The federal pay czar is trying to force the American International Group to reduce $198 million in bonuses promised to employees of its trading unit, where problems posed a threat to the global financial system last year.
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Times Topics: Kenneth R. Feinberg | American International Group Inc.
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But the Treasury’s special master for compensation, Kenneth Feinberg, is running into legal hurdles because those bonuses fall outside new rules against bonus payments at companies receiving government assistance. The bonus agreements at issue were struck before last year’s emergency rescues by the Treasury and the Federal Reserve, and thus are not directly covered by the new rules.
The problem is a recurring one. A.I.G. payments early this year to the same employees elicited public outrage, though government officials said then that they had little legal authority to rescind pre-existing contracts.
To strengthen his hand, Mr. Feinberg is threatening to reduce the compensation packages he does control, according to a person close to the talks. That could mean shrinking the pay of other A.I.G. executives — including its new chief, Robert Benmosche — if the firm does not claw back part of the bonuses for the people in its trading unit, known as A.I.G. Financial Products.
At companies that received extraordinary government support, Mr. Feinberg’s task is to monitor and enforce rules governing new pay packages. He can approve or reject cash pay that exceeds $500,000 for top executives.
Mr. Benmosche, hired by A.I.G. late this summer, received a compensation package that includes $3 million initially and about $4 million in stock that he must hold for five years, as well as annual bonuses based on performance.
A.I.G. has a variety of employee bonus programs. The Financial Products group began a two-year retention program in January 2008, before its government rescue, designed to keep skilled employees from leaving and jeopardizing its derivatives portfolio .
After A.I.G. paid $165 million in retention bonuses to that group in March, it promised to try to recover much of the money to quell the uproar that ensued.
But the insurance company has recovered only $19 million of the $45 million it asked the recipients to repay, according to an audit of its compensation program and the government’s oversight.
A company spokeswoman, Christina Pretto, said in a statement that the people who had received that money had “until the end of the year to fulfill their commitments,” and that the company believed those people would honor them.
But the special inspector general for the Troubled Asset Relief Program, Neil M. Barofsky, who conducted the audit, said some of the money appeared to be unrecoverable, because the employees had resigned rather than return the pay.
Other people are still weighing tax issues arising from those bonuses, and some have asked the insurer to dock their paychecks in the future, rather than make a single payment now.
The inspector general’s audit will be the subject of a hearing Wednesday by the House Oversight and Government Reform Committee.
The report stated that Mr. Feinberg had “informally advised A.I.G. not to pay the full $198 million,” scheduled for payment next March, but did not reveal how sharply Mr. Feinberg hoped to pare the bonuses.
The amount of the bonuses at A.I.G. is quite small relative to the record amount of government assistance received by the firm over the last year, roughly $182 billion.
The $165 million in bonus pay made last March coincided with the news that A.I.G. had just posted the biggest loss in American history and would need a bigger rescue package. That led to stormy Congressional hearings and tours of the suburbs where some bonus recipients lived.
Company officials argued at the time that only a handful of the employees of financial products bore responsibility for the disastrous derivatives trading, and it was unfair to blame everybody for the harm caused by a few. The company also said it wanted to honor its commitments because skilled people might resign en masse if bonuses were rescinded.
The new audit pointed out that the bonus program for the Financial Products unit was unusual because it included payments to unessential people. It cited a $7,700 bonus for a kitchen assistant, a $7,000 bonus for a mailroom assistant and $700 for a file administrator.
The audit also described the lack of coordination between the Federal Reserve and the Treasury over A.I.G.’s compensation program. It said Fed officials had their own conversations with company officials about compensation last fall, and were further briefed over the winter by compensation specialists at Ernst & Young brought in to help.
But the Fed did not convey any of the information it had gathered to the Treasury until just before the bonuses were scheduled to be paid in March. Then, the Fed sent an e-mail message to the general counsel at the Treasury, the report stated, warning that the looming bonuses had “garnered press and congressional attention” and would “not be easy for Treasury and the Fed to defend.”
That message promised to supply more detail, but nothing followed for about a week.
“Despite the strong language” of the Fed’s messages, the audit found “that the e-mail did not raise any flags in Treasury.”
Stephen Labaton contributed reporting.
