustees, said they were still considering the proposal. “To my knowledge, they are batting ideas back and forth but have not made fixed decisions,” he said.

Mr. Ferlauto said the compensation debate at A.I.G. would be yet another indication of how A.I.G. sees its relationship with those who continue to bail it out of trouble: taxpayers.

“If they do vote against a reasonable compensation reform,” he said, “then it would be an appalling breach of faith with the American taxpayer.”




Insurance giant paying out millions in bonuses; company agrees to restrain payments in future
By MARTIN CRUTSINGER
Copyright 2009 Associated Press
5:56 AM CDT, March 15, 2009
http://www.chicagotribune.com/business/sns-ap-aig-bonuses,0,5839769.story


WASHINGTON (AP) — American International Group is giving its executives tens of millions of dollars in new bonuses even though it received a taxpayer bailout of more than $170 billion dollars.

AIG is paying out the executive bonuses to meet a Sunday deadline, but the troubled insurance giant has agreed to administration requests to restrain future payments.

The Treasury Department determined that the government did not have the legal authority to block the current payments by the company. AIG declared earlier this month that it had suffered a loss of $61.7 billion for the fourth quarter of last year, the largest corporate loss in history.

Treasury Secretary Timothy Geithner has asked that the company scale back future bonus payments where legally possible, an administration official said Saturday.

This official, who spoke on condition of anonymity because of the sensitivity of the issue, said that Geithner had called AIG Chairman Edward Liddy on Wednesday to demand that Liddy renegotiate AIG's current bonus structure.

Geithner termed the current bonus structure unacceptable in view of the billions of dollars of taxpayer support the company is receiving, this official said.

In a letter to Geithner dated Saturday, Liddy informed Treasury that outside lawyers had informed the company that AIG had contractual obligations to make the bonus payments and could face lawsuits if it did not do so.

Liddy said in his letter that "quite frankly, AIG's hands are tied" although he said that in light of the company's current situation he found it "distasteful and difficult" to recommend going forward with the payments.

Liddy said the company had entered into the bonus agreements in early 2008 before AIG got into severe financial straits and was forced to obtain a government bailout last fall.

The large bulk of the payments at issue cover AIG Financial Products, the unit of the company that sold credit default swaps, the risky contracts that caused massive losses for the insurer.

A white paper prepared by the company says that AIG is contractually obligated to pay a total of about $165 million of previously awarded "retention pay" to employees in this unit by Sunday, March 15. The document says that another $55 million in retention pay has already been distributed to about 400 AIG Financial Products employees.

The company says in the paper it will work to reduce the amounts paid for 2009 and believes it can trim those payments by at least 30 percent.

Bonus programs at financial companies have come under harsh scrutiny after the government began loaning them billions of dollars to keep the institutions afloat. AIG is the largest recipient of government support in the current financial crisis.

AIG also pledged to Geithner that it would also restructure $9.6 million in bonuses scheduled to go a group that covers the top 50 executives. Liddy and six other executives have agreed to forgo bonuses.

The group of top executives getting bonuses will receive half of the $9.6 million now, with the average payment around $112,000.

This group will get another 25 percent on July 14 and the final 25 percent on September 15. But these payments will be contingent on the AIG board determining that the company is meeting the goals the government has set for dealing with the company's financial troubles.

The Obama administration has vowed to put in place reforms in the $700 billion financial rescue program in an effort to deal with growing public anger over how the program was operated during the Bush administration.

That anger has focused in part on payouts of millions of dollars in bonuses by financial firms getting taxpayer support.

In his letter, Liddy told Geithner, "We believe there will be considerably greater flexibility to reduce contractual payments in respect of 2009 and AIG intends to use its best efforts to do so."

But he also told Geithner that he felt it could be harmful to the company if the government continued to press for reductions in executive compensation.

"We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses, which are now being operated principally on behalf of the American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury," Liddy said.