[DEBATE] : Officials Knew of AIG Bonuses Months Before Firestorm

[Riaz K Tayob]

[An unfolding lesson in how you manage a nation that you perceive to be 
docile and manipulable sheep... Africans were ripped off with less 
style... but a rip off is a rip off - ]

Officials Knew of AIG Bonuses Months Before Firestorm

By David Cho and Brady Dennis
Washington Post Staff Writers
Wednesday, May 13, 2009

As American International Group chief executive Edward M. Liddy returns 
to Washington to face Congress today, new details are emerging about how 
long federal officials were aware of the company's recent bonus payments 
to its executives and of how inflammatory the payments could be.

Documents show that senior officials at the Federal Reserve Bank of New 
York received details about the bonuses more than five months before the 
firestorm erupted and were deeply engaged with AIG as well as outside 
lawyers, auditors and public relations firms about the potential 
controversy. But the New York Fed did not raise the alarm with the Obama 
administration until the end of February.

Timothy F. Geithner, who became Treasury secretary early this year, was 
the head of the New York Fed when it became aware of the bonus details. 
But his name is not among those of senior New York Fed officials 
mentioned in the summaries of phone calls, correspondence and other 
documents obtained by The Washington Post.

Those documents also illuminate who in the government, beyond the New 
York Fed, knew what about the bonuses at AIG's most troubled unit, and when.

Key members of Congress began investigating the payments as long ago as 
October and, beginning in January, repeatedly warned the Treasury about 
the matter.

In early February, Fed officials in New York sent details about the 
bonus program to their counterparts at the Federal Reserve in 
Washington, to prepare Chairman Ben S. Bernanke in case he was asked 
about the payments at a congressional hearing.

By the time the Obama administration was fully engaged in early March, 
the New York Fed had determined that AIG was legally bound to pay the 
bonuses to its Financial Products division, the documents show. Top New 
York Fed officials also huddled with AIG about developing a strategy to 
mollify angry lawmakers -- but that did little to quell the firestorm 
that ensued.

The furor over the bonus payments at AIG -- the crippled insurance giant 
that is benefiting from a government bailout of more than $180 billion 
-- disappeared from public view as quickly as it erupted in mid-March.

At the height of the controversy, the House passed a resolution that 
would tax the bonuses at 90 percent and the Senate introduced an even 
harsher bill, which it abandoned as AIG employees began promising to 
return the money.

But even after the storm, the fallout remains. As the financial crisis 
demands their attention, senior Treasury officials have met several 
times a week since March to review, one by one, the bonuses of even 
lower-ranking AIG executives, sources familiar with the discussions 
said. Geithner attended some of the initial meetings.
Ongoing Legal, Tax Issues

AIG is still grappling with the legal and tax issues surrounding the 
bonuses while trying to stay afloat. And while employees of AIG's 
Financial Products division have said they intend to repay nearly a 
third of their $165 million in bonuses in response to the public outcry, 
it is unclear when or how much will be returned.

After the initial $85 billion federal bailout of AIG in September, the 
New York Fed, which is accustomed to dealing with banks, struggled to 
understand a complex global insurance company.

"They really didn't know us at all," said one AIG executive, who was not 
authorized to speak publicly. "We had a real education process with 
them. They were asking us questions on a gazillion different issues."

By Sept. 29, the bonus matter first appeared on the radar of the New 
York Fed, which was designated as the primary contact for AIG, documents 
show. Senior officials from the New York Fed met with AIG officials to 
discuss the compensation plans in place at Financial Products, whose 
risky derivative contracts had brought the insurance giant to the brink 
of collapse.

AIG e-mailed officials at the New York Fed copies of the company's 
compensation plans, which detailed bonuses and retention payments, 
including those at Financial Products, documents show. The issue arose 
in scores of meetings and conference calls over the ensuing months. AIG 
also disclosed its retention programs in public filings.

