Responsive Documents - CREW: Department of The Treasury: Regarding AIG Bonuses: 5/18/2012 - 2009 03 124 - Final Redacted Documents

Aiken, Justin (Contractor)
From: Sent: To: Subject: Kinsella, Erin Wednesday, January 28, 2009 4:55 PM Lambright, James AIG - Released last night
FYI - American International Group Inc. said it is paying retention bonuses as planned to employees in the unit that sold credit default swaps, the risky contracts that caused massive losses at the insurer. According to news reports, approximately $450 million is being offered to a group of about 400 employees in the financial products unit. That averages to about $1.13 million per employee.
ErinKinsella OfficeofFinancialStability U.S.DepartmentoftheTreasury 1500PennsylvaniaAvenue Washington,DC20005 2026229654office (b) (6) mobile
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From: Sent: To: Cc: Subject: Schaffer, Laurie Wednesday, February 11, 2009 9:37 AM Morse, Duane; Ferlazzo, Ronald Albrecht, Stephen Re: AIG Executive Comp Question
Yes. We have talked . He agrees about meeting with Ron.
From: Morse, Duane To: Schaffer, Laurie; Ferlazzo, Ronald Cc: Albrecht, Stephen Sent: Wed Feb 11 09:34:32 2009 Subject: Re: AIG Executive Comp Question Steve has been involved in the AIG process for the past few weeks. He can speak for himself, but I believe he is fully up to speed.
From: Schaffer, Laurie To: Ferlazzo, Ronald; Morse, Duane Cc: Albrecht, Stephen Sent: Wed Feb 11 09:32:02 2009 Subject: Re: AIG Executive Comp Question Thanks. I want to make sure steve knows.
From: Ferlazzo, Ronald To: Morse, Duane Cc: Schaffer, Laurie; Albrecht, Stephen Sent: Wed Feb 11 09:30:33 2009 Subject: RE: AIG Executive Comp Question
IagreeDuane.Wecanusethat(oranupdatedversionofthat)asthebasisofourdiscussion.MikeHsuwillbebriefing theSecretaryonAIGat6:15pmtonight.
From: Morse, Duane Sent: Wednesday, February 11, 2009 9:27 AM To: Schaffer, Laurie; Ferlazzo, Ronald; Albrecht, Stephen Subject: Re: AIG Executive Comp Question
The slide deck that Mike Hsu prepared provides a good overview of the situation. I will forward it to Laurie.
From: Schaffer, Laurie To: Ferlazzo, Ronald; Albrecht, Stephen Cc: Morse, Duane Sent: Wed Feb 11 09:25:13 2009 Subject: Re: AIG Executive Comp Question
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Regards, RonFerlazzo RonFerlazzo AttorneyAdvisor OfficeofFinancialStability DepartmentoftheTreasury (202)9272800 Ronald.Ferlazzo@do.treas.gov
Zarco, Juan (Contractor)

From: Sent: To: Subject:
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Albrecht, Stephen Tuesday, March 03, 2009 10:55 AM Ferlazzo, Ronald RE: AIG comp question
From: Ferlazzo, Ronald Sent: Tuesday, March 03, 2009 10:09 AM To: Albrecht, Stephen Subject: RE: AIG comp question
Steve:
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Thanks Ron
From: Albrecht, Stephen Sent: Monday, February 23, 2009 5:22 PM To: Jaconi, Kristen; Greene, Michelle; Morse, Duane; Ferlazzo, Ronald; Hsu, Michael; Lambright, James; Schaffer, Laurie; Knight, Bernard Jr. Subject: FW: AIG comp question
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-Steve
From: James.Hennessy@ny.frb.org [mailto:James.Hennessy@ny.frb.org] Sent: Monday, February 23, 2009 5:01 PM To: Albrecht, Stephen Subject: AIG comp question
Hi Steve,
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Many thanks, Jim 212-720-8195

From: Sent: To: Cc: Subject: Hsu, Michael Monday, March 09, 2009 3:11 PM Albrecht, Stephen; Lambright, James; Ferlazzo, Ronald; Schaffer, Laurie; Morse, Duane; Jaconi, Kristen Knight, Bernard Jr. RE: AIG Update
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Eveningworksbestforme.
From: Albrecht, Stephen Sent: Monday, March 09, 2009 2:57 PM To: Lambright, James; Hsu, Michael; Ferlazzo, Ronald; Schaffer, Laurie; Morse, Duane; Jaconi, Kristen Cc: Knight, Bernard Jr. Subject: FW: AIG Update All (b) (5)
I have meetings at 4 and 5, but would like to talk about this after that -- maybe at 6pm?
From: James.Hennessy@ny.frb.org [mailto:James.Hennessy@ny.frb.org] Sent: Monday, March 09, 2009 2:45 PM To: Albrecht, Stephen Cc: Ferlazzo, Ronald; Hsu, Michael; Rich.Ashton@frb.gov Subject: RE: AIG Update
Steve, For your information and review, attached please find the company's supporting materials for the compensation actions discussed below: 2008 Bonus - Detailed description of the 2008 bonus program.
FP Retention Program - Draft white paper discussing the FP retention program. - Spreadsheets showing payments under the program. - A copy of the program agreement.
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I'm happy to provide you with any additional detail you might like. Please let me know if you have any thoughts or if these items will need more follow-up from your end. Many thanks, Jim 212-720-8195

From: Sent: To: Cc: Subject:
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Lambright, James Monday, March 09, 2009 3:52 PM Albrecht, Stephen; Hsu, Michael; Ferlazzo, Ronald; Schaffer, Laurie; Morse, Duane; Jaconi, Kristen Knight, Bernard Jr.; Kashkari, Neel; Abdelrazek, Rawan AIG Comp action
From: James.Hennessy@ny.frb.org [mailto:James.Hennessy@ny.frb.org] Sent: Monday, March 09, 2009 2:45 PM To: Albrecht, Stephen Cc: Ferlazzo, Ronald; Hsu, Michael; Rich.Ashton@frb.gov Subject: RE: AIG Update
Steve, For your information and review, attached please find the company's supporting materials for the compensation actions discussed below: 2008 Bonus - Detailed description of the 2008 bonus program.
FP Retention Program - Draft white paper discussing the FP retention program. - Spreadsheets showing payments under the program. - A copy of the program agreement.
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From: Sent: To: Cc: Subject: Hsu, Michael Monday, March 09, 2009 4:08 PM Yardeni, Dawn Lambright, James Fw: AIG Update
Can you pls send out a calendar invite for 6pm on this? Use our general dial-in. Mtg location, lambrights office.
From: Lambright, James To: Morse, Duane; Albrecht, Stephen; Hsu, Michael; Ferlazzo, Ronald; Schaffer, Laurie; Jaconi, Kristen Cc: Knight, Bernard Jr. Sent: Mon Mar 09 16:03:14 2009 Subject: Re: AIG Update 6 is good for me.
From: Morse, Duane To: Albrecht, Stephen; Lambright, James; Hsu, Michael; Ferlazzo, Ronald; Schaffer, Laurie; Jaconi, Kristen Cc: Knight, Bernard Jr. Sent: Mon Mar 09 15:59:42 2009 Subject: RE: AIG Update
Icanmeetat6:00.
Duane D. Morse Chief Counsel - Office of Financial Stability Department of the Treasury 202-622-1192 Duane.Morse@do.treas.gov
From: James.Hennessy@ny.frb.org [mailto:James.Hennessy@ny.frb.org] Sent: Monday, March 09, 2009 2:45 PM To: Albrecht, Stephen
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From: James.Hennessy@ny.frb.org [mailto:James.Hennessy@ny.frb.org] Sent: Thursday, March 05, 2009 1:02 PM To: Albrecht, Stephen Cc: Ferlazzo, Ronald Subject: AIG Update
Steve, As promised, attached please find an overview of the AIG compensation issues, outlining what has transpired since September and matters that are in the hopper. I would draw your attention to two pages in particular:
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From: Sent: To: Subject: Kinsella, Erin Monday, March 09, 2009 5:11 PM Hsu, Michael AIG 2 questions
1) Pleasegoaheadandforwardonwhowillbehandlingexeccomp.compliancefromAIGsowecansetupa lineofcommunication 2) Anydiscussionyetonhowtheco.planstodrawonthe$30bn?IamfollowinguponJimsrequesttoprovide aonesheetcheatsheetforustoreference,perdealcompleted.Keepmeposted. Thanks! Erin ErinKinsella OfficeofFinancialStability U.S.DepartmentoftheTreasury 1500PennsylvaniaAvenue Washington,DC20005 2026229654office (b) (6) mobile
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From: Sent: To: Subject: Hsu, Michael Monday, March 09, 2009 10:18 PM Lambright, James Re: AIG Update
Talked to mike alix about FP. Wanna chat?

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From: Lambright, James To: Hsu, Michael Sent: Mon Mar 09 21:58:41 2009 Subject: Fw: AIG Update From: James.Hennessy@ny.frb.org To: Lambright, James Sent: Mon Mar 09 20:38:04 2009 Subject: Fw: AIG Update Jim -- in case the attached document hasn't already made its way to you -- this provides a summary of all AIG compensation matters we've been dealing with. Pages 6 and 8 provide a quick overview of the issues we discussed tonight. Jim
From: James.Hennessy@ny.frb.org [mailto:James.Hennessy@ny.frb.org] Sent: Thursday, March 05, 2009 1:02 PM To: Albrecht, Stephen Cc: Ferlazzo, Ronald Subject: AIG Update Steve, As promised, attached please find an overview of the AIG compensation issues, outlining what has transpired since September and matters that are in the hopper. I would draw your attention to two pages in particular:
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Shaw, Karen (Contractor)

From: Sent: To: Subject: Lambright, James Friday, March 13, 2009 12:40 PM Hsu, Michael Fw: Heads up and request for comment on AIG story
Fyi.Seeifyoucanloopin. OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Sent:FriMar1312:38:372009 Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA approach.CC'ingafewmorepeople(b) (5) Icanmeetnow. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,200912:36PM To:Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Albrecht,Stephen;Lambright,James;Wolin,Neal; Patterson,Mark(DO) Subject:RE:HeadsupandrequestforcommentonAIGstory Caneveryonemeetinmyofficeasaptodiscussthis?It'sveryimportant. OriginalMessage From:Baker,Isaac Sent:Friday,March13,200912:35PM To:Cutter,Stephanie Cc:Williams,Andrew;Engebretsen,Jenni Subject:FW:HeadsupandrequestforcommentonAIGstory FirstrequestforcommentonAIGbonuses.Stephaniedidwegetanyguidanceonwhatwe're allowedtosay? OriginalMessage From:HUGHSON,BLOOMBERG/NEWSROOM:[mailto:(b) (6) Sent:Friday,March13,200912:23PM To:Baker,Isaac Subject:HeadsupandrequestforcommentonAIGstory Isaac,justaheadsupandopportunityforcommentornocommentonanAIGstory.Intheir 10Kfromlastweek,thecompanydisclosedthatretentionpaymentswouldtotalabout$1 billion.
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JustwonderediftheTreasuryknewaboutandapprovedthesepayments.Andifultimatelythis wasawiseexpense,givethepaymentsonlykeeppeopleinplaceuntiltheendof2009and thedivestitureplancouldtakelongerthanthat. thanks, HughSon BloombergNews (b) (6) CC:RebeccaChristie
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From: Sent: To: Subject: Albrecht, Stephen Friday, March 13, 2009 1:32 PM Aviel, Sara Re: Heads up and request for comment on AIG story
FYIGibbsisexpectingsomeQsonAIGathispressconferenceinafewminutes.Wegavehim TPsonthecurrentstatus. OriginalMessage From:Albrecht,Stephen To:Aviel,Sara Sent:FriMar1312:41:532009 Subject:FW:HeadsupandrequestforcommentonAIGstory Theupdateiscontainedinthechainbelow.Bottomlinegettingpressinquiriessowe needtofinalizeourpositiononpayingFPretention. (b) (5) OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,200912:40PM To:Wallace,Kim;Albrecht,Stephen;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee Subject:RE:HeadsupandrequestforcommentonAIGstory Itwouldbegreattodothisnow.Idon'tthinkwehavemuchtime.Plus,Gibbsisbriefing at1:30soweneedtogivehimpoints. OriginalMessage From:Wallace,Kim Sent:Friday,March13,200912:39PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee Subject:RE:HeadsupandrequestforcommentonAIGstory Nowisfinefor1520mins.Moretimeat3p OriginalMessage From:Albrecht,Stephen Sent:Friday,March13,200912:39PM To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA (b) (5) approach.CC'ingafewmorepeople Icanmeetnow.
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OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,200912:36PM To:Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Albrecht,Stephen;Lambright,James;Wolin,Neal; Patterson,Mark(DO) Subject:RE:HeadsupandrequestforcommentonAIGstory Caneveryonemeetinmyofficeasaptodiscussthis?It'sveryimportant. OriginalMessage From:Baker,Isaac Sent:Friday,March13,200912:35PM To:Cutter,Stephanie Cc:Williams,Andrew;Engebretsen,Jenni Subject:FW:HeadsupandrequestforcommentonAIGstory FirstrequestforcommentonAIGbonuses.Stephaniedidwegetanyguidanceonwhatwe're allowedtosay? OriginalMessage From:HUGHSON,BLOOMBERG/NEWSROOM:[mailto:(b) (6) Sent:Friday,March13,200912:23PM To:Baker,Isaac Subject:HeadsupandrequestforcommentonAIGstory Isaac,justaheadsupandopportunityforcommentornocommentonanAIGstory.Intheir 10Kfromlastweek,thecompanydisclosedthatretentionpaymentswouldtotalabout$1 billion. JustwonderediftheTreasuryknewaboutandapprovedthesepayments.Andifultimatelythis wasawiseexpense,givethepaymentsonlykeeppeopleinplaceuntiltheendof2009and thedivestitureplancouldtakelongerthanthat. thanks, HughSon BloombergNews (b) (6) CC:RebeccaChristie
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From: Sent: To: Subject: Wolin, Neal Friday, March 13, 2009 2:01 PM Albrecht, Stephen Re: Heads up and request for comment on AIG story
Whataretheissues?Wherearewe? OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Sent:FriMar1312:38:372009 Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA approach.CC'ingafewmorepeople(b) (5) Icanmeetnow. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,200912:36PM To:Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Albrecht,Stephen;Lambright,James;Wolin,Neal; Patterson,Mark(DO) Subject:RE:HeadsupandrequestforcommentonAIGstory Caneveryonemeetinmyofficeasaptodiscussthis?It'sveryimportant. OriginalMessage From:Baker,Isaac Sent:Friday,March13,200912:35PM To:Cutter,Stephanie Cc:Williams,Andrew;Engebretsen,Jenni Subject:FW:HeadsupandrequestforcommentonAIGstory FirstrequestforcommentonAIGbonuses.Stephaniedidwegetanyguidanceonwhatwe're allowedtosay? OriginalMessage From:HUGHSON,BLOOMBERG/NEWSROOM:[mailto:(b) (6) Sent:Friday,March13,200912:23PM To:Baker,Isaac Subject:HeadsupandrequestforcommentonAIGstory Isaac,justaheadsupandopportunityforcommentornocommentonanAIGstory.Intheir 10Kfromlastweek,thecompanydisclosedthatretentionpaymentswouldtotalabout$1 billion. JustwonderediftheTreasuryknewaboutandapprovedthesepayments.Andifultimatelythis wasawiseexpense,givethepaymentsonlykeeppeopleinplaceuntiltheendof2009and thedivestitureplancouldtakelongerthanthat.
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thanks, HughSon BloombergNews (b) (6) CC:RebeccaChristie
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From: Sent: To: Subject: Lambright, James Friday, March 13, 2009 2:15 PM Albrecht, Stephen RE: Heads up and request for comment on AIG story
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HsuandIcancallfrommyLstoffice.Canyougiveagivecallat24995? OriginalMessage From:Albrecht,Stephen Sent:Friday,March13,20092:11PM To:Cutter,Stephanie;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara;Knight,BernardJr. Subject:RE:HeadsupandrequestforcommentonAIGstory All
Itwouldbebesttohaveaquickmeetingorcalltodiscussthisandreachresolution. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,20091:48PM To:Wolin,Neal;Albrecht,Stephen;Baker,Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:RE:HeadsupandrequestforcommentonAIGstory

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JimistakingtheleadonQ&A.Isaachasputtogetherbackgroundoncurrentexeccomp requirements. SteveisworkingthroughtheagreementwithAIG. Thisneedstoberesolvedquickly. OriginalMessage From:Wolin,Neal Sent:Friday,March13,200912:53PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory AmstuckinSecofHUD'soffice. OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Sent:FriMar1312:38:372009 Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA approach.CC'ingafewmorepeople(b) (5) Icanmeetnow. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,200912:36PM To:Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Albrecht,Stephen;Lambright,James;Wolin,Neal; Patterson,Mark(DO) Subject:RE:HeadsupandrequestforcommentonAIGstory Caneveryonemeetinmyofficeasaptodiscussthis?It'sveryimportant. OriginalMessage From:Baker,Isaac Sent:Friday,March13,200912:35PM To:Cutter,Stephanie Cc:Williams,Andrew;Engebretsen,Jenni Subject:FW:HeadsupandrequestforcommentonAIGstory FirstrequestforcommentonAIGbonuses.Stephaniedidwegetanyguidanceonwhatwe're allowedtosay? OriginalMessage From:HUGHSON,BLOOMBERG/NEWSROOM:[mailto:(b) (6) Sent:Friday,March13,200912:23PM
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To:Baker,Isaac Subject:HeadsupandrequestforcommentonAIGstory Isaac,justaheadsupandopportunityforcommentornocommentonanAIGstory.Intheir 10Kfromlastweek,thecompanydisclosedthatretentionpaymentswouldtotalabout$1 billion. JustwonderediftheTreasuryknewaboutandapprovedthesepayments.Andifultimatelythis wasawiseexpense,givethepaymentsonlykeeppeopleinplaceuntiltheendof2009and thedivestitureplancouldtakelongerthanthat. thanks, HughSon BloombergNews (b) (6) CC:RebeccaChristie
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From: Sent: To: Subject: Hsu, Michael Friday, March 13, 2009 2:49 PM Cutter, Stephanie; Albrecht, Stephen; Lambright, James; Jaconi, Kristen; Wolin, Neal RE: ERP PAYMENTS AUTHORIZED AND UNDERWAY, SALARY REDUCTIONS ANNOUNCED
CONFIDENTIAL Newtome.Notsureitwillmattermuch,though.The25thhighestretentionpaymentis$1.96mm.
From: Cutter, Stephanie Sent: Friday, March 13, 2009 2:30 PM To: Hsu, Michael; Albrecht, Stephen; Lambright, James; Jaconi, Kristen; Wolin, Neal Subject: RE: ERP PAYMENTS AUTHORIZED AND UNDERWAY, SALARY REDUCTIONS ANNOUNCED
Thereductioninpayisnew?
From: Hsu, Michael Sent: Friday, March 13, 2009 2:18 PM To: Albrecht, Stephen; Cutter, Stephanie; Lambright, James; Jaconi, Kristen; Wolin, Neal Subject: FW: ERP PAYMENTS AUTHORIZED AND UNDERWAY, SALARY REDUCTIONS ANNOUNCED
CONFIDENTIAL FYI.AIGFPsstatementtoemployeestoday,attachedbelow.
From: (b) (6) @aigfpc.com [mailto:(b) (6) @aigfpc.com] Sent: Friday, March 13, 2009 9:02 AM To: (b) (6) @AIGFPC.COM Cc: (b) (6) @Notes; (b) (6) @New York; Kelly, Anastasia; Liddy, Edward Subject: ERP PAYMENTS AUTHORIZED AND UNDERWAY, SALARY REDUCTIONS ANNOUNCED
ERP PAYMENTS AUTHORIZED AND UNDERWAY, SALARY REDUCTIONS ANNOUNCED

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From: Sent: To: Cc: Subject: Hsu, Michael Friday, March 13, 2009 2:51 PM Albrecht, Stephen; Cutter, Stephanie; Wolin, Neal; Baker, Isaac; Lambright, James Williams, Andrew; Engebretsen, Jenni; Patterson, Mark (DO); Jaconi, Kristen; Greene, Michelle; Sachs, Lee; Wallace, Kim; Aviel, Sara; Knight, Bernard Jr. RE: Heads up and request for comment on AIG story
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CONFIDENTIAL Fyi,20sr.execsaregoingtoget$17mminApril(partofthenonFPretentionpayments). OriginalMessage From:Albrecht,Stephen Sent:Friday,March13,20092:11PM To:Cutter,Stephanie;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara;Knight,BernardJr. Subject:RE:HeadsupandrequestforcommentonAIGstory All
Itwouldbebesttohaveaquickmeetingorcalltodiscussthisandreachresolution. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,20091:48PM

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To:Wolin,Neal;Albrecht,Stephen;Baker,Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:RE:HeadsupandrequestforcommentonAIGstory

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JimistakingtheleadonQ&A.Isaachasputtogetherbackgroundoncurrentexeccomp requirements. SteveisworkingthroughtheagreementwithAIG. Thisneedstoberesolvedquickly. OriginalMessage From:Wolin,Neal Sent:Friday,March13,200912:53PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory AmstuckinSecofHUD'soffice. OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Sent:FriMar1312:38:372009 Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA approach.CC'ingafewmorepeople(b) (5) Icanmeetnow. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,200912:36PM To:Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Albrecht,Stephen;Lambright,James;Wolin,Neal; Patterson,Mark(DO) Subject:RE:HeadsupandrequestforcommentonAIGstory Caneveryonemeetinmyofficeasaptodiscussthis?It'sveryimportant. OriginalMessage From:Baker,Isaac Sent:Friday,March13,200912:35PM To:Cutter,Stephanie Cc:Williams,Andrew;Engebretsen,Jenni Subject:FW:HeadsupandrequestforcommentonAIGstory
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FirstrequestforcommentonAIGbonuses.Stephaniedidwegetanyguidanceonwhatwe're allowedtosay? OriginalMessage From:HUGHSON,BLOOMBERG/NEWSROOM:[mailto:(b) (6) Sent:Friday,March13,200912:23PM To:Baker,Isaac Subject:HeadsupandrequestforcommentonAIGstory Isaac,justaheadsupandopportunityforcommentornocommentonanAIGstory.Intheir 10Kfromlastweek,thecompanydisclosedthatretentionpaymentswouldtotalabout$1 billion. JustwonderediftheTreasuryknewaboutandapprovedthesepayments.Andifultimatelythis wasawiseexpense,givethepaymentsonlykeeppeopleinplaceuntiltheendof2009and thedivestitureplancouldtakelongerthanthat. thanks, HughSon BloombergNews (b) (6) CC:RebeccaChristie
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From: Sent: To: Cc: Subject: Cutter, Stephanie Friday, March 13, 2009 2:57 PM Aviel, Sara; Albrecht, Stephen; Greene, Michelle; Wallace, Kim; Wolin, Neal; Baker, Isaac; Lambright, James; Hsu, Michael Williams, Andrew; Engebretsen, Jenni; Patterson, Mark (DO); Jaconi, Kristen; Sachs, Lee; Knight, Bernard Jr. RE: Heads up and request for comment on AIG story
Canwemeetonthisplease?Wecandothisinmyofficeorinthelargeconferenceroom. And,cansomeonelayoutclearlywhattheoptionsare? OriginalMessage From:Aviel,Sara Sent:Friday,March13,20092:54PM To:Cutter,Stephanie;Albrecht,Stephen;Greene,Michelle;Wallace,Kim;Wolin,Neal;Baker, Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Sachs,Lee; Knight,BernardJr. Subject:RE:HeadsupandrequestforcommentonAIGstory MyunderstandingisthatwearewaitingforaclearrecommendationfromthisteambeforeTim makesthecall.PleaseresolveandthenIwillmakesureTimmakesthecallifthat'swhat isrecommended. Tim'sscheduleisdifficult,butthisisclearlyapriority.Lookslike56pmETtonightis bestwindow.Wecanalsodothisenroutetoairporttomorrowaround1pmET. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,20096:42PM To:Albrecht,Stephen;Greene,Michelle;Wallace,Kim;Wolin,Neal;Baker,Isaac;Lambright, James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Sachs,Lee; Aviel,Sara;Knight,BernardJr. Subject:RE:HeadsupandrequestforcommentonAIGstory Sarapleaseadvise.Weneedtoresolvethis. OriginalMessage From:Albrecht,Stephen Sent:Friday,March13,20092:38PM To:Greene,Michelle;Wallace,Kim;Cutter,Stephanie;Wolin,Neal;Baker,Isaac;Lambright, James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Sachs,Lee; Aviel,Sara;Knight,BernardJr. Subject:RE:HeadsupandrequestforcommentonAIGstory Don'tknow.Liddywasdoingacallwithhissr.employeesat2pm.NotsurewhenTim's scheduleallowsforthecall. OriginalMessage
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From:Greene,Michelle Sent:Friday,March13,20092:25PM To:Wallace,Kim;Albrecht,Stephen;Cutter,Stephanie;Wolin,Neal;Baker,Isaac;Lambright, James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Sachs,Lee; Aviel,Sara;Knight,BernardJr. Subject:Re:HeadsupandrequestforcommentonAIGstory Steve Anysenseofwhentimscallwliddyisgoingtobe?(b) (5) (b) (5) OriginalMessage From:Wallace,Kim To:Albrecht,Stephen;Cutter,Stephanie;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu, Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Aviel,Sara;Knight,BernardJr. Sent:FriMar1314:22:342009 Subject:RE:HeadsupandrequestforcommentonAIGstory Icandoanytimebetween2:30and3:45,and57p. OriginalMessage From:Albrecht,Stephen Sent:Friday,March13,20092:11PM To:Cutter,Stephanie;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara;Knight,BernardJr. Subject:RE:HeadsupandrequestforcommentonAIGstory All
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(b) (5)
JimistakingtheleadonQ&A.Isaachasputtogetherbackgroundoncurrentexeccomp requirements. SteveisworkingthroughtheagreementwithAIG. Thisneedstoberesolvedquickly. OriginalMessage From:Wolin,Neal Sent:Friday,March13,200912:53PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory AmstuckinSecofHUD'soffice. OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Sent:FriMar1312:38:372009 Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA approach.CC'ingafewmorepeople(b) (5) Icanmeetnow. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,200912:36PM To:Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Albrecht,Stephen;Lambright,James;Wolin,Neal; Patterson,Mark(DO) Subject:RE:HeadsupandrequestforcommentonAIGstory Caneveryonemeetinmyofficeasaptodiscussthis?It'sveryimportant. OriginalMessage
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From:Baker,Isaac Sent:Friday,March13,200912:35PM To:Cutter,Stephanie Cc:Williams,Andrew;Engebretsen,Jenni Subject:FW:HeadsupandrequestforcommentonAIGstory FirstrequestforcommentonAIGbonuses.Stephaniedidwegetanyguidanceonwhatwe're allowedtosay? OriginalMessage From:HUGHSON,BLOOMBERG/NEWSROOM:[mailto:(b) (6) Sent:Friday,March13,200912:23PM To:Baker,Isaac Subject:HeadsupandrequestforcommentonAIGstory Isaac,justaheadsupandopportunityforcommentornocommentonanAIGstory.Intheir 10Kfromlastweek,thecompanydisclosedthatretentionpaymentswouldtotalabout$1 billion. JustwonderediftheTreasuryknewaboutandapprovedthesepayments.Andifultimatelythis wasawiseexpense,givethepaymentsonlykeeppeopleinplaceuntiltheendof2009and thedivestitureplancouldtakelongerthanthat. thanks, HughSon BloombergNews (b) (6) CC:RebeccaChristie
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From: Sent: To: Subject: Greene, Michelle Friday, March 13, 2009 3:29 PM Albrecht, Stephen FW: Heads up and request for comment on AIG story
(b) (5)
Steve, Ithinkifyoucouldwriteuptheoptionsofwhatourrecommendation(s)couldbe,thatwould beveryhelpfulforthe4pm.PleaseletmeknowifIcanhelp. MichelleD.GreeneUSDepartmentoftheTreasury(202)6222018 OriginalMessage From:Aviel,Sara Sent:Friday,March13,20093:27PM To:Cutter,Stephanie;Albrecht,Stephen;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu, Michael;Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory Spoketotimquickly.Hewantstosee: 1.Clearrecommendation 2.Presstalkingpoints Willingtomakecallifseenasabsolutelynecessarybutwantstoseeaboveresolvedfirst. Pleasealsolayoutpurposeofcall,whatyouneedhimtosay OriginalMessage From:Cutter,Stephanie To:Albrecht,Stephen;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu,Michael;Sperling, Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara Sent:FriMar1315:18:172009 Subject:RE:HeadsupandrequestforcommentonAIGstory
OriginalMessage From:Albrecht,Stephen Sent:Friday,March13,20093:16PM To:Wolin,Neal;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael;Sperling, Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara Subject:RE:HeadsupandrequestforcommentonAIGstory Hereisthebreakdown:

