Troubled insurer American International Group (AIG), which is 79.9%-owned by the federal government, will pay $165 million in retention bonuses on Sunday to those at the division that has drawn most of the heat for the company's near-collapse.
Also on Sunday, AIG released the names of the major financial institutions to which it paid at least $50 billion in recent months to settle contracts. AIG covered those companies against losses on mortgage-backed securities insured with credit default swaps. Last November, the Federal Reserve agreed to pay out more than $30 billion to buy collateralized debt obligations, or CDOs, from companies that had bought AIG's swaps on mortgage-backed securities.
READAIG's list of counterparties to certain types of lending transactionsThe developments have drawn more negative attention to an insurance company that the Treasury Department and Federal Reserve have committed up to $170 billion to help stabilize itself after dangerously betting much of its future on a now-illiquid market.
Last year, the company disclosed it would pay $450 million in bonuses to keep employees at AIG Financial Products, the division that focused much of its business on credit default swaps. The bonuses range from $1,000 to $6.5 million, with seven employees making more than $3 million each.
READAIGFinancial Products' Employee Retention PlanThrough the criticism and outrage, AIG has said it recognizes the problems with these payments, but continued to stress the need for the bonuses.
"We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses which are now being operated on behalf of the American taxpayers," AIG chairman and CEO Edward Liddy said in a letter to Treasury Secretary Timothy Geithner on Saturday.
READ the letter AIG CEOEdward Liddy sent to Treasury Secretary GeithnerWhen asked whether employees at AIG Financial Products should be held responsible, not rewarded with bonuses, a source close to the company said only about a dozen of the hundreds of employees at the division engineered the credit default swaps -- and added that division has the knowledge to unwind those bets.
The company doesn't see it as people getting rewarded for making bad decisions, said the source. But, the company can see why people feel that way, maintaining that the collapse resulted largely because the way AIG was regulated, it wasn't required to hold sufficient reserves for credit default swaps.
Liddy's letter said the company has a contract with these employees to pay their bonuses and added, legally, AIG's hands are tied -- but he said he would try to decrease those payouts. We believe that there will be considerably greater flexibility to reduce contractual payments in respect of 2009, and AIG intends to use its best efforts to do so, wrote Liddy in his letter to Secretary Geithner.
A company document shows AIG still owes more than $200 million to these employees this year. The CEO said he would try to reduce those payments by 30%.
A source close to the matter offered a more practical assessment when asked if 30% is a realistic goal.
"We're not promising to. We'll make out best effort," said the source.
Administration officials have called AIG's bonus structure both inappropriate and unacceptable, but an Obama Administration official added the White House conducted its own analysis of the bonus contracts and agreed that they are binding.
Treasury Secretary Tim Geithner called Liddy Wednesday to push the AIG CEO to renegotiate the bonuses.
"They were entered into before the government had anything to do with AIG," said another administration official. "We're going to be very involved, to make sure those kinds of things aren't happening [again] as long as they aren't contractual.
An administration official said AIG is working with the federal government to repay the Treasury Department for these bonuses that will be addressed in the company's new restructuring agreement.
The administration is also negotiating with AIG to alter executive bonuses that fall outside of the binding financial retention contracts. The company was to pay $9.6 million to about 50 senior partners today, according to an administration official. They will now get half of that in cash, a quarter more on July 15 and the rest two months later. The top seven of those 50 executives are not expected to participate in this bonus payout. An administration official said the government wants to renegotiate those payments, spread them out over time, and tie them to when AIG repays taxpayers.
In Liddy's letter to Geithner, the CEO said the top 25 executives at AIG Financial Products will accept $1 salaries for the remainder of this year. He also said anyone with a title of associate vice president or higher will receive at 10% pay cut for the rest of 2009.
The company has already paid about $121 million of its 2008 bonus program to 6,411 employees across the company.
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