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Government Staff Members Knew Weeks Ago About AIG Bonus Program

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The New York Times

Published: March 21, 2009

WASHINGTON - The question was direct and prescient. Rep. Joseph Crowley, D-N.Y., asked the Treasury secretary in an open hearing what could be done to stop American International Group from paying $165 million in bonuses to hundreds of employees in the very unit that nearly destroyed the company.

Tim Geithner, the Treasury secretary, responded by saying that executive pay in the financial industry had gotten out of whack in recent years and pledged to crack down on exorbitant pay at companies such as AIG that were being bailed out with billons of taxpayer dollars.

The exchange took place before the House Ways and Means Committee on March 3, one week before, Geithner says, he learned that the failed insurance company was about to pay bonuses that have caused a political uproar.

A Treasury official said on Thursday that it hardly was surprising that Geithner had not been aware of the magnitude of the bonuses until last week. When Crowley described the bonuses at the hearing on March 3, the official said, Geithner had not known what the congressman was talking about.

The official added, "Unfortunately, this piece of information slipped through the cracks."

Hiding In Plain Sight

Interviews with senior Federal Reserve and Treasury officials, as well as members of Congress, leave little doubt that the bonus program was a disaster hiding in plain sight. Geithner is not the only one who appears not to have understood the populist fury the bonuses would set off.

Career staff officials at the Treasury, Fed and Federal Reserve Bank of New York exchanged e-mail messages about the AIG bonus program as early as late February, said a person familiar with the matter. AIG itself revealed the bonus plan in regulatory filings in September.

In November, when the bailout of AIG was restructured, Treasury and Fed officials negotiated the terms under which AIG could make the retention payments. And in December, Democratic lawmakers sought a hearing on the payments.

AIG, which incurred staggering losses through its sale of complex financial instruments tied to mortgage-backed securities, has received more than $170 billion in capital infusions, loans and credit lines from the federal government since September and is about to get $30 billion more.

AIG executives have insisted they informed the New York Fed about the bonus plan and that they assumed the New York Fed was informing the Treasury.

Treasury officials have suggested the New York Fed and the Federal Reserve Board in Washington failed to alert the Treasury staff until March 5. And Fed officials said they not only alerted the Treasury staff weeks earlier, but they also discussed the issue with them via e-mail.

Despite the interagency discussions in February about AIG's ill-starred bonus plan, as well as Geithner's exchange on the matter in a hearing, Geithner continued to insist on Thursday that he had not really understood the magnitude of the bonuses until one week ago.

"I was informed by my staff of the full scale of these specific things on Tuesday, March 10," Geithner said in an interview with CNN on Thursday. "As soon as I heard about the full scale of these things, we moved very actively to explore every possible avenue - legal avenue - to address this problem."

As early as December, two Democratic lawmakers vociferously and repeatedly complained about the bonuses, and one of them went so far as to demand the resignation of AIG's chief executive.

Both Geithner and the chairman of the Federal Reserve, Ben Bernanke, were preoccupied at the time with multiple crises. The nation's banks were reeling from as much as $2 trillion in mortgage-related losses. The recession was deepening, and unemployment was soaring.

Staffs Communicated

Bernanke's team at the Fed and Geithner's team at Treasury, moreover, were reluctant to impose what they viewed as punitive and possibly self-defeating pay restrictions on companies being bailed out.

In early February, Geithner opposed a provision in the economic stimulus bill that would have slapped a steep tax on the kind of bonuses AIG was about to pay.

If AIG's plan to pay additional $165 million in bonuses came as a surprise to Geithner, it did not come as a surprise to staff at the Treasury, the Federal Reserve in Washington or the New York Fed.

Staff at all three agencies had been in daily communication with one another about AIG since the Fed agreed to lend the company $85 billion in September in exchange for almost 80 percent of the company.

In late November, after AIG's plight became worse and the Treasury jumped in with a $40 billion capital infusion, the three agencies negotiated cuts in bonuses and salaries for many of the company's top executives.

Officials at the New York Fed carried out the most direct oversight of AIG, and they were well aware of the coming bonus payments, said a person familiar with the matter.

Geithner was president of the New York Fed until he became Treasury secretary in late January. But Geithner recused himself from any actions involving bailout talks after Obama announced in late November that he would nominate Geithner for the Treasury post. That may have made the oversight of AIG, fractured between the Fed, the New York Fed and the Treasury, even more disjointed.

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