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(b) (5)
(b) (5)
OriginalMessage From:Wolin,Neal Sent:Friday,March13,20092:37PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael; Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara;Knight,BernardJr. Subject:Re:HeadsupandrequestforcommentonAIGstory
(b) (5)
OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara;Knight,BernardJr. Sent:FriMar1314:10:462009 Subject:RE:HeadsupandrequestforcommentonAIGstory All
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(b) (5)
(b) (5)
JimistakingtheleadonQ&A.Isaachasputtogetherbackgroundoncurrentexeccomp requirements. SteveisworkingthroughtheagreementwithAIG. Thisneedstoberesolvedquickly. OriginalMessage From:Wolin,Neal Sent:Friday,March13,200912:53PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory AmstuckinSecofHUD'soffice. OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Sent:FriMar1312:38:372009 Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA approach.CC'ingafewmorepeople(b) (5) Icanmeetnow.
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From: Sent: To: Cc: Subject: Albrecht, Stephen Friday, March 13, 2009 3:40 PM Wolin, Neal; Greene, Michelle; Cutter, Stephanie; Baker, Isaac; Lambright, James; Hsu, Michael; Sperling, Gene Williams, Andrew; Engebretsen, Jenni; Patterson, Mark (DO); Jaconi, Kristen; Sachs, Lee; Wallace, Kim RE: Heads up and request for comment on AIG story
IwillbringanoptionsoutlinetoStephanie'sat3:45.Pleasejoinwhenyoucansome willnotbejoininguntil4. Thedialinis(b) (6) ,passcode(b) (6) OriginalMessage From:Wolin,Neal Sent:Friday,March13,20093:32PM To:Greene,Michelle;Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James; Hsu,Michael;Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Sachs,Lee; Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory Yes.Plsprovidenumber. OriginalMessage From:Greene,Michelle To:Wolin,Neal;Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu, Michael;Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Sachs,Lee; Wallace,Kim Sent:FriMar1315:27:132009 Subject:RE:HeadsupandrequestforcommentonAIGstory Leeisnotfreeuntil4pm.Neal,couldyoudialinthen?Stephanie/Kim/Stevewould4pm workforyou? Stephanie'soffice? MichelleD.GreeneUSDepartmentoftheTreasury(202)6222018 OriginalMessage From:Wolin,Neal Sent:Friday,March13,20093:24PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael; Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory (b) (6) Plsdialmeinon (b) (5)
OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu,Michael;Sperling, Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara Sent:FriMar1315:21:132009 Subject:RE:HeadsupandrequestforcommentonAIGstory Canwedo3:45inthelargeconf.room? OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,20093:18PM To:Albrecht,Stephen;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu,Michael;Sperling, Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara Subject:RE:HeadsupandrequestforcommentonAIGstory (b) (5)
(b) (5)
OriginalMessage From:Albrecht,Stephen Sent:Friday,March13,20093:16PM To:Wolin,Neal;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael;Sperling, Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara Subject:RE:HeadsupandrequestforcommentonAIGstory Hereisthebreakdown:
OriginalMessage From:Wolin,Neal Sent:Friday,March13,20092:37PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael; Sperling,Gene

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(b) (5)
Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara;Knight,BernardJr. Subject:Re:HeadsupandrequestforcommentonAIGstory
(b) (5)
Itwouldbebesttohaveaquickmeetingorcalltodiscussthisandreachresolution. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,20091:48PM

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To:Wolin,Neal;Albrecht,Stephen;Baker,Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:RE:HeadsupandrequestforcommentonAIGstory (b) (5)
JimistakingtheleadonQ&A.Isaachasputtogetherbackgroundoncurrentexeccomp requirements. SteveisworkingthroughtheagreementwithAIG. Thisneedstoberesolvedquickly. OriginalMessage From:Wolin,Neal Sent:Friday,March13,200912:53PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory AmstuckinSecofHUD'soffice. OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Sent:FriMar1312:38:372009 Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA approach.CC'ingafewmorepeople(b) (5) Icanmeetnow. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,200912:36PM To:Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Albrecht,Stephen;Lambright,James;Wolin,Neal; Patterson,Mark(DO) Subject:RE:HeadsupandrequestforcommentonAIGstory Caneveryonemeetinmyofficeasaptodiscussthis?It'sveryimportant. OriginalMessage From:Baker,Isaac Sent:Friday,March13,200912:35PM To:Cutter,Stephanie Cc:Williams,Andrew;Engebretsen,Jenni Subject:FW:HeadsupandrequestforcommentonAIGstory
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FirstrequestforcommentonAIGbonuses.Stephaniedidwegetanyguidanceonwhatwe're allowedtosay? OriginalMessage From:HUGHSON,BLOOMBERG/NEWSROOM:[mailto:(b) (6) Sent:Friday,March13,200912:23PM To:Baker,Isaac Subject:HeadsupandrequestforcommentonAIGstory Isaac,justaheadsupandopportunityforcommentornocommentonanAIGstory.Intheir 10Kfromlastweek,thecompanydisclosedthatretentionpaymentswouldtotalabout$1 billion. JustwonderediftheTreasuryknewaboutandapprovedthesepayments.Andifultimatelythis wasawiseexpense,givethepaymentsonlykeeppeopleinplaceuntiltheendof2009and thedivestitureplancouldtakelongerthanthat. thanks, HughSon BloombergNews (b) (6) CC:RebeccaChristie
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From: Sent: To: Cc: Subject: Fitzpayne, Alastair Friday, March 13, 2009 3:46 PM Greene, Michelle; Albrecht, Stephen; Wolin, Neal; Cutter, Stephanie; Baker, Isaac; Lambright, James; Hsu, Michael; Sperling, Gene Williams, Andrew; Engebretsen, Jenni; Patterson, Mark (DO); Jaconi, Kristen; Sachs, Lee; Wallace, Kim RE: Heads up and request for comment on AIG story
MyunderstandingisthatitwouldbegoodtohaveaseparateconversationaboutnonAIGbonus execcompissues,butsinceNealhopsonaplaneat4:30,andheisessentialtothis conversation,weshouldpostponethatuntiltomorrowunlesspeoplefeelhugeurgencytodoit tonight. Wecanalsodiscussat3:45meeting... OriginalMessage From:Greene,Michelle Sent:Friday,March13,20093:38PM To:Albrecht,Stephen;Wolin,Neal;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu, Michael;Sperling,Gene;Fitzpayne,Alastair Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Sachs,Lee; Wallace,Kim Subject:RE:HeadsupandrequestforcommentonAIGstory Thatworks.Stephanie'sofficeat3:45?AlJusttoclarify.Iassumeyourcallonexec compisonexeccompmorebroadlyandthereforeinadditionto,notinplaceofthismeeting. Pleasecorrectifthatiswrong. MichelleD.GreeneUSDepartmentoftheTreasury(202)6222018 OriginalMessage From:Albrecht,Stephen Sent:Friday,March13,20093:29PM To:Greene,Michelle;Wolin,Neal;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu, Michael;Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Sachs,Lee; Wallace,Kim Subject:RE:HeadsupandrequestforcommentonAIGstory Let'sstartat3:45,andhaveLeejoinusat4. OriginalMessage From:Greene,Michelle Sent:Friday,March13,20093:27PM To:Wolin,Neal;Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu, Michael;Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Sachs,Lee; Wallace,Kim Subject:RE:HeadsupandrequestforcommentonAIGstory Leeisnotfreeuntil4pm.Neal,couldyoudialinthen?Stephanie/Kim/Stevewould4pm workforyou?
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Stephanie'soffice? MichelleD.GreeneUSDepartmentoftheTreasury(202)6222018 OriginalMessage From:Wolin,Neal Sent:Friday,March13,20093:24PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael; Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory (b) (6) Plsdialmeinon .
(b) (5)
OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu,Michael;Sperling, Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara Sent:FriMar1315:21:132009 Subject:RE:HeadsupandrequestforcommentonAIGstory Canwedo3:45inthelargeconf.room? OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,20093:18PM To:Albrecht,Stephen;Wolin,Neal;Baker,Isaac;Lambright,James;Hsu,Michael;Sperling, Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara Subject:RE:HeadsupandrequestforcommentonAIGstory (b) (5)
OriginalMessage From:Albrecht,Stephen Sent:Friday,March13,20093:16PM To:Wolin,Neal;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael;Sperling, Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara Subject:RE:HeadsupandrequestforcommentonAIGstory Hereisthebreakdown: (b) (5)
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(b) (5)
OriginalMessage From:Wolin,Neal Sent:Friday,March13,20092:37PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael; Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara;Knight,BernardJr. Subject:Re:HeadsupandrequestforcommentonAIGstory (b) (5)
(b) (5)
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(b) (5)
(b) (5)
JimistakingtheleadonQ&A.Isaachasputtogetherbackgroundoncurrentexeccomp requirements. SteveisworkingthroughtheagreementwithAIG. Thisneedstoberesolvedquickly. OriginalMessage From:Wolin,Neal Sent:Friday,March13,200912:53PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory AmstuckinSecofHUD'soffice. OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Sent:FriMar1312:38:372009 Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA approach.CC'ingafewmorepeople(b) (5) Icanmeetnow.
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From: Sent: To: Cc: Subject: Wallace, Kim Friday, March 13, 2009 9:20 PM Albrecht, Stephen; Cutter, Stephanie; Wolin, Neal; Sachs, Lee; Lambright, James; Fitzpayne, Alastair; Sperling, Gene Mayock, Andrew; Greene, Michelle; Jaconi, Kristen; Baker, Isaac; Aviel, Sara; Hsu, Michael Re: We should send this; I've not received edits in the past ten minutes.
And it's Senator McCaskill not McCaskey.
From: Albrecht, Stephen To: Cutter, Stephanie; Wallace, Kim; Wolin, Neal; Sachs, Lee; Lambright, James; Fitzpayne, Alastair; Sperling, Gene Cc: Mayock, Andrew; Greene, Michelle; Jaconi, Kristen; Baker, Isaac; Aviel, Sara; Hsu, Michael Sent: Fri Mar 13 21:17:23 2009 Subject: Re: We should send this; I've not received edits in the past ten minutes. Tim spoke to (b) (6) on Weds night and again tonight.
From: Cutter, Stephanie To: Albrecht, Stephen; Wallace, Kim; Wolin, Neal; Sachs, Lee; Lambright, James; Fitzpayne, Alastair; Sperling, Gene Cc: Mayock, Andrew; Greene, Michelle; Jaconi, Kristen; Baker, Isaac; Aviel, Sara; Hsu, Michael Sent: Fri Mar 13 21:12:13 2009 Subject: Re: We should send this; I've not received edits in the past ten minutes. When did tim first talk (b) (6) about this? And can someone send me if they have it handy the details of how much is being paid and to whom?
From: Albrecht, Stephen To: Wallace, Kim; Wolin, Neal; Sachs, Lee; Lambright, James; Cutter, Stephanie; Fitzpayne, Alastair; Sperling, Gene Cc: Mayock, Andrew; Greene, Michelle; Jaconi, Kristen; Baker, Isaac; Aviel, Sara; Hsu, Michael Sent: Fri Mar 13 19:26:59 2009 Subject: RE: We should send this; I've not received edits in the past ten minutes.
(b) (5)
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(b) (5)
From: Wallace, Kim Sent: Friday, March 13, 2009 5:59 PM To: Wolin, Neal; Albrecht, Stephen; Sachs, Lee; Lambright, James; Cutter, Stephanie; Fitzpayne, Alastair; Sperling, Gene Cc: Mayock, Andrew; Greene, Michelle; Jaconi, Kristen; Baker, Isaac; Aviel, Sara Subject: We should send this; I've not received edits in the past ten minutes.
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From: Sent: To: Subject: Albrecht, Stephen Friday, March 13, 2009 9:20 PM Cutter, Stephanie Fw: Heads up and request for comment on AIG story
(b) (5)
Hereisthegeneralpayoutbreakdown. OriginalMessage From:Albrecht,Stephen To:Wolin,Neal;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael;Sperling, Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara Sent:FriMar1315:16:072009 Subject:RE:HeadsupandrequestforcommentonAIGstory Hereisthebreakdown:
(b) (5)
OriginalMessage From:Wolin,Neal Sent:Friday,March13,20092:37PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael; Sperling,Gene Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara;Knight,BernardJr. Subject:Re:HeadsupandrequestforcommentonAIGstory
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(b) (5)
(b) (5)
JimistakingtheleadonQ&A.Isaachasputtogetherbackgroundoncurrentexeccomp requirements. SteveisworkingthroughtheagreementwithAIG. Thisneedstoberesolvedquickly.

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OriginalMessage From:Wolin,Neal Sent:Friday,March13,200912:53PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:Re:HeadsupandrequestforcommentonAIGstory AmstuckinSecofHUD'soffice. OriginalMessage From:Albrecht,Stephen To:Cutter,Stephanie;Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Lambright,James;Wolin,Neal;Patterson,Mark (DO);Jaconi,Kristen;Greene,Michelle;Sachs,Lee;Wallace,Kim Sent:FriMar1312:38:372009 Subject:RE:HeadsupandrequestforcommentonAIGstory WejustgotoffthephonewithAIGandhavesomeproposalsonthe2008bonusissues.(b) (5) soweshouldmeetonthataswellasthePA approach.CC'ingafewmorepeople(b) (5) Icanmeetnow. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,200912:36PM To:Baker,Isaac Cc:Williams,Andrew;Engebretsen,Jenni;Albrecht,Stephen;Lambright,James;Wolin,Neal; Patterson,Mark(DO) Subject:RE:HeadsupandrequestforcommentonAIGstory Caneveryonemeetinmyofficeasaptodiscussthis?It'sveryimportant. OriginalMessage From:Baker,Isaac Sent:Friday,March13,200912:35PM To:Cutter,Stephanie Cc:Williams,Andrew;Engebretsen,Jenni Subject:FW:HeadsupandrequestforcommentonAIGstory FirstrequestforcommentonAIGbonuses.Stephaniedidwegetanyguidanceonwhatwe're allowedtosay? OriginalMessage From:HUGHSON,BLOOMBERG/NEWSROOM:[mailto:(b) (6) Sent:Friday,March13,200912:23PM To:Baker,Isaac Subject:HeadsupandrequestforcommentonAIGstory Isaac,justaheadsupandopportunityforcommentornocommentonanAIGstory.Intheir 10Kfromlastweek,thecompanydisclosedthatretentionpaymentswouldtotalabout$1 billion. JustwonderediftheTreasuryknewaboutandapprovedthesepayments.Andifultimatelythis wasawiseexpense,givethepaymentsonlykeeppeopleinplaceuntiltheendof2009and thedivestitureplancouldtakelongerthanthat.
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thanks, HughSon BloombergNews (b) (6) CC:RebeccaChristie
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(b) (5)
James.Hennessy@ny.frb.org Saturday, March 14, 2009 10:20 AM Albrecht, Stephen Re: Resolution of 2008 Bonus Issue
From: Stephen.Albrecht Sent: 03/14/2009 10:18 AM AST To: James Hennessy Subject: Re: Resolution of 2008 Bonus Issue
(b) (5)
From: James.Hennessy@ny.frb.org To: Albrecht, Stephen Sent: Fri Mar 13 22:24:43 2009 Subject: Re: Resolution of 2008 Bonus Issue
(b) (5)
From: Stephen.Albrecht Sent: 03/13/2009 09:21 PM AST To: James Hennessy Subject: Re: Resolution of 2008 Bonus Issue
(b) (5)
From: James.Hennessy@ny.frb.org To: Albrecht, Stephen Sent: Fri Mar 13 19:43:13 2009 Subject: Fw: Resolution of 2008 Bonus Issue
----- Forwarded by James Hennessy/NY/FRS on 03/13/2009 07:42 PM ----James Hennessy/NY/FRS To (b) (6) 03/13/2009 07:41 PM
@aig.com>
cc (b) (6) @aig com>, "'Sarah.Dahlgren@ny frb.org'" <Sarah.Dahlgren@ny.frb.org>, "'trevinom@Sullcrom.com < revinom@Sullcrom.com> Subject Re: Resolution of 2008 Bonus Issue
Link
Steve says that Treasury has already circulated talking points with the July 15 date, and that what he heard on the call was acceptance of the company's proposal from this afternoon, which was July15. So, we have to stick with that. I think it should go by email. I'll leave the signature problem to your tech folks to solve. I think the letter should be signed (maybe Ed could sign it and fax it to the company, and they could then image it and send on to Treasury?) Thanks, everyone
(b) (6)
03/13/2009 07:32 PM
To "'James Hennessy@ny.frb.org'" <James.Hennessy@ny.frb.org>, "'trevinom@Sullcrom.com'" <trevinom@Sullcrom.com> cc "(b) (6) " Thomas.Baxter@ny.frb.org'" <Thomas.Baxter@ny.frb.org>, Sarah.Dahlgren@ny.frb.org <Sarah.Dahlgren@ny.frb.org> Subject Re: Resolution of 2008 Bonus Issue
Jim: thanks. I just got off the phone with Ed. His description same as yours, except he thought June 15 was the date he proffered without objection? Doable? Marc: can you finalize with the few minor changes you sent earlier? Jim: would final go by email or do you want Ed to sign?
(b) (6)
From: James.Hennessy@ny.frb.org To: (b) (6) ; trevinom@sullcrom.com Cc: (b) (6) ; thomas.baxter@ny.frb.org ; Sarah.Dahlgren@ny.frb.org Sent: Fri Mar 13 19:17:04 2009 Subject: Resolution of 2008 Bonus Issue
Steve Albrecht reports that Tim and Ed have reached agreement on how to deal with the senior partners under the 2008 Bonus Program: 50% will be paid now, the next 25% in July, and the final 25% in September, as proposed by the company. The July and September payments may be approved by the AIG board of directors, provided that the company has made sufficient progress on its restructuring and repayment plans. Steve requests that Ed's letter (and the white paper) be put into final form and sent to Tim; the draft that Marc Trevino circulated this morning does not need any more changes. The sooner Treasury can get it the better -- they are already getting press and congressional inquiries, and would like to be able to release the letter as soon as possible. Treasury's main talking points will be along these lines: 1. Complying the contract was unavoidable. It provides the cheapest resolution to the situation. 2. The company is committed to finding ways to repay the taxpayer for the retention payments. 3. Bonus amounts to the senior partners have been significantly reduced and payments extended and tied to progress on the restructuring and repayment plans.

From: Sent: To: Subject: Goodman, Mary Saturday, March 14, 2009 12:20 PM Cutter, Stephanie; Albrecht, Stephen; Wolin, Neal AIG exec comp
ApologiesifIfelloutoftheloop,butcouldyoupleaseforwardtomethefinalsuggested publiclineonAIG.

(b) (5)
Cutter, Stephanie Saturday, March 14, 2009 10:34 PM Albrecht, Stephen Hsu, Michael Fw: help!
From: Peter Baker To: Cutter, Stephanie Sent: Sat Mar 14 22:33:48 2009 Subject: help! Hey there, thanks for the help. This is what the AIG exec summary says about the AIGFP retention plan. We were interpreting this as meaning that they owe $165 million, they've paid $55 million already, so they're going to pay $110 million by March 15 (tomorrow). But then I don't understand where the $93 million comes in. Is that something that was over and above the $165 million and has now been canceled? Which would mean our $110 million is correct? And then again, the document later refers to $220 million due on or before March 15; since $220 million minus $55 million is $165 million, maybe then they're actually paying $165 million by tomorrow on top of what was paid in December? Any guidance you could give us would be hugely appreciated. Thanks...
AIG is contractually obligated to pay a total of about $165 milion of previously awarded retention pay to AIGFP employees (in respect of 2008). This amount is due pursuant to a retention plan entered into in early 2008. About $55 million of retention pay was prevoiusly paid around December, and about $93 million of additional retention pay will be elimintaed because of losses at AIGFP (in accordance with the term sof the plan). AIG is also obligated to pay about $6 million of guaranteed pay to AIGFP employees under contractual obligations outside of the retention plan.
Mcnulty, Amy
From: Sent: To: Subject: Hsu, Michael Monday, March 16, 2009 6:28 AM Lambright, James Re:
Thee&ydecktitled"projectmaidenlanecompsummary"isthebestreference.I'llprintout thekeypages,butitisworthflippingthroughonyourownifyouhavethetime.I'll forwardnowifIcanfinditonmybberry. OriginalMessage From:Lambright,James To:Hsu,Michael Sent:MonMar1604:51:572009 Subject:Re: Canyoualsoprintoutwhateverwe'veseenthatisthebestsummaryofallthedifferentexec compissues(contractualvdiscretionary,dollarsvnumberofpeople,averagepmtvhighest bonuspaid,etc)? OriginalMessage From:Hsu,Michael To:Lambright,James Sent:MonMar1600:22:192009 Subject:Fw: GoodmanaskedmetobriefNEConaig.Isuggestedthatyoushouldjoin(andcc'dyou).If possible,wouldbegoodtogothroughthistomakesureitmakessenseandcoversthebases. OriginalMessage From:MikeHsu<(b) (6) @yahoo.com> To:Hsu,Michael Sent:MonMar1600:19:502009
90

Subject: Location: Start: End: Show Time As: Recurrence: Meeting Status: Required Attendees: AIG Exec Comp Stephanie's Office 3450 Mon 3/16/2009 4:30 PM Mon 3/16/2009 5:00 PM Tentative (none) Not yet responded Williams, Andrew; Albrecht, Stephen; Hsu, Michael; Lambright, James; Jaconi, Kristen; Cutter, Stephanie; Wolin, Neal
Herearesomequestionswearegetting:
1) Stephanie, by your own account Treasury people knew about the bonus issue for months. What were people doing BEFORE last Wednesday? 2) From the outside, it certainly seems that this issue fell off the radar until the ineluctable deadline of March 15 was suddenly at hand. Can you help disabuse me of this impression? When did people become aware of the bonuses at least, when did the Obama Treasury become aware of them?
3) Have Treasury officials examined the actual compensation agreements to see for themselves how legally binding they are?

4) How much do Treasury officials know about who was getting the retention payments? Were the biggest payments those above $3 million for top-ranked executives at AIGFP, or did some go to traders and commission-based sales people?
5) Can somebody explain to me how the President can vow to get back some of that money after his own Treasury Department has told him theres nothing more to do?
6) As I mentioned yesterday, I am told that a lot of the money actually went out on Friday, the last business day before march 15. Am I right? 7) I am still confused about how much of the bonuses are being deferred, and how much, if any, are not being paid at all. Can you help?
8) ifweweregoingtoputprovisionsinplaceinthemarch2nddealwithAIG,whydidn't wedoitwhenweannouncedit?Whydidwewait? 9) didGeithnersignoffontheLiddyplanonFridayandnowwe'recomingbackandtrying torevise? 10) whatroleifanydidGeithnerplayindealingwithAIGbonusesatNYFed? 11) dowestillbelieveAIGissystemicallysignificant/can'tbeallowedtofail?

