The special inspector general for the government's Troubled Asset Relief Program said Wednesday a "failure" of oversight at the Treasury Department was to blame for regulators' not reining in retention bonuses at American International Group.
Neil Barofsky told the House Oversight and Government Reform Committee that the Treasury Department paid little attention to the executive compensation structure at AIG.
"Our audit concludes that this was a failure," Barofsky testified, saying the Treasury Department abdicated its oversight role to the Federal Reserve. Barofsky said that move turned out to be a mistake "as reflected perhaps most clearly by the fact that its agreement with AIG included no provisions relating to executive compensation."
Barofsky was on Capitol Hill to answer questions about a report released Tuesday that outlines events leading up to AIG's payment of $1.75 billion in bonuses, retention payments and deferred compensation to executives and other workers. About $168 million went to employees of AIG Financial Products, the unit that lead the company to the brink of failure.
In the report, Barofsky wrote that Treasury did not understand AIG's pay structure when it gave the firm billions in aid last fall. On Wednesday, he said that officials at the New York Fed were still struggling with AIG's compensation structure when he finished his audit last month.
Officials discovered 620 bonus programs totaling $455 million, and 13 retention plans allocating $1 billion, according to the report. The company has asked employees to return some of the money voluntarily.
Barofsky criticized the Treasury, under then-Secretary Henry Paulson, for "outsourcing" its oversight duties to the Fed, which he said had different priorities from Treasury.
Barofsky said Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke were aware of AIG's bonus plans, but they were not aware of the size and scope of the bonuses that were going out to AIG employees in March 2009 until shortly before they were paid.
Geithner was president of the New York Federal Reserve in September 2008 when it gave AIG its first bailout, $85 billion. Later, AIG got a bailout of $180 billion from taxpayers.
"Our audit also concludes that Secretary Geithner did not find out, did not learn of these bonus payments until just days before they were made, but this too is a failure. It was a failure of communications, and it was a failure of management," Barofsky told the House panel.
He said some executives at New York's Federal Reserve knew that AIG was contractually obligated to make the bonus payments in the fall of 2008, but they did not alert Geithner.
"What they explained to us was, in substance, they didn't think it was such a big deal — $168 million was a drop in the bucket," Barofsky told lawmakers.
Barofsky's report said the Obama administration's pay czar has asked AIG to withhold some of the millions in bonuses promised to its employees.
Kenneth Feinberg, the special master for executive compensation, has "informally" advised AIG not to pay the full $198 million employees expect to receive, according to the report.
Rep. Marcy Kaptur (D-OH) suggested that the government look for legal ways to force AIG to return some of the money spent on executive compensation.
But Barofsky said that could be difficult. However, he said it is possible that monies could be recovered through forfeiture if a recipient of the bonuses was involved in the fraud that led to a bonus being paid out.
Rep. Darrell Issa (R-CA) faulted Geithner for failing to keep himself apprised of how AIG was spending the money that provided the company's first lifeline.
"We have a secretary of the Treasury who failed to know when he should have known and failed to give us transparency," Issa said. He asked Geithner to meet with the committee to answer questions at a future date.
From NPR and wire reports