In Letter to Kerry, Bernanke Warned of Fed's 'Limited Rights' in AIG Oversight

March 17, 2009 -- Just one day before the Obama administration expressed its disapproval of AIG's $165 million in bonuses, Federal Reserve chairman Ben Bernanke warned in a private letter to a key lawmaker that the Federal Reserve did not monitor bonuses by the company.

The Fed had "limited rights" in its oversight of AIG, Bernanke wrote Sen. John Kerry, D-Mass., and was "not in a position to review or approve all of the specific compensation or other expenditures" at the insurance company.

In the letter, sent last Tuesday, Bernanke noted that the Fed has the power to "monitor the financial condition of AIG and to restrict certain major decisions that might reduce the ability of AIG to repay its loan from the Federal Reserve."

But he cautioned that the Fed's oversight role was limited, and did not cover compensation or "other expenditures related to the ongoing business operations of AIG and its subsidiaries."

"These types of decisions are within the authority of the company's senior management," wrote Bernanke, "and, as noted below, are also, to some degree, within the authority of the Treasury as an equity owner."

Despite its oversight limitations, Bernanke touted the Fed's efforts to restrict AIG's compensation and travel expenses.

"Importantly, we routinely make our views known on key issues," he wrote. "Last fall, for example, we made clear to AIG's management our deep concern about reported incidents of corporate spending and questions surrounding certain executive compensation. We have also pressed the company to ensure that robust corporate governance surrounds all compensation actions."

The timing of Bernanke's letter -- sent months after Kerry wrote him last October to ask about lavish AIG executive retreats -- raises questions about how much the Fed knew about AIG's bonuses and when they knew it.

The day after Bernanke sent the letter, Treasury Secretary Tim Geithner called AIG Chairman Edward Liddy and demanded he stop the "unacceptable" payments. Liddy responded that his hands were "tied" and the company was contractually obligated to pay the bonuses.

After hearing Bernanke state that the Fed does not have a role in setting compensation, a Kerry aide told ABC News that they want the Fed to know about the compensation practices of any company they help and would also like to see the Fed working more closely with Treasury.

Lawmakers on Capitol Hill have expressed concern over whether the Fed and Treasury have effective oversight over institutions receiving bailout funds.

"The American people are outraged and I am as well," Senate Banking Committee chairman Chris Dodd, D-Conn., said at a Tuesday hearing. "The chairman of the Federal Reserve has said that the government's efforts to prevent AIG from failing outright are akin to a neighbor smoking in bed and setting the house on fire. With these bonuses, what we are seeing is the folks responsible picking the pockets of the firefighters and stealing the hubcaps off the fire truck. It's outrageous."