For the New York Fed, the primary contacts were Jim Hennessy, counsel 
and vice president, and Sarah Dahlgren, a senior vice president and head 
of its bank supervision group. Leading the effort at AIG was Anastasia 
Kelly, the company's executive vice president and general counsel. Ernst 
& Young participated as an outside auditor, along with New York law 
firms including Sullivan & Cromwell.

Throughout the fall, the correspondence between New York Fed officials 
and AIG proceeded but without the urgency of later discussions. The 
company was still in danger of imploding -- along with the rest of the 
financial system -- so examining bonus payments to several hundred 
employees was not a top priority among the Fed officials.

Geithner has said in interviews that he was getting regular updates as 
president of the New York Fed and was vaguely aware of the bonus issue 
but that he was not apprised of the specifics.
A Political Storm Erupts

The spark that would grow into a political firestorm began in October 
when lawmakers began to request documents about the compensation at 
Financial Products.

Rep. Elijah E. Cummings (D-Md.) in particular latched on to the issue.

By January, AIG was feeling heat from lawyers at the House Financial 
Services Committee, and from the offices of Rep. Paul E. Kanjorski 
(D-Pa.) and Rep. Joseph Crowley (D-N.Y.), who one staff member noted in 
an e-mail to AIG was "very upset about these payments." Kanjorski has 
said that around this time his staff began calling the Treasury about 
the issue and sending letters, but communication was hindered by the 
transition between administrations.

The frequency and urgency of the correspondence between AIG and the New 
York Fed ratcheted up. Fed officials openly debated with AIG officials 
over how to handle the coming storm and examined whether there was a 
legal way to escape making the bonus payments or at least delay them.

"Did we think people were not going to like this? Sure," an AIG 
executive said. "But did we think it was going to be the Armageddon of 
compensation? No, we didn't."

The New York Fed officials continued to keep their bosses in Washington 
updated. On Feb. 9, Hennessey e-mailed the Fed in Washington, informing 
officials that the retention programs were devised in 2007 -- "another 
fact relevant to any question Bernanke gets on FP retention."

Bernanke has said in congressional testimony that he was not made aware 
of the issue until around March 10. After his staff informed him about 
it, he tried to stop the payments but was counseled by Fed attorneys 
that there may be no legal way to do so.
In Plain Language

As the outcry on Capitol Hill grew louder, Hennessy of the New York Fed 
sent an e-mail to Stephen Albrecht, a Treasury attorney, on Feb. 28, 
documents show. The correspondence was intended to set off alarm bells: 
More than $160 million in bonuses would be paid in March to AIG's 
Financial Products unit, the e-mail stated plainly.

"This was triage, Treasury triage," said the AIG executive, noting the 
department had been largely absent from the discussions to that point. 
"When they finally realized it was a heart attack and not the measles, 
it was too late."

By that time, senior officials at the New York Fed and AIG were resigned 
that nothing could be done to stop the bonuses. On March 2, Hennessy 
received an opinion from an outside legal counsel concluding that AIG 
could be sued if it failed to make the payments as originally crafted.

That same day, the company posted a $62 billion loss for the first 
quarter of 2008, the largest corporate loss in U.S. history. The 
government announced its fourth bailout for the firm, raising the total 
rescue package to more than $180 billion.

After growing convinced they could not restructure the payments, 
Hennessy, Dahlgren and top AIG officials focused on devising a strategy 
for presenting the matter to Capitol Hill.

Senior Treasury officials have said they had been aware of the bonuses, 
but not their specifics, since early February. But the e-mails from 
Hennessy alerted the department that big trouble was on its way.

Geithner said in interviews that he had been preoccupied with the 
financial crisis and was taken aback when he was told about the extent 
of the bonuses. But he said he took responsibility for not knowing about 
the details of the bonuses earlier.

Geithner called Liddy on March 11, demanding that the company 
restructure the bonuses. Liddy began drafting a letter that bowed to 
some of Geithner's concerns. Because the letter was to be released 
publicly, Treasury officials reviewed drafts and suggested changes.

The letter was released March 14. But it was too late. The bonuses to 
executives at Financial Products were already heading out the door.