The Obama administration has asked bailed-out insurance company American International Group to reduce almost $200 million in future retention payments after their bonus fiasco last spring, a government watchdog reported today.
The administration's request was revealed in a new audit from Neil Barofsky, the special inspector general for the $700 billion Troubled Asset Relief Program. In his report, Barofsky criticizes the Treasury Department for failing to understand the extent of AIG's compensation agreements before bailing out the company with taxpayer money last fall.
AIG, a company that is 80 percent owned by American taxpayers, then dished out $168 million in retention bonuses last March.
While the inspector general report found that in the fall of 2008, Treasury officials discussed with AIG what compensation restrictions the company would face after its initial $40 billion government loan, the department "essentially relied upon" information from the Federal Reserve Bank of New York and there was "little indication" that FRBNY knowledge about AIG's compensation plans, particularly at the Financial Products unit, was being passed to Treasury, the report concludes.
"Treasury invested $40 billion of taxpayer funds in AIG, designed AIG's contractual executive compensation restrictions, and helped manage the government's majority stake in AIG for several months, all without having any detailed information about the scope of AIG's very substantial, and very controversial, executive compensation obligations," Barofsky said in his report.
"Treasury's failure to discover the scope and scale of AIG's executive compensation obligations, in particular at AIGFP, potentially resulted in a missed opportunity to avoid the explosively controversial events and created considerable public and congressional concern over the retention payments."
It was not until Feb. 28, only days before the insurance giant was due to make the payments – when Treasury officials ultimately became aware of the details of the bonuses. Treasury Secretary Tim Geithner, despite running the New York Fed until taking over as Treasury chief in February, has said he did not have any personal knowledge about the bonuses until March 10, just three days before the payments were set to be made.
Upon learning about the details of AIG's bonuses, Geithner said he called the company's then-CEO Ed Liddy to try to halt the payments, but both parties agreed that there were no legal grounds to do so, a correct determination according to Barofsky. However, the watchdog said that Geithner's "lack of knowledge until the eve of the payment of the bonuses represents a failing at both FRBNY and Treasury to identify adequately the significance" of the bonus issue.
Adminstration Asks AIG to Withold Future Bonuses
On March 13, AIG went through with their $168 million in payments, including thousands of dollars to non-essential support employees at AIGFP (AIG Financial Products), such as kitchen and mailroom assistants. The company eventually asked employees receiving payments over $100,000 to voluntarily return half of the money. AIG officials told Barofsky that as of Aug. 31, there had been pledges to repay about $45 million before taxes and actual repayments of $19 million before taxes.
In June, the Obama administration appointed Kenneth Feinberg to oversee compensation at AIG and six other bailout recipients. Barofsky, in his audit, said Feinberg has indicated that he wants AIGFP's future retention payments to be scaled back. The company is set to pay out a second portion of retention payments, totaling $198 million, in March 2010.
"AIG continues to discuss a variety of compensation issues with the Special Master, including future payments to employees of AIG Financial Products," AIG spokeswoman Christina Pretto said in a statement. "FP employees have until the end of the year to fulfill their commitments to return a portion of their March 2009 payment. We expect FP employees will honor their commitments. In the meantime, those employees are making considerable progress in unwinding trades and reducing risk at AIGFP."
Feinberg, who will release his review in the coming weeks, is now communicating with FRBNY officials on AIG's compensation plans, after Barofsky recommended he do so. But the watchdog warned, "The uncertainty of future compensation levels poses a challenge for AIG in retaining personnel that will assist in winding down certain businesses, spinning off strong businesses for initial public offerings, and maintaining operations at any portion of the company that remains."
Going forward, Barofsky said, "Legitimate concerns exist over large bonus and retention payments" to employees at firms that needed government bailouts to avoid bankruptcy. To date, AIG has received $120 billion in taxpayer aid.
On Wednesday morning at 10 a.m., Barofsky will testify before the House Oversight and Government Reform Committee. TARP chief Herb Allison said in a letter to the watchdog that Treasury agreed with the watchdog's recommendations.