I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

DeSantis also aims at Liddy directly:

I have the utmost respect for the civic duty that you are now performing at A.I.G. You are as blameless for these credit default swap losses as I am. You answered your country’s call and you are taking a tremendous beating for it.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didn’t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut.

This tidbit on Liddy’s timing is particularly interesting:

At no time during the past six months that you have been leading A.I.G. did you ask us to revise, renegotiate or break these contracts — until several hours before your appearance last week before Congress.

Read it for yourself, and decided whether DeSantis deserves your sympathy. But whether or not you agree with his side of the story, it’s worth hearing. In the outrage and anger of last week, not everyone’s voice was heard.

AIG CEO Edward Liddy at Wednesday's congressional hearing. (WDCpix)

The AIG bonus scandal probably won’t lead to any forced return of those bonuses after all.

Instead, what emerged from the House Financial Services Committee hearing on AIG’s payment of $165 million in bonuses to executives was that there probably isn’t a legal way to avoid paying those bonuses now. Despite the expressions of outrage by members of Congress, these bonuses were all promised by the company in signed contracts — as Committee Chairman Barney Frank (D-Mass.) noted early in the hearing, waving his copies of the documents — and those contracts don’t appear to offer an escape hatch.

Illustration by: Matt Mahurin

Shortly after TWI asked Frank’s office for copies of the contracts, his staff posted them on this Financial Services Committee website. According to Article 3 of the 2008 AIG Employee Retention Plan, the company can only renege on paying the bonuses if the employee “resigns without good reason;” is “terminated by AIG-FP for cause;” or is terminated due to the employee’s “failure to meet performance standards….”  Even if employees should have been terminated for cause, if they weren’t, they are entitled to those bonuses. The contract does not require any other specific performance by the employee.

While there are good reasons to argue about whether retention bonuses should ever have been put in place – David Leonhardt in The New York Times Wednesday made a strong case that they should not have been – it does seem clear, as President Obama indicated initially, before the public outrage forced him to say he woud investigate options to recoup the money, that little can be done to change things now.

Edward Liddy, the chief executive of AIG, struggled to make that point throughout Wednesday’s hearings, amid the barrage of accusations aimed at a man who only six months ago took over the company at the government’s request and earns $1 a year for his efforts. If the company had not paid the bonuses due under the contracts, it would likely have faced a slew of lawsuits, seeking double the amount of the bonuses, plus attorneys’ fees, Liddy said.

That’s because AIG’s contracts were written to be governed by Connecticut law, under which the penalty for failing to pay wages owed is double the amount of the wages, plus attorneys’ fees. (All this is set out in a White Paper that AIG gave to Treasury Secretary Tim Geithner to explain why it had to pay the bonuses.) So if an employee was owed a $250,000 bonus by the terms of her contract, she could sue for $500,000, plus attorneys’ fees – and likely would get it.

Although under Connecticut law bonuses based on “subjective factors” not in an employee’s control are not considered wages, the AIG bonuses at issue were “retention bonuses” which means that as long as the employees stay for the time period required to do the work they’re asked to do – in this case, winding down many of the company’s assets – they get the bonus. Nothing subjective about it.

Despite AIG’s vociferous critics in Congress and the media – or Senator Charles Grassley’s insistence that AIG’s executives ought to just kill themselves – those employees are probably entitled to those bloated checks. Liddy appears to be correct that refusing to honor those contracts would only open the company up to far greater liability and could land it in bankruptcy.

“The result of not paying [the contracts] is an event of default and it forces the company into bankruptcy,” Liddy said. “I’m trying desperately to prevent an uncontrolled collapse of that business” and “to avoid a systemic shock to the economy that the American government’s help was meant to relieve. Had I been CEO at the time I would never have approved the retention contracts put in place over a year ago. But we concluded that the risks were unacceptably high if they were not paid.”

While he agreed to comply with ongoing investigations into possible criminal activity by company officials – there are pending investigations by the Department of Justice, the SEC, and in the UK – Liddy still has to pay those contracts. “If we don’t, the risk is we undo everything we’ve done to get to this point,” referring to the winding down of portions of the company and the efforts to return it to solvency. While he’s been criticized for overstating the demise that would result, it’s still a high and likely costly risk to refuse to pay people under a clear contract that says the company owes them the money.

If an investigation reveals that any of those employees committed a crime, of course, the government could try to take the money back by prosecuting them. And if it turns out that the company arranged to pay bonuses while knowing it was insolvent, company officials could be sued for fraud, as Barney Frank has suggested. New York Attorney General Andrew Cuomo is also investigating that angle. At the same time, Congress is considering several other avenues that would allow the government to at least partially recover the money, including the imposition of ultra-high tax rates on the pay-outs.

