Geithner: AIG will be penalized for paying bonuses
WASHINGTON -- The heads of the Federal Reserve and the Treasury Department on Tuesday called on Congress to give the government broad emergency powers to shut down financial businesses, using AIG as the poster child for why such powers are needed.
Currently, the government can move in to dismantle failing banks in an orderly way to minimize the damage. But no such authority exists for non-banks. That forced the Federal Reserve to use its emergency powers in a rare move last year to prop up American International Group. After four interventions, the government has pledged $182.5 billion in support and holds a nearly 80% stake in the insurance giant.
"As we have seen with AIG, distress at large, interconnected, non-depository financial institutions can pose systemic risks just as distress at banks can," Treasury Secretary Timothy Geithner told the House Financial Services Committee.
Lawmakers mainly focused on the issue of the $165 million paid to AIG employees this month. Geithner said the government is working to recoup the money and said that as a penalty, the insurer would receive less cash from a recently announced $30 billion aid package.
"I knew that we had a big mess on the compensation side … but I did not have — I should have had, but I did not have — detailed knowledge of these particular legally contracted retention bonuses," he said. "That's my responsibility."
AIG CEO Edward Liddy last week asked the employees in the financial products division, the group that produced AIG's massive losses, to return at least half their bonus money. New York Attorney General Andrew Cuomo says employees have agreed to return approximately $50 million.
Last week, the House of Representatives passed legislation to tax bonuses given to employees at some firms receiving government aid at 90%, effective retroactively. Congress and the administration are working to alter the measure before it is considered by the Senate. Geithner and Bernanke said they stood by their decision to continue to step in and prop up AIG, noting the firm's wide reach.
