Dodd vs. Treasury: Who Is Responsible for AIG Loophole?

March 19, 2009— -- More information emerged today about who is responsible for the apparent loophole in the February stimulus bill that paved the way for the AIG bonuses.

In an interview today with CNN's Ali Velshi, Treasury Secretary Tim Geithner said, "Treasury staff were working with Sen. [Christopher] Dodd's staff throughout this process."

Geithner's comment came in response to a remark by Dodd, D-Conn., saying that the Treasury Department had insisted on inserting language in the bill that created a loophole for AIG to exploit.

"Treasury staff did express concern about whether this provision was vulnerable to legal challenge," Geithner said.

Geithner said he did not personally talk to Dodd or Dodd's staff about the provision, which exempted employees who signed contracts before February from tough new executive compensation limits that Dodd and others included in the stimulus. Staffers at the Treasury Department were concerned that the provision would not stand up to legal challenges without the exemption for existing contracts.

"We expressed concern about this specific provision because we wanted to make sure it was strong enough to survive legal challenge," Geithner said in the interview with Velshi. "But we also worked with [Dodd] to make sure we strengthened the overall framework, and his bill has this very important provision we are relying on now to go back and see if we can recoup payments that were made that there was no legal ability to block."

The front pages of the major newspapers in Connecticut this morning pointed the finger at Dodd, the state's senior senator. The Hartford Courant banner headline screamed, "Dodd's Flip-Flop: Admits Role in Bill Changes that Led to AIG Bonuses."

In a statement issued Wednesday night, Dodd said that during stimulus negotiations, he did change a section on limiting executive pay to include an exemption for any company that received taxpayer bailout money. The change permitted payouts of any executive bonuses as long as they were agreed to on or before Feb. 11, 2009.

Dodd said he did so because the administration asked him to. At the time, he said, he was not aware of any pre-existing AIG bonuses.

Two separate federal agencies have begun investigations into how the provisions ended up in the legislation, ABC News has learned.

"I did not want to make any changes to my original Senate-passed amendment, but I did so at the request of administration officials, who gave us no indication that this was in any way related to AIG," Dodd said. "Let me be clear -- I was completely unaware of these AIG bonuses until I learned of them last week."

Dodd told the Courant that it was ironic that he is now getting blamed for the loophole when he alone was the only senator who sought to ban all bonus payments past and future.

"It's somewhat ironic that the people who thought I had gone too far," Dodd said, "are now saying I didn't go far enough."

An administration official responded that when Treasury was shown the original Dodd amendment language, it raised legal concerns about the effect of the legislation on pre-existing contracts, pointing out that there could be litigation as a result.

Officials Say Treasury Did Not Insist on Exemption

Still, the official told ABC News that Treasury did not insist on any exemption. As the official put it, Treasury had no leverage in the situation because everyone knew the president would sign the stimulus bill, so it was up to Congress to decide what to include.

Dodd is not the only Democratic senator denying any culpability. Sen. Max Baucus of Montana is the chairman of the Senate Finance Committee and an appointed conferee on the stimulus bill. But on Tuesday, he said the bill was written mostly by Senate and Treasury staffers, who were responsible, he said, for changing the language.

"This was a huge bill," Baucus said. "We agreed on structure. Then when staffs and Treasury get in the room and actually write it, that's where it got dropped. And frankly, it was such a rush, talking about the stimulus bill right now, to get it passed, I did not have time, other conferees did not have time to address many of the provisions that were modified significantly. We do the best we can, but we missed that stuff as a result."

ABC News' Z. Byron Wolf contributed to this report.