From: Sent: To: Cc: Subject: Attachments: FYI Albrecht, Stephen Tuesday, March 17, 2009 9:19 AM Wolin, Neal; Wallace, Kim; Cutter, Stephanie; Knight, Bernard Jr.; Lambright, James; Sachs, Lee; Greene, Michelle Hsu, Michael FW: AIG List of FP Retention Payments AIG-NYAG 0000029-0000036.PDF
From: James.Hennessy@ny.frb.org [mailto:James.Hennessy@ny.frb.org] Sent: Tuesday, March 17, 2009 9:11 AM To: Rich.Ashton@frb.gov; Brian.J.Gross@frb.gov; Hsu, Michael; Albrecht, Stephen; Michael.Nelson@ny.frb.org Cc: Sarah.Dahlgren@ny.frb.org; Michael.Alix@ny.frb.org; Calvin.Mitchell@ny.frb.org; Smith, Michelle A,.; Scott.Alvarez@frb.gov; thomas.baxter@ny.frb.org; Jon Polk Subject: AIG List of FP Retention Payments
As provided to Mr. Cuomo, here is the list of individual payments made under the AIGFP Employee Retention Program.
AIG FINANCIAL PRODUCTS CORP. 2008 EMPLOYEE RETENTION PLAN Effective December 1, 2007
INTRODUCTION This document sets forth the terms of the AIG Financial Products Corp. 2008 Employee Retention Plan, effective December 1, 2007 (the "Plan"). The Plan sets out the 2008 and 2009 Guaranteed Retention Awards to be provided hereunder to certain employees and consultants of AIG-FP (which term includes subsidiaries). The objectives of the Plan are: 1. To provide incentives for AIG-FPs employees and consultants to continue developing, promoting and executing AIG-FPs business; 2. To recognize the uncertainty that the unrealized market valuation losses in AIGFPs super senior credit derivative and originally-rated AAA cash CDO portfolios have created for AIG-FPs employees and consultants; 3. To ensure that AIG-FPs and its employees and consultants interests continue to be aligned with those of AIG and AIGs shareholders; 4. To continue to build and maintain the formation of capital in AIG-FP; and 5. To show the support by AIG of the on-going business of AIG-FP by implementing a meaningful employee retention plan.
SECTION 1 DEFINITIONS For purposes of this AIG Financial Products Corp. 2008 Employee Retention Plan: 1.01. Additional Return Payment shall have the meaning ascribed thereto under the Deferred Compensation Plan. 1.02. AIG shall mean American International Group, Inc.
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1.03. thereof.
AIG-FP shall mean AIG Financial Products Corp., including all subsidiaries
1.04. AIG General Guarantee Agreement shall mean the General Guarantee Agreement of AIG, dated December 4, 1995, in favor of each holder of a monetary obligation or liability of AIG Financial Products Corp. 1.05. "Beneficiary" shall mean such person or trustee as may be designated by a Covered Person in his or her Confirmation and Acknowledgement. 1.06. "Board" shall mean the Board of Directors of AIG Financial Products Corp.
1.07. Bonus Pool shall have the meaning ascribed thereto in Section 3.02(a) of the Plan. 1.08. Buy-Out Amount shall mean the portion of any Previous Guarantee payable to a Covered Person that was intended to offset compensation from a previous employer that the Covered Person forfeited upon joining AIG-FP. 1.09. Capped Realized Losses shall have the meaning ascribed thereto in Section 3.07(a) of the Plan. 1.10. CDO Portfolio shall mean the existing multi-sector collateralized debt obligation (CDO) portfolio of AIG-FP, including both super senior derivatives and originally-rated AAA cash CDO bonds. 1.11. "Committee" shall mean a committee consisting of the Chief Executive Officer of AIG Financial Products Corp., the Chief Administrative Officer of AIG Financial Products Corp., the Chief Financial Officer of AIG Financial Products Corp., and the Secretary of AIG Financial Products Corp. 1.12. "Compensation Year" shall mean the 12-month period beginning on December 1st of each calendar year and ending on November 30th of the following calendar year. The first Compensation Year under this Plan shall be the Compensation Year beginning on December 1, 2007 and ending on November 30, 2008 (the 2008 Compensation Year); and the second Compensation Year under this Plan shall be the Compensation Year beginning on December 1, 2008 and ending on November 30, 2009 (the 2009 Compensation Year). 1.13. Confirmation and Acknowledgement. The written confirmation and acknowledgement described in Section 3.01(e) of the Plan that is executed by each Covered Person. 1.14. Covered Persons shall mean all employees and certain designated consultants of AIG-FP as of March 31, 2008 (excluding any employees or consultants who have notified AIG-FP of their intent to resign on or prior to such date) who received
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discretionary incentive compensation, or had a Previous Guarantee, in respect of the 2007 Compensation Year or who have a Previous Guarantee in respect of the 2008 Compensation Year. Covered Persons shall receive a Confirmation and Acknowledgement from AIG Financial Products Corp., as described in Section 3.01(e). 1.15. Deferred Compensation Plan shall mean, collectively, the AIG Financial Products Corp. Deferred Compensation Plan, as amended and restated effective March 18, 2005, and the AIG Financial Products Corp. Deferred Compensation Plan - Certain Banque AIG, Tokyo Branch Employees/Secondees, dated as of November 25, 2005, as amended, as each may be amended in the future. 1.16. "Distributable Income" shall have the meaning ascribed thereto under the Deferred Compensation Plan. 1.17. Excess Deferral Amount shall mean, in respect of any Covered Person for any Compensation Year, the amount of the Total Award deferred pursuant to the terms of the Deferred Compensation Plan that is in excess of $650,000 (as determined pursuant to Schedule A to the Deferred Compensation Plan). 1.18. Guaranteed Retention Awards shall mean the amounts guaranteed to be awarded to Covered Persons pursuant to Section 3.01 of the Plan for the 2008 Compensation Year and the 2009 Compensation Year. 1.19. Japanese Plan shall mean any retirement plan in which members of AIGFP's Tokyo office participate in lieu of participating in the Deferred Compensation Plan. 1.20 Notional Bonus Amount shall have the meaning ascribed thereto under the Deferred Compensation Plan. 1.21. Plan shall mean the AIG Financial Products Corp. 2008 Employee Retention Plan, as set forth herein and as hereinafter amended from time to time. 1.22. Previous Guarantee shall mean, in respect of any Covered Person, any right of the Covered Person to receive guaranteed compensation (which, for the avoidance of doubt, does not include salary paid periodically during the term of employment) pursuant to a written letter or agreement with AIG-FP executed on or prior to March 31, 2008. 1.23. Schedule 2. Realized Losses shall have the meaning ascribed thereto in the attached
1.24. Senior Management Team shall mean the fourteen (14) Covered Persons whose status as a member of the Senior Management Team is so indicated on each such individuals Confirmation and Acknowledgement. 1.25. Share Amount shall mean the number of shares of AIG common stock into which a Stock-Indexed Deferral is translated pursuant to Section 3.05(c)(i) of the Plan, as
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adjusted by the Committee to the extent necessary, in its reasonable good faith discretion, to take into account stock splits, stock dividends, spin-offs, reorganizations, recapitalizations, share combinations, mergers, consolidations, or other corporate actions with respect to AIG common stock. 1.26. SIP shall mean the AIG Financial Products Corp. 2007 Special Incentive Plan, dated January 20, 2008, as it may be amended in the future. 1.27. Stock-Indexed Deferrals shall mean the deferred amounts of 2008 Total Awards or 2009 Total Awards that are indexed to shares of AIG stock, as described in Section 3.05(b) of the Plan. 1.28. Total Award shall mean, for any Covered Person for either the 2008 Compensation Year or the 2009 Compensation Year, the Guaranteed Retention Award for such Covered Person for such Compensation Year plus any discretionary incentive compensation award in excess thereof for such Compensation Year. 1.29. 2007 Total Economic Award shall mean for each Covered Person, the sum of (a) and (b), where (a) is the amount of the discretionary incentive compensation or Previous Guarantee awarded to such Covered Person in respect of the 2007 Compensation Year, before taking into account any deferrals of such compensation under, or contributions of amounts to, the Deferred Compensation Plan or any Japanese Plan, or payments of amounts under the Deferred Compensation Plan or any Japanese Plan in respect of previous Compensation Years, and (b) is the amount, if any, of the SIP Credit credited to such Covered Person under Section 3.01(a) of the SIP, excluding the amount of such SIP Credit, if any, received in lieu of an Additional Return Payment under the Deferred Compensation Plan (or as the equivalent for Covered Persons who participate in a Japanese Plan in lieu of participating in the Deferred Compensation Plan).
SECTION 2 PARTICIPATION 2.01. Participation.
(a) Participation by Covered Persons. Each Covered Person shall be entitled to participate under this Plan, subject to (i) AIG Financial Products Corp. determining that the Covered Person meets the requirements to be a Covered Person and delivering to such person the Confirmation and Acknowledgement referenced in Section 3.01(e), and (ii) such person executing such document and returning it to AIG Financial Products Corp.
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(b) Deferrals. Each Covered Person who participates in the Deferred Compensation Plan and whose 2008 Total Award or 2009 Total Award is in excess of the level referred to in Schedule A of the Deferred Compensation Plan shall be required to defer, under the Deferred Compensation Plan, the portions of such Total Award that are required to be deferred pursuant to such Schedule A, subject, for the avoidance of doubt, to the provisions of Section 3.05 below in respect of Stock-Indexed Deferrals; provided, for the avoidance of doubt, that any payment of a Guaranteed Retention Award to a Covered Person or a Beneficiary shall not be subject to deferral under the Deferred Compensation Plan if such Covered Person or Beneficiary has received a distribution under Section 3.05(a) of the Deferred Compensation Plan. Additional voluntary deferral of any portion of such Total Award shall be permitted only in respect of the portion of such Total Award, if any, that exceeds the respective Guaranteed Retention Award, and shall be subject to the terms and conditions related thereto under the Deferred Compensation Plan, subject, for the avoidance of doubt, to the provisions of Section 3.05 below in respect of Stock-Indexed Deferrals. (c) Beneficiary. Each Covered Person may designate on his or her Confirmation and Acknowledgement a Beneficiary or Beneficiaries under the Plan in the event he or she should die prior to receipt of all Guaranteed Retention Awards to which he or she is entitled under the Plan; provided that if none is designated, such Beneficiary shall be the Covered Person's estate or as otherwise provided under applicable law. Any payment to a Beneficiary or Beneficiaries shall be made when the respective Covered Person would have received such payment.
SECTION 3 2008 AND 2009 GUARANTEED RETENTION AWARDS DETERMINATION OF AIG-FP BONUS POOL 3.01. 2008 and 2009 Guaranteed Retention Awards.
(a) Covered Persons Who Are Not Members of the Senior Management Team. Subject to Sections 3.01(c) and 3.01(d), for the 2008 Compensation Year and the 2009 Compensation Year, each Covered Person (other than members of the Senior Management Team) shall be awarded a Guaranteed Retention Award for each of those Compensation Years equal to one hundred percent (100%) of such Covered Persons 2007 Total Economic Award. (b) Covered Persons Who Are Members of the Senior Management Team. Subject to Sections 3.01(c) and 3.01(d), for the 2008 Compensation Year and the 2009 Compensation Year, each Covered Person who is a member of the Senior Management Team shall be awarded a Guaranteed Retention Award for each of those Compensation Years equal to seventy-five percent (75%) of such Covered Persons 2007 Total Economic Award.
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(c) Impact of Previous Guarantees on Amount of Guaranteed Retention Awards. The Guaranteed Retention Award for a Compensation Year for any Covered Person who has a Previous Guarantee for such Compensation Year will be reduced by the amount of such Previous Guarantee for such Compensation Year. Previous Guarantees will not be affected by this Plan. If (i) a Covered Person has a Previous Guarantee with respect to the 2008 Compensation Year, and (ii) such 2008 Previous Guarantee exceeds such Covered Persons 2007 Total Economic Award, then the Guaranteed Retention Award for such Covered Person for the 2008 Compensation Year shall be zero (by reason of the second preceding sentence), and for the 2009 Compensation Year shall equal the amount of such 2008 Previous Guarantee (reduced by the amount of the Covered Persons Previous Guarantee for the 2009 Compensation Year, if any). (d) Impact of Buy-Out Amounts on Amount of Guaranteed Retention Awards. If (i) the Guaranteed Retention Award for a Covered Person is based in whole or in part on a Previous Guarantee for the 2007 Compensation Year or the 2008 Compensation Year, and (ii) a portion of such Previous Guarantee represents a Buy-Out Amount, then the Buy-Out Amount shall be excluded for purposes of calculating the Covered Persons Guaranteed Retention Awards and 2007 Total Economic Award. (e) Notification of Guaranteed Retention Award Amounts and of Status as a Member of Senior Management Team. Each Covered Person individually will receive a written confirmation (Confirmation and Acknowledgement), in the form of Schedule 1, from AIG Financial Products Corp. of his or her Guaranteed Retention Awards for the 2008 Compensation Year and the 2009 Compensation Year under this Plan. Each Covered Person who has been designated as a member of the Senior Management Team for purposes of determining the Covered Persons Guaranteed Retention Awards has already been informed of such designation, which designation shall also be indicated on the Confirmation and Acknowledgement for such Covered Person. (f) Currency. All 2008 and 2009 Guaranteed Retention Awards shall be denominated in US dollars. 3.02. Effect of Guaranteed Retention Awards on the Bonus Pool.
(a) General Rule for Bonus Pool Determination. Under the existing arrangement between AIG, AIG-FP, and its employees, Distributable Income of AIG-FP is payable each year on the basis of 70% to AIG and 30% to AIG-FP employees (and consultants) as bonuses (such 30% referred to hereunder as the Bonus Pool). The Bonus Pool will continue to equal 30% of Distributable Income of AIG-FP subject to calculation consistent with past practices and the provisions of Sections 3.02(b) and 3.02(c). (b) Aggregate Amount of Guaranteed Retention Awards for a Compensation Year Equals or Is Less than the Bonus Pool for Such Compensation Year. If the aggregate amount of the Guaranteed Retention Awards for the 2008 Compensation Year or the 2009 Compensation Year is equal to or less than the calculated Bonus Pool for such Compensation
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Year, the total amount of the Guaranteed Retention Awards for such Compensation Year will, in the first instance, be paid from the calculated Bonus Pool for such Compensation Year, with any excess remaining in the calculated Bonus Pool for such Compensation Year paid out to AIG-FP employees (and, in the discretion of AIG-FP, consultants) as discretionary incentive compensation with respect to such Compensation Year. (c) Aggregate Amount of Guaranteed Retention Awards for a Compensation Year Exceeds the Bonus Pool for a Compensation Year. If the aggregate amount of the Guaranteed Retention Awards for the 2008 Compensation Year or the 2009 Compensation Year exceeds the calculated Bonus Pool for such Compensation Year, AIG will cover the shortfall so that Covered Persons are paid their full Guaranteed Retention Awards (subject, for the avoidance of doubt, to deferral pursuant to Section 3.05(a)). Any such Bonus Pool shortfall shall, for purposes of Section 3.07 related to the carry-forward of Capped Realized Losses, be deemed to give rise to a Capped Realized Loss equal to the amount of such shortfall. 3.03. Guarantee by AIG of 2008 and 2009 Guaranteed Retention Awards Under AIG General Guarantee Agreement. The obligation to pay the Guaranteed Retention Awards described under Section 3.01 is guaranteed by AIG pursuant to the AIG General Guarantee Agreement; provided that amounts deferred under the Deferred Compensation Plan (including Stock-Indexed Deferrals) will not, in accordance with the terms of the Deferred Compensation Plan, benefit from the AIG General Guarantee Agreement. 3.04. Forfeiture of 2008 and 2009 Guaranteed Retention Awards as a Result of Termination of Employment of Covered Person. If the employment (or, as applicable, consultancy) of a Covered Person terminates prior to payment of a Guaranteed Retention Award, the Covered Person will forfeit the right to such Guaranteed Retention Award in the following circumstances: (a) the Covered Person resigns without good reason (good reason means a material reduction in base salary, a material reduction in title, duties or responsibilities, or transfer to a geographic location that is more than 50 miles from the Covered Person's current location); or the Covered Persons employment (or, as applicable, consultancy) is terminated by AIG-FP for cause (cause means conduct involving intentional wrongdoing, fraud, dishonesty, gross negligence, material breach of the AIG Code of Conduct or other policies of AIG-FP or AIG, or conviction of or entry of a plea of guilty or no contest to a criminal offense); or the Covered Persons employment (or, as applicable, consultancy) is terminated by AIG-FP during calendar year 2008 due to the Covered Persons failure to meet performance standards; provided, however, that in the case of a termination of employment (or, as applicable, consultancy) described in this Section 3.04(c), only the Guaranteed Retention Award attributable to the
(b)
(c)
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Covered Persons 2009 Compensation Year will be forfeited, and the Guaranteed Retention Award for the Covered Persons 2008 Compensation Year will remain payable at the same time that Guaranteed Retention Awards are paid to Covered Persons whose employment (or, as applicable, consultancy) is not terminated (subject to deferral pursuant to Section 3.05(a)). Any Covered Person whose employment (or, as applicable, consultancy) terminates for a reason other than those described in Sections 3.04(a), 3.04(b), and 3.04(c) will receive any subsequent Guaranteed Retention Award at the same time that Guaranteed Retention Awards are paid to continuing Covered Persons (subject to deferral pursuant to Section 3.05(a)); provided that any such Guaranteed Retention Award in respect of the 2009 Compensation Year will be reduced by the amount of any compensation paid to the terminated employee or consultant by another employer in respect of work performed by the terminated employee or consultant during calendar year 2009; and further provided that prior to payment of any Guaranteed Retention Awards to such terminated employees or consultants, the former employee or consultant will be required to confirm in writing whether any such compensation has been received and, if so, the amount thereof. 3.05. Payment of 2008 and 2009 Guaranteed Retention Awards. Subject to the terms of this Plan, Guaranteed Retention Awards will be paid to Covered Persons in respect of each Compensation Year on or prior to the date on which discretionary incentive compensation for such Compensation Year is paid to employees of AIG-FP (subject to deferral as described below); provided, however, that such payment will not be later than March 15th of the calendar year next following the end of such Compensation Year (whether or not any discretionary incentive compensation is paid with respect to such Compensation Year). All payments to a Covered Person hereunder shall be paid to such Covered Person from the company or companies from which such payment represents compensation for services provided by such Covered Person; provided that, where any such company is not AIG Financial Products Corp., AIG Financial Products Corp. shall remain liable for any such payment not paid by such company. (a) Deferral under Deferred Compensation Plan. The payment of 2008 and 2009 Total Awards to Covered Persons who participate in the Deferred Compensation Plan will be subject to partial mandatory deferral and subsequent payment under the Deferred Compensation Plan in accordance with its terms (in the same manner as discretionary incentive compensation is subject to partial mandatory deferral and subsequent payment under such plan); provided that subsequent payment of any Stock-Indexed Deferrals shall be indexed as described in Section 3.05(c) below for purposes of making payment of such deferrals under Section 3.05 of the Deferred Compensation Plan. (b) Determination of Amount of Stock-Indexed Deferrals. If the Total Award for a Covered Person who participates in the Deferred Compensation Plan exceeds $2 million for the 2008 or 2009 Compensation Year, then, notwithstanding any term of the Deferred Compensation Plan to the contrary, fifty percent (50%) of the Excess Deferral Amount for
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such Compensation Year will be deemed a Stock-Indexed Deferral under this Plan and, as such, will be indexed to AIG stock and paid as provided in Section 3.05(c) of the Plan. (c) Indexing of Stock-Indexed Deferrals.
(i) The Stock-Indexed Deferrals will be translated into a number of shares of AIG common stock (Share Amount), based on the average daily closing price of a share of AIG common stock during the month of November in the respective Compensation Year. (ii) Notwithstanding such indexing, the original US dollar value of the unpaid portion of any Stock-Indexed Deferral (without regard to any change in the market price of a share of AIG common stock) will accrue interest pursuant to Section 3.03 of the Deferred Compensation Plan, and shall be included when determining the aggregate amount credited to a Deferred Compensation Plan Participants Deferred Compensation Account under the Deferred Compensation Plan for purposes of calculating any Additional Return Payments payable to such Participant pursuant to Section 3.04 of the Deferred Compensation Plan. No amount shall be payable to any Covered Person in respect of dividends paid on AIG common stock. (iii) When a distribution of a Stock-Indexed Deferral (including any installment thereof) would otherwise be payable under Section 3.05 of the Deferred Compensation Plan, Covered Persons will receive, in lieu of receiving such distribution, at AIGs election, either: (A) a number of shares of AIG common stock equal to the Share Amount for such distribution of the Stock-Indexed Deferral, or (B) based on: a cash amount equal to the value of such number of shares
(1) in the case of a distribution under Sections 3.05(a) and 3.05(c) of the Deferred Compensation Plan, the closing price of a share of AIG common stock on the date that is five NYSE trading days before the payment date; and (2) in the case of a distribution under Section 3.05(b) of the Deferred Compensation Plan, the average daily closing price of a share of AIG common stock during the month of November immediately preceding the applicable payment date. (C) The election made by AIG in this Section 3.05(c)(iii) shall be made as follows: (1) in the case of a distribution under Section 3.05(a) of the
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Deferred Compensation Plan, not later than 15 calendar days prior to the applicable payment date; (2) in the case of a distribution under Section 3.05(b) of the Deferred Compensation Plan, not later than November 1st immediately preceding the applicable payment date; and (3) in the case of an early distribution under Section 3.05(c) of the Deferred Compensation Plan, not later than 15 calendar days following the determination to make an early distribution. The original US dollar value of the applicable unpaid portion of any Stock-Indexed Deferral (without regard to any change in the market price of a share of AIG common stock) shall be paid by AIG-FP to AIG in exchange either for AIGs delivery of stock to AIG-FP pursuant to Section 3.05(c)(iii)(A) or for AIGs payment to AIG-FP of the cash amount provided for pursuant to Section 3.05(c)(iii)(B), as applicable. (iv) Stock-Indexed Deferrals are not subject to the Foreign Currency Alternative provided in Section 3.05(d) of the Deferred Compensation Plan. (d) Deferred Amounts Represent Subordinated Claims against AIG-FP. To the extent that Guaranteed Retention Awards are deferred under the Deferred Compensation Plan (including any Stock-Indexed Deferrals), such deferred amounts shall represent, in accordance with the terms of the Deferred Compensation Plan, subordinated claims against AIG-FP and shall not be guaranteed by AIG. 3.06. Effect on Bonus Pool of Mark-to-Market and Realized Losses. AIG-FP will continue to monitor and manage the existing CDO Portfolio. (a) Effect of Mark-to-Market Losses on the Bonus Pool. The Bonus Pool for any Compensation Year beginning with the 2008 Compensation Year will not be affected by the incurrence of any mark-to-market losses (or gains) or impairment charges (or reversals thereof) arising from (i) the CDO Portfolio or (ii) super senior credit derivative transactions that are not part of the CDO Portfolio. (b) Effect of Realized Losses on Bonus Pool. The Bonus Pool for any Compensation Year beginning with the 2008 Compensation Year will be affected by the incurrence of any Realized Losses (or gains) arising from any source, subject to the limitations set forth in Section 3.07. 3.07. Limitations Related to Realized Losses.
(a) Compensation Year Limit on Reduction to Bonus Pool Attributable to Capped Realized Losses. Notwithstanding any other provision of the Plan, for any Compensation Year beginning with the 2008 Compensation Year, there shall be a $67.5 million limit per Compensation Year on the extent to which the Bonus Pool can be reduced in the aggregate as
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a result of Realized Losses arising from the CDO Portfolio and/or deemed Realized Losses arising as provided in Section 3.02(c) (collectively, Capped Realized Losses). Given the 70%/30% split of Distributable Income between AIG and the Bonus Pool described in Section 3.02(a), the Compensation Year limit will be applicable if Capped Realized Losses in respect of any Compensation Year (beginning with the 2008 Compensation Year) exceed $225 million. Capped Realized Losses for any Compensation Year that are in excess of $225 million will be carried forward to subsequent Compensation Years for Bonus Pool calculation purposes, subject each year to a per Compensation Year limit on Capped Realized Losses for Bonus Pool calculation purposes of $225 million (corresponding to the $67.5 million limit per Compensation Year on reductions to the Bonus Pool due to Capped Realized Losses). Carry-forwards of Capped Realized Losses to subsequent Compensation Years will continue until the aggregate Capped Realized Losses (Capped Realized Losses that reduce Distributable Income for Bonus Pool calculation purposes in the Compensation Year in which realized, plus Capped Realized Losses carried forward to reduce Distributable Income for Bonus Pool calculation purposes in future Compensation Years) are fully absorbed through reductions to Distributable Income for Bonus Pool calculation purposes of up to $225 million per Compensation Year (corresponding to reductions to the Bonus Pool of up to $67.5 million per Compensation Year). (b) Effect of Realized Losses on Current and Future Balances under the Deferred Compensation Plan, Japanese Plans and SIP. Current and future balances under the Deferred Compensation Plan, Japanese Plans and SIP (including the deferred component of 2008 and 2009 Total Awards, including Stock-Indexed Deferrals) will remain subject to reduction as a result of Realized Losses from the CDO Portfolio or otherwise in accordance with the terms of the Deferred Compensation Plan, Japanese Plans and SIP (without reference to any annual limits, which will relate solely to the determination of the Distributable Income for Bonus Pool calculation purposes in the 2008 and subsequent Compensation Years).
SECTION 4 MISCELLANEOUS 4.01. Nonassignability. Subject to Section 2.01(c) of the Plan, no Covered Person or Beneficiary shall have the power to subject any right to receive payments under this Plan to assignment, pledge, sale, attachment, garnishment or any other transfer, alienation or encumbrance, nor shall such rights be subject to the Covered Person's or Beneficiarys debts or to seizure for satisfaction of judgments, alimony or separate maintenance obligations. 4.02. Continuation as Employee or Consultant. Neither this Plan nor the payment of any benefits hereunder shall be construed as giving the Covered Person any right to be retained as an employee or consultant of AIG-FP. 4.03 Amendment and Termination. The Committee may from time to time, with
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the approval of the Board, amend these Plan terms in whole or in part; provided, however, that any such amendment may not reduce or delay payment of any Covered Persons benefits and entitlements under the Plan in respect of the Covered Persons 2008 and 2009 Guaranteed Retention Awards or increase the Compensation Year limit or the extent to which Distributable Income for Bonus Pool calculation purposes can be reduced as a result of Capped Realized Losses. Any such amendment shall be effective immediately or as otherwise specified therein and shall be communicated in writing (including e-mail) to all Covered Persons and to AIG. 4.04. Governing Law. The law of the State of Connecticut shall govern the interpretation, application and operation of this Plan document. 4.05. Claims Procedure. Claims for benefits under the Plan shall be filed with the Committee, on forms supplied by the Committee. Written notice of the Committee's disposition of a claim shall be furnished to the claimant within 30 days after the application therefor is filed. In the event the claim is denied the reasons for the denial shall be specifically set forth in writing, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claims will be provided. If a Covered Person or Beneficiary has been denied a benefit, each shall be entitled, upon request to the Board, to appeal the denial of the claimed benefit within 90 days following the Committee's determination described in the preceding sentence. Upon such appeal, the Board (or a special committee designated by the Board) shall, as soon as practicable, meet with and hear the position of the claimant. Its decision following such meeting shall be made within 30 days and shall be communicated in writing to the claimant. 4.06. Effect of this Plan on the Deferred Compensation Plan. The terms and operation of the Deferred Compensation Plan are not affected by this Plan; provided that to the extent there is any inconsistency between the terms of this Plan and the terms of the Deferred Compensation Plan with respect to the treatment of Guaranteed Retention Awards, the determination of Distributable Income or the Bonus Pool, or the application of the terms of that plan to Stock-Indexed Deferrals, the terms of this Plan shall govern. 4.07. Compliance with Internal Revenue Code Section 409A. It is intended that amounts awarded under this Plan and/or deferred under the Deferred Compensation Plan will not be taxable under Internal Revenue Code Section 409A. This Plan shall be interpreted and administered, to the extent possible, in a manner that does not result in a plan failure (within the meaning of Internal Revenue Code section 409A(a)(1)) of this Plan or any other plan or arrangement maintained by AIG-FP.
mws076.doc
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SCHEDULE 1 Confirmation and Acknowledgement

Name of Covered Person: __________________________________________ Member of Senior Management Team: Yes or No Compensation Year 2008 2009 Previous Guarantee Buy-Out Amount Guaranteed Retention Award
I acknowledge that I have received, read and understood the AIG Financial Products Corp. 2008 Employee Retention Plan (the Employee Retention Plan) and that my participation in the Employee Retention Plan, including any payment of a Guaranteed Retention Award to me under the Employee Retention Plan, will be subject to the terms of the Employee Retention Plan, which provide in part that payment of Guaranteed Retention Awards (i) is subject to continued employment to the extent provided pursuant to Section 3.04, and (ii) is subject, if I participate in the Deferred Compensation Plan (as defined in the Employee Retention Plan), to deferral and, to the extent deferred, shall become an unsecured subordinated liability of AIG Financial Products Corp. to me and my Beneficiaries. I further acknowledge that my right to receive any Guaranteed Retention Award under the Employee Retention Plan is separate from and independent of any Notional Bonus Amount I might receive for 2008 or 2009, as that term is defined in the Deferred Compensation Plan, and that, to the extent the portion of any Guaranteed Retention Award or any additional Notional Bonus Amount is subject to deferral as a Stock-Indexed Deferral, I waive any claim that such deferred amount would be subject to, or payable to me pursuant to, the Deferred Compensation Plan without reference to the terms of the Employee Retention Plan. In the event that I should die prior to receipt of all Guaranteed Retention Awards to which I am entitled under the Employee Retention Plan, I hereby direct that, pursuant to Section 2.01(c) of the Employee Retention Plan, all amounts due to me under the Employee Retention Plan be distributed as follows: Proportion ___________ ___________ ___________ Name of Beneficiary(ies) _________________________ _________________________ _________________________ ____________ Date
______________________________ Signature of Covered Person
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SCHEDULE 2 Realized Losses x Realized Losses: o Losses resulting from the termination or other unwind of a derivative transaction or from the sale of a cash bond position. Realized Loss will be the termination/unwind payment for the derivative transaction, or the difference between par (plus accrued interest) and the sale proceeds for the cash bond position.
o Losses resulting from a payment default on a cash bond position. Realized Loss will be determined based on an evaluation by AIG-FP and AIG of the facts and circumstances of the underlying portfolio and the likelihood of payment of the defaulted amount, including the quality of the underlying portfolio and rights to control its liquidation. For example: x Where there has been a complete liquidation of the underlying portfolio, Realized Losses will equal the amount by which payments received are less than par (plus accrued interest). Where there has been no liquidation of the underlying portfolio (e.g., because of stand-still provisions in the trust indenture), and it is reasonably likely that all amounts on the cash bond position will be paid (e.g., where the bond is still rated investment grade), there would be no Realized Loss. o Such a conclusion may apply even where the cash bond has been accelerated and the principal amount declared due and payable (but has not been paid). o Losses resulting from a payment default on a reference obligation (or equivalent) underlying a credit default swap (CDS) transaction. For CDS that have physical settlement provisions: x If the CDS is physically settled, Realized Losses will be determined as described above for the cash bond position that results from the physical settlement. Pending physical settlement of such a CDS, there is no Realized Loss.
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For pay-as-you-go CDS: x Any payment under a pay-as-you-go CDS will be a Realized Loss unless (i) AIG-FP has a right to be reimbursed by the protection buyer if the buyer receives payment of the unpaid amount that gave rise to the CDS payment, and (ii) an evaluation by AIG-FP and AIG of the facts and circumstances of the underlying portfolio, including the quality of the underlying portfolio and rights to control its liquidation, indicates such payment is reasonably likely.
For total return swaps (TRS): x To the extent that settlement of the TRS results in AIG-FP acquiring the reference obligation (the most likely circumstance), Realized Losses will be determined as described above for the cash bond position that results. To the extent that settlement of the TRS results in AIG-FP making payment to the protection buyer without acquiring the reference obligation (unlikely), the Realized Loss equals the amount of such payment. Pending settlement of the TRS, there will be no Realized Loss.
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From: Sent: To: Subject: Looping in Albrecht Lambright, James Tuesday, March 17, 2009 3:15 PM Williams, Andrew; Hsu, Michael; Albrecht, Stephen Re: Treasury-AIG deal on bonuses?
(b) (5)
From: Williams, Andrew To: Lambright, James; Hsu, Michael Sent: Tue Mar 17 15:12:27 2009 Subject: FW: Treasury-AIG deal on bonuses?
From: Jaffe, Matthew B [mailto:Matthew.B.Jaffe@abc.com] Sent: Tuesday, March 17, 2009 2:57 PM To: Baker, Isaac Cc: Williams, Andrew Subject: Treasury-AIG deal on bonuses?
NYT - Can you confirm? This was a deal between Treasury & AIG, I assume? Just so I know how new this is, when did you guys release this info?
Under a deal reached last week, A.I.G. agreed that the top 50 executives would get half of the $9.6 million they were supposed to get by March 15. The second half of their bonuses would be paid out in two installments in July and in September. To get those payments, Treasury officials said, A.I.G. would have to show that it had made progress toward its goal of selling off business units and repaying the government.
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From: Sent: To: Subject: Williams, Andrew Tuesday, March 17, 2009 3:19 PM Hsu, Michael FW: AIG related question/Rogers--politico
2ndpart?
From: Cutter, Stephanie Sent: Tuesday, March 17, 2009 3:17 PM To: Williams, Andrew Subject: FW: AIG related question/Rogers--politico

From: David Rogers [mailto:drogers@politico.com] Sent: Tuesday, March 17, 2009 3:10 PM To: Cutter, Stephanie Subject: AIG related question/Rogers--politico
CanyoupleasesendmeacopyoftheLIddylettertoyourbossrethebonuses.Also
hadatechnicalquestionarisingfromFrankpressconference: IwastoldthatifAIGweretonotpaybonusesandbeseenindefaultoncontracts, thatcantriggersomeofthedefaultswapstheyhavebeentradingin.ThatLiddyinhisletter makesacrypticallusiontothis
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From: Sent: To: Cc: Subject: Hsu, Michael Tuesday, March 17, 2009 3:27 PM Cutter, Stephanie; 'Sarah.Dahlgren@ny.frb.org'; Smith, Michelle A,.; Williams, Andrew; 'Calvin.Mitchell@ny.frb.org'; 'Dave Skidmore'; 'Deborah.Kilroe@ny.frb.org'; 'James.Hennessy@ny.frb.org' Lambright, James; Albrecht, Stephen RE: WSJ advises the Solomon/Reddy story
Note,theemailthatJimH.willsendwillbedatedFeb28. Theratingagencydiscussions,whichiswherethebailoutpackagewaspresented(including the$30bntreaspiece),tookplaceduringthedayspriortothat. Wedidn'tknowthedetailsofFPretentionpaymentsuntilafterthedealwassealed.Period. OriginalMessage From:Cutter,Stephanie Sent:Tuesday,March17,20093:22PM To:'Sarah.Dahlgren@ny.frb.org';Smith,MichelleA,.;Williams,Andrew; Calvin.Mitchell@ny.frb.org;DaveSkidmore;Deborah.Kilroe@ny.frb.org; James.Hennessy@ny.frb.org Cc:Hsu,Michael;Lambright,James;Albrecht,Stephen Subject:RE:WSJadvisestheSolomon/Reddystory AddingsomeTreasurypeople. OriginalMessage From:Sarah.Dahlgren@ny.frb.org[mailto:Sarah.Dahlgren@ny.frb.org] Sent:Tuesday,March17,20093:20PM To:Smith,MichelleA,.;Cutter,Stephanie;Williams,Andrew;Calvin.Mitchell@ny.frb.org; DaveSkidmore;Deborah.Kilroe@ny.frb.org;James.Hennessy@ny.frb.org Subject:Re:WSJadvisestheSolomon/Reddystory JimwillforwardamessagefromtheendofFebruarytoUST.....aswell,we'llgetother chainsofemailstoUSTthatshowswhattheyknow/knewSarahDahlgrenSeniorVicePresident FederalReserveBankofNewYork Office:2127207537 Cell:(b) (6) SentfrommyBlackBerryHandheld. OriginalMessage From:Michelle.A.Smith Sent:03/17/200903:14PMAST To:"StephanieCutter"<Stephanie.Cutter@do.treas.gov>;"AndrewWilliams" <Andrew.Williams@do.treas.gov>;CalvinMitchell;"DaveSkidmore"<david.skidmore@frb.gov>; DeborahKilroe;JamesHennessy;SarahDahlgren Subject:WSJadvisestheSolomon/Reddystory
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(b) (5)
Cutter, Stephanie Tuesday, March 17, 2009 3:27 PM Lambright, James; Williams, Andrew; Albrecht, Stephen; Hsu, Michael; Wolin, Neal RE: WSJ advises the Solomon/Reddy story
OriginalMessage From:Lambright,James Sent:Tuesday,March17,20093:27PM To:Williams,Andrew;Albrecht,Stephen;Cutter,Stephanie;Hsu,Michael;Wolin,Neal Subject:Re:WSJadvisestheSolomon/Reddystory
(b) (5)
OriginalMessage From:Williams,Andrew To:Albrecht,Stephen;Cutter,Stephanie;Hsu,Michael;Wolin,Neal;Lambright,James Sent:TueMar1715:22:212009 Subject:FW:WSJadvisestheSolomon/Reddystory FYI OriginalMessage From:Sarah.Dahlgren@ny.frb.org[mailto:Sarah.Dahlgren@ny.frb.org] Sent:Tuesday,March17,20093:20PM To:Smith,MichelleA,.;Cutter,Stephanie;Williams,Andrew;Calvin.Mitchell@ny.frb.org; DaveSkidmore;Deborah.Kilroe@ny.frb.org;James.Hennessy@ny.frb.org Subject:Re:WSJadvisestheSolomon/Reddystory JimwillforwardamessagefromtheendofFebruarytoUST.....aswell,we'llgetother chainsofemailstoUSTthatshowswhattheyknow/knewSarahDahlgrenSeniorVicePresident FederalReserveBankofNewYork Office:2127207537 Cell:(b) (6) SentfrommyBlackBerryHandheld. OriginalMessage From:Michelle.A.Smith Sent:03/17/200903:14PMAST To:"StephanieCutter"<Stephanie.Cutter@do.treas.gov>;"AndrewWilliams" <Andrew.Williams@do.treas.gov>;CalvinMitchell;"DaveSkidmore"<david.skidmore@frb.gov>; DeborahKilroe;JamesHennessy;SarahDahlgren Subject:WSJadvisestheSolomon/Reddystory
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(b) (5)
Cutter, Stephanie Tuesday, March 17, 2009 3:36 PM Albrecht, Stephen; Williams, Andrew; Hsu, Michael; Wolin, Neal; Lambright, James RE: WSJ advises the Solomon/Reddy story
OriginalMessage From:Albrecht,Stephen Sent:Tuesday,March17,20093:33PM To:Cutter,Stephanie;Williams,Andrew;Hsu,Michael;Wolin,Neal;Lambright,James Subject:RE:WSJadvisestheSolomon/Reddystory (b) (5)
(b) (5)
OriginalMessage From:Cutter,Stephanie Sent:Tuesday,March17,20093:27PM To:Albrecht,Stephen;Williams,Andrew;Hsu,Michael;Wolin,Neal;Lambright,James Subject:RE:WSJadvisestheSolomon/Reddystory (b) (5) TheemailstalkaboutFSPthough.
OriginalMessage From:Albrecht,Stephen Sent:Tuesday,March17,20093:25PM To:Williams,Andrew;Cutter,Stephanie;Hsu,Michael;Wolin,Neal;Lambright,James Subject:RE:WSJadvisestheSolomon/Reddystory ThesearelikelytheemailsIwasexplainingtoAndrewearierthatIwentbackandfound yesterday.Icanforwardaswell.IhaveaFeb28raisingissuesandpromisinga presentation,andthentheMarch5partialpresentationandMarch9fullpresentationwith supportingdocs. OriginalMessage From:Williams,Andrew Sent:Tuesday,March17,20093:22PM To:Albrecht,Stephen;Cutter,Stephanie;Hsu,Michael;Wolin,Neal;Lambright,James Subject:FW:WSJadvisestheSolomon/Reddystory FYI OriginalMessage From:Sarah.Dahlgren@ny.frb.org[mailto:Sarah.Dahlgren@ny.frb.org] Sent:Tuesday,March17,20093:20PM
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(b) (5)
To:Smith,MichelleA,.;Cutter,Stephanie;Williams,Andrew;Calvin.Mitchell@ny.frb.org; DaveSkidmore;Deborah.Kilroe@ny.frb.org;James.Hennessy@ny.frb.org Subject:Re:WSJadvisestheSolomon/Reddystory JimwillforwardamessagefromtheendofFebruarytoUST.....aswell,we'llgetother chainsofemailstoUSTthatshowswhattheyknow/knewSarahDahlgrenSeniorVicePresident FederalReserveBankofNewYork Office:2127207537 Cell:(b) (6) SentfrommyBlackBerryHandheld. OriginalMessage From:Michelle.A.Smith Sent:03/17/200903:14PMAST To:"StephanieCutter"<Stephanie.Cutter@do.treas.gov>;"AndrewWilliams" <Andrew.Williams@do.treas.gov>;CalvinMitchell;"DaveSkidmore"<david.skidmore@frb.gov>; DeborahKilroe;JamesHennessy;SarahDahlgren Subject:WSJadvisestheSolomon/Reddystory
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Pone, Ray (Contractor)

