AIG Bonuses: What Can the White House Do?

March 16, 2009— -- President Obama moved to the front of a growing line of government officials and taxpayers who are furious that the insurance giant AIG agreed to pay $165 million in bonuses after taking more than $170 billion in taxpayer money to stay afloat.

Channeling the populist outcry, Obama vowed to do whatever he could to recover the AIG bonuses, calling them a fundamental violation of American values. He urged Treasury Secretary Timothy Geithner to use his leverage and legal avenues to rectify the situation.

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"I've asked Secretary Geithner to use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers whole," Obama said.

At issue is whether the government can recover the money. Sunday was the deadline for paying the bonuses.

AIG CEO Edward Liddy wrote a letter to Geithner Saturday explaining that "AIG's hands are tied" regarding the $165 million in bonuses and that "there are serious legal, as well as business, consequences for not paying."

It turns out that the leverage of future bailout money may be a far more powerful tool for the administration than legal action. However outrageous, the contracts are legally binding.

But there is one very small catch: the so-called "clawback option" that comes with government TARP money. The government can literally claw back bonus money, but only when it can prove executives lied about bank financing or knowingly took excessive risk.

Compensation consultant James Reda says he has never seen it work. "To actually 'clawback' the money that's been paid is very difficult to do," said Reda, author of "Pay to Win."

Still, taxpayers have already spent $170 billion on AIG. And the Obama administration pledged an additional $30 billion to AIG two weeks ago. The White House hinted today that future help could depend on what ultimately happens with the bonuses.