2nd Update: AIG Bonuses May Be Renegotiated Before 2010
October 14 2009 - 1:24PM
Dow Jones News
The Special Inspector General for the U.S. government's
financial system bailout said Wednesday that the $168 million in
retention payments to American International Group Inc. (AIG)
represented a "failure" that occurred when the U.S. Treasury
Department "outsourced its oversight" to other agencies.
Inspector General Neil Barofsky said while legally binding last
year, AIG compensation contracts may be renegotiated before this
year's payments, scheduled for March 2010.
AIG has argued that it had no choice but to pay the bonuses,
regardless of employee performance. Barofsky said while his audit
concluded the contracts were binding, both AIG and Congress lost
opportunities to demand renegotiation of the contracts,
particularly when the company received additional bailout funds
from the government.
"Just because it was a legally binding contract didn't mean
there weren't other alternatives," Barofsky said. Currently the
government is pursuing other options before AIG's next round of
scheduled payments in March 2010, he said.
In his testimony before the House Committee on Oversight and
Government Reform, Barofsky highlighted the Treasury Department's
inadequate oversight of AIG's compensation plans, whose complexity
bogs down even AIG's human resources officers, he said.
"This was a failure of communications, a failure of management,"
Barofsky said. He highlighted the fact that the Treasury Department
did not find out from better-informed officials at the Federal
Reserve Bank of New York about the $168 million of retention
payments for employees in the insurance company's troubled
financial services division until two weeks before they were issued
last March. And even when Treasury Department officials found out
about the imminent payments, they did not alert Treasury Secretary
Timothy Geithner for an additional 10 days, he said.
Committee Chairman Edolphus Towns, D-N.Y., asked Barofsky if he
would characterize the lack of cooperation as a break-down in
communications between the Treasury and the New York Federal
Reserve.
"I think that would be kind, to have it as a breakdown,"
Barofsky said. "Communications were virtually nonexistent."
As guardians of the taxpayer-funded bailout, the Treasury
Department had specific responsibilities to oversee executive
compensation that the New York Fed did not, Barofsky said. To the
New York Fed, the $168 million in retention payments was not
significant compared to the size of the government's $180 billion
bailout of the insurance company and did not identify it as a
politically explosive issue.
"They didn't think it was that big a deal - $168 million was a
drop in the bucket," Barofsky said. "Their concern was paying back
the debt. The Federal Reserve was looking at this as a
creditor."
Barofsky agreed with lawmakers' comments that "retention
payments" paid to AIG administrative employees, including to a file
administrator and kitchen assistant, were not necessary to keep
irreplaceable employees from resigning.
"Somebody who made the decision to give these bonuses made the
decision to make everyone happy and not to act in the interest of
American taxpayers," said ranking member Rep. Darrell Issa,
R-Calif.
Barosky said in any future government bailouts of this
magnitude, the Treasury Department should either take on the
primary oversight role or establish specific procedures to maintain
communications.
There need to policies in place to ensure a "comprehensive and
not ad-hoc review of executive compensation and other politically
sensitive issues," Barofsky said. He also said he planned to work
with "pay czar" Kenneth Feinberg to review compensation packages
for the highest-paid executives at seven companies that have
received special government assistance.
"That's clearly within our jurisdiction," Barofsky said.
-By Kristina Peterson, Dow Jones Newswires; (202) 862-6619;
kristina.peterson@dowjones.com