3rd UPDATE:Inspector General: AIG Bonuses A Treasury 'Failure'
October 14 2009 - 2:56PM
Dow Jones News
A special inspector general said Wednesday that U.S. Treasury
Secretary Timothy Geithner was ultimately responsible for a
"failure of management" surrounding American International Group
Inc. (AIG)'s $168 million in retention bonuses.
Special Inspector General Neil Barofsky, who is responsible for
oversight of the U.S. government's financial bailout actions, said
Geithner, formerly president of the Federal Reserve Bank of New
York and now the top Treasury official, had to answer for a lack of
communications between the two agencies over the politically
explosive bonuses. But Barofsky also spread blame broadly across
the Treasury Department, which he said "outsourced its
oversight."
In his testimony before the House Committee on Oversight and
Government Reform, Barofsky cited the Treasury Department's
inadequate oversight of AIG's compensation plans, the complexity of
which 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 Geithner for an
additional 10 days, he said.
Ranking member Rep. Darrell Issa, R-Calif., said Geithner was
uniquely positioned to be aware of the impending payments, but did
not stop them.
"He failed to know when he should have known, he failed to stop
them when he should have at least halted for a review," said Issa.
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 guardian 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 with the size of the government's $180 billion
bailout of the insurance company and did not identify it as a
politically sensitive 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."
In its formal response included with Barofsky's report, the
Treasury Department said it intended to implement his
recommendations.
"Treasury agrees with the importance of effective communication
when various federal agencies have a role in executing TARP
programs," wrote Assistant Secretary for Financial Stability
Herbert Allison Jr.
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 Issa.
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 legally 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.
Barofsky 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