Top level bonuses to its executive staff are to be dramatically cut this year according to a letter sent by Edward Liddy, AIG’s Chairman to the US Treasury Secretary Timothy Geithner.
The letter confirmed that 2008 bonuses would be paid because the company had no choice. These were legally binding payouts, which were being honored despite being bailed out by the taxpayer.
It is still believed to be the biggest-ever government rescue of a US company. American International Group (AIG) plays a key role in insuring risk for financial institutions around the world and was seen to be too important to fail.
In the letter, Mr Liddy said he had come under pressure from the Treasury to reduce the firm’s bonus payments. He said bonuses agreed to in 2008, before the firm’s problems became known, could not legally be blocked.
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“Under 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.” Said Liddy in his letter.
AIG had promised to pay hundreds of millions of dollars in bonuses to staff for the year 2008.
AIG would do its best to cut bonuses by at least 30% in 2009, Mr Liddy wrote to Mr Geithner.
Additionally US President Barack Obama’s top economic adviser has said “outrageous” conduct at AIG as the bailed-out insurance giant prepared to hand out millions in bonuses to top executives.
Lawrence Summers, director of the White House’s National Economic Council, has said the Obama administration had “scaled back” the bonuses but said its hands were tied by contract law in how far it could go.
“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, what that company did,” he said on US television.
But Mr Summers added: “We are a country of law. There are contracts. The government cannot just abrogate contracts.
“Every legal step possible to limit those bonuses is being taken by (Treasury) Secretary (Timothy) Geithner and by the Federal Reserve system. And they have, as a result of Secretary Geithner’s efforts, been scaled back.”
A white paper prepared by the company says that AIG is contractually obligated to pay a total of about $165 million of previously awarded “retention pay” to employees in this unit by March 15. The document says that another $55 million in retention pay has already been distributed to about 400 AIG Financial Products employees.
Mr Liddy has reportedly told Mr Geithner the bonuses cannot be cancelled due to a risk of lawsuits for breach of employment contracts, and AIG risks an exodus of senior employees if it does not pay out bonuses.
Mr Summers appeared to lend some credence to that argument. “There is one other reality we have to recognize, which is that these companies have to be enabled to function, if the government is going to maximize the prospect of getting its money back.”
Massive losses at the division in London have forced the US government to pump about $150 billion into crippled AIG, and it is planning another emergency injection of $30 billion.
Condemnation of the planned bonuses came from both sides of politics. “It is an outrageous situation,” Senate Republican leader Mitch McConnell said, while accusing the Obama administration of dodging culpability.