From: Sent: To: Subject: Cutter, Stephanie Tuesday, March 17, 2009 4:40 PM Smith, Michelle A,.; Hsu, Michael; Lambright, James; Williams, Andrew; Baker, IsaacDisabled ; 'Calvin.Mitchel @ny.frb.org'; Albrecht, Stephen FW: AIG Bonuses?
????
From: Baker, Isaac Sent: Tuesday, March 17, 2009 4:34 PM To: Williams, Andrew; Cutter, Stephanie Subject: FW: AIG Bonuses?
Letmeknowifwerereadytopushbackonthis
From: Spoerry, Scott [mailto:Scott.Spoerry@turner.com] Sent: Tuesday, March 17, 2009 4:26 PM To: Baker, Isaac Subject: AIG Bonuses? I have to ask: Did somebody drop the ball at Treasury? Or at the Fed, on this AIG bonus matter? I read these articles from January and it seems like the SEC filings were made, you guys signed off on the December round of bonus paymentspeople must have known. Its hard not to think that the lack of senior political appointees at Treasury might not have had some effect on the way this was handled. My cell is(b) (6) if you have an opportunity of inclination to chat.
Business; Business Desk AIG is said to pay big money on division that lost billions Bloomberg News 417 words 28 January 2009 Los Angeles Times Home Edition C-7 English Copyright 2009 The Los Angeles Times American International Group Inc., the insurer saved from collapse by government money after losses on credit-default swaps, offered about $450 million in retention pay to employees of the unit that sold the derivatives, according to two people familiar with the situation. About 400 workers at the financial products unit may get the money in two installments, said the people, who declined to be named because details of the payments were confidential. The business was responsible for about $34 billion in write-downs since 2007 as the market value of swaps AIG sold to banks plunged amid the subprime mortgage market collapse.
The payments bring to more than $1 billion the amount AIG has committed to keep its employees from leaving. The New York-based insurer in September took a federal bailout to avoid bankruptcy and is selling subsidiaries to repay the government. AIG said the retention payment program was disclosed before the government rescue, now valued at $150 billion. "I was extremely disappointed -- but not surprised -- to learn that AIG will be awarding bonuses to the very division that drove the company into the ground," said Rep. Elijah Cummings (D-Md.), a member of the House Committee on Oversight and Government Reform. AIG shouldn't be awarding "millions of unmerited dollars to employees while at the same time begging the U.S. government for financial life support." Chief Executive Edward Liddy, 62, has been providing data on employee compensation to Congress, saying retention programs are needed to keep the value of the units from eroding as AIG seeks buyers. The payments have drawn criticism from legislators including Cummings, who has said that the awards are unnecessary while employment markets are weak and has called for hearings into the compensation. The U.S. lost almost 2.6 million jobs in 2008. The insurer started the retention plan for the financial products unit in the first quarter of 2008, AIG said in regulatory filings, including one in August. The program guarantees a minimum level of pay through 2009 for employees, who had $563 million wiped out from existing compensation plans in the third quarter of 2008, AIG said in a November filing, without saying how much the plan would cost. AIG said the company cut almost $800 million of deferred compensation to the unit's employees and that the most senior workers would get less than half their usual pay package. Document LATM000020090128e51s0002b
AIG offers $450 million to keep unit staff-report 342 words 27 January 2009 17:41 Reuters News English (c) 2009 Reuters Limited NEW YORK, Jan 27 (Reuters) - Insurer American International Group Inc (AIG) offered about $450 million in retention bonuses to employees of a financial unit responsible for most of its $42.5 billion in losses in the last year, according to Bloomberg News, citing two people familiar with the situation. The payments were offered to about 400 employees of AIG Financial Products (AIGFP), according to the report on Tuesday. AIGFP's heavy losses on toxic mortgage debt left AIG on the verge of bankruptcy, forcing it to seek a taxpayer-funded rescue last September that has since swelled to $150 billion. AIG spokeswoman Christina Pretto said the retention bonus scheme had been in place for nearly a year, pre-dating the federal rescue. It was instituted under then-chief executive Martin Sullivan, who left AIG last June. Pretto declined to comment on how much AIG had agreed to pay to retain AIGFP employees. A filing with the U.S. Securities and Exchange Commission last February said that to "retain and motivate" AIGFP employees, some would be "granted cash awards vesting over two years and payable in 2013." AIG said it would recognize the expense over the period of the payments. The payments are in addition to a retention scheme for employees of other units, put in place by AIG since its federal bailout. The two plans would total about $1 billion. Pretto said that AIG, once the world's largest insurer by market value, felt it had to try to keep employees at the financial products unit, which held about $2.1 trillion in derivatives at the end of 2007.
2
"It was clear, given the market environment, that we would need to retain employees to manage the complex issues arising in our financial products business," said Pretto. AIG is winding down its financial products unit, which is based in Connecticut and has an operation in London. (Reporting by Lilla Zuill) AIG/RETENTIONPAY|LANGEN|ABN|E|RBN|U|D|RNP|DNP|PCO Document LBA0000020090127e51r001t3
AIG Cancels $93.3 Million in Bonuses to Top Execs, Former Employees 503 words 8 January 2009 Best's Insurance News English Copyright 2009 (c) A.M. Best Company, Inc. All Rights Reserved. WASHINGTON (BestWire) - Responding to congressional pressure, American International Group Inc. has cancelled $93.3 million in accelerated payouts to former employees and former top executives that it previously planned to disburse as part of a plan to terminate 14 deferred compensation plans. In a filing with the U.S. Securities and Exchange Commission, AIG (NYSE: AIG) said it still would pay out $273.5 million to current employees in connection with its termination of its AIG Supplemental Incentive Savings Plan, AIG Executive Deferred Compensation Plan, SunAmerica Executive Savings Plan and 11 other legacy plans of AIG assumed in connection with acquisitions. That was down from the $367 million in deferred compensation it initially said in November it planned to pay out during the first quarter, a plan that drew scrutiny from Reps. Joseph Crowley, D-N.Y., and Paul E. Kanjorski, D-Pa., the chairman of the House Financial Services Subcommittee on Capital Markets and Insurance. According to Kanjorski, an internal probe he and Crowley requested the company perform demonstrated that $90.3 million of the payouts would have gone to former employees and agents, running counter to the stated goal of using the awards to retain key personnel. "While I commend AIG for cooperating with our inquiry, I still have many questions about the developments that led to a federal rescue of AIG, and the Federal Reserve's and the Treasury's ongoing oversight, or lack thereof, of that intervention," Kanjorski said in a statement. "This case provides a prime example of how a minimal review of AIG can result in a better use of taxpayer money." According to the company's 8-k filing, the company also will cancel deferred compensation that would have gone to executive officers invested in AIG's Senior Partners Plan. Of the $6 million of account balances in the plan, roughly $3 million was scheduled to go to executive officers, who are precluded from the awards by compensation caps instituted on companies that draw funds from the Treasury Department's Troubled Asset Relief Program. AIG's $150 billion federal rescue package includes $40 billion from the TARP's Systemically Significant Failing Institutions Program, which purchased perpetual preferred shares in the company and warrants equal to 2% of issued and outstanding shares. The Federal Reserve Bank of New York, which provided the remaining $110 billion loan and liquidity package, holds warrants for nearly 80% of the company's equity. AIG noted that it closed the deferred payment plans Dec. 31 to new contributions, but participants accounts will continue to accrue earnings until the planned April 1 distribution. Shares of AIG were selling at $1.64 the afternoon of Jan. 8, unchanged from the previous close. Most insurance subsidiaries of AIG currently have a Best's Financial Strength Rating of A (Excellent) with a negative outlook. (By R.J. Lehmann, Washington bureau manager: raymond.lehmann@ambest.com)
BN-NJ-01-08-2009 1441 ET # 122591 Document AMBEST0020090108e51800105

From: Sent: To: Cc: Subject: Rich.Ashton@frb.gov Saturday, March 21, 2009 9:41 AM James.Hennessy@ny.frb.org; Hsu, Michael Sarah.Dahlgren@ny.frb.org; Albrecht, Stephen Re: Edmund Tse -- postpones retirement and $14.3m payment until May
Jim,Doyouknowifthispaymentisunfunded,asdeferredcomparrangementstypicallyareso thatAIGwillhavetofundthispaymentfromexistingcashresources?Thanks. SentfrommyBlackBerryWirelessHandheld OriginalMessage From:JamesHennessy Sent:03/20/200906:20PMEDT To:RichAshton;michael.hsu@do.treas.gov Cc:SarahDahlgren;stephen.albrecht@do.treas.gov Subject:Re:EdmundTsepostponesretirementand$14.3mpaymentuntilMayRichand Mike, Asdiscussedearliertoday,EdmundTse,aseniorexecutiveatAIG,decidedlastnightthathe willretirefromthecompanyafter48years.UndertheAIGSeniorPartnersPlan("Plan"), uponretirementheisduetoreceive $14.3million. ThePlanwasanAIG"longterm"planunderwhichawardsweremadetoSeniorPartners(agroup ofabout70peopleasoflastfall,nowreducedtoapproximately50people).Theawards representedparticipationsinanincentivepoolthatwascalculatedbasedonincreasesin bookvalue,ifany,duringoverlapping3yearperformanceperiods.Amountsearnedinrespect ofanyperformanceperiodwerethendeferred,subjecttopayoutincashinsubsequentyears, assumingcontinuedemployment.Duringthe"deferral"period,participantsreceivedquarterly cashpaymentsinthenatureofdividendequivalents.Ifaparticipantdies,becomesdisabled orretiresatorafterage65,allearnedbutunpaidamountsaretobepaidpromptly followingsuchevent.Mr.Tseisoverage65and,asreflectedinthe2008proxyinrespect of2007,hisbalanceundertheplanat12/31/07was$14.3million. Giventhecurrentenvironment,thecompanyandMr.Tseagreedtodaythathewouldpostpone hisretirement,andhispaymentunderthePlan,untiltheannualmeetinginMay.Therewill bean8KnextTuesdayorWednesdayannouncinghisretirementanddescribingthepayment. Thishasbeenreportedinthepast.ItwillbesimilarlyreportedintheproxyonFriday, whichwillalsoshowapproximately$4minimputedincomerelatedtopasttaxremediation. Thanks
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From: Sent: To: Subject: Let's discuss Lambright, James Saturday, March 21, 2009 10:41 AM Hsu, Michael Fw: Hearing Prep Meeting Agenda: 9am 3/21/09 / (b) (6)
Code: (b) (6)
From: Gerety, Amias To: Mayock, Andrew; Adeyemo, Adewale (Wally); Fitzpayne, Alastair; Sperling, Gene; Solomon, Ian; Albrecht, Stephen; Munchus, Damon; Wallace, Kim; Knight, Bernard Jr.; Williams, Andrew; Jaconi, Kristen; Abdelrazek, Rawan; Apsel, Sarah; Lambright, James; Johnson, Alfred I.; Hsu, Michael; Gebhardt, Paige; Langdon, Michelle; Kashkari, Neel; Green, Melissa; Greene, Michelle Cc: Aviel, Sara; Matera, Cheryl; Goodman, Mary Sent: Sat Mar 21 10:35:51 2009 Subject: RE: Hearing Prep Meeting Agenda: 9am 3/21/09 / (b) (6) Code:(b) (6) # Here is what I have captured as the highlights of the feedback on the testimony. As far as schedule, I need to drive back to DC today so will not turn a draft until late tonight. If people can send any comments and chunks of language as detailed below (or others if appropriate) by early evening tonight I can then turn a full draft. Thanks, Amias (b) (5)
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From: Mayock, Andrew Sent: Saturday, March 21, 2009 10:20 AM To: Adeyemo, Adewale (Wally); Fitzpayne, Alastair; Sperling, Gene; Solomon, Ian; Albrecht, Stephen; Munchus, Damon; Wallace, Kim; Gerety, Amias; Knight, Bernard Jr.; Williams, Andrew; Jaconi, Kristen; Abdelrazek, Rawan; Apsel, Sarah; Lambright, James; Johnson, Alfred I.; Hsu, Michael; Gebhardt, Paige; Langdon, Michelle; Kashkari, Neel; Green, Melissa; Greene, Michelle Cc: Aviel, Sara; Matera, Cheryl; Goodman, Mary Subject: Re: Hearing Prep Meeting Agenda: 9am 3/21/09 /(b) (6) Code: (b) (6) #
We're putting together briefing book for tonight per call with appropriate docs. Amias - let us know what the schedule will handle for next draft and how we can help. We can get you Kohn, Bernanke and Dudley statements. Al/Ian: will you continue to QB frames and Q+A? Seems like a full integrated draft for a 3pm rvw would be good and then we can edit and drop in book. Exec secr is pulling together other supporting materials. If there are things you think are key outside of those noted, let us know. PA: a few key articles daily help too. By 4pm today. Leg: any committee intel is appreciated. By 4pm today for whatever you may have today. Al/Ian/others, feel free to add here of course. Thanks all.
From: Adeyemo, Adewale (Wally) To: Fitzpayne, Alastair; Sperling, Gene; Solomon, Ian; Albrecht, Stephen; Munchus, Damon; Wallace, Kim; Gerety, Amias; Knight, Bernard Jr.; Williams, Andrew; Jaconi, Kristen; Abdelrazek, Rawan; Apsel, Sarah; Lambright, James; Johnson, Alfred I.; Mayock, Andrew Sent: Sat Mar 21 08:34:41 2009 Subject: Hearing Prep Meeting Agenda: 9am 3/21/09 / (b) (6) Code: (b) (6) 0#
Hearing Prep Meeting Agenda: 9am 3/21/09 / (b) (6)

(b) (5)
Code:(b) (6)
130

(b) (5)
Albrecht, Stephen Saturday, March 21, 2009 9:53 PM Fitzpayne, Alastair; Cutter, Stephanie; Knight, Bernard Jr. Hsu, Michael Re: Edmund Tse -- postpones retirement and $14.3m payment until May
From: Fitzpayne, Alastair To: Albrecht, Stephen; Cutter, Stephanie; Knight, Bernard Jr. Cc: Hsu, Michael Sent: Sat Mar 21 16:58:02 2009 Subject: RE: Edmund Tse -- postpones retirement and $14.3m payment until May
Whatareouroptionsgoingforward?
(b) (5)
From: Albrecht, Stephen Sent: Saturday, March 21, 2009 3:04 PM To: Cutter, Stephanie; Knight, Bernard Jr.; Fitzpayne, Alastair Cc: Hsu, Michael Subject: Fw: Edmund Tse -- postpones retirement and $14.3m payment until May
Fyi - this issue will be reported in an AIG 8K early next week. Could get some coverage.
From: James.Hennessy@ny.frb.org To: Rich.Ashton@frb.gov ; Hsu, Michael Cc: Sarah.Dahlgren@ny.frb.org ; Albrecht, Stephen Sent: Fri Mar 20 18:20:51 2009 Subject: Re: Edmund Tse -- postpones retirement and $14.3m payment until May Rich and Mike, As discussed earlier today, Edmund Tse, a senior executive at AIG, decided last night that he will retire from the company after 48 years. Under the AIG Senior Partners Plan ("Plan"), upon retirement he is due to receive $14.3 million. The Plan was an AIG "long-term" plan under which awards were made to Senior Partners (a group of about 70 people as of last fall, now reduced to approximately 50 people). The awards represented participations in an incentive pool that was calculated based on increases in book value, if any, during overlapping 3 year performance periods. Amounts earned in respect of any performance period were then deferred, subject to pay out in cash in subsequent years, assuming continued employment. During the "deferral" period, participants received quarterly cash payments in the nature of dividend equivalents. If a participant dies, becomes disabled or retires at or after age 65, all earned but unpaid amounts are to be paid promptly following such event. Mr. Tse is over age 65 and, as reflected in the 2008 proxy in respect of 2007, his balance under the plan at 12/31/07 was $14.3 million.
83
Given the current environment, the company and Mr. Tse agreed today that he would postpone his retirement, and his payment under the Plan, until the annual meeting in May. There will be an 8-K next Tuesday or Wednesday announcing his retirement and describing the payment. This has been reported in the past. It will be similarly reported in the proxy on Friday, which will also show approximately $4m in imputed income related to past tax remediation. Thanks
84
Howard, Frank
From: Sent: To: Subject: Attachments: Neel Kashkari Neel Kashkari Saturday, March 21, 2009 11:30 PM Kashkari, NeelDisabled Re: apologies for delay testimony_nk.doc
From: "Neel.Kashkari@do.treas.gov" <Neel.Kashkari@do.treas.gov> To: Neel Kashkari Sent: Saturday, March 21, 2009 10:22:51 PM Subject: Fw: apologies for delay
----- Original Message ----From: Solomon, Ian To: Abdelrazek, Rawan; Kashkari, Neel Cc: Gerety, Amias; Lambright, James; Albrecht, Stephen Sent: Sat Mar 21 22:13:59 2009 Subject: RE: apologies for delay I feel bad for getting you guys stuff so late, and for it still being so incomplete. We will be continuing to plug on it through the night, but if you have thoughts/corrections/etc. on the section below, they are welcome. Thanks.... INTERNAL USG WORKING DRAFT...
(b) (5)
From: Sent: To:

Cc:
Subject:
Hsu, Michael Monday, March 23, 2009 7:42 PM Wolin, Neal; Lambright, James; Kashkari, Neel; Albrecht, Stephen; Solomon, lan Gerety, Amias; Morse, Duane; Ferlazzo, Ronald Tse, $14mm, wed 8-K
Fyi. I ' ll let you guys rework the info below for PA, sperling, et al. Neel, jim, or duane, pls add or correct as necessary. Let me know if you have other questions.
(b) (5)
----- Original Message ----From: Mike Hsu (b) (6) vahoo.com> To: Hsu, Michael Sent: Mon Mar 23 19:35:23 2999 Facts regarding Edmund Tse and other looming AIG compensation issues
> Edmund Tse, 72, has been with AIG for 48 years. > He is the senior-most person in the company in Asia and a top 5 employee as reported in the company's proxy statement last year. > This past Friday, he announced his intention to retire. > Under the terms of a mandatory, non-qualified, deferred payment program, he is entitled to $14.3 million. > This payment is not covered under EESA, as it is not a bonus, golden parachute, or severance. It is for services rendered, over a rolling time horizon. > The company is likely to retain Tse post-retirement through some consultant arrangement in order to help the company see through the sales of ALICO, AIA, and other Asian operations, which are part of AIG's asset disposition plan. > The company negotiated a postponement of Tse's $14.3mm payment until the next shareholders' meeting in May. > While this buys some time until the actual payment, under SEC disclosure rules the company is required to file an 8-K within four days of an event - here, Tse's announcement of his intention to retire. > Thus, the company anticipates filing an 8-K disclosing Tse's retirement and AIG's payment obligation this Wednesday. > In theory, someone with last year's proxy statement and news of Tse's retirement could figure out that the payment is an obligation of AIG's and one that is payable immediately, with or without the 8-K (i.e., for tomorrow's hearing). > There are other executives in a similar retirement position. and E&Y to generate the complete list.
1
AIG is working with DPW
InApril,AIGisscheduledtomakea$20mmpaymentto17nonFPexecutives,aspartof theretentionprogramLiddyputinplaceafterhewasnamedCEO. AIG,DPWandE&Yarecurrentlyputtingtogetheracompletescheduleofpaymentsforthe USG.Thiswilltaketimetoproducegiventhenumberofbusinessentitiesandpayment programsinplacethroughoutthecompany.

From: Sent: To: Cc: Subject: Attachments: Hsu, Michael Monday, March 30, 2009 12:51 PM Solomon, Ian; Jaconi, Kristen; Ferlazzo, Ronald Albrecht, Stephen FW: [WARNING : MESSAGE ENCRYPTED] FW: AIG Investments - Additional Information INVESTMENTS MASTER LIST.xls; Sr Partner Partner Plan Emps Vers5.xls; Voluntary Terminations 9 15 08 to 3 27 09_All Divisions (2).xls
From: Chase, Beverly Fanger [mailto:beverly.chase@dpw.com] Sent: Monday, March 30, 2009 12:31 PM To: James.Hennessy@ny.frb.org; Sarah.Dahlgren@ny.frb.org; Albrecht, Stephen; Hsu, Michael Cc: Huebner, Marshall S.; James, Ethan T.; (b) (6) @ey.com'; (b) (6) @ey.com; (b) (6) Wright, John T. Subject: [WARNING : MESSAGE ENCRYPTED] FW: AIG Investments - Additional Information FYI
@ey.com;
From: (b) (6) @aig.com] On Behalf Of (b) (6) Sent: Monday, March 30, 2009 11:17 AM To: (b) (6) @sullcrom.com'; (b) (6) , (b) (6) @NY;(b) (6) (b) (6) @ey.com'; (b) (6) @ey.com'; Chase, Beverly Fanger; (b) (6) (b) (6) @sullcrom.com'; (b) (6) Subject: AIG Investments - Additional Information Attached are the following documents: 1. List of AIG Investment employees who are in the ESP 2. List of AIG Investment regrettable losses 3. List of AIG Investment participants in phases 1, 2 and 3 retention
(b) (6) Assistant to (b) (6) (b) (6)
(b) (6)
From: (b) (6) Sent: Monday, March 30, 2009 12:53 PM To: ; (b) (6) @yahoo.com'; (b) (6)
(b) (6)
@AIG.com] @ge.com'; (b) (6) @gs.com'; (b) ;
Cc: Liddy, Edward; (b) (6) @New York; (b) (6) @aol.com'; (b) (6) (b) (6) Chase, Beverly Fanger; (b) (6) ey.com'; (b) (6) @ey.com'; 'sarah.dahlgren@ny.frb.org'; 'danielle.chei@ny.frb.org'; 'jeanette.diaz@ny.frb.org'; 'celia.marrazzo@ny.frb.org'; (b) (6) e@stblaw.com'; '(b) (6) 'james.hennessy@ny.frb.org'; (b) (6) (b) (6) (b) (6) @ey.com; (b) (6) @ey.com'; (b) (6) Subject: CMRC Meeting - March 30th at 3:00 p.m. Importance: High On behalf of (b) (6)
(b) (6)
please see the attached memorandum and attachments. Thank you.
Office of the Corporate Secretary AMERICAN INTERNATIONAL GROUP, INC. 70 Pine Street, 27th Floor New York, NY 10270
Tel: 212-770-5159
Fax: 212-785-1584
(b) (6)
@aig.com
This e-mail, and any attachments thereto, is intended only for use by the addressee(s) named herein and may contain legally privileged and/or confidential information. If you are not the intended recipient of this e-mail, you are hereby notified that any dissemination, distribution or copying of this e-mail, and any attachments thereto, is strictly prohibited. If you have received this e-mail in error, please immediately notify me at (212) 770-5159 and permanently delete the original and any copy of any e-mail and any printout thereof.
Howard, Frank
From: Sent: To: Cc: Subject: Attachments: Chase, Beverly Fanger [beverly.chase@dpw.com] Monday, March 30, 2009 2:42 PM 'James.Hennessy@ny.frb.org'; Sarah.Dahlgren@ny.frb.org; Albrecht, Stephen; Hsu, Michael Huebner, Marshall S.; James, Ethan T.; Wright, John T. ***UNCHECKED*** [WARNING : MESSAGE ENCRYPTED] FW: Payments in Excessof $250 etc Bonus Over $250000 03-30-09.zip
To ensure compliance with requirements imposed by the IRS, we inform you that, unless explicitly provided otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. ************************* Beverly F. Chase Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 chase@dpw.com (email) 212-450-4383 (tel) 212-450-3383 (fax) *************************
From: (b) (6) aig.com] On Behalf Of (b) (6) Sent: Monday, March 30, 2009 2:33 PM To: (b) (6) @sullcrom.com'; (b) (6) (b) (6) @NY; (b) (6) @ey.com'; (b) (6) @ey.com'; Chase, (b) (6) (b) (6) @sullcrom.com'; Cc:( b Subject: [Not Virus Scanned] RE: Payments in Excess of $250 etc Act II: The Attachment
(b) (6)
(b) (6)
From: (b) (6) On Behalf Of (b) (6) Sent: Monday, March 30, 2009 2:31 PM To: (b) (6) @sullcrom.com'; (b) (6) (b) (6) K(b) (6) @NY; (b) (6) k@ey.com'; (b) (6) @dpw.com'; (b) (6) @sullcrom.com'; (b) (6) Cc: (b) (6) Subject: Payments in Excess of $250 etc
@ey.com'; 'Chase, (b) (6)
(b) (6)
While still in draft form, and needing a bit more organization, attached is the list of anticipated payments either in excess of $250,000 or in concert with other payments in excess of $350,000 due to be made from 3/23/09 to 5/31/09. I hope to follow a little later with it resorted.
(b) (6) Assistant to (b) (6) (b) (6)
1
Project Maiden Compensation Overview