Meanwhile, the message that the public has had it with soaring executive pay and unmerited bonuses appears to be getting across. At yesterday’s hearing, Liddy announced that he has asked all employees who who received more than $100,000 in retention bonuses to return at least half of the money. Some have already agreed to give back 100% of their payments, he said. But he refused to provide Congress with the names of who has given back what, noting that AIG employees have been threatened and he fears for their safety.

Frank (D-Mass.) said he might subpoena those names, after consulting with law enforcement.

What also emerged at the hearing was a dramatic failure of communication between the Federal Reserve Bank of New York and the U.S. Treasury Department. Liddy testified that he has been communicating for the past three months with the Federal Reserve about payment of these bonuses, though he didn’t know whether the Fed was communicating with Treasury Secretary Geithner about them.  Geithner has said he first learned about the bonus payments just two weeks ago. Even though Geithner was the president of the Federal Reserve Bank of New York before he took over at Treasury, he apparently wasn’t kept in the loop on what were sure to be politically dicey decisions at AIG.

While it remains a major embarrassment to both AIG and the government, the bonus scandal could ultimately provide the best opportunity yet for President Obama to make real changes to regulation of the financial system.

At an impromptu press conference yesterday on the White House lawn, the president acknowledged that people are “rightly outraged” about the AIG bonuses that were paid to executives, even as the firm suffered huge losses. But “just as outrageous is the culture these are a symptom of,” a culture that rewards “excess greed and risk-taking,” he said.

In fact, the fury unleashed over AIG’s promises to pay up to $1 billion to employees who helped drive the company into the ground could go a long way towards highlighting the need to better regulate not only risky securities, but the soaring heights of executive compensation.

“Shareholders and boards of directors have to hold executives more accountable for their compensation scales,” Obama said yesterday. “The fact that these guys are looking for bonuses after having run down AIG raises the question of why were they making this kind of money beforehand? This kind of culture has to change.”

AIG CEO Edward Liddy pleads for civility with a sometimes hostile crowd at Wednesday's congressional hearing. (WDCpix)

On day four of AIG bonus-gate, the message from Capitol Hill has emerged as clear as it is unanimous: The $165 million paid this week to executives of bailed-out American International Group is “appalling,” “outrageous” and “a breach of public trust.”

Illustration by: Matt Mahurin

Yet as pitchfork populism continues to fuel the congressional castigation, a vital element of the debate has gone largely ignored: Congress, going back to September, has had numerous opportunities to limit executive pay for bailed-out banks, only to ignore or abandon those efforts in the face of opposition from the finance industry, the White House or both.

The result has been that hundreds of billions of dollars in bailout funds have left Washington with virtually no conditions on how the money would be spent. The banks have taken advantage of that freedom, collectively paying out billions in bonuses, retention salaries and other perks to the same employees who helped run the companies into the ground.

Julian E. Zelizer, congressional expert at Princeton University, said the failure of policymakers to limit executive pay for bailed out banks was no accident. “Neither Congress nor the president wanted to look as if they were ‘taking over’ financial institutions,” Zelizer wrote in an email, “nor did they want to anger business.”

The result, he added, was “predictable:” a bailout strategy with plenty of leeway for the companies receiving the money.

Indeed, allowing most bonus payments to continue was a central element of both the Bush and Obama administrations’ bailout strategies. When Henry Paulson, Treasury secretary under the Bush White House, first unveiled the Troubled Asset Relief Program in September, the public wailed about the absence of conditions on the money. Congress intervened to add some limits on executive pay — provisions that Senate Banking Committee Chairman Christopher Dodd (D-Conn.) labeled “anything but mild.” But liberal critics of those compensation limits, including a number of congressional Democrats, pointed out loopholes allowing the companies to pay their executives virtually any sum they wanted. Most provisions, for example, apply only to companies receiving more than $300 million in TARP funds.

“Under this bill,” Sen. Bernie Sanders (I-Vt.) said at the time, “the CEOs and the Wall Street insiders will still, with a little bit of imagination, continue to make out like bandits.”

In January, the House passed legislation placing tighter restrictions on TARP spending, including tougher limits on executive pay. Senate Democrats, pressed by administration officials, never took up the bill.

A month later, after Congress released the second $350 billion in TARP funding, President Barack Obama tightened the restrictions on executive pay, but not without including a telling caveat: The rules wouldn’t be so strict that they would scare away the employees of recipient companies.

