American International Group has asked those receiving $165 million in retention bonuses to return half if not all of the money, but fears the effects, according to company CEO Edward Liddy.

Edward Liddy

“We had great angst over these bonuses …but felt we would lose all we have gained if we didn’t pay the bonuses,” Liddy said in testimony before a House subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises Hearing today (March 18).

The subcommittee was exploring the federal government’s nearly $182 billion investment in the failing insurer and how repayment to American taxpayers will occur, as well as the status of $165 million in bonuses AIG recently bestowed upon members of AIG Financial Products, the division that caused many of the insurer’s financial problems.

Liddy testified that he found awarding the bonuses “distasteful,” but awarded them per pre-conditioned contracts March 15 to make sure the company, and to a larger extent the U.S. economy, did not accept “unacceptably high” risk if the insurer failed.

“I’ve asked those employees to do step up and do the right thing and for those in excess of $100,000 to return at least half and others to give 100% of the payments,” Liddy told Capitol Hill legislators.

Seventy-three individuals received bonuses of $1 million of more, including 11 no longer with the company. The top ten bonus recipients received a combined $42 million, according to New York Attorney General Andrew Cuomo.

Liddy said that the bonuses went primarily to employees of AIG Financial Products division in an attempt to wind-down that section of the insurer. If the employee stayed, participated in the wind down of their personal book of business and AIG was satisfied with their efforts, they received the bonus, he said.

Without their help, Liddy said he feared “irreparable damage to the progress we’ve made” in reforming the company and “I know $165 million is a large number, but in the context of $1.6 trillion [of total derivatives business], we thought it was a good trade.”

CEO concerned about employee safety

Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, thanked Liddy for his service to the country in taking over the troubled AIG six months ago, but said there was a need for change in the company.

Frank asked Liddy to provide a list of names of those receiving the bonuses and whether or not they repaid the money or he would subpoena that information from AIG.

Citing threatening letters against AIG employees and their children, Liddy said he would seek a confidentiality agreement so the information does not become public. Frank refused such an agreement and said he would consult with law enforcement on the risk associated with the list’s disclosure.

Liddy added that he plans to consult the insurer’s general counsel regarding a similar request by Cuomo, but would not commit to providing the list before the panel.
Rep. Gary L. Ackerman (D-N.Y.) had a simple message for Liddy: “Pay the $165 million back.”

“Bonuses of $165 million are less than one-tenth of 1% [of the government's assistance],” Ackerman said. “That is not worth the aggravation or angst you’ve suffered and the country is going through. Cut your losses …it’s just not worth it.”

Liddy said he has requested returns of the bonuses, but added his fear is that “the bulk will come back, but will come with resignations and it will be more difficult to wind things down” without these employees who have knowledge of the insurer’s operations.

Exit strategy

Liddy said AIG has a two-to-three year goal of repaying federal money, a timeline he called “very market dependant.”

“We will sell what assets we can to repay and for those we cannot sell now, we will put in separate trusts and give them to the Federal Reserve [for sale later],” he said. “When they can be sold, the Federal Reserve will do it.”

Liddy said the actual loan to the insurer is $78 billion: $40 billion from the TARP program and $37.8 billion in federal loans. Billons more, he said, have been invested by the Federal Reserve in distressed assets at a discount.

“They and the American public will do well [with those assets],” he said.

In an earlier panel before the House subcommittee, Pennsylvania Insurance Commissioner Joel Ario said it will likely be the property-casualty and life insurance divisions of AIG that will ultimately help pay back that debt.

“The success story is that the insurance [arms] are strong and are the most likely route that taxpayers get paid back,” he said.

Ario testified that AIG’s financial programs and its $440 billion in credit default swaps, not its insurance companies, led to the insurer’s financial problems. Only the insurance companies are under the jurisdiction of state regulators.

“To put it bluntly, AIG’s Financial Products reach was so broad and so interconnected with the world’s largest financial institutions that it has become the poster child for systemic risk,” he said. “The fact is that the [insurance] companies continue to perform well and not in a ‘death spiral’.”