Updated March 19, 2009
nd on Compensation Programs
trictions:
Implications of Recent Guidance (2009 Act and February 4, 2009 Treasury Guidance)
y Response to Original Guidance (Fall 2008)
tion Decisions Made to Date
n Program Financial Products Compensation
porate and Business Unit Plans
nus Program
d Compensation Considerations
nus Proposal for AIG Investments
se Salary
nual Bonus Program
ng-Term Incentive Program
ce Program
ograms to be Reviewed
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 19, 2009 AMERICAN INTERNATIONAL GROUP, INC. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation) 1-8787 (Commission File Number) 13-2592361 (IRS Employer Identification No.)
70 Pine Street New York, New York 10270 (Address of principal executive offices) Registrants telephone number, including area code: (212) 770-7000
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below): Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) Pre-commencement communications pursuant to Rule 13e4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Section 5 Corporate Governance and Management Item 5.02. Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers. On March 19, 2009, Edmund S.W. Tse notified American International Group, Inc. (AIG) that he would be retiring as Senior Vice ChairmanLife Insurance of AIG, effective at the AIG 2009 Annual Meeting of Shareholders. In connection with his retirement, Mr. Tse also will not be standing for re-election to the AIG Board of Directors. Except as noted below, Mr. Tse will retire from all director and officer positions that he currently holds at AIG subsidiaries effective at the Annual Meeting. Mr. Tse is retiring at age 71, having worked with AIG since 1961. Mr. Tse will not be entitled to any severance payments or special separation rights as a result of his retirement. Mr. Tse is entitled only to the retirement benefits he has accrued under Hong Kong and AIG retirement programs for his 48 years of service and awards previously earned for performance in prior years under AIGs plans that require continuing longterm service. Under AIGs share-based incentive plans, Mr. Tse is entitled to receive 122,224 shares of AIG Common Stock on retirement, and, under the AIG Senior Partners Plan, Mr. Tse is entitled to $14,388,500 earned for years before 2008. At the request of AIG, Mr. Tse has agreed to enter into a Service Agreement with American International Assurance Company, Limited (AIA), an insurance subsidiary of AIG based in Hong Kong, that will become effective upon his retirement from AIG. As part of that agreement, Mr. Tse agreed to serve as Honorary Chairman of AIA and NonExecutive Chairman of each of Nan Shan Life Insurance Company, Limited and The Philippine American Life and General Insurance Company for a one-year period, subject to future extensions as agreed between AIA and Mr. Tse. AIG requested this continuing service so that it would continue to benefit from Mr. Tses expertise and relationships in Asia as AIG continues its restructuring and divestiture program. As part of the agreement, Mr. Tse agreed to abide by certain restrictive covenants and to execute a release of claims in favor of AIG. Mr. Tse will receive an annual fee of U.S. $250,000 for his service. The agreement is terminable on 30 days notice by either party, in which case the fee would be prorated. In addition, Mr. Tse will be eligible to receive a transaction bonus in an amount to be determined by AIG in its sole discretion in the event of a sale or initial public offering of any of AIGs foreign life operations (subject to limitations imposed by any other agreement or arrangement of AIG). The Service Agreement with Mr. Tse, as amended, is filed herewith as Exhibit 10.1 and is incorporated by reference herein. Section 9 Financial Statements and Exhibits Item 9.01. Financial Statements and Exhibits. (d) Exhibits.
Exhibit 10.1
Service Agreement (as amended) between Edmund S.W. Tse and AIA, dated as of March 24, 2009.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AMERICAN INTERNATIONAL GROUP, INC. (Registrant)
Date: March 25, 2009
By: /s/ Kathleen E. Shannon Name: Kathleen E. Shannon Title: Senior Vice President and Secretary
EXHIBIT INDEX Exhibit No. Exhibit 10.1 Description Service Agreement (as amended) between Edmund S.W. Tse and AIA, dated as of March 24, 2009.
Exhibit 10.1
[AIG Letterhead] March 24, 2009 Mr. Edmund S.W. Tse 10C Headland Road Repulse Bay Hong Kong Dear Edmund: Following our conversation on Friday, we have mutually confirmed that the date of your retirement from American International Group, Inc. (AIG) and its Board of Directors will be the date of our 2009 Annual Meeting of Shareholders. I am heartened that even after your retirement, we will continue to benefit from your deep expertise and knowledge of our Asian operations as we continue to execute our restructuring and divestiture program during difficult times. To coordinate your ongoing contributions to AIG, we will hereby amend the Services Agreement, dated as of March 20, 2009, between you, American International Assurance Company, Limited and AIG, to provide that the Term of that Agreement will instead begin on the date of our 2009 Annual Meeting of Shareholders. In addition, please find attached the final schedules referred to in the Services Agreement, reflecting your retirement date, updated estimates of your benefits and the final amounts of your plan awards. I thank you again for your decades of dedicated service to AIG. Sincerely, /s/ Edward M. Liddy Edward M. Liddy Chairman and Chief Executive Officer American International Group, Inc.
Accepted and agreed: /s/ Edmund S.W. Tse____________________ Edmund S.W. Tse /s/ [Mark Wilson]________________________ American International Assurance Company, Limited
By:
[Mark Wilson] [President]
SCHEDULE 1 Edmund S. W. Tse Retirement Benefits Summary Hong Kong Staff Provident Fund Mr. Tse participates in the Hong Kong Provident Fund. The Fund includes contributions from both AIG and Mr. Tse. Amounts contributed each year, and earnings thereon, are distributed in a lump sum payment upon a participants retirement after reaching age 65. Mr. Tse is currently age 71 and eligible for a lump sum distribution at retirement. Mr. Tses updated December 31, 2008 Provident Fund Account balance for his Company and Employee contribution amounts are summarized below: Company HK$ 35,253,451.28 Employee HK$ 6,427,972.38 Total Account HK$ 41,681,423.66 For a retirement date effective May 13, 2009 the total lump sum amount will be subject to market fluctuations and additional contributions made between January 1, 2009 and May 13, 2009. Supplemental Executive Retirement Plan Mr. Tse is a participant in the Supplemental Executive Retirement Plan (SERP). The retirement benefit from the SERP is payable at retirement in the form of an annuity. The SERP formula, based upon Mr. Tses age and length of service, would provide a lifetime annuity based upon 60% of Final Average Base Pay earned in the 36 months prior to retirement, reduced by the annuity equivalent of the lump sum payment Mr. Tse will receive from the Company portion of his Provident Fund account. The lump sum in the Provident Plan is converted to an equivalent annuity using the conversion factors in our qualified pension plan. Mr. Tses SERP benefit estimate (using base pay through May 13, 2009 and his December 31, 2008 Provident Fund account balance) with service projected to May 2009 is provided below. SERP Annual Annuity: Less Provident Fund Annuity Equivalent: * (FX rate @ 0.129057 as of 3/23/09) SERP Annual Retirement Benefit: $540,609 (453,311)* $ 87,298*
* This SERP benefit is payable as a lifetime annuity for Mr. Tses lifetime only. The annual amount is paid monthly effective the first of the month after Mr. Tses retirement effective date. The SERP also offers other payment options which result in a reduction to this amount to provide a survivor annuity benefit or to provide payments on a guaranteed basis for 10 years. The actual SERP benefit will be calculated using the actual market values in the Provident fund as of May 13, 2009 and will not commence until after the actual fund performance results through that date are officially finalized.
3/24/09
SCHEDULE 1 (contd) Edmund S. W. Tse Retirement Benefit Summary
Corporate Officer Group Life Insurance Benefit Mr. Tses retiree life insurance benefit is based upon 36 times his basic monthly salary with a cap at HK$3,000,000. The amount of insurance in retirement is subject to reduction based upon the following schedule: Year After Retirement First 2nd year and after Percentage of Amount of Insurance 100% 50%
Comprehensive Major Medical Plan of the Legency Plan for Retired Employee Provides comprehensive retiree medical coverage for the retiree and his spouse. For 2009 retirements, there is an annual premium contribution of USD $900 for retired employees and USD $900 for spouse coverage. The required contribution is paid on a monthly basis of USD $150 for retiree and spouse coverage.
3/24/09
SCHEDULE 2
Edmund Tse Shares and Cash Due Upon Retirement Plan Time-vested RSUs AIG DCPPP AIG Partners Plan AIG Senior Partners Plan 2005 Jan 2004 - Dec 2006 Jan 2005 - Dec 2007 TOTAL EARNED SHARES OR CASH PAYABLE $3,850,000 $5,783,750 $4,754,750 Grant Dec 2007 2005-2006 2006-2007 Earned Shares 22,404 76,800 23,020 Earned Cash
122,224
$14,388,500
3/24/09
[ADD SERVICES AGREEMENT]
Service Agreement This Services Agreement (Agreement) is entered into as of March 20, 2009, by and between Edmund S.W. Tse (Special Advisor), American International Assurance Company, Limited (the Company) and, solely with respect to paragraph 4, American International Group, Inc. 1. Purpose of Engagement (a) During the term of this Agreement, Special Advisor will serve as Honorary Chairman of the Company, providing advisory and other consulting services. Special Advisor will exercise due care, conduct himself with proper regard to the best interest of the Company and use his best efforts to promote its interests.
(b)
2.
Term (a) This Agreement will commence on March 24, 2009 and will continue for a one-year period thereafter, subject to future extensions as may be agreed to in writing by both parties and subject to early termination as provided in paragraph 5 (the Term).
3.
Fees During the Term, the Company will pay Special Advisor an annual fee of USD $250,000, prorated for any partial years during the Term. Special Advisor will submit quarterly invoices, and the Company will pay the fee on a quarterly basis.
4.
Transaction or Completion Bonus American International Group, Inc. agrees to pay Special Advisor a reasonable transaction or completion bonus in an amount to be determined by American International Group, Inc. in its sole discretion in the event of a sale or IPO of any foreign life operations (subject, of course, to any restrictions on American International Group, Inc.s ability to pay such a bonus). Any such transaction or completion bonus will survive the termination or expiration of this Agreement.
5.
Renewal and Termination (a) Special Advisor or the Company may terminate this Agreement and the Term before its scheduled expiration by giving thirty (30) days notice in writing. The Company may immediately terminate this Agreement and the Term before its scheduled expiration by written notice to Special Advisor without the notice required by paragraph (5)(a) if Special Advisor is (i) in breach of this Agreement or (ii) absent from his responsibilities under this Agreement as a result of incapacity due to
(b)
mental or physical illness or injury for a period of sixty (60) or more days during any year. (c) (d) This Agreement and the Term will automatically terminate on Special Advisors death. Upon termination or expiration of this Agreement and the Term without renewal, Special Advisor agrees to return all property belonging to the Company and any of its parents, subsidiaries or affiliates (collectively, AIG) and not to make or retain any copies, duplicates, reproductions or excerpts of AIGs materials and not to access, utilize or affect in any manner, any of AIGs property, including, without limitation, its electronic communications systems or any information contained therein.
6.
Logistics and Expenses (a) During the Term, Special Advisor will be provided with office space appropriate for his services as Honorary Chairman, administrative support, transportation services (including a car and driver for business purposes only) and reimbursement for travel (including first class travel for airfare between Hong Kong and New York), hotel accommodations and club memberships, as deemed appropriate by the Company. Special Advisor agrees to abide by all of AIGs policies and procedures applicable to outside consultants that are related to the items described under paragraph 6(a) above, and he agrees to purchase all reimbursable air tickets through a travel agency approved by AIG.
(b)
7.
Non-Competition, Non-Hire (a) Other than for the purpose of AIGs businesses, Special Advisor will not, during the Term, do or permit any of the following without the prior written consent of AIG: (i) Solicit any person who is or has been during the Term a customer of AIG for the purpose of offering to that person goods or services similar to or competing with those of the business conducted by the Company during the Term; Solicit or entice away, or endeavor to solicit or entice away, any director or employee of AIG; Cause or permit any person directly or indirectly under Special Advisors control to do any of the acts or things specified above; Be employed by an organization that provides goods or services similar to or that competes with the business conducted by the Company during the Term; and
(ii) (iii)
(iv)
2 of 7
(v)
Act as director, advisor or consultant or any other similar role in an organization that provides goods or services similar to that competes with the business conducted by the Company during the Term (this obligation shall not prevent Special Advisor from serving as an outside director as appointed by AIG).
The parties acknowledge and agree that the terms of this Agreement, including this paragraph 7, do not prevent Special Advisor from providing services to other entities (including non-AIG entities) that do not provide goods and services similar to, and that do not compete with, the business conducted by the Company. (b) (c) Ownership of not more than 1% of the outstanding stock of any publicly traded company will not be a violation of this paragraph. In addition to any other rights the Company may have, including those under paragraphs 5 and 12(e), which are expressly retained, if Special Advisor violates any provision of this paragraph 7, the Company may declare any prior payments made to Special Advisor under paragraph 3 of this Agreement void. Special Advisor agrees that, under such circumstances, he will promptly return all prior payments made to him under paragraph 3 of this Agreement. Each undertaking in paragraph 7(a) will be treated as independent of the other undertakings so that, if one or more is held to be invalid as an unreasonable restraint of trade or for any other reason, the remaining undertakings will be valid to the extent that they are not affected. While the undertakings in paragraph 7(a) are considered by the parties to be reasonable in all the circumstances, if one or more is held invalid as an unreasonable restraint of trade or for any other reason but would have been held valid if part of the wording had been deleted, the period reduced or the range of activities or area dealt with reduced in scope, the undertakings will apply with such modifications as may be necessary to make them valid.
(d)
(e)
8.
Representations and Warranties Special Advisor represents and warrants that in his capacity as Honorary Chairman he will: (a) (b) (c) Devote the necessary and appropriate amount of time, attention and skill to the performance of his duties; Conduct himself with proper regard to the bst interest of the Company and use his best efforts to promote its interests; Always abide by all of AIGs rules and procedures applicable to AIGs outside consultants;
3 of 7
(d)
Obey AIGs Code of Conduct (Code) as it applies to outside consultants, as attached in Exhibit 1 to this Agreement and which Code is made a part of this Agreement; Not disparage AIG, its officers or employees during or after his service as Honorary Chairman; and Maintain the confidential nature of all records and information (including electronic data) of AIG and not discuss those records or information except as required in the performance of Special Advisors authorized duties.
(e) (f)
9.
Confidentiality (a) Except as reasonably required in the performance of Special Advisors authorized duties, Special Advisor covenants that he will not at any time during the Term or at any time thereafter disclose to any person or otherwise make use of any of the Confidential Information which has been collected by him or made known to him by virtue of his services under this Agreement. Special Advisor further covenants to take all reasonable steps to prevent unauthorized use or disclosure of any Confidential Information. The foregoing provision does not apply to: (i) Information that by means other than Special Advisors deliberate or inadvertent disclosure becomes well known or readily ascertainable by the public; or Disclosures compelled by judicial or administrative proceedings following Special Advisors diligent challenge to such disclosure and after having afforded AIG the opportunity to participate in such proceeding.
(b)
(ii)
(c)
All notes, data of every kind (including electronic data), information and/or memoranda of any nature and in particular the Confidential Information which will be acquired, received or made by Special Advisor during the Term will be the property of the Company and will be surrendered by him to the Company upon the termination of this Agreement and the Term or at the request of the Company at any time during the Term or any time thereafter. Special Advisor acknowledges that this condition may not be altered nor its obligations excused except by a written document signed by a corporate officer of the Company. The obligations contained in this paragraph 9 will endure, even after the termination of this Agreement and the Term, except and until any Confidential Information enters the public domain as set out above. For purposes of this Agreement, Confidential Information means information which is not publicly known relating to the business
(d)
(e)
(f)
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affairs, proprietary products, technology, research, development and trade secrets of AIG and other legal entities with which AIG deals in commercial transactions. 10. Independent Contractor Special Advisor agrees that he is performing his services under this Agreement as an independent contractor and not as an employee of the Company or any of its parents, subsidiaries or affiliates. Special Advisor will be responsible for all taxes and other non-reimbursable expenses attributable to the rendition of these services and he will indemnify, hold harmless and defend the Company and their parents, subsidiaries and affiliates and their incumbent or former officers, directors, consultants, employees, successors and assigns, from any and all claims, liabilities, damages, taxes, fines or penalties sought or recovered by any governmental entity, including, but not limited to, any federal, state, local or foreign taxing authority, arising out of Special Advisors alleged failure to pay federal, state, local or foreign taxes during the Term or in respect of amounts paid during the Term. Nothing in this Agreement will be deemed to constitute a partnership or joint venture between Special Advisor and any member of AIG, nor will anything in this Agreement be deemed to constitute any member of AIG or Special Advisor as the agent of the other. Except pursuant to this Agreement, neither Special Advisor nor any member of AIG will be or become liable to or bound by any representation, act or omission whatsoever of the other. 11. Release of Claims; Acknowledgment (a) Special Advisor agrees to waive and release American International Group, Inc., the Company, their parents, subsidiaries and affiliates and their officers, directors and employees from any and all rights and claims under United States and Hong Kong law and the laws of all other relevant jurisdictions to the greatest extent permitted by applicable law, except any rights relating to obligations under this Agreement and as set forth in the two schedules provided to him in connection with his retirement (the Schedules). Special Advisor acknowledges that he is not owed any amounts from AIG except as set forth in this Agreement and in the Schedules. Payment of any sum referred to in the Schedules shall be made only upon receipt of required regulatory approvals and in accordance with the conditions thereof. Special Advisor agrees to execute any documentation that AIG may reasonably request to give effect to this paragraph.
(b) 12.
Miscellaneous (a) Neither party may assign, transfer or subcontract this Agreement or any of its obligations hereunder without the other partys express, prior written consent. Notwithstanding the foregoing, the Company may assign this Agreement to an entity under AIGs operation, management or control or to a purchaser of or successor to the
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assets of any entity or business line to which Special Advisor is to provide services under this Agreement. (b) Special Advisor agrees that he will not issue any press release or public statement of any kind, or publicize this Agreement or the business relationship between the parties without the prior review and approval of AIG, except as required by applicable law upon notice to AIG. This Agreement will be governed by the law applicable in Hong Kong and the parties irrevocably and unconditionally submit to the nonexclusive jurisdiction of the courts of Hong Kong. Special Advisor acknowledges that the services he is to provide under this Agreement are of a specific, unique and extraordinary character and that his breach or threatened breach of the Non-Competition, Non-Hire provisions set forth in paragraph 7 or the Confidentiality provisions set forth in paragraph 9 would cause irreparable injury to the Company, its parents, subsidiaries and affiliates for which monetary damages alone will not provide an adequate remedy. Accordingly, in addition to any rights or remedies the Company may have available to it under this Agreement or otherwise, it also will be entitled to an injunction to be issued by any court of competent jurisdiction, restraining Special Advisor from committing or continuing any violation of this Agreement. Special Advisor agrees that no bond will need to be posted for the Company to receive such an injunction, and no proof will be required that monetary damages for violations of the non-competition provisions would be difficult to calculate and that remedies at law would be inadequate. The provisions of paragraph 9 of this Agreement will survive the termination of this Agreement. This Agreement constitutes the entire agreement of the parties hereto and supersedes all prior and contemporaneous representations, proposals, discussions and communications, whether oral or in writing. This Agreement may be modified only in a writing signed by Special Advisor and the Company; with respect to paragraph 4, this Agreement can only be amended in a writing signed by Special Advisor, the Company and American International Group, Inc. This Agreement may be executed in any number of counterparts and such counterparts may be obtained by facsimile transmission, each of which taken together will constitute one and the same instrument. Any notices given under this Agreement (i) by the Company to Special Advisor will be in writing and will be given by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, addressed to Special Advisor at 10C Headland Road, Repulse Bay, Hong Kong or (ii) by Special Advisor to the Company will be in writing and will be given by hand delivery or by registered or certified mail, return receipt requested, postage prepaid, addressed to American International Assurance Company, Limited, care of General Counsel,
(c)
(d)
(e)
(f)
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American International Group, Inc., 70 Pine Street, New York, New York 10270.
Accepted and Agreed:
/s/ Edmund S.W. Tse Edmund S. W. Tse
3/20/09 Date
American International Assurance Company, Limited
By: /s/ Mark Wilson Name: Mark Wilson Title: President AIA
3/20/09 Date
Accepted and Agreed Solely With Respect To Paragraph 4: American International Group, Inc.
By: Name: Title: Date
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Exhibit 1
AMERICAN INTERNATIONAL GROUP, INC. CODE OF CONDUCT
Exhibit 1
Delivering on our Commitments
Code of Conduct
AIG
Our Vision
Our vision is . . . To be the worlds first-choice provider of insurance and financial services. We will create unmatched value for our customers, colleagues, business partners and shareholders as we contribute to the growth of sustainable, prosperous communities.
Our Values
People
Develop diverse talent. Reward excellence.
Customer Focus
Anticipate their priorities. Exceed their expectations.
Performance
Be accountable. Manage risks. Deliver AIGs strength.
Integrity
Work honestly. Enhance AIGs reputation.
Respect
Value all colleagues. Collaborate with one another.
Entrepreneurship
Seize opportunities. Innovate for and with customers.
Deliver the Firm

The core values and principles set forth in our Code are a reflection of the talents and expertise which distinguish AIG and are an integral component of the value proposition that we bring to our customers, employees and all of our communities as we strive every day to truly Deliver The Firm. In order to execute our Deliver The Firm strategy, AIG expects every employee to collaborate with colleagues throughout the organization, manage risks, comply with all applicable regulations and optimize operational efficiencies.
A Message from Anastasia D. Kelly

In 1919, 27 year old Cornelius Vander Starr founded an insurance agency in Shanghai, China that established the roots of the organization that became AIG. Starr was not a wealthy young man. He built a company by delivering on his commitments to customers and business partners. He acted with respect for local customers and his employees, hard work, entrepreneurial spirit and uncompromising integrity. Starrs was the right way to build a great company then. There is no other way to run a great company now. We have an exceptional legacy. This legacy is the strong foundation for our business today in the complex, highly regulated world in which AIG operates. This Code of Conduct is a tool to help each of us live up to our shared corporate Values and the commitments that guide us. This Code is neither a comprehensive resource nor a substitute for sound judgment. It is a summary of standards intended to drive integrity throughout AIG. In the 130 countries and jurisdictions in which AIG does business, words like integrity, honesty, fairness and accountability are held in common. While words matter, actions matter more. We must incorporate the letter and spirit of these principles into our actions on behalf of AIG. We must deliver on our commitments to each other, customers, business partners, shareholders and the communities where we do business. AIG is an exceptional organization, providing valuable services to customers around the world. Please join me in building on our great legacy and demonstrating the Values we share in everything we do.
Anastasia D. Kelly Executive Vice President, General Counsel, and Senior Regulatory and Compliance Officer
When used in this Code, AIG refers to American International Group, Inc. and its subsidiaries worldwide. Business units and jurisdictions may have other Codes consistent with or more stringent than this Code. These Codes may impose additional responsibilities on AIG employees in those business units and jurisdictions. Concerns regarding potential conflicts between a provision of this Code and local law should be escalated to the compliance officer assigned to your business.
Table of Contents
Our Vision, Our Values...............................Inside Cover A Message from Anastasia D. Kelly..............................1 Delivering on Our Commitments..................................4
To Whom Does this Code Apply? Individual Responsibilities Additional Responsibilities for Managers Asking Questions and Raising Concerns Non Retaliation Discipline Waivers of the Code Delivering on Our Commitments Q&A
Our Commitments to Each Other.................................6

Global Diversity and Opportunity Respecting Others Safe, Healthy and Secure Workplace Alcohol and Drug Use Employee Privacy Our Commitments to Each Other Q&A
Our Commitments in the Marketplace.........................8

Customer Privacy and Data Security Conflicts of Interest Corporate Opportunities Personal Relationships Outside Activities Gifts and Entertainment Relations with Our Business Partners Supplier Diversity Fair Dealing Antitrust and Fair Competition Competitive Information Our Commitments in the Marketplace Q&A
Our Commitments to Our Shareholders....................14

Financial Reporting Accurate Business Records Document Retention Safeguarding AIG Resources Physical Property Intellectual Property Funds Information Technology Systems Our Commitments to Our Shareholders Q&A
Our Commitments as Corporate Citizens..................17

Sustainability Political Activities Trading in Securities Money Laundering Prevention Economic Sanctions, Anti-boycott Laws and Export Control Laws Communicating with the Public Communicating with Regulators and Other Government Officials Government Business Anticorruption and Bribery Our Commitments as Corporate Citizens Q&A
Delivering on Our Commitments

At the core of AIGs business is a promise that we will stand behind our products and services. Personal and organizational integrity are critical to delivering on this promise and protecting our reputation.
Delivering on our commitments is vitally important to our employees, customers, shareholders and the communities in which we live and do business.
To Whom Does the Code Apply?

The AIG Code of Conduct (the Code) provides ethical guidelines for conducting business on behalf of AIG companies. The Code is a resource for all AIG officers and employees. This Code cannot address every issue that we may encounter but it does provide guidance and resources for those times when the right choice is not clear. Additional information, including relevant rules and policies, may be found in links throughout this document as well as in our corporate policies. Certain AIG business partners, such as agents, and consultants represent AIG to the public, and they are expected to adhere to the spirit of the Code, and to any applicable contractual provisions, when working on behalf of AIG companies. AIG is a vast organization, and yet we are united by our commitment to deliver on our promises. Each of us has a responsibility to earn the trust that is placed in us. Our fellow employees trust us to value and respect them. Our customers and business partners trust our integrity. Our shareholders trust our stewardship. Communities around the world rely on us to be responsible corporate citizens. This Code of Conduct is organized based on the commitments we deliver to each of these groups of people.
Individual Responsibilities
Meeting our responsibilities enables our business to succeed and grow, today and in the future. Each of us is expected to: Understand and act according to this Code and AIGs policies, applicable laws and regulations. Seek guidance from management, compliance personnel or AIGs legal counsel when you have questions. Promptly report concerns about possible violations of this Code or applicable laws and regulations to management or to one of the resources listed on the next page. Participate in ethics and compliance training to keep up-to-date on current standards and expectations. No reason, including the desire to meet business goals, can ever be an excuse for violating laws or regulations.
Additional Responsibilities for Managers

Each manager is expected to fulfill the following additional responsibilities: Serve as a role model for the highest ethical standards and create and sustain a culture of trust, honesty, integrity and respect. Be a resource for employees. Ensure that they are aware of, understand, and know how to apply this Code and AIGs policies, applicable laws and regulations in their daily work. Seek assistance from other managers or AIGs legal counsel, compliance officers or human resource professionals when unsure of the best response to any given situation. Be proactive. Take reasonable actions to prevent and identify misconduct. Report situations that might impact the ability of employees to act ethically on behalf of AIG.
I expect you to be honest, hard working, and treat the company as if you own it.
C.V. Starr
Asking Questions and Raising Concerns

Most concerns likely to be faced at work can be resolved by talking to and working with management, Human Resources or the compliance officer assigned to your business. In addition, AIG employees may ask questions, raise concerns or report instances of non-compliance with this Code, AIG policies or applicable laws and regulations by contacting any of the following:
AIGs Corporate Compliance Group at 1-646-857-1877 or e-mail corporatelegalcompliance@aig.com.