“The Treasury guidelines on executive pay,” according to a department press release, “seek to strike the correct balance between the need for strict monitoring and accountability on executive pay and the need for financial institutions to fully function and attract the talent pool that will maximize the chances of financial recovery.”

Indeed, the guidelines — which fleetingly raised hopes among government watchdog groups that the new administration would break sharply from the past over executive pay — were full of loopholes. A $500,000 pay cap, for example, applies only to “senior executives,” and only the companies accepting “exceptional assistance” under TARP are subject to it. In another controversial provision, the restrictions don’t apply to those companies receiving TARP funds before the new rules were announced.

More recently, some Senate lawmakers tried to attach executive pay limits to the $787 billion stimulus bill, passed in the middle of February. One amendment, sponsored by Sen. Claire McCaskill (D-Mo.), would have capped executive compensation at $400,000 a year. Another, sponsored by Sens. Ron Wyden (D-Ore.) and Olympia Snowe (R-Maine), would have forced TARP recipients to reimburse the government for any 2008 bonuses in excess of $100,000 or pay a 35 percent tax. Both amendments were stripped from the stimulus bill during negotiations with House lawmakers and White House officials.

One executive compensation amendment survived the stimulus negotiations. Sponsored by Dodd, the provision prohibits bonuses for a set number of executives based on the amount of federal help the companies receive. For companies accepting less than $25 million, the bonus-ban would apply only to the chief executive. For those receiving more than $500 million, the prohibition would expand to the 25 top employees. But the law doesn’t apply to the AIG bonuses. That’s because, during negotiations after the Senate bill passed, Treasury officials insisted on an exemption for contractually obligated bonuses, like those recently paid by AIG.

There are other absurdities surrounding the recent AIG-bonus outcry. Not least of all, AIG’s bonuses have been well known as far back as December, when stories emerged that the insurance giant — which had received $152 billion in federal help at the time — would pay hundreds of employees bonuses as high as $4 million.

David Arkush, director of Public Citizen’s Congress Watch, said that the delayed reaction is a signal that voters have had enough. “This is sort of like a perfect storm,” Arkush said. “The [AIG] bonuses send a strong signal to the public that these firms are acting wildly, they’re acting irresponsibly, and Washington has done nothing to rein them in.”

The outcry over the AIG bonuses — exacerbated by yesterday’s headlines that 73 AIG executives received bonuses exceeding $1 million — could have much further reaching effects. Rep. Paul Kanjorski (D-Penn.), chairman of the Capital Markets subcommittee, said during a panel hearing Wednesday that the episode might jeopardize future bailout legislation that many lawmakers and finance experts maintain will be necessary to rescue the flailing economy. Appearing before the panel, AIG CEO Edward Liddy defended the bonuses with the argument that the company’s most talented employees would seek greener pastures if the bonuses are withheld.

“We have to continue managing our business as a business,” Liddy said.

Lawyers for the company have also claimed that, fair or unfair, they’re contractually obligated to make good on the controversail bonus payments.

That argument doesn’t fly among some experts, however. Peter Morici, economist at the University of Maryland, said this week that, if the Treasury forced the autoworkers to change their contracts as a condition of the automaker bailout, it could do the same for the banks.

“The federal government imposed the renegotiation of the labor contracts at General Motors and Chrysler, and it could have imposed it at AIG,” Morici said yesterday in an interview with National Public Radio. “It was employment contracts in both places. You know, it’s up to [Treasury] Secretary [Tim] Geithner to defend his conduct.”

The saga has led a number of powerful lawmakers to propose legislation this week forcing AIG to repay the $165 million. One such proposal would empower the U.S. attorney general to recover the money. Others would tax the bonuses at sky-high rates to get the cash back. House Speaker Nancy Pelosi (D-Calif.) said she wants “closure” on a bill by next week.

But Charles M. Elson, an executive compensation expert at the University of Delaware, said that there’s little lawmakers can do. “The contract was between the company and the individual,” Elson said. “How [is] the Congress going to get the money back?”

Amid a struggling economy, Elson added, lawmakers are simply pandering in the face of the public outcry. “The bonuses are horrible,” Elson said. “But at this point, they’re almost, unfortunately, water under the bridge.”

Rep. Barney Frank (D-Mass.), who chairs the House Financial Services Committee (a subcommittee of which is holding the hearing where Liddy is testifying) said he might subpoena the names of AIG employees who received bonuses, after consulting with law enforcement.

Earlier, Liddy testified that he’s been communicating for the past three months with the Federal Reserve about payment of these bonuses, though he didn’t know if the Fed has communicated that information to Treasury Secretary Timothy Geithner.  Geithner has said he only learned about the bonus payments two weeks ago.