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AIG Contracts Provide No Escape From Bonus Fury « The Washington Independent

Image has not been found. URL: /wp-content/uploads/2009/03/07-031809-aig-345_copy.jpgAIG 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
Illustration by: Matt Mahurin

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.”

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