AIG Compliance Help Line at 1-877-244-2210 or via the internet, at www.aigcompliancehelpline.com. The Compliance Help Line is staffed by an independent third party that provides written reports to AIGs Corporate Compliance Group. Communications to the Help Line may be made anonymously, subject to local laws. Reports may be made in all major languages from anywhere in the world. For concerns related to accounting, internal accounting controls or auditing matters, employees may contact either of the above (anonymously through the helpline) or may bring the concern to the attention of the Audit Committee of AIGs Board of Directors by e-mail at accountinghotline@aig.com.
Non Retaliation
AIG prohibits retaliation against any employee for making a good faith report of actual or suspected violations of this Code, laws, regulations or AIG policy.
Discipline
Violating applicable laws, regulations or this Code, or encouraging others to do so, puts AIGs reputation at risk and therefore may result in disciplinary action. Failing to promptly report known violations by others also may be a violation of this Code. Discipline may include termination of employment and loss of employment-related benefits.
Waivers of the Code

From time to time, AIG may amend or waive certain provisions of this Code. Any employee who believes that a waiver may be appropriate should discuss the matter with their business unit compliance officer. Only the AIG Board of Directors or its Nominating and Corporate Governance Committee may grant a waiver of a specific provision of the code for an executive officer of AIG.
The Headline Test

For making better decisions
Is it Legal? Is it consistent with AIGs Values and Policies? Is it Appropriate and Honest? How would my actions be perceived if they appeared in the Newspaper?
Q&A
Q: My Business Unit sets various goals that we are supposed to achieve. Sometimes I feel pressured to violate the Code to achieve these goals. Is this acceptable? A: No. While successful businesses often set high goals and strive to achieve them you should never violate the Code of Conduct or other AIG policies to achieve your goals. Q: Our Manager typically does nothing when concerns about potential misconduct are brought to her attention. She has made things difficult for co-workers who have raised issues. Now I have a problem: a co-worker is doing something wrong. What should I do? A: Speak up. Our Code says that you should report misconduct and that you can do so without fear of retaliation. While starting with your direct manager is often the best way to get concerns addressed, if you do not believe that it is appropriate or that your manager will help, you should talk to another member of management, human resources, or to the compliance officer assigned to your business. Additionally you may call or e-mail AIGs Compliance Help Line. Q: How does the Help Line work? A: The Help Line is AIGs 24-hour line for reporting potential issues and concerns. The Help Line is staffed by professionals acting on behalf of AIG. Language translation is available. Subject to local laws, callers may choose to remain anonymous. Q: If I think that a local law conflicts with this Code, what should I do? A: If you believe local laws conflict with the Code, please discuss the issue with the compliance officer for your business.
Our Commitments to Each Other

The AIG companies have been world leaders in insurance for over 85 years because we have always believed in the power of diverse, talented people to create value and perform for customers and shareholders.
Global Diversity and Opportunity

AIG seeks to hire and promote the best talent by providing a dynamic environment that brings people with diverse skills and ideas together. An inclusive, diverse workforce fosters innovation and enhances our position as a global market leader. AIG relies on the contributions of local people who best understand the cultures in the countries and jurisdictions in which we do business. AIG has always been committed to hiring local expertise and providing local talent with a positive business environment, leadership opportunities and fair compensation. AIG provides employees with opportunities to learn, excel in their jobs, grow with the organization and profit financially.
Respecting Others
Treating others with respect means that we do not discriminate on the basis of race, color, religion, sex, national origin, age, disability, military service, marital status or sexual orientation. Respect also means valuing each others differences. We respect each others opinions and should not treat others in a harassing or threatening manner.
Warning Signs Harassment

x x x Unwelcome gestures or physical contact. The display of sexually explicit or offensive pictures or other materials. Sexual or offensive jokes or comments (explicit or by innuendo).
Respecting Others
Provide employees with opportunities based on performance and characteristics that are relevant to
job performance.
Abide by local labor and employment laws including those addressing discrimination and
harassment.
Provide a work environment free of improper harassment. Escalate concerns you may have regarding your workplace environment to human resources or the
compliance officer assigned to your business.
Safe, Healthy and Secure Workplace

AIG is committed to conducting business in a manner that protects the health, safety and security of AIG employees and customers while they are on AIG premises. Situations that may pose a health, safety, security or environmental hazard must be reported promptly to management or the appropriate corporate security personnel.
Avoiding security breaches, threats, losses and theft requires that all employees remain vigilant in the workplace and while carrying out AIG business. Notify management or Corporate Security of any issue that may impact AIGs security, emergency readiness, or fire and life safety preparedness.
Alcohol and Drug Use

Using, selling, possessing or working under the influence of illegal drugs at AIG is prohibited. Excessive or inappropriate use of alcohol while conducting business for AIG is also prohibited.
Employee Privacy
AIG respects the personal information and property of employees. Access to personal information or employee property is only authorized for appropriate personnel with a legitimate reason to access such information or property. Nonetheless, from time to time, AIG may access and monitor employee internet usage and communications. Subject to local laws, employees shall have no expectation of privacy with regard to workplace communication or use of AIG information technology resources.
Q&A
Our Commitments to Each Other
Q: My supervisor and several of my colleagues tell jokes with a sexual overtone that I find very offensive. I have not complained because I know they will tell me to mind my own business or that Im making trouble over nothing. Would they be right? A: No, they would be wrong. Offensive jokes of a sexual nature, even in private conversations that may be overheard by others, can be a form of harassment. First, you should try to talk to your supervisor and colleagues. If this does not work, or if you think doing so may subject you to retaliation or other problems, talk to a Human Resources representative or contact the compliance officer assigned to your business. Q. Isnt diversity just a U.S. issue? Why include it in the Code for a global enterprise like AIG? A: Diversity is a worldwide issue. We have always worked together to utilize the unique talents and perspectives of our diverse global workforce. Diversity is one of the key contributors to AIGs success. To make good decisions and serve our customers around the world we need a broad spectrum of perspectives and backgrounds. Q: I overheard my manager discussing with one of her peers some private information contained in a co-workers medical records. What should I do? A: Medical information is strictly confidential. Inappropriate sharing of such information is a violation of AIG policy and a breach of trust. You should raise this issue with the appropriate management personnel. If you are uncomfortable raising this issue with management, then report the matter to human resources or the compliance officer assigned to your business. Additionally you may call or e-mail AIGs Compliance Help Line.
What is our business? Its no more than a guarantee, a piece of paper. What it boils down to is people. And we take care of our people.
C.V. Starr
Our Commitments in the Marketplace

AIG is known for entrepreneurship. We compete vigorously to create new opportunities for our customers and ourselves. We seek competitive advantages only through legal and ethical business practices.
Customer Privacy and Data Security

Our customers expect us to carefully handle and safeguard the business and personal information they share with us. Never compromise a customers trust by disclosing private information other than to those with a legitimate business need to know. The classification of information as personal information or business data may differ by country. Employees who handle customer information are responsible for knowing and complying with applicable information privacy and information security laws. In all cases we must maintain appropriate physical, administrative and technical safeguards for personal information and business data. We must be especially vigilant in following laws, regulations and policies when transferring personal information and business data across country borders. If you have any questions about information privacy and/or data security, consult your manager, legal counsel and/or the compliance officer assigned to your business.
Examples of private information include:

Personal information: Information about an individual including name, address, national identity or passport number. Business data: Information related to the business plans, transactions and financial information of commercial customers, business associates and other parties.
Conflicts of Interest
Your position at AIG cannot be used for inappropriate personal gain or advantage to you or a member of your family. Any situation that creates, or even appears to create, a conflict of interest between personal interests and the interests of AIG must be avoided. Potential conflicts of interest should be reported to management, who will work with the compliance officer assigned to your business to determine how best to handle the situation.
Conflicts of Interest
Always make decisions in the best interest of AIG and our customers not to advance personal
interest.
Remain aware of how personal activities can lead to potential conflicts, such as taking a second job
with or making an investment in an AIG customer, vendor or competitor.
Discuss with your manager any situation that could be perceived as a potential conflict of interest. Proactively address situations that may put your interests or those of a family member or friend in
potential conflict with AIG.
Corporate Opportunities
AIG employees are prohibited from taking for themselves or directing to a third party a business opportunity that is discovered through the use of AIG corporate property, information or position, unless AIG has already been offered and declined the opportunity. AIG employees are prohibited from using corporate property, information or position for personal gain to the exclusion of AIG and from competing with AIG.
Personal Relationships
Immediate family members, members of your household and individuals with whom you have a close personal relationship should never improperly influence business decisions.
Outside Activities
On occasion, outside activities can create a potential conflict of interest. The following activities may be considered conflicts and should be reported as set forth below: Service with an outside business, whether as an employee, board member, officer, trustee, partner or consultant, and especially any business that currently does or seeks to do business with AIG, or competes or seeks to compete with AIG; prior written approval from your manager is required before engaging in this type of outside activity. Service with a foundation, charity or non-profit organization where an employee will be paid for his or her service; prior written approval from your manager is required before engaging in this type of outside activity. Service with a foundation, charity or non-profit organization that has a business relationship with AIG. No approval for this type of outside activity is required provided that the employee will not be paid and there is no actual, potential or perceived conflict of interest. If you have a question whether there is a conflict, discuss it with your manager or the compliance officer assigned to your business. A presentation, talk, or service on a panel in which you are offered an honorarium. If an employee is compensated for this type of activity, he/she must notify his/her manager in writing of any fees received and may be required to turn the fees received over to AIG. Serving as a public official or running for elected office; prior written approval must be obtained from AIGs General Counsel or his/her designee to serve as a public official or run for elected office. To avoid even the appearance of any conflict with AIGs interests, employees who participate in community support efforts outside of AIG-sponsored programs should never imply AIG endorsement of the effort.
Conflicts of Interest (Cont.)

Gifts and Entertainment
Modest gifts and appropriate entertainment can help strengthen business relationships, but these business courtesies, whether given or received by AIG employees, must never improperly influence business decisions. If you are offered a gift that does not meet the criteria set forth in the appropriate gifts or entertainment section on this page, politely decline the gift or entertainment. If declining a gift would be offensive or hurt a business relationship, accept the gift on behalf of AIG and submit a written gift report to your manager within 30 days. The gift must be forwarded to your manager who, together with your compliance officer, will determine the appropriate disposition of the gift. Managers are responsible for collecting gift reports and filing them with their compliance officer. Cash or cash equivalents, including gift certificates, checks, travelers checks or money orders, investment securities, negotiable instruments, payment of credit card charges or similar items, cannot be accepted or offered as gifts regardless of the amount. Special care must be taken when providing gifts and entertainment to officials or employees of governments or government-owned or controlled enterprises. When providing gifts or entertainment to government officials or employees of government owned or controlled enterprises, you are required to abide by local law and AIGs Anti-Corruption Policy. Consult with the compliance officer assigned to your business if you have any questions regarding gifts or entertainment provided to government officials. Business units may impose additional gift and entertainment restrictions and reporting requirements.
Gifts and Entertainment

Never allow business gifts and entertainment, whether given or received, to improperly influence
business decisions.
Remember if the donor is not present, then the entertainment is subject to gift policies. Respect local and cultural sensitivities when exchanging business gifts and entertainment. Never provide or accept extravagant gifts or lavish entertainment. Never offer anything that could be considered a bribe or other improper payment or gift. When
providing gifts or entertainment to government officials, comply with AIGs Anti-Corruption Policy.
Do not solicit gifts, favors or entertainment. Report any gifts valued at more than $150 USD to your manager and the compliance officer
assigned to your business, and turn it over to them for disposition.
Prior written approval of a manager is required before providing a gift valued at more than $150
USD.
Appropriate gifts or entertainment, whether given or received, should:
Have a specific business purpose. Be in good taste and not extravagant or excessive. Not be exchanged frequently with the same source. Be allowed by AIGs and the recipients organizations policies. Be reasonable, ordinary, customary and lawful in the country or region where they are exchanged. Not be intended to improperly influence business decisions. If a gift, not be valued in excess of $150 USD.
Relations with Our Business Partners

Our business partners serve as extensions of AIG. When working on behalf of AIG, business partners are expected to adhere to the spirit of the Code, and to any applicable contractual provisions. Business partners must not act in a way that is prohibited or considered improper for an AIG employee to perform. We must all ensure that customers, producers, agents, and suppliers do not exploit their relationship with AIG or use AIGs name in connection with any fraudulent, unethical or dishonest transaction. AIG business partners are expected not to create incentives for AIG employees or others who do business with AIG to violate the Codes standards.
Supplier Diversity
AIG seeks supplier partnerships with diverse businesses. We particularly value suppliers that share AIGs dedication and commitment to diversity and social responsibility. Each of us is expected to support AIGs Supplier Diversity Program by promoting the use of suppliers that meet the programs qualifications.
Fair Dealing
AIG seeks competitive advantages only through legal and ethical business practices. Each of us must conduct business in a fair manner with our customers, service providers, suppliers and competitors. Do not disparage competitors or their products and services. Improperly taking advantage of anyone through manipulation, concealment, abuse of privileged information, intentional misrepresentation of facts or any other unfair practice is not tolerated at AIG.
Relations with Our Business Partners

Be aware of business practices of AIG agents and other representatives to ensure that proper
means are used to deliver our services.
Perform appropriate due diligence regarding potential agents, consultants and independent
contractors prior to engaging their services.
Never pressure or encourage AIG suppliers or agents to engage in improper activities. Treat suppliers, agents, and other representatives with respect and consideration.
Fair Dealing
Conduct business with customers and suppliers in a manner that demonstrates our commitment
to fair competition.
Provide truthful and accurate marketing information. Gather information about competitors only according to legal and proper means and in a manner
that reinforces AIGs integrity.
Never use improper or questionable methods to gather information about competitors. Never misrepresent yourself or your purpose in business interactions with a potential or current
AIG customer or business partner.
Antitrust and Fair Competition

AIG competes vigorously and fairly around the world. We seek to maintain and grow our business through superior products and services - not through improper or anticompetitive practices. We strive to understand and comply with global competition and antitrust laws. These laws are complex. Employees who are unsure of appropriate practices should consult with the compliance officer assigned to their business for additional information and clarification. The following guidelines will help ensure fair business conduct and appropriate competition.
Do:
Compete vigorously and lawfully in every market in which AIG participates, making all business decisions independently in the best interest of AIG. Obtain competitively sensitive information about AIGs competitors only from lawful and appropriate sources. Comment on competitors or their products or services based only on factual information.
Do not:
Agree formally or informally with a competitor to fix prices or other terms of sale, rig bids, set production or sales levels, or allocate customers, markets, or territories. Discuss any of the following with a competitor: prices, bids, customer sales, commissions, terms of sale, profits, margins, costs, production, inventories, supplies, marketing plans or other competitively sensitive information. Attend meetings with competitors at which competitively sensitive information, including the subjects mentioned in the above two bullets, is discussed. Agree with others outside of AIG as to which suppliers or customers to do business with. Make unsubstantiated or untruthful comparisons to competitors or their products or services. Obtain competitively sensitive information from AIGs competitors or those known to have a duty of confidentiality to such competitors.
Warning Signs
Antitrust and Fair Competition

Antitrust and competition laws vary among different countries and states. These variations result in certain actions potentially being permitted in some countries or states and prohibited in others. If you encounter any of the activities set forth below and are not sure whether these activities are lawful, contact the compliance officer assigned to your business for advice on how to proceed: x x x x x Attempts to dictate or control a customers resale prices. Making the sale of any product or service conditional on a customers purchase of another product. Offering a customer prices or terms more favorable than those offered to a similarly situated competitor of the customer. Restricting a customer or supplier from dealing with a competitor. Selling products or services below cost or other unfair pricing or promotion practices.
Competitive Information
AIG prohibits using illegal or unethical means to obtain competitor or supplier confidential information, including trade secrets. Obtain competitive information about AIGs competitors only from lawful and appropriate sources. Do not obtain competitively sensitive information from AIGs competitors or those known to have a duty of confidentiality to such competitors. Never improperly obtain, disclose or use others trade secrets without appropriate authorization. Offers of confidential information that may have been obtained improperly must be immediately reported to the compliance officer assigned to your business.
Warning Signs
Obtaining Competitive Intelligence

x x x x Retaining documents or computer records from prior employers. Pressuring or encouraging new AIG employees to discuss confidential information from previous employers. Obtaining information through any behavior that could be construed as espionage, spying or which you would not be willing to fully disclose. Unreasonably relying on third parties claims that business intelligence was obtained properly.
Q&A
Our Commitments in the Marketplace
Q: Do data privacy laws cover only sensitive personal data, like ethnicity, medical data, credit card numbers and pension account numbers? A: No. Data privacy laws potentially apply to all data about individuals. Customers e-mail addresses, contact details, preferences, voice and image are all personal data protected by data privacy laws when such data can be linked to an identifiable individual. Q: What is meant by a valid business purpose for accepting gifts or entertainment? A: AIG employees are paid by AIG to act in its best interests. An example of a valid business purpose for accepting entertainment would be lunch from a business partner to discuss business issues and build a stronger working relationship. In contrast, accepting gifts of personal items such as jewelry does not further a business interest of AIG. Such gifts should be declined as they may compromise employee loyalty or create an obligation to the giver. Q: To help me do a better job at AIG, I kept several documents from my previous employer. These documents describe marketing initiatives my prior employer used. Can I use these documents at AIG? A: If the documents contain your former employers confidential or proprietary information then you cannot use or share this information. AIG expects all employees to honor any disclosure or use restrictions on confidential information obtained from former employers or other third parties. If you are unsure whether prior employer information would be considered confidential or subject to use restrictions, you should not use or share this information until you have consulted with the compliance officer assigned to your business.
Our Commitments to Our Shareholders

Shareholders entrust their assets to us. AIG safeguards these assets by acting with integrity in all our business practices.
Financial Reporting
Shareholders, business partners, regulators and the public rely on our financial reports to make decisions. Our financial reports must be truthful, complete, timely, fair, accurate and understandable. To ensure that we consistently meet these standards, only authorized employees may provide financial reports to external parties.
Accurate Business Records

Business records always should be prepared honestly and accurately. Information on business records never should be falsified or altered. We must never be dishonest or deceptive in maintaining AIG records, or otherwise attempt to mislead AIGs management, auditors, regulators or shareholders. Business records include information in any medium, including hard copies, electronic records, emails, instant messages, video and backup tapes.
Document Retention
We must always comply with all applicable records management policies. These policies apply to information in any medium, including but not limited to hard copies, electronic records, e-mails, instant messages, video and backup tapes. We must maintain essential information used for reporting, auditing and other critical purposes in a recoverable format for the duration of assigned retention periods. Information that is of transitory value, with no ongoing importance, or whose retention period has expired according to the applicable records management policy destruction guidelines should be discarded. AIG may suspend destruction of documents, records, or data due to possible or pending litigation, audits, investigations or regulatory inquiries via a document preservation notice issued to those AIG employees believed to have relevant materials in their possession, custody or control. It is every AIG employees duty to quickly review any document preservation notice received and follow its instructions carefully. Information subject to a document preservation notice issued by AIG should be retained until otherwise instructed, regardless of the time frame set forth in the applicable records retention policy. Any questions about how to comply with a document preservation notice should be raised as soon as possible with the contact person identified in the preservation notice. Failure to maintain required documents, records, or data may lead to disciplinary action including, termination of employment and/or civil and criminal liability for AIG and responsible individuals.
Safeguarding AIG Resources

To best serve our customers and shareholders, it is vital that we demonstrate proper care and use of our resources.
Physical Property
AIG property, including real estate, equipment and supplies, must be protected from misuse, damage, theft or other improper handling. Generally, AIG property is meant solely for AIG business, though incidental personal use, such as local telephone calls, appropriately limited personal use of e-mail, minor photocopying or computer use is permitted.
Intellectual Property
AIG intellectual property consists of any business ideas or information that AIG owns, such as unique products and methodologies. AIG protects its intellectual property through patents, trademarks and copyrights. Each of us is required to safeguard the confidential information and trade secrets belonging to AIG and its business partners.
Funds
AIG funds are to be used responsibly and solely for AIG business. Corporate credit cards issued to employees for payment of business expenses may not be used for personal expenses. Each of us has a responsibility to safeguard AIG funds from misuse or theft and ensure that AIG receives good value when spending AIG funds. We should only seek reimbursement for actual, reasonable and authorized business expenses.
Information Technology Systems

AIGs information technology systems include computers, networking resources, e-mail systems, telephone, voice systems and other computer-processed information. Each of us has a responsibility to protect these systems and the data resident on these systems, from improper access, damage or theft. Subject to applicable local laws, AIG may have the right to review all electronic mail and other electronic information to determine compliance with this Code, laws, regulations or AIG policy. All electronic information, including without limitation e-mails, instant messages, and voicemails sent or received from an AIG computer, Blackberry or work station may be subject to review.
Intellectual Property
Never improperly use AIG intellectual property. Never disclose non-public intellectual property without approval. Protect AIG intellectual property by obtaining, or helping others obtain, patents, trademarks or
copyrights as appropriate.
Never use a previous employers intellectual property without permission. Never use or copy software or documentation, except as specified in the licensing agreement. AIG
respects the limitations placed upon software by the developer or distributor. The electronic mail system is AIG property and is intended for business purposes. Occasional, incidental, appropriate personal use of the e-mail system may be permitted if the use does not interfere with any employees work performance, have undue impact on the operation of the e-mail system, or violate any other AIG policy, guideline, or standard. E-mail messages and any other communications sent or received using AIGs information technology systems are not to be used to create, store, or transmit information that is hostile, malicious, unlawful, sexually explicit, discriminatory, harassing, profane, abusive or derogatory. These systems also are not to be used to intentionally access Web sites which contain illegal, sexually explicit or discriminatory content.
Q&A
Our Commitments to Our Shareholders
Q: I think I found an error in a financial summary prepared by an outside auditor. The information is submitted for inclusion in a public disclosure. How should I raise my concern? A: It is critical that you notify someone with the authority to address the issue. The error potentially could be serious. You have a responsibility to raise your concern with appropriate individuals immediately. If unsure, contact your manager, the compliance officer for your business, the Compliance Help Line at 1-877-244-2210 or e-mail the Accounting Hotline at accountinghotline@aig.com. Q: My supervisor asked me to prepare a purchase order for services that cost $30,000. Her spending authority is only $25,000. Can I divide the order into two purchase orders to avoid getting higher level approval? A: No, you may not. Not getting the proper approvals violates AIG Policy, which is to ensure that adequate internal accounting controls are maintained and operating effectively. If you are uncomfortable telling your supervisor, alert the compliance officer assigned to your business. Q: I was attending a meeting with several other AIG managers in a hotel conference room. At lunchtime, everyone left their laptops in the room. I felt uneasy, but I did the same. Should I have done something else? A: Yes, the situation should have been handled differently. The laptops and the information on them are AIG property and frequently include confidential or sensitive data. You have a responsibility to ensure that the equipment and information is protected from loss, theft or inadvertent disclosure. You and your co-workers should have either secured the equipment/room or chosen someone to stay with the equipment. Q: I just learned that employees of a vendor have been given broad access to our networks. I dont think they need that type of access to do their work. Isnt this putting AIG information at risk? What should I do? A: You may be right, but you may not have all the information. You should first discuss the situation with your manager. If further actions are required, you or your manager should contact the compliance officer assigned to your business.
Warning Signs
Protecting Our Sensitive Information

x x x x Discussing confidential information loudly or openly when others might be able to hear. Discussing AIG proprietary information with third parties without authorization and a non disclosure agreement in place. Discussions about AIG proprietary information with customers or suppliers without proper approval and knowledge of the status of the relationship as confidential or non-confidential. Improperly discarding confidential drafts and notes.
Our Commitments as Corporate Citizens

Through our products, services and responsible business practices, AIG strives to improve the quality of life in every country where we do business. Promoting compliance with the laws and regulations that apply to our business is at the foundation of corporate citizenship.
Sustainability
Through sustainable practices, each of us can do our part to help AIG make a positive contribution to society and the environment. Our environmental insurance operations lead the way in providing solutions that promote a cleaner and safer environment. Our insurance businesses have long experience in helping our customers recover from natural disasters. Over the years, the AIG companies have invested in developing green funds that invest in projects and technology to benefit the environment. Investing in the countries throughout the world where we do business is a core strategy benefiting local economies and one with a long tradition at AIG.
Political Activities
It is important that personal political activities or interests do not conflict with responsibilities at AIG or imply AIGs support. Specifically: AIGs name never should be used by employees running for a political office, other than to identify AIG as their employer. Holding or campaigning for political office by AIG employees must not create, or appear to create, a conflict of interest with AIG duties. AIG funds or other AIG assets are never to be used for political purposes, including political advocacy (lobbying) without first consulting the AIG Vice PresidentCorporate Affairs or the Director of State Relations of the AIG Law Department. Only authorized representatives can make corporate contributions to political candidates for public office on behalf of AIG. Because laws and regulations governing corporate political activities and contributions are complex, the AIG Corporate Affairs Department or the State Relations Group of the AIG Law Department must be consulted regarding contributions to ensure such contributions and activities are permitted and consistent with AIGs business strategy for the region.
Trading in Securities
In conducting AIG business we often learn material, non-public information about AIG, its suppliers and other companies. It is our duty to safeguard this information from improper use. It is against AIG policy, and in many countries it is illegal to: Trade securities while in possession of material non-public information. Pass material non-public information to anyone who may trade securities based on it or give others recommendations to buy or sell securities.
Insurance is the magic of averages that works wonders for millions.

Sir Winston Churchill
Additionally, employees may not: Engage in speculative trading in securities of AIG or its subsidiaries. Engage in hedging transactions using AIG securities. Short sell AIG securities. Trade derivative securities, such as put or call options, swaps or collars related to AIG securities. Employees of certain business areas may be subject to pre-clearance requirements in regard to their personal trading activities.
Money Laundering Prevention

AIG is committed to meeting its responsibilities to help prevent money laundering and terrorist financing. These responsibilities generally include identifying clients, monitoring client activity and reporting suspicious or unusual activity consistent with applicable laws. Employees are required to abide by antimoney laundering programs established by AIG and its business units. Suspicious activity reporting requirements are time sensitive. Contact your manager or the compliance officer responsible for money laundering prevention as soon as you have a concern that an activity might be unusual or suspicious.
Economic Sanctions, Anti-boycott Laws and Export Control Laws

In compliance with U.S. and other applicable economic sanctions programs, AIG employees are prohibited from conducting business with or benefiting designated governments, individuals and entities (such as suspected terrorists and narcotics traffickers) as well as individuals and entities that are located in, have certain dealings with or are nationals or agents of particular countries. To determine if a government, individual or entity is subject to these prohibitions, consult with the compliance officer responsible for sanctions. AIG employees are prohibited from participating in boycotts unless sanctioned by the U.S. Government. If you are asked to participate in, or to provide information that may be used for the furtherance of such a boycott, report the matter immediately to your designated sanctions compliance officer. AIG employees must also comply with applicable export control laws. To determine if exports or reexports are subject to controls or prohibitions, consult with the compliance officer assigned to your business. As a global organization, AIG employees may be asked to follow economic sanctions or embargo laws. Since countries laws may conflict, in such a situation it is important to contact the compliance officer responsible for sanctions.
Communicating with the Public

Only persons who are authorized to do so should speak on behalf of AIG, and the information they provide must be full, fair, accurate, timely and understandable. All requests from investors, analysts and the media should be referred to AIGs Corporate Communications Departments or Investor Relations. Never give the impression that you are speaking on behalf of AIG in any personal communication, including user forums, blogs, chat rooms and bulletin boards.
Communicating with Regulators and Other Government Officials

Inquiries from regulators outside the normal course of AIGs regulatory relationships must be reported immediately to the compliance officer for your business or a designated AIG attorney before a response is made. Financial reporting related
inquiries may be responded to by authorized comptrollers. Responses to regulators must contain complete, factual and accurate information. During a regulatory inspection or examination, documents must never be concealed, destroyed or altered, nor should lies or misleading statements be made to regulators. Requests from auditors are subject to the same standards.
Government Business
Doing business with governments may present different risks than business in the commercial marketplace. Laws relating to contracting with international, federal, state and local agencies generally are more stringent and complex. Certain conduct and practices that might be acceptable in the commercial setting are prohibited in the public sector. You therefore should consult with management, or the compliance officer assigned to your business before you make any decision about doing business with government entities.
Anticorruption and Bribery

We must never use improper means to influence anothers business judgment. No AIG employee, agent, or independent contractor may provide bribes or other improper benefits to another person in order to obtain or retain business or an unfair advantage in any business interaction that involves AIG, our customers, or employees. Payments or promises to pay something of value to obtain or retain business or otherwise secure an improper advantage must never be made to a government official or employee. Government officials may include senior management of enterprises that are controlled or owned in whole or in part by a government. Anticorruption laws also prohibit the creation of inaccurate or false books and records and they require companies to develop and maintain adequate controls regarding corporate assets and accounting. All AIG employees and officers are required to comply with the U.S. Foreign Corrupt Practices Act. Any AIG employee who has knowledge of, or in good faith suspects, a violation of any of these laws, regulations or policies must report them promptly to the compliance officer assigned to your business.
Q&A
Our Commitments as Corporate Citizens
Q: I heard from my manager that a new supplier is being used in connection with a newlydeveloped product that will be announced to the public in four weeks. Investing in that supplier seems like a great investment idea. Can I let others know? A: No. This type of information is considered material, non-public information. You cannot trade while possessing it, nor should you share it with others who may use the information. Q: If I am asked to comment about AIGs financial outlook by a member of the media, may I give my opinion if I state it as such? A: No. You should not provide any comments, even personal opinion, to the press without prior approval from AIG Corporate Communications. You should refer all media requests for information to Corporate Communications. Q: An executive of a state-owned company has suggested that if we make a donation to a local charity he believes our sales efforts in his country would be more favorably received. Im uncomfortable with this. What should I do? A: You are right to be uncomfortable. The payment may be a violation of anti-bribery laws. Discuss the situation with the compliance officer assigned to your business.
The AIG Code of Conduct is not an employment contract. Nothing in the Code should be construed as a promise of any kind or as creating a contract regarding wages or any other working conditions. AIG employees have the unqualified right to terminate their employment relationship at any time for any reason, subject to any written employment agreement. Likewise, subject to any applicable laws and any written employment agreement, AIG has the right to discharge or discipline any employee with or without just cause or prior warning.
Q&A
Q: While overseas I was presented a ceremonial gift by a supplier. I didnt feel I could refuse. What should I do now? A: The gift may be accepted if: it is valued at less than $150 USD; it is otherwise consistent with the gift and entertainment policies of AIG and your business unit; and it could not be construed as unduly influencing business decisions. If refusing or returning a gift valued at more than $150 USD would be offensive, embarrassing, or hurt a business relationship, the gift may be accepted on behalf of AIG provided that acceptance does not violate any laws. In these instances, notify your manager and compliance officer, promptly turn the gift over to your manager, and file a report regarding the receipt of the gift with your manager. Q: Im an administrative assistant. My manager is very active in local politics and she often asks me to help her copy flyers and plan political events that she hosts on her own time. Since her political work is often related to our industry and to issues that have an impact on AIG, shes asked me to submit some of her expenses for reimbursement. Is this okay? A: No, it is not. Your managers expenses are her own personal contributions. AIG reimbursement of personal political contributions is prohibited by law. Your manager may also be violating our Code and policies if she is asking you to use AIG equipment or other resources, including your work time, to make copies and otherwise assist in planning her personal political activities. Q: A business partner offered me tickets to a soccer match. He couldnt use them and he told me hed throw them out if I didnt take them. May I take the tickets? A: Any business entertainment provided to an AIG employee should include a representative from the organization providing the entertainment. Otherwise, as in this case, the business courtesy would be considered a gift and AIG gift receipt standards apply. Q: Im an AIG employee in a sales position. Does AIGs gift policy apply to sales awards? A: No. The gift policy does not apply to awards that AIG provides its employees based on sales production, provided that the awards are supported by demonstrable sales objectives and objective compensation criteria. Q: Im confused about antitrust issues. What do I really need to know or do? A: Heres a simple standard in this complicated area. If a conversation or situation appears to limit competition in a market between competitors, suppliers or others, discuss it with the compliance officer assigned to your business. Q: I live in the U.S., and Im planning to run for city council. Do I need to get permission from AIG? A: You should discuss your plans with management to determine whether any potential AIG business conflict might arise if you run for elected office or are appointed to a political office. For example, complex issues regarding campaign financing and potential conflicts of interest may need to be addressed in connection with running for office. Contact the compliance officer assigned to your business before announcing your candidacy for elected office or accepting appointed office.
AIG Code of Conduct

Acknowledgement
I acknowledge that I have received the AIG Code of Conduct. I acknowledge that as an AIG: (check one) Officer Employee I am required to comply with the policies described in the AIG Code of Conduct, and failure to do so may subject me to disciplinary action, up to and including termination (and loss of employee benefits) and, if applicable, to criminal or civil proceedings. I understand if I have a concern about a violation of the AIG Code of Conduct, I must promptly report the violation to my manager and/or the compliance officer assigned to my business. Signature: Date: Name:
(please print)
AIG Company: Department: Address:
Stephen.Albrecht@do.treas.gov 03/05/2009 03:34 PM
To James.Hennessy@ny.frb.org cc Ronald.Ferlazzo@do.treas.gov Subject RE: AIG Update
Thanks Jim. We'll review, and should plan to discuss -- perhaps early next week.
From: James.Hennessy@ny.frb.org [mailto:James.Hennessy@ny.frb.org] Sent: Thursday, March 05, 2009 1:02 PM To: Albrecht, Stephen Cc: Ferlazzo, Ronald Subject: AIG Update
Steve, As promised, attached please find an overview of the AIG compensation issues, outlining what has transpired since September and matters that are in the hopper. I would draw your attention to two pages in particular:
(b) (5)
Many thanks, Jim 212-720-8195

