Anger is building over American International Group's decision to pay $165 million to employees of its troubled financial products division, but company officials maintain that they're bound by contract to make the payout.
President Obama on Monday called the bonuses at the ailing insurance giant an "outrage" and said his administration would take all legal steps possible to stop them. New York Attorney General Andrew Cuomo said he would subpoena company officials to learn more details about the payments.
Ironically, the bonuses are going to the same AIG division that created and sold the complex derivatives and insurance products that have landed AIG in so much trouble. The company agreed to the payments a year ago, before its subsequent meltdown and federal takeover, because it was worried about retaining employees who understood the products, says Nick Ashooh, spokesman for the company.
"The fear was that the people who knew these contracts and know the systems of financial products would walk out the door and leave AIG with almost $3 trillion in notional value of derivatives that needed to be unwound," he says.
Until last year, Wall Street companies regularly paid retention bonuses as a way of preventing employees from defecting to other firms, says executive compensation consultant James F. Reda.
"These were pretty much standard because there was a lot of movement between companies and even cities," Reda says. For instance, London was growing as a financial capital, and regularly tried to lure people from Wall Street.
But as the scope of AIG's troubles has become clear, the company has sought and received nearly $180 billion in assistance from the federal government. That has put the bonuses revealed this weekend in a different light.
"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay," Obama said. "How do they justify this outrage to the taxpayers who are keeping the company afloat?"
Edward Liddy, who was hired as the company's CEO last September, was "disturbed" by the payments once he learned about them, and the anger was shared by employees at other divisions, Ashooh says.
"A lot of people inside AIG are pretty upset about it," he adds. "I mean, imagine, most of these people, our employees, are working in very good businesses that had nothing to do with these problems, and they're paying a very substantial penalty financially, and taking a fair amount of abuse as well."
But AIG was told by its inside counsel and other attorneys that it had no choice but to pay the bonuses, because previous management had signed contracts agreeing to them, Ashooh says.
State and federal officials say they are investigating whether there is any way to prevent the bonus payments.
Obama pointed to the substantial aid that AIG had received from the government and said he had asked Treasury Secretary Timothy Geithner "to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole."
Meanwhile, in a letter to Liddy, Cuomo said he wanted to find out "whether any of the retention payments may be considered fraudulent conveyances under New York law."
The state attorney general also said he wanted details about whether the payments have yet been made, and who designed the bonus packages.
"Covering up the details of these payments breeds further cynicism and distrust in our already shaken financial system," Cuomo wrote.