Monday, March 16, 2009

Summers, U.S. Lawmakers Lambaste AIG Bonus Plan as ‘Outrageous’

March 16 (Bloomberg) -Obama administration officials and lawmakers lambasted plans by American International Group Inc., the insurer rescued by the government, to dole out $1 billion in bonuses and retention pay to employees.

Lawrence Summers, director of the White House National Economic Council, called the payments "outrageous" in an interview on ABC's "This Week" program yesterday. AIG is "abusing the system," Barney Frank, the Massachusetts Democrat who heads the House Financial Services Committee, told "Fox News Sunday."

AIG, which has received $170 billion in taxpayer money, succumbed to demands from the U.S. Treasury to scale back the payments. AIG agreed to reduce some retention payments in 2009 by 30 percent and tie bonuses to the company's recovery. The New York-based insurer still plans to hand out about $165 million on March 15 because of legally binding contracts, according to a person briefed on the matter.

Public anger has been stoked by revelations of bonuses paid by firms at the center of the financial-market meltdown that has plunged the U.S. into what may become the deepest recession since World War II. New York Attorney General Andrew Cuomo is investigating $3.6 billion in bonuses paid by Merrill Lynch & Co. shortly before it was acquired Jan. 1 by Bank of America Corp.

"There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous," Summers said yesterday on CBS's "Face the Nation."

Safeguarding Taxpayer

Summers said the Obama administration's priority is safeguarding the U.S. taxpayer. "No one cares about the shareholders of AIG. No one feels the slightest obligation to people who led us into these difficulties."

Even so, the administration can't abrogate existing contractual obligations without shaking confidence in the legal system, Summers said.

“The easy thing would be to just say, you know, ‘Off with their heads,’ and violate the contracts,” he said. “But you have to think about the consequences of breaking contracts for the overall system of law.”

Frank said that starting when the Federal Reserve initiated the AIG rescue last September there should have been stricter rules on executive compensation and clearer guidelines for major financial institutions getting a government bailout.

“Clearly there was a mistake at the beginning,” Frank said on Fox. “These people who were receiving this should have been given much stricter rules at the beginning.”

‘Abusing System’

AIG is “abusing the system,” said Frank. “Any bank that thinks we’re being too tough on compensation, or trying to get foreclosures reduced, or stopping some of the lavish entertaining, they can give the money back.”

“With AIG, I would just say we need to find out, one, are they legally recoverable,” Frank added. “But I do want to find out at what point these illegal obligations were incurred, who said, and at what point, we’re going to give these bonuses no matter what.”

Senate Minority Leader Mitch McConnell, speaking on ABC’s “This Week,” said the example of AIG might be followed by other companies lining up for government assistance.

“The message here, I’m afraid, to any business out there that’s thinking about taking government money, is let’s enter into a bunch of contracts real quick, and we’ll have the taxpayers pay bonuses to our employees,” the Kentucky Republican said. “This is an outrage.”

Treasury Secretary Timothy Geithner was “really upset” by AIG’s plan to distribute the $165 million, Austan Goolsbee, a top White House economist, said on Fox. “You worry about that backlash” from the public, “but you’re also angry,” he said.

‘Not Sensible’

“I don’t know why they would follow a policy that’s really not sensible, is obviously going to ignite the ire of millions of people,” Goolsbee said. “And we’ve done exactly what we can do to prevent this kind of thing from happening again.”

AIG Chief Executive Officer Edward Liddy, who was recruited by the U.S. to run the insurer after the bailout, has vowed that the company will repay “every penny” to the U.S. of its bailout package by selling subsidiaries, and said the retention pay for talented people helps taxpayers by making the units attractive to buyers.

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