(b) (5)
Albrecht, Stephen Monday, March 23, 2009 11:29 PM 'James.Hennessy@ny.frb.org' Re: Documents Delivered to the Hill
OriginalMessage From:James.Hennessy@ny.frb.org<James.Hennessy@ny.frb.org> To:Albrecht,Stephen;SarahDahlgren<sarah.dahlgren@ny.frb.org>;Hsu,Michael Cc:MichaelNelson<Michael.Nelson@ny.frb.org>;ScottAlvarez<Scott.Alvarez@frb.gov> Sent:MonMar2320:18:182009 Subject:Fw:DocumentsDeliveredtotheHill Mostcuriousaboutitem6(can'tseeonBB)fodderfortomorrow? OriginalMessage From:"James,EthanT."[ethan.james@dpw.com] Sent:03/23/200908:11PMAST To:JamesHennessy;"Chase,BeverlyFanger"<beverly.chase@dpw.com>;"Wright,JohnT." <john.wright@dpw.com> Subject:Fw:DocumentsDeliveredtotheHill Fyi.ETJ OriginalMessage From:(b) (6) <(b) (6) @aig.com> To:James,EthanT. Cc:(b) (6) <(b) (6) @aig.com>;(b) (6) <(b) (6) @aig.com> Sent:MonMar2319:05:222009 Subject:DocumentsDeliveredtotheHill Ethan, Peryourrequest,pleasefindattachedthefollowingdocumentsourfolksdeliveredtothe Hill: 1.TheERPPlan 2.The(b) (6) Letter 3.ThelistingofERPpayments(nonames)4.LetterfromLiddytoGeithner5.ERPWhitePaper 6.BusinessOverviewandVariablePerformancePayChart(thisisnotspecifictotheFPbonus issue)7.AIGresponsetoBarneyFrankquestions8.22609DraftoftheSystemicRisk document9.AIGSourcesofFundschart Ifyouhaveanyquestionsorifyouneedanythingelse,pleaseletusknow. Bestregards,
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Mcnulty, Amy
From: Sent: To: Subject: Goodman, Mary Tuesday, March 24, 2009 6:44 AM Hsu, Michael Re:
ThanksalotMike.Iamaroundallday. OriginalMessage From:Hsu,Michael To:Goodman,Mary Sent:TueMar2406:23:282009 Subject:Re: Noworries. Iamverypluggedintotheustteamonexeccompandtestimonyprep,etc.Justwantedtogive you/necaheadsuponthefactthattherearegoingtobeongoingpayments,(b) (5) (b) (5) (b) (5) Myworry isthatthemarchrestructuringthatwejustcommittedtoandwhichwe'reabouttocloseon fightslastyear'swarandisn'tdesignedforwhatmaybecomingrapiddeteriorationof thefranchisevalueofthebusinesses. Wouldbegoodtochatsometimelatertodaytocatchup. mike OriginalMessage From:Goodman,Mary To:Hsu,Michael Sent:TueMar2405:25:432009 Subject:Re: Mike SorryIcouldnotcallyoulastnight.Haveyougiventhisinfotoallthefolksdirectly involvedintheAIGissuesandexeccomp?Ihavenotbeendirectlyinvolvedinprepforthe testimonyorinthesubstanceheresoIhadnotheardabouttheretentionarrangementsputin placebyLiddy.Thankyouforkeepingmeposted. Canwecatchupthismorning? (b) (5) Thanks OriginalMessage From:Hsu,Michael To:Goodman,Mary Sent:MonMar2323:16:022009
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Subject: Headsup.Seebelow. Moresuchpaymentssuretocomeourway.Weknowforsureabout$20mminretentionpayments to17nonFPexecutivesinapril,whichwereestablishedunderliddy. Also,fairnumberofresignationsatthecompany.WhenIgetabetterreadonhowbad exactly,I'llletyouknow. OriginalMessage From:MikeHsu<(b) (6) @yahoo.com> To:Hsu,Michael Sent:MonMar2319:35:232009 FactsregardingEdmundTseandotherloomingAIGcompensationissues EdmundTse,72,hasbeenwithAIGfor48years. HeistheseniormostpersoninthecompanyinAsiaandatop5employeeasreportedin thecompanysproxystatementlastyear. ThispastFriday,heannouncedhisintentiontoretire. Underthetermsofamandatory,nonqualified,deferredpaymentprogram,heisentitled to$14.3million. ThispaymentisnotcoveredunderEESA,asitisnotabonus,goldenparachute,or severance.Itisforservicesrendered,overarollingtimehorizon. ThecompanyislikelytoretainTsepostretirementthroughsomeconsultantarrangement inordertohelpthecompanyseethroughthesalesofALICO,AIA,andotherAsianoperations, whicharepartofAIGsassetdispositionplan. ThecompanynegotiatedapostponementofTses$14.3mmpaymentuntilthenext shareholdersmeetinginMay. Whilethisbuyssometimeuntiltheactualpayment,underSECdisclosurerulesthe companyisrequiredtofilean8Kwithinfourdaysofaneventhere,Tsesannouncementof hisintentiontoretire. Thus,thecompanyanticipatesfilingan8KdisclosingTsesretirementandAIGs paymentobligationthisWednesday. Intheory,someonewithlastyearsproxystatementandnewsofTsesretirementcould figureoutthatthepaymentisanobligationofAIGsandonethatispayableimmediately, withorwithoutthe8K(i.e.,fortomorrowshearing). Thereareotherexecutivesinasimilarretirementposition.AIGisworkingwithDPW andE&Ytogeneratethecompletelist. InApril,AIGisscheduledtomakea$20mmpaymentto17nonFPexecutives,aspartof theretentionprogramLiddyputinplaceafterhewasnamedCEO. AIG,DPWandE&Yarecurrentlyputtingtogetheracompletescheduleofpaymentsforthe USG.Thiswilltaketimetoproducegiventhenumberofbusinessentitiesandpayment programsinplacethroughoutthecompany.
33
Howard, Frank
(b) (5)
Chase, Beverly Fanger [beverly.chase@dpw.com] Sunday, March 29, 2009 4:09 PM Albrecht, Stephen; 'James.Hennessy@ny.frb.org'; Hsu, Michael Chase, Beverly Fanger; Wright, John T.; Huebner, Marshall S. Re: updated summary of proposed bonus plan for Investments
To ensure compliance with requirements imposed by the IRS, we inform you that, unless explicitly provided otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
From: Stephen.Albrecht@do.treas.gov To: James.Hennessy@ny.frb.org ; Michael.Hsu@do.treas.gov Cc: Chase, Beverly Fanger Sent: Sun Mar 29 15:11:32 2009 Subject: Re: updated summary of proposed bonus plan for Investments
(b) (5)
From: James.Hennessy@ny.frb.org To: Hsu, Michael; Albrecht, Stephen Cc: beverly.chase@dpw.com Sent: Sun Mar 29 14:06:08 2009 Subject: Fw: updated summary of proposed bonus plan for Investments Gentlemen,
(b) (5)
Thanks, Jim
----- Forwarded by James Hennessy/NY/FRS on 03/29/2009 01:52 PM ----martha.cook@ey.com To James.Hennessy@ny.frb.org 03/29/2009 11:54 AM cc william murphy05@ey.com, Nancy.Kelly1@ey.com, Renee Tarantini@ey.com, Richard.Scarpa@ey.com, beverly.chase@dpw.com, john.wrigh @dpw.com Subject updated summary of proposed bonus plan for Investments
Howard, Frank
From: Sent: To: Cc: Subject: Attachments: James.Hennessy@ny.frb.org Sunday, March 29, 2009 4:47 PM Hsu, Michael; Albrecht, Stephen Beverly Chase Re: updated summary of proposed bonus plan for Investments pic18467.gif
(b) (5)
OriginalMessage From:JamesHennessy Sent:03/29/200902:06PMEDT To:michael.hsu@do.treas.gov;stephen.albrecht@do.treas.gov Cc:beverly.chase@dpw.com Subject:Fw:updatedsummaryofproposedbonusplanforInvestmentsGentlemen,

(b) (5)
Thanks, Jim ForwardedbyJamesHennessy/NY/FRSon03/29/200901:52PM martha.cook@ey.co m To 03/29/200911:54James.Hennessy@ny.frb.org AMcc william.murphy05@ey.com, Nancy.Kelly1@ey.com, Renee.Tarantini@ey.com, Richard.Scarpa@ey.com, beverly.chase@dpw.com, john.wright@dpw.com
1
T008738I
212-450-3383 (fax) *************************

From: Chase, Beverly Fanger Sent: Monday, March 23, 2009 6:55 PM To: 'James.Hennessy@ny.frb.org'; 'michael.hsu@do.treas.gov' Cc: 'Stephen.Albrecht@do.treas.gov'; Huebner, Marshall S.; James, Ethan T.; Wright, John T. Subject: FW: SPP balances by retirement eligibility--relevant to Edmund Tse's situation The folks at Treasury have asked for more information on the Senior Partner Plan, including information about how many others are eligible to retire and receive payments. Attached is an email summarizing the status of the participations in the Senior Partner Plan.
(b) (4)
The history of the plan is more complicated than I had recalled It was first instituted in 2005 when Mr Greenberg The
The reference in the schedules to Senior Partners who satisfy the rule of 70 is to identify those who will "forfeit" balances if they leave, but who are eligible to have their "forfeited" awards reinstated and paid out at the normal time.
To ensure compliance with requirements imposed by the IRS, we inform you that, unless explicitly provided otherwise, any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. ************************* Beverly F. Chase Davis Polk & Wardwell 450 Lexington Avenue New York, New York 10017 chase@dpw.com (email) 212-450-4383 (tel) 212-450-3383 (fax) *************************
From: (b) (6) [mailto (b) (6) Sent: Monday, March 23, 2009 6:35 PM To: Chase, Beverly Fanger Cc: (b) (6) ; (b) (6) @NY; (b) (6) (b) (6) . Subject: SPP balances by retirement eligibility @aig.com]
(b) (6)
(b) (6)
.'; (b) (6)
Attached is the list of Senior Partners, their balances (for each of the three earned plans and in aggregate) and (for each) their combined age and service as of 1-1-2010. The first page includes Senior Partners who are either not yet 55 or do not meet the rule of 70. The second page includes Senior Partners who either can retire normally (are already 65 or older) and receive final payment immediately or qualify for the rule of 70 (and are at least 55 years old) and would receive payment on the normal vesting date.
(b) (6)

From: Sent: To: Cc: Subject: James.Hennessy@ny.frb.org Tuesday, March 31, 2009 9:20 PM Chase, Beverly Fanger James, Ethan T.; Wright, John T.; Huebner, Marshall S.; Hsu, Michael; Sarah Dahlgren; Albrecht, Stephen Re: Senior Partner Plan--relevant to (b) (6) and Edmund Tse's situations
Thanks,Beverly.FRBNYisfinewiththisproceeding. "Chase,BeverlyFanger"<beverly.chase@dpw.com> 03/31/200907:31PM To "Stephen.Albrecht@do.treas.gov"<Stephen.Albrecht@do.treas.gov>,SarahDahlgren <Sarah.Dahlgren@ny.frb.org>,"'James.Hennessy@ny.frb.org'" <James.Hennessy@ny.frb.org>,"'Michael.Hsu@do.treas.gov'" <Michael.Hsu@do.treas.gov> cc "Huebner,MarshallS."<marshall.huebner@dpw.com>,"James,EthanT." <ethan.james@dpw.com>,"Wright,JohnT."<john.wright@dpw.com>SubjectSeniorPartnerPlan relevantto(b) (6) andEdmundTse'ssituations Asyouknow,(b)(4), (b)(6) Ithinkitwillimportanttogivethecompanyfeedbackonthispayment verypromptlyastheholdonthepaymenthascausedconsternationatthe CompanyandtheCMRCasweheardyesterday. BelowisanemaildescribingtheSeniorPartnerPlanandtheattached schedules. Aswehavediscussed,aSeniorpartnerwhohasreachedage65at terminationiseligibleforapayoutofhisSeniorPartnerPlanbalances. Asyouwillseeintheattachments,otherthanEdmund,thereareonly3 SeniorPartnerscurrentlyage65orolderandtheirbalancesaggregate approximately$2.5million. wasan WehavealsodiscussedthatcertainSeniorPartners((b) (6) example)whohavesatisfiedtheruleof70(ageplusservice)have customarilyhavetheirforfeitedSeniorPartnerPlanbalances"reinstated"
1
(meaningdiscretionarily,thoughroutinely,restoredafterforfeiture uponaterminationpriortoage65).Wesuccessfullypostponed(and signaledourconcern)aboutthereinstatementfor(b) (6) Nodoubtwewill hearaboutthatagain,butIdon'tthinkthatfavorableactionon(b) (6) andTsewillprovideaprecedentfor(b) (6) etal,astheydonothavea writtencontractualentitlement.Thebesttheycanargueisapast practice/courseofdealingforpeoplemeetingtheruleof70. SeniorPartnerswhodonotmeettheruleof70forfeittheirbalances withoutrestoration. ItwouldbeconsistentwiththenotionthatAIGisgoingtoliveuptoits contractualobligationstohonorthe(b) (6) andTseobligationsandit would,nodoubt,sendareassuringsignaltodoso.Inanycase,Ithink weneedtobeabletoprovidesomefeedbackpromptlysoIwantedtoraise itagainforyourconsideration.Letmeknowifyouwouldliketodiscuss thisfurther. ToensurecompliancewithrequirementsimposedbytheIRS,weinformyou that,unlessexplicitlyprovidedotherwise,anyU.S.federaltaxadvice containedinthiscommunication(includinganyattachments)isnot intendedorwrittentobeused,andcannotbeused,forthepurposeof(i) avoidingpenaltiesundertheInternalRevenueCodeor(ii)promoting, marketingorrecommendingtoanotherpartyanytransactionormatter addressedherein. ************************* BeverlyF.Chase DavisPolk&Wardwell 450LexingtonAvenue NewYork,NewYork10017 chase@dpw.com(email) 2124504383(tel) 2124503383(fax) ************************* From:Chase,BeverlyFanger Sent:Monday,March23,20096:55PM To:'James.Hennessy@ny.frb.org';'michael.hsu@do.treas.gov' Cc:'Stephen.Albrecht@do.treas.gov';Huebner,MarshallS.;James,Ethan T.;Wright,JohnT. Subject:FW:SPPbalancesbyretirementeligibilityrelevanttoEdmund Tse'ssituation ThefolksatTreasuryhaveaskedformoreinformationontheSenior PartnerPlan,includinginformationabouthowmanyothersareeligibleto retireandreceivepayments.Attachedisanemailsummarizingthestatus oftheparticipationsintheSeniorPartnerPlan. ThehistoryoftheplanismorecomplicatedthanIhadrecalled.Itwas firstinstitutedin2005whenMr.Greenberg.ThePlanisasasuccessorto aStarrplan. (b) (4) ThereferenceintheschedulestoSeniorPartnerswhosatisfytheruleof 70istoidentifythosewhowill"forfeit"balancesiftheyleave,butwho
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areeligibletohavetheir"forfeited"awardsreinstatedandpaidoutat thenormaltime. ToensurecompliancewithrequirementsimposedbytheIRS,weinformyou that,unlessexplicitlyprovidedotherwise,anyU.S.federaltaxadvice containedinthiscommunication(includinganyattachments)isnot intendedorwrittentobeused,andcannotbeused,forthepurposeof(i) avoidingpenaltiesundertheInternalRevenueCodeor(ii)promoting, marketingorrecommendingtoanotherpartyanytransactionormatter addressedherein. ************************* BeverlyF.Chase DavisPolk&Wardwell 450LexingtonAvenue NewYork,NewYork10017 chase@dpw.com(email) 2124504383(tel) 2124503383(fax) ************************* From:(b) (6) [mailto:(b) (6) @aig.com] Sent:Monday,March23,20096:35PM To:Chase,BeverlyFanger Cc:(b) (6) @NY;(b) (6) ;'(b) (6) '; (b) (6) (b) (6) .'; . Subject:SPPbalancesbyretirementeligibility AttachedisthelistofSeniorPartners,theirbalances(foreachofthe threeearnedplansandinaggregate)and(foreach)theircombinedageand serviceasof112010.ThefirstpageincludesSeniorPartnerswhoare eithernotyet55ordonotmeettheruleof70.Thesecondpageincludes SeniorPartnerswhoeithercanretirenormally(arealready65orolder) andreceivefinalpaymentimmediatelyorqualifyfortheruleof70(and areatleast55yearsold)andwouldreceivepaymentonthenormalvesting date. (b) (6) [attachment"SPPbalances&Ruleof70032309.pdf"deletedby JamesHennessy/NY/FRS]
Consumer Mortgage Coalition Financial Services Clips March 16, 2009 Page 41
Washington Post3/16/09
AIG Discloses $75 Billion in Bailout Payments

Insurer Reveals List of Taxpayer Funds Doled Out to Settle Debts With Companies, Municipalities
By Brady Dennis Washington Post Staff Writer Monday, March 16, 2009; A01
In the six months since the government's bailout of insurance giant American International Group, a rescue that has become increasingly costly and contentious, one question has loomed above all others: Where did the money go? The answer became a little clearer yesterday when AIG unexpectedly released the names of dozens of trading partners it has paid using billions in taxpayer dollars. The disclosure, which the company said was made after consulting the Federal Reserve, revealed that AIG paid more than $75 billion in the final months of 2008 to numerous domestic and foreign banks, as well as to various U.S. municipalities. The funds were paid from the government's initial $85 billion emergency loan in September and included major firms such as Goldman Sachs, Societe Generale, Deutsche Bank, Merrill Lynch, Morgan Stanley, Bank of America and Barclays. The payments were made between Sept. 16 -- the date that government assistance began -- and Dec. 31. More than $34 billion of the money went to trading partners of AIG Financial Products, the small subsidiary whose exotic derivatives brought AIG to the edge of collapse. In recent years, the firm had written massive numbers of credit-default swaps, insurance-like contracts that other companies bought as protection against the default of mortgage-backed securities. When the housing boom began to go bust, banks that had purchased the swaps demanded collateral from AIG, burying the company under a tidal wave of debt. Federal officials, wanting to keep the company from failing because they feared it was too intertwined with the global economy, stepped in to help. In the last months of 2008, AIG Financial Products paid more than $22 billion in taxpayer money to satisfy debts caused by its swap contracts. Another $12 billion went to pay off municipalities in dozens of states for whom the firm had created complex investment agreements. Nearly $44 billion went to pay debts that AIG incurred under its "securities lending" program, according to the company. In those instances, various companies borrowed securities from AIG in exchange for cash. In turn, AIG invested much of the money in mortgage-backed assets that plummeted in value, leaving the insurer on the hook for billions. Yesterday's disclosure was an about-face for AIG and the Fed. In recent weeks, public outrage and pressure from lawmakers demanding to know who benefited from the AIG bailout has reached a crescendo. But until yesterday, AIG executives and federal officials had repeatedly refused to release such details, arguing that trading partners had a right to privacy and that any disclosure could harm their businesses.
"These are extraordinary times," AIG spokeswoman Christina Pretto said yesterday in explaining the company's decision. "And we and our partners at the Fed thought this was right thing to do." Fed spokeswoman Michelle Smith agreed, saying, "We commend the company for finding a balance between its concerns with confidentiality and the concerns of the public interest." AIG's disclosure came on the same day that President Obama's top economic adviser berated the firm for its plans to dole out hundreds of millions of dollars in employee bonuses and retention pay, despite posting a record $62 billion loss in the fourth quarter of 2008. "There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous," Lawrence H. Summers, chairman of the White House National Economic Council, said yesterday during an appearance on ABC's "This Week." "What that company did, the way it was not regulated, the way no one was watching, what's proved necessary, it is outrageous." Summers was but one in a chorus of administration officials and lawmakers who took to the airwaves yesterday to excoriate AIG, whose rescue package from the federal government stands at an estimated $170 billion. "This is an example of people at the commanding heights of the economy misbehaving, abusing the system," said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee. Their anger stemmed in large part from AIG's decision to move forward with retention bonuses for executives at the troubled Financial Products unit. In early 2008, before the government rescue, the firm's employees had been promised more than $400 million in retention pay this year and next. Lawyers for the government and AIG have agreed that most of those payments, however unsavory, are legally binding. "We are a country of laws. There are contracts," Summers said yesterday. "The government cannot just abrogate contracts. Every legal step possible to limit those bonuses is being taken by Secretary Geithner and by the Federal Reserve system." In addition, AIG is in the process of paying $121 million in previously scheduled corporate bonuses and hundreds of millions more in retention payments to more than 6,000 employees throughout the company's global insurance units. The bonuses and other payments have infuriated the public and government officials. After a contentious call on Wednesday between Treasury Secretary Timothy F. Geithner and AIG chairman Edward M. Liddy, first reported by The Washington Post, Liddy agreed to alter the terms of some executive bonuses and make future payments contingent on the company's progress with its restructuring and paying back taxpayers. But in a letter that followed, Liddy said he had "grave concerns" about the impact on the firm's ability to retain talented staff "if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury." Speaking on CBS's "60 Minutes" last night, Fed Chairman Ben S. Bernanke once again expressed frustration with the bad will that AIG has wrought.
"I understand why the American people are angry," he said. "It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy." Staff writer Neil Irwin contributed to this report.
New York Times--March 16, 2009
A.I.G. Lists Which Banks It Paid With U.S. Bailouts

By MARY WILLIAMS WALSH Amid rising pressure from Congress and taxpayers, the American International Group on Sunday released the names of dozens of financial institutions that benefited from the Federal Reserves decision last fall to save the giant insurer from collapse with a huge rescue loan. Financial companies that received multibillion-dollar payments owed by A.I.G. include Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion). Big foreign banks also received large sums from the rescue, including Socit Gnrale of France and Deutsche Bank of Germany, which each received nearly $12 billion; Barclays of Britain ($8.5 billion); and UBS of Switzerland ($5 billion). A.I.G. also named the 20 largest states, starting with California, that stood to lose billions last fall because A.I.G. was holding money they had raised with bond sales. In total, A.I.G. named nearly 80 companies and municipalities that benefited most from the Fed rescue, though many more that received smaller payments were left out. The list, long sought by lawmakers, was released a day after the disclosure that A.I.G. was paying out hundreds of millions of dollars in bonuses to executives at the A.I.G. division where the companys crisis originated. That drew anger from Democratic and Republican lawmakers alike on Sunday and left the Obama administration scrambling to distance itself from A.I.G. There are a lot of terrible things that have happened in the last 18 months, but whats happened at A.I.G. is the most outrageous, Lawrence H. Summers, an economic adviser to President Obama who was Treasury secretary in the Clinton administration, said Sunday on This Week on ABC. He said the administration had determined that it could not stop the bonuses. But some members of Congress expressed outrage over the bonuses. Representative Elijah E. Cummings, a Democrat of Maryland who had demanded more information about the bonuses last December, accused the companys chief executive, Edward M. Liddy, of rewarding reckless business practices. A.I.G. has been trying to play the American people for fools by giving nearly $1 billion in bonuses by the name of retention payments, Mr. Cummings said on Sunday. These payments are nothing but a reward for obvious failure, and it is an egregious offense to have the American taxpayers foot the bill. An A.I.G. spokeswoman said Sunday that the company would not identify the recipients of these bonuses, citing privacy obligations. Ever since the insurers rescue began, with the Feds $85 billion emergency loan last fall, there have been demands for a full public accounting of how the money was used. The taxpayer
assistance has now grown to $170 billion, and the government owns nearly 80 percent of the company. But the insurance giant has refused until now to disclose the names of its trading partners, or the amounts they received, citing business confidentiality. A.I.G. finally relented after consulting with the companies that received the government support. The companys chief executive, Edward M. Liddy, said in a statement on Sunday: Our decision to disclose these transactions was made following conversations with the counterparties and the recognition of the extraordinary nature of these transactions. Still, the disclosure is not likely to calm the ire aimed at the company and its trading partners. The Fed chairman, Ben S. Bernanke, appearing on 60 Minutes on CBS on Sunday night, said: Of all the events and all of the things weve done in the last 18 months, the single one that makes me the angriest, that gives me the most angst, is the intervention with A.I.G. He went on: Here was a company that made all kinds of unconscionable bets. Then, when those bets went wrong, they had a we had a situation where the failure of that company would have brought down the financial system. In deciding to rescue A.I.G., the government worried that if it did not bail out the company, its collapse could lead to a cascading chain reaction of losses, jeopardizing the stability of the worldwide financial system. The list released by A.I.G. on Sunday, detailing payments made between September and December of last year, could bolster that justification by illustrating the breadth of losses that might have occurred had A.I.G. been allowed to fail. Some of the companies, like Goldman Sachs and Socit Gnrale, had exposure mainly through A.I.G.s derivatives program. Others, though, like Barclays and Citigroup, stood to lose mainly because they were customers of A.I.G.s securities-lending program, which does not involve derivatives. But taxpayers may have a hard time accepting that so many marquee financial companies including some American banks that received separate government help and others based overseas benefiting from government money. The outrage that has been aimed at A.I.G. could complicate the Obama administrations ability to persuade Congress to authorize future bailouts. Patience with the companys silence began to run out this month after it disclosed the largest loss in United States history and had to get a new round of government support. Members of Congress demanded in two hearings to know who was benefiting from the bailout and threatened to vote against future bailouts for anybody if they did not get the information. A.I.G.s trading partners were not innocent victims here, said Senator Christopher J. Dodd, the Connecticut Democrat who presided over one recent hearing. They were sophisticated investors who took enormous, irresponsible risks.
The anger peaked over the weekend when correspondence surfaced showing that A.I.G. was on the brink of paying rich bonuses to executives who had dealt in the derivative contracts at the center of A.I.G.s troubles. Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, implicitly questioned the Treasury Departments judgment about the whether the bonuses were binding. We need to find out whether these bonuses are legally recoverable, Mr. Frank said in an interview Sunday on Fox News. Many of the institutions that received the Fed payments were owed money by A.I.G. because they had bought its credit derivatives in essence, a type of insurance intended to protect buyers should their investments turn sour. As it turned out, many of their investments did sour, because they were linked to subprime mortgages and other shaky loans. But A.I.G. was suddenly unable to honor its promises last fall, leaving its trading partners exposed to potentially big losses. When A.I.G. received its first rescue loan of $85 billion from the Fed, in September, it forwarded about $22 billion to the companies holding its shakiest derivatives contracts. Those contracts required large collateral payments if A.I.G.s credit was downgraded, as it was that month. Among the beneficiaries of the government rescue were Wall Street firms, like Goldman Sachs, JPMorgan and Merrill Lynch that had argued in the past that derivatives were valuable riskmanagement tools that skilled investors could use wisely without any intervention from federal regulators. Initiatives to regulate financial derivatives were beaten back during the administrations of Presidents Bill Clinton and George W. Bush. Goldman Sachs had said in the past that its exposure to A.I.G.s financial trouble was immaterial. A Goldman Sachs representative was not reachable on Sunday to address whether that characterization still held. When asked about its exposure to A.I.G. in the past, Goldman Sachs has said that it used hedging strategies with other investments to reduce its exposure. Until last falls liquidity squeeze, A.I.G. officials also dismissed those who questioned its derivatives operation, saying losses were out of the question. Edmund L. Andrews and Jackie Calmes contributed reporting.
AP3/16/09
Frank assails bonuses paid to executives at AIG

House committee chairman rails against bonuses paid executives of financially-strapped AIG
x
Monday March 16, 2009, 8:24 am EDT
WASHINGTON (AP) -- Rep. Barney Frank charged Monday that a decision by financially strapped insurance giant AIG to pay millions in executive bonuses amounts to "rewarding incompetence." Echoing outrage expressed on both sides of the political aisle in the wake of revelations that American International Group will pay roughly $165 million in bonuses, Frank said he believes it's time to shake up the company. "These people may have a right to their bonuses. They don't have a right to their jobs forever," said Frank, a Massachusetts Democrat who is chairman of the House Financial Services Committee. Appearing on NBC's "Today" show, Frank noted that the Federal Reserve Board, using a Depression-era statute, was the institution that gave AIG its initial government bailout, before Congress passed legislation providing for additional assistance. He said he did not think sufficient safeguards were built into that initial bailout by the Fed. The $165 million was payable to executives by Sunday and was part of a larger total payout reportedly valued at $450 million. The company has benefited from more than $170 billion in a federal rescue. AIG reported this month that it had lost $61.7 billion for the fourth quarter of last year, the largest corporate loss in history. The bulk of the payments at issue cover AIG Financial Products, the unit of the company that sold credit default swaps, the risky contracts that caused massive losses for the insurer. It also was revealed over the weekend that American International Group Inc. used more than $90 billion in federal aid to pay out foreign and domestic banks, some of whom had received their own multibillion-dollar U.S. government bailouts. Some of the biggest recipients of the AIG money were Goldman Sachs at $12.9 billion, and three European banks -- France's Societe Generale at $11.9 billion, Germany's Deutsche Bank at $11.8 billion, and Britain's Barclays PLC at $8.5 billion. Merrill Lynch, which also is undergoing federal scrutiny of its bonus plans, received $6.8 billion as of Dec. 31. The money went to banks to cover their losses on complex mortgage investments, as well as for collateral needed for other transactions. On ABC's "Good Morning America" Monday, Sen. Richard Shelby said Congress must do everything it can to make sure the government money going to AIG is handled appropriately.
"We ought to explore everything that we can through the government to make sure that this money is not wasted," the Alabama Republican said. "These people brought this on themselves. Now you're rewarding failure. A lot of these people should be fired, not awarded bonuses. This is horrible. It's outrageous." Frank said he was disgusted, asserting that "these bonuses are going to people who screwed this thing up enormously." "Maybe it's time to fire some people," he said. "We can't keep them from getting bonuses but we can keep them from having their jobs. ... In high school, they wouldn't have gotten retention (bonuses), they would have gotten detention." AIG has agreed to Obama administration requests to restrain future payments. Treasury Secretary Timothy Geithner pressed the president's case with AIG's chairman, Edward Liddy, last week. "He stepped in and berated them, got them to reduce the bonuses following every legal means he has to do this," said Austan Goolsbee, staff director of President Barack Obama's Economic Recovery Advisory Board. Lawrence Summers, a leading Obama economic adviser, said Sunday that Geithner had used all his power, "both legal and moral, to reduce the level of these bonus payments." In an interview that aired Sunday on CBS' "60 Minutes," Federal Reserve Chairman Ben Bernanke did not address the bonuses but expressed his frustration with the AIG intervention. "It makes me angry. I slammed the phone more than a few times on discussing AIG," Bernanke said. "It's -- it's just absolutely -- I understand why the American people are angry." In a letter to Geithner dated Saturday, Liddy said outside lawyers had informed the company that AIG had contractual obligations to make the bonus payments and could face lawsuits if it did not do so.
Consumer Mortgage Coalition Financial Services ClipsCommentaries & Editorials March 17, 2009 Page 2
Fortune3/17/09 Commentary
How to stop AIG's bonuses

