The chairman of insurance giant AIG admitted Wednesday that the massive bonuses recently paid out to executives are "distasteful" and said he has called on employees to return at least half of that money.
Testifying before the House Financial Services panel on Capitol Hill Wednesday, Edward M. Liddy, chairman and CEO of American International Group Inc., said that some of his workers have already stepped forward to give the money back.
But he said that the bonuses could be defended as a legal obligation of AIG and that retention payments recently paid to company executives were a necessary cost of doing business.
He said the company is working on a restructuring plan that will make good use of billions in government bailout funds.
"We have to continue managing our business as a business -- taking account of the cold realities of competition for customers, for revenues and for employees," Liddy said in a statement.
"Because of this, and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful."
But, he told lawmakers, "I want to assure you that the people at AIG today are working as hard as we can to execute the restructuring plan that, we believe, offers America's taxpayers the best possible income."
In his statement, Liddy acknowledged that AIG has received "generous amounts" of government aid.
The insurance giant has received more bailout funds than any other company, to the tune of US$170 billion.
Liddy said Wednesday that AIG grew to become an internal hedge fund that was overexposed to market risks.
"Mistakes were made at AIG on a scale few could have every imagined possible," Liddy said.
Despite the financial turmoil, the company has paid out more than $200 million in bonuses that were designed to prevent employees from leaving the company's financial products division.
The payments, which range from $1,000 to nearly $6.5 million, were part of contracts that were signed early last year, before then-treasury secretary Henry Paulson asked Liddy to take over AIG.
However, the payments were made and Congress now wants the money back.
Massachusetts Rep. Barney Frank, chairman of the House Financial Services Committee, said the U.S. government must "assert our ownership rights" in the company. The government now owns 80 per cent of the insurer.
Frank said Congress will ask for a list of names of employees who received bonuses, but if a list is not forthcoming, he will convene the committee to issue a subpoena.
"We do intend to use our power to get the names," he said Wednesday after Liddy spoke.
Earlier Wednesday, Frank said that Congress should have been able to place tougher conditions on the AIG bailout.
He called for a 1930s-era law that the Federal Reserve used to give the bailout directly to AIG to be rewritten.
Frank told CBS's "The Early Show" that Congress was not involved in the decision to give $85 billion in taxpayer funds to the insurance conglomerate last fall.
If Congress had been consulted, there would have been conditions placed on the detail that would have limited executive bonuses, he said.
Frank said lawmakers have since "gotten tougher on conditions," and said that "it is my hope" that Congress will amend the statute that allowed for the direct loan.
AIG is the largest recipient of government help. While free marketeers may argue that companies should be allowed to fail, BNN's Michael Kane said, AIG's financial transactions were considered too integrated to let the company go under.
"The big question is, what is too big to fail? What is so integrated into society that if you let it fail then you cascade the negative effects and make it worse," Kane said during an interview on Newsnet. "That is almost a case-by-case basis."
Liddy told lawmakers that AIG's new management team found the company's "overall structure is too complex, too unwieldy and too opaque for its component businesses to be well managed as one company."
He said the team has "addressed our liquidity crisis and stabilized the company's cash position," and is preparing to shut down the financial products end of the business.
90 per cent tax on bonuses?
Representatives in Congress and within the Obama administration are using the AIG case as an example of corporate excess and lawmakers are now hoping to find a way to reverse the corporate bonuses.
New York Democrat Charles Rangel wants to take up a bill tomorrow that would see a 90 per cent tax on any bonuses given to companies receiving a government bailout -- including AIG.
Rangel chairs the tax-writing House Ways and Means Committee.
He said the tax would apply to employees making more than $250,000 per year, and who work for companies that have received more than $5 billion from the U.S. government, which would exclude community banks.
Meanwhile, Max Baucus of Montana, the Democratic chairman of the Senate Finance Committee, as well as the committee's top Republican, Charles Grassley of Iowa, proposed legislation that would require companies and individuals to pay a 35 per cent tax on retention payments and bonuses that total more than $50,000.
"If you don't return it on your own, we will do it for you," said Democratic Sen. Charles Schumer of New York.
For his part, Geithner said he is working with the Justice Department to devise other options to recoup the money. For example, a provision in the recent economic stimulus legislation gives him the authority to review compensation to the most highly paid employees of companies that are receiving government aid.
In total, AIG has paid $220 million in retention payments to employees in the financial products division. About $55 million was paid out in December and another $165 million had to be paid by Friday.
New York Attorney General Andrew Cuomo said last week, AIG paid bonuses of $1 million or more to 73 employees, including 11 who have left the company.
And while Liddy is under fire for the large payouts, Geithner said Tuesday that Liddy, "inherited a difficult situation, including these...retention contracts, which were entered prior to his or the government's involvement with AIG."
In a weekend letter to Geithner, Liddy said he would have designed the payments differently and to equal less money. However, he said he did not have the power to change the contracts.
"Honouring contractual commitments is at the heart of what we do in the insurance business," he said.
With files from The Associated Press
