"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," Larry Summers, chairman of the National Economic Council, told George Stephanopoulos this morning.
Summers was responding to news that Treasury Secretary Timothy Geithner told AIG CEO Edward Liddy that it was unacceptable for the company to dole out $121 million in bonuses for senior executives after the company took more than $170 billion in taxpayer dollars. Geithner suggested to Liddy that $9.6 million in bonuses going to the top 50 executives should be cut in half, with other bonuses tied to performance.
"Secretary Geithner has been in Europe," reported White House economic adviser Austan Goolsbee on Fox News Sunday. "He was really upset...by the news. He stepped in and berated them, got them to reduce the bonuses following every legal means he has to do this. 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, and we've done exactly what we can do to prevent this kind of thing from happening again."
Liddy, brought on to run AIG in September by Treasury Secretary Henry Paulson, later said that the conversation was a "difficult one" for him.
As reported by ABC News' Matt Jaffe , CEO Liddy wrote to Geithner on Saturday explaining that his predecessors "took significant retention steps at AIG Financial Products," the company's most notorious division. "These arrangements were designed at a time when AIG Financial Products was expected to have a significant, ongoing role at AIG, and guaranteed a minimum level of pay for both 2008 and 2009. (Due to losses at AIG Financial Products, a senior manager will receive about 43% of his 2007 expected level for 2008.)"
Liddy wrote that some of "these payments are coming due on March 15, and, quite frankly, AIG’s hands are tied. Outside counsel has advised that these are legal, binding obligations of AIG, and there are serious legal, as well as business, consequences for not paying. Given the trillion-dollar portfolio at AIG Financial Products, retaining key traders and risk managers is critical to our goal of repayment."
The CEO said that "in the current circumstances, I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them. ...Honoring contractual commitments is at the heart of what we do in the insurance business. I cannot have our clients lose faith in our desire and ability to do just that."
Focusing on AIG Financial Products, the most notorious of the company's divisions, Liddy responded that the 25 highest-paid active contract employees at AIG Financial Products "have agreed to reduce their remaining 2009 salary to $1….The remaining 2009 salary of all other officers – that is, anyone with a title of associate vice president or higher – will be reduced by 10% (subject to local law requirements)." In addition, members of the AIG Leadership Group including Liddy will receive no 2008 year-end bonus.
But Liddy said he was worried about these steps, saying the company "cannot attract and retain the best and brightest talent to lead and staff the AIG businesses – which are now being operated principally on behalf of the American taxpayers – if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury."
"We are a country of law," Summers told Stephanopoulos today. "There are contracts. The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system...What the Obama administration has done, based on the advice of attorneys, is done everything that it can to, within the law and within the tradition of upholding law that we have in this country, to limit these bonuses. And they have as a result of Secretary Geithner's efforts been scaled back."
House Financial Services Committee Chair Barney Frank, D-Mass., told Fox News Sunday, "we need to find out whether these bonuses are legally recoverable."
It seems to me that these $121 million in bonuses -- combined with AIG's continued refusal to share the names of the companies such as Goldman Sachs receiving $50 billion or so of its bailout funds -- could represent a tipping point of sorts, with the public more inclined to let these companies go under than to agree to further bills in bailout funds.
The administration clearly seems concerned by this. Goolsbee this morning, asked if he feared the AIG bonuses would trigger a backlash impacting future financial steps, said "Yes, you worry about that backlash, but you're also angry...that this would happen...at an institution that, you know, has been so troubled and you're trying to save. So I think that's perfectly fair."
What do you think?