The President has asked government lawyers to find a way. Here's one legal argument: They're unconscionable.
By Roger Parloff, senior editor Last Updated: March 17, 2009: 10:28 AM ET NEW YORK (Fortune) -- Everyone wants to know and, today, President Obama has tasked government lawyers with figuring it out: How can we stop AIG from paying more than $165 million in bonuses that it claims it is contractually obligated to pay employees of its financial products unit - the very unit that was responsible for taxpayers having had to spend $170 billion to bail out that company? Here's one possibility - with a proviso at the end. One tack would be to invoke a controversial doctrine called "unconscionability." In extremely rare circumstances, judges will invoke this doctrine to refuse to enforce outrageously one-sided in other words, unconscionable - contract terms, even though the parties entered into those terms knowingly and voluntarily. If the judge concludes that fulfilling the contract's provisions would "shock the conscience," or some similar formulation, he might be empowered to refuse to enforce them. Courts are understandably reluctant to use the doctrine because it runs contrary to the whole premise of contract law - the notion that courts should not second-guess contracts written by competent adults. Any exception threatens to swallow the rule. Nevertheless, the doctrine has been used, for instance, to nullify exceedingly onerous consumer credit contracts. To take a famous law-school example, suppose an appliance store agrees to sell someone a blender on credit, but the person defaults. Then suppose that, under the terms of the borrower's contract, the store is entitled not only to repossess the blender, but also to repossess everything else the buyer has ever purchased from that appliance store in the past - including, say, the borrower's refrigerator, TV, vacuum cleaner, and dishwasher. Then suppose, further, that the borrower can't claim not to have understood the terms of the contract, because he'd already seen that same appliance store repossess a string of items from his next-door neighbor under identical circumstances. In that situation, courts have - notwithstanding the fact that both parties were adults and knew exactly what they were doing - struck down such terms as unconscionable. So, suppose today the government were to go to a federal court and ask it to cancel AIG's contracts as unconscionable under the absolutely extraordinary circumstances we have here, in which the taxpayers, due to an unprecedented bailout, are paying the company's obligations, and they are allegedly being asked to pay the very people whose mammoth blunders brought about the bailout in the first place. There would be little danger of creating a precedent here that would come back to haunt us, since mammoth federal bailouts are, by definition, rare.
(Note that if taxpayers hadn't bailed AIG (AIG, Fortune 500) out, and it had fallen into bankruptcy, bankruptcy judges would have had broad powers to nullify the debtor's contracts where necessary to achieve the equitable results for creditors.) Here's the big note of caution. For the sake of argument, I've been assuming that the populist assumptions about what AIG is trying to do here are correct. They might not be. If and when a judge were to look closely at the precise contract terms involved, that judge might conceivably find that, for instance, most of the people getting the bonuses were, in fact, not the same people truly responsible for the catastrophe; that, in helping wind down the unit, they were providing an invaluable service to taxpayers that no one else was qualified to perform; and that they stayed on to perform that service only because of the contract terms they were offered. These details have yet to come out, and they are the sorts of things that a judge would, thankfully, have available to him before making a decision. That said, I personally think that once a company is bailed out by taxpayers, its officers are basically government employees. I don't know any government employees who get $3-millionplus bonuses, which is what at least seven AIG financial products officers reportedly stand to receive if these contracts can't be stopped. First Published: March 16, 2009: 4:52 PM ET
The Wall Street bonus in retreat

As Washington steps up its attacks, bankers are already getting used to a whole new pay scale.
By William D. Cohan, contributor Last Updated: March 16, 2009: 1:50 PM ET NEW YORK (Fortune) -- While Washington's attacks on Wall Street bonuses have reached a fever pitch - "outrageous," declared President Obama's economic advisor Larry Summers on Sunday about AIG's bonuses - this latest round of firepower is being leveled at forces already in retreat. In the wake of one of the most heavily scrutinized bonus seasons on what is left of Wall Street, a review of how bankers and traders got paid this year reveals not only a few unexpected surprises but also a sense that market forces - with two notable exceptions - are doing as much to set compensation now as are the lawmakers in Washington. The outrageous exceptions, of course, occurred at both AIG (AIG, Fortune 500), the large international insurer that is now nearly 80%-owned by U.S. taxpayers, and at Merrill Lynch, where "Let them eat cake"-style massive bonuses were paid last December to a plethora of top traders and bankers before the firm completed its sale to Bank of America, even though Merrill lost $27.6 billion in 2008, took $10 billion in TARP funds and was days away from a likely bankruptcy filing. With complete disregard for reality, Merrill's board of directors authorized the payment of $3.6 billion in bonuses, including $209 million for 10 of Merrill's bankers and traders alone - notably $33.8 million to European investment banker Andrea Orcel - while another 149 bankers were paid $3 million each and some 700 in total were paid at least $1 million each. This tone-deaf behavior has prompted a full-blown investigation by Andrew Cuomo, the New York State attorney general, into how and why this happened. AIG has also been operating in a fantasyland where it was somehow acceptable to pay out $450 million in bonuses to the very employees in the financial products unit, in London, that caused so many of AIG's problems - and now ours too. Aside from Merrill and AIG, however, most other Wall Street firms seemed to get the message that 2008 was not the year for lavish bonuses. Top executives at Goldman Sachs (GS, Fortune 500), Morgan Stanley (MS, Fortune 500), JPMorgan Chase (JPM, Fortune 500), Bank of America (BAC, Fortune 500) and Citigroup (C, Fortune 500) took no bonuses. (Several top executives at Merrill Lynch, including Greg Fleming, Robert McCann and Rosemary Berkery also received no bonuses when they left the firm in January 2008; after requesting a $10 million bonus, former Merrill CEO John Thain quickly backtracked and got nothing, too.) The rank-andfile at Citi received cash equal to about 50% of vastly reduced bonuses, half of which was deferred for three years in case it needs to be clawed back, and half was paid in stock.
At Goldman, many bonuses were reduced by 80% from 2007 and the cash component was capped at $400,000. At UBS, the bonus pool was also cut by 80%. Cleverly, at Credit Suisse (CS), bankers and traders were paid, in large part, from a $5 billion pool stocked with some of the very same mortgage-backed securities and leveraged loans that have played such a vital role in causing the financial crisis and of which the bank had a surfeit. Any payoff from these assets will be received in around seven years. Talk about a dog's breakfast. John Mack, the CEO of Morgan Stanley, testified before Congress in February that not only had he received a zero bonus for the second year in a row but also that since he became the firm's CEO in 2005 he has never received a cash bonus. (His salary, meanwhile, was $800,000 in 2007 and his total compensation was around $1.5 million, including $400,000 in perks for use of the company's jet.) He also said his firm would take the lead in tying compensation more explicitly to the longer-term performance of bankers and traders. Morgan Stanley, in fact, was the first U.S. bank to institute a "clawback" mechanism that allows it to reclaim pay from anyone who causes detrimental harm to the firm or "significant" financial losses. "I know the American people are outraged about some compensation practices on Wall Street," Mack said. "I can understand why. I couldn't agree more that compensation should be closely tied to performance." Bankers at the firm refer crankily to their 2008 compensation as forms of scrip. Meanwhile, at Lazard, the 160-year-old M&A advisory and asset-management firm, some managing directors were surprised to discover recently that they received no cash bonuses for 2008. The bonuses they did get were about half of what they had been the year before - although others were paid better - and consisted only of Lazard's restricted stock units that vest in 2013 (the firm's stock closed Friday at $28.30, 13% above its IPO price). The ironies of that decision abound: First, until Lazard (LAZ) went public in 2005, the firm prided itself on paying its partners and employees large bonuses consisting solely of cash, as its stock was closely held by a lucky few individuals, most of whom were either Michel DavidWeill, the firm's longtime patriarch, or his relatives. Second, the firm remained profitable during 2008 - earning $206 million, excluding one-time charges - and has not taken a penny of TARP money or in any other way been a burden to anyone. While it is true that Lazard's earnings in 2008 were about 37% below the firm's earnings in 2007, the firm's decision did raise the question among many managing directors about what a banker had to do to get a cash bonus in 2008. (The answer apparently was to be at Merrill Lynch or AIG.) Lazard trumpeted in a press release that its CEO, Bruce Wasserstein, who wrested control of the firm from David-Weill soon after he came to Lazard at the end of 2001, requested "no additional bonus" for 2008 - cash, stock or otherwise. He does get a $900,000 annual salary and 2.7 million restricted stock units that vest in 2012, which he was given a year ago as part of a five-year employment agreement. As of last Friday, Wasserstein's 2008 stock grant was worth $76.4 million. Lazard spokeswoman Judi Mackey said the firm does not comment on compensation matters and so would not share Wasserstein's thinking with regard to not paying cash bonuses to everybody despite being profitable.
In the end, the bonuses paid in 2008 - whether outrageous or tempered - elicited a rare moment of public passion from Tim Geithner, the Treasury secretary and the man who will have a lot to say about how bonuses on Wall Street are doled out in the future. The leaders of the financial community "made some exceptionally bad judgments," he told Charlie Rose the other night, "not just in compensation practices, and how they ran their firms and how much risk they took but as the crisis intensified and as they got themselves in the position of needing exceptional assistance from the government, many of these boards of directors made things dramatically worse by continuing to pay out unjustifiable bonuses to their senior executives as they were losing tens of billions of dollars. That made this basic crisis of confidence much worse because people understandably looked at that and said, 'How could that be tenable?' And that leaves a deeper loss of basic faith [in the] quality of leadership in our institutions. We're not going to let that happen again." William Cohan is the author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Street, published this month by Doubleday Books, a division of Random House, Inc.
Wall St. Journal3/17/09 Editorial

MARCH 17, 2009
The Real AIG Outrage

President Obama joined yesterday in the clamor of outrage at AIG for paying some $165 million in contractually obligated employee bonuses. He and the rest of the political class thus neatly deflected attention from the larger outrage, which is the five-month Beltway cover-up over who benefited most from the AIG bailout. Taxpayers have already put up $173 billion, or more than a thousand times the amount of those bonuses, to fund the government's AIG "rescue." This federal takeover, never approved by AIG shareholders, uses the firm as a conduit to bail out other institutions. After months of government stonewalling, on Sunday night AIG officially acknowledged where most of the taxpayer funds have been going. Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion. This comes after months of claims by Goldman that all of its AIG bets were adequately hedged and that it needed no "bailout." Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts.
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Given that the government has never defined "systemic risk," we're also starting to wonder exactly which system American taxpayers are paying to protect. It's not capitalism, in which risk-takers suffer the consequences of bad decisions. And in some cases it's not even American. The U.S. government is now in the business of distributing foreign aid to offshore financiers, laundered through a once-great American company. The politicians also prefer to talk about AIG's latest bonus payments because they deflect attention from Washington's failure to supervise AIG. The Beltway crowd has been selling the story that AIG failed because it operated in a shadowy unregulated world and cleverly exploited gaps among Washington overseers. Said President Obama yesterday, "This is a corporation that finds itself in financial distress due to recklessness and greed." That's true, but Washington doesn't want you to know that various arms of government approved, enabled and encouraged AIG's disastrous bet on the U.S. housing market. Scott Polakoff, acting director of the Office of Thrift Supervision, told the Senate Banking Committee this month that, contrary to media myth, AIG's infamous Financial Products unit did not slip through the regulatory cracks. Mr. Polakoff said that the whole of AIG, including this unit, was regulated by his agency and by a "college" of global bureaucrats.
But what about that supposedly rogue AIG operation in London? Wasn't that outside the reach of federal regulators? Mr. Polakoff called it "a false statement" to say that his agency couldn't regulate the London office. And his agency wasn't the only federal regulator. AIG's Financial Products unit has been overseen for years by an SEC-approved monitor. And AIG didn't just make disastrous bets on housing using those infamous credit default swaps. AIG made the same stupid bets on housing using money in its securities lending program, which was heavily regulated at the state level. State, foreign and various U.S. federal regulators were all looking over AIG's shoulder and approving the bad housing bets. Americans always pay their mortgages, right? Mr. Polakoff said his agency "should have taken an entirely different approach" in regulating the contracts written by AIG's Financial Products unit. That's for sure, especially after March of 2005. The housing trouble began -- as most of AIG's troubles did -- when the company's board buckled under pressure from then New York Attorney General Eliot Spitzer when it fired longtime CEO Hank Greenberg. Almost immediately, Fitch took away the company's triple-A credit rating, which allowed it to borrow at cheaper rates. AIG subsequently announced an earnings restatement. The restatement addressed alleged accounting sins that Mr. Spitzer trumpeted initially but later dropped from his civil complaint. Other elements of the restatement were later reversed by AIG itself. But the damage had been done. The restatement triggered more credit ratings downgrades. Mr. Greenberg's successors seemed to understand that the game had changed, warning in a 2005 SEC filing that a lower credit rating meant the firm would likely have to post more collateral to trading counterparties. But rather than managing risks even more carefully, they went in the opposite direction. Tragically, they did what Mr. Greenberg's AIG never did -- bet big on housing. Current AIG CEO Ed Liddy was picked by the government in 2008 and didn't create the mess, and he shouldn't be blamed for honoring the firm's lawful bonus contracts. However, it is on Mr. Liddy's watch that AIG has lately been conducting a campaign to stoke fears of "systemic risk." To mute Congressional objections to taxpayer cash infusions, AIG's lobbying materials suggest that taxpayers need to continue subsidizing the insurance giant to avoid economic ruin. Among the more dubious claims is that AIG policyholders won't be able to purchase the coverage they need. The sweeteners AIG has been offering to retain customers tell a different story. Moreover, getting back to those infamous bonuses, AIG can argue that it needs to pay top dollar to survive in an ultra-competitive business, or it can argue that it offers services not otherwise available in the market, but not both. The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization. Whether or not these funds ever come back to the Treasury, regulators should now focus on getting AIG back into private hands as soon as possible. And if Treasury and the Fed want to continue bailing out foreign banks, let them make that case, honestly and directly, to American taxpayers.
Wall St. Journal3/17/09 Commentary

MARCH 17, 2009
AIG Can Be Salvaged By a Breakup

By RON SHELP
Two weeks ago the insurance giant AIG declared its fourth-quarter earnings for 2008 -- nearly $62 billion in losses, the largest quarterly corporate loss in American history. And even though it was mostly a noncash loss -- poor investments and more losses from its renegade financialproducts unit and mark-to-market accounting -- it was still shocking and hard to explain. Now we've learned that AIG, which has to date received more than $170 billion in federal funds, is paying some $165 million in bonuses to the very executives in its financial-products unit -mainly derivatives traders -- who almost sank the entire company. Not surprisingly, this has infuriated everyone from government officials to ordinary citizens. Yesterday, facing a political firestorm, President Barack Obama responded: "This is a corporation that finds itself in financial distress due to recklessness and greed," he said. "Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay." He then said he instructed Treasury Secretary Tim Geithner to pursue "every single legal avenue" to cancel the bonuses. Clearly, the president's outrage reflects the views of the American people. But unless Mr. Obama and his Treasury secretary go to extreme measures they will not succeed in canceling the AIG bonuses, many of which have already been paid out. And while these bonuses stick in my craw, there are reasons to proceed with them as part of the breakup and restructuring of a once great insurance company. First, these bonus programs were all in place well before AIG received federal funds and before the current CEO, Edward Liddy, was in charge of the company. Second, they are part of legally binding employment contracts between these executives and AIG. Even if Mr. Liddy wanted some way out of awarding these bonuses, under current law he could not. If he tried, AIG would be sued by the executives. But the real reason the bonuses are justifiable is because the executives in the financial unit are trying to undo and wind down very difficult agreements. It is in everybody's interest, AIG's and the government's, to get them cleaned up and to close down the unit. This will allow AIG to stop losing money on derivatives and related products and get out of the financial units business that wrecked the company. For the government, it means it will have to cover no further derivatives or credit default swaps and will be on its way to getting out of the insurance business. What went wrong? AIG was done in by credit default swaps and other derivatives tied to securities and corporate debt. When these financial instruments weakened, the company lost massive amounts of money. In the course of one night last September, AIG's cash needs went
from $20 billion to $80 billion. To meet these financial needs, the whole company was practically wiped out. Hank Greenberg, who was CEO of AIG for nearly 40 years, is the only one who really understands the company in all its complexity, much of which he created. What's clear, however, is that AIG will be broken up and its parts sold off to repay the government. The company has announced tentative plans to spin off its Asian life insurance company, AIA, as well as its international life insurer, ALICO. Earlier this month, AIG announced it will form AIU Holdings Inc. to facilitate the restructuring. The firm will "assist AIG in preparing for the potential sale of a minority stake in the business, which ultimately may include a public offering of shares, depending on market conditions," according to a press release. If all goes as planned, the moves could free the company of its huge debt burden and bad investments, and help retain key employees and customers. Admirers of AIG can only hope that AIU Holdings will one day be built into something like AIG was in its heyday -- before it was virtually destroyed by its bonus-seeking financial unit. Mr. Shelp, a former AIG vice president, is author of "Fallen Giant: The Amazing Story of Hank Greenberg and the History of AIG" (Wiley, 2006).
Washington Post3/17/09 Commentary
Bonus Blowback
Could outrage at AIG's maddening payouts make a bad situation worse?
Tuesday, March 17, 2009; A14
THE FINANCIAL Products division of American International Group is a monument to corporate greed and irresponsibility. It exploited the AAA credit rating of its parent, the profitable global insurance firm, to underwrite hundreds of billions of dollars worth of financial derivatives without setting aside reserves to cover the potential downside. When it faced a sudden cash shortage last fall, the U.S. Treasury and the Federal Reserve had to take it over, lest the firm's counterparties, which included such pillars of Wall Street as Merrill Lynch and Goldman Sachs, as well as European mainstays Deutsche Bank and BNP Paribas, get dragged down with it. Necessary to preserve the global financial system, the bailout of AIG is nevertheless especially galling because of the firm's recklessness and the staggering cost -- $170 billion at last check, with no end in sight. So everyone felt a surge of outrage upon learning this weekend that Financial Products executives stand to get $165 million in bonuses. The idea that the very people who built Financial Products should now receive so much taxpayer money is, indeed, disgusting. If fairness and justice were the only considerations, we would join the chorus urging the Obama administration to eliminate the bonuses. Alas, AIG Financial Products still retains tremendous potential to damage the world economy. The firm's remaining $1.6 trillion derivatives portfolio is like one of those delicate, world-destroying time bombs that James Bond used to have to disarm in the movies; the difference here is that the only people who appear to be knowledgeable enough to dismantle the bomb are the ones who built it. Or as the firm's management put it in a recent document, its books "contain a number of complex . . . transactions that are difficult to understand and manage. This is one reason replacing key traders and risk managers would not be practical on a large scale." Translation: Give them the bonuses, or they'll walk out and let Treasury Secretary Timothy F. Geithner try to figure out this mess. Like most of the people writing about AIG, we have no idea whether this threat is empty. We note, though, that the man closest to the situation, chief executive Edward M. Liddy -- who was brought in by the government to detoxify AIG -- believes that the danger is real and that the potential additional losses from a mismanaged wind-down of Financial Products could run into the many billions of dollars. He counsels paying the bonuses, on the plausible ground that $165 million is the cost of avoiding a much bigger meltdown, for which taxpayers would also be on the hook. In other words, this little episode presents in near-perfect microcosm the broader moral dilemma of bailing out miscreant financial companies. That doesn't make it any easier politically for President Obama, which is why he went before the cameras yesterday and ordered Mr. Geithner to "pursue every legal avenue to block these bonuses." This forceful statement could mean anything from "don't pay them even if they sue" to "try to negotiate a better deal once the controversy cools." We hope that the president is setting the stage to do whatever it takes to answer legitimate protests about AIG without adding to the existing dangers or jeopardizing the necessary rescues of the banking sector still to come. In his
address to Congress last month, Mr. Obama observed that "we cannot afford to govern out of anger, or yield to the politics of the moment." Those remain wise words. Do you have a different view of this issue? Debate a member of the editorial board today in the Editorial Judgment discussion group.
New York Times--March 17, 2009 Editorial
The Gift That Keeps on Giving

After four bailouts totaling some $170 billion, the American International Group has finally answered some of the questions about where the money went. Unfortunately, the answers have only succeeded in raising many more questions. On Saturday, Americans learned that A.I.G. planned to pay $165 million in bonuses to executives and employees in the very division that caused the problems that led to the federal bailouts. Taxpayers have every right to be outraged, and President Obama was right to acknowledge that outrage on Monday, when he vowed to try to stop the payments. Mr. Obamas tough talk, however, contrasted with comments made by his top economic adviser, Lawrence Summers, and by the Treasury Department. They had already expressed dismay but said that legally they could do nothing to stop the bonuses, which, in fact, had already mostly been paid on Friday. It is frustrating enough for Americans to try to figure out which part of that mixed message reflects the administrations true position. But the bigger issue is that the bonuses are something of a distraction. Seen by themselves, the payments are huge, but they are less than one-tenth of 1 percent of the money already committed to the A.I.G. bailout. Which brings us to the second disclosure of recent days. It was common knowledge that most of the A.I.G. bailout money had been funneled to the companys trading partners banks and other financial firms that would have lost big if A.I.G. were allowed to fail. On Sunday, after much prodding by Congress and the public, A.I.G. finally released the partners identities, along with amounts paid thus far to make them whole. The largest single recipient was Goldman Sachs ($12.9 billion). The amount hardly chump change even by Wall Street standards appears to contradict earlier assertions by Goldman that its exposure to risk from A.I.G. was not material and that its positions were offset by collateral or hedges. If so, why didnt the hedges pay up instead of the American taxpayers? Other recipients include 20 European banks that received a total of $58.8 billion and Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion) and Citigroup ($2.3 billion). Altogether, the disclosures account for $107.8 billion in A.I.G. bailout money. Which leaves us wondering about the rest of the money. Another $30 billion was added to the A.I.G. bailout pot this month and must be accounted for as soon as it is spent. That leaves some $32 billion unaccounted for. Where did it go? Taxpayers also need to be told the precise nature of the banks dealings with A.I.G. Appearing on 60 Minutes on Sunday, Ben Bernanke, the Federal Reserve chairman, described A.I.G. as a company that made all kinds of unconscionable bets. Well, on the other side of those bets are the banks that received the bailout money. It is possible that one side of a bet is acting unconscionably and that another side is acting in good faith. But its also possible that both sides are trying to play an unseemly game to their own advantage.
Congress must investigate, and the new disclosures give them enough to get started. Untangling all the entanglements is not only essential to understanding how the system became so badly broken, but also to restoring faith in the government that it is up to the task of fixing it.
New York Times--March 17, 2009 Commentary Dealbook
The Case for Paying Out Bonuses at A.I.G.

By ANDREW ROSS SORKIN Do we really have to foot the bill for those bonuses at the American International Group? It sure does sting. A staggering $165 million for employees of a company that nearly took down the financial system. And heck, we, the taxpayers, own nearly 80 percent of A.I.G. It doesnt seem fair. So here is a sobering thought: Maybe we have to swallow hard and pay up, partly for our own good. I can hear the howls already, so let me explain. Everyone from President Obama down seems outraged by this. The president suggested on Monday that we just tear up those bonus contracts. He told the Treasury secretary, Timothy F. Geithner, to use every legal means to recoup taxpayers money. Hard to argue there. This isnt just a matter of dollars and cents, he said. Its about our fundamental values. On that last issue, lawyers, Wall Street types and compensation consultants agree with the president. But from their point of view, the fundamental value in question here is the sanctity of contracts. That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right. As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts. If government officials were to break the contracts, they would be breaking a bond, Ms. Meyer says. They are raising a whole new question about the trust and commitment organizations have to their employees. (The auto industry unions are facing a similar issue but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.) But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it. A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave the buzz on Wall Street is that some have, and more are ready to they might simply turn around and trade against A.I.G.s book. Why not? They know how bad it is. They built it.
So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments. Not that any of this takes the bite out of paying these bonuses. For better or worse in this case, worse someone at A.I.G. decided this company needed to sign bonus agreements last year to keep people before the full extent of its problems became clear. Now we can debate why A.I.G. felt it necessary to guarantee seven executives at least $3 million apiece when the economy was clearly on shaky ground. Perhaps we will find out these contracts were a bit of sleight of hand to enrich executives who knew this financial Titanic had hit the iceberg. But another possible explanation is that A.I.G. knew it needed to keep its people. That is the explanation offered by Edward M. Liddy, who was installed as A.I.G.s chief executive when the government effectively nationalized the company last fall. (He is being paid $1 a year.) We cannot attract and retain the best and brightest talent to lead and staff the company if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury, he said. Theres some truth to what Mr. Liddy is saying. Would you want to work at A.I.G.? Sure, maybe for $3 million. But not if you could go somewhere else for even more or even much less. The jobs are terrible, said Robert M. Sedgwick, an executive compensation lawyer at Morrison Cohen who represents a number of employees of banks that have taken government money. You have to read about yourself in the paper every day. These people are leaving as soon as they can. Let them leave, you say. Where would they go, given the troubles in the financial industry? But the fact is, the real moneymakers in finance always have a place to go. You can bet that someone would scoop up the talent from A.I.G. and, quite possibly, put it to work against taxpayers interests. The word on the street is that A.I.G. employees are being heavily recruited, Ms. Meyer says. Of course, if taxpayers had not bailed out A.I.G., these contracts would not be worth anything. Andrew M. Cuomo, the attorney general of New York, made the point on Monday, when he subpoenaed A.I.G. for the names of the people who received the bonuses. If A.I.G. had spiraled into bankruptcy, its employees would have had to get in line with other unsecured creditors. Mr. Cuomo wants to know who A.I.G.s lucky employees are, and how they have been doing at their jobs. So here is a suggestion for him. Get the list, and give those big earners at A.I.G. a notso-subtle nudge: Perhaps they will volunteer to give some of their bonuses back or watch their names hit the newspapers. But in the meantime, despite how offensive and painful it might be, lets honor the contracts. The latest news on mergers and acquisitions can be found at nytimes.com/dealbook.
Wall St. Journal3/17/09

MARCH 17, 2009
Political Heat Sears AIG

Obama Vows to Block Bonuses, but It May Be Too Late; Firm Pressured to Repay U.S.
By JONATHAN WEISMAN, SUDEEP REDDY and LIAM PLEVEN
President Barack Obama said Monday that he would "pursue every single legal avenue to block" $165 million in bonuses to American International Group Inc. employees who were in part responsible for the insurance giant's near collapse. But hours later, administration officials said the payouts made Friday couldn't be extracted from their recipients without a legal fight that would cost the taxpayers even more. Instead, officials said the White House will focus on ensuring taxpayers recoup the cost of the bonuses and, going forward, executive compensation at AIG would be on a much tighter leash. As leverage, the government said it would apply new rules to the next round of AIG bailout funds, a $30 billion infusion pledged earlier this month. WSJ's Liam Pleven and Dennis Berman discuss the growing controversy over AIG's decision to award bonuses to several executives, after government funds were used to boost the troubled insurer. Mr. Obama's statements came as his administration grappled with how to manage a bipartisan firestorm that erupted after the weekend news of the bonuses, and word from his aides Sunday that they couldn't do anything to stop the payments. The confusion that seemed to mark the White House's AIG response Monday illustrates the bind that Mr. Obama finds himself in. He needs to convince Americans he shares their mounting fury over the hundreds of billions of taxpayer dollars being pumped into companies like AIG. At the same time, he needs the executives and employees of those companies to help the government untangle the current financial mess. "This is a corporation that finds itself in financial distress due to recklessness and greed," Mr. Obama said Monday, his voice rising in anger. "Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay." At issue are retention bonuses for employees of AIG's financial-products division, whose credit default swaps brought AIG to the brink of collapse. The government controls AIG through an 80% equity stake and as a major lender and doesn't have legal authority to freeze payments on its own. The U.S. has committed $173.3 billion to AIG, including $70 billion from Treasury's rescue fund.
New York Attorney General Andrew Cuomo said at a news conference Monday that AIG told him the company had already released the bonuses in question on Friday. Mr. Cuomo has subpoenaed the company seeking more information about the payments and their recipients. "We are in ongoing contact with the attorney general and will respond appropriately to the subpoena," said an AIG spokeswoman New York Attorney General Andrew Cuomo issues subpoenas for the names of AIG employees who have received bonuses. He's looking for a loophole to block the bonuses. Video courtesy of Fox News. The $165 million is the latest installment of a retention program that is slated to pay the unit's employees about $450 million. AIG had previously paid out $55 million, and an additional $230 million is pending for 2009. An administration official said that on Friday Treasury Secretary Timothy Geithner discussed the bonuses and compensation going forward with AIG's government-appointed chief executive, Edward Liddy. Mr. Liddy informed Mr. Geithner he intended to pay out the bonuses, and the Treasury secretary said there was nothing he could do legally to stop that. The official also said that Treasury has determined there is no way the government can actually extract the money from the individuals who already received the bonus payments. The government would face lawsuits with the potential of significant damage payouts and lawyer fees that could easily exceed the cost of the bonuses. Instead, the administration said it will use a $30 billion installment of bailout funds approved March 2, to bring some pressure to bear on AIG. The official said before AIG can draw down funds from the $30 billion, new rules would be written into AIG's contract to ensure no government money goes toward paying financial-products division bonuses. The cost of bonuses already paid would be recouped for the taxpayer. In a letter to Mr. Geithner dated Saturday, Mr. Liddy said the firm will "use best efforts" to reduce the pending payments by "at least 30%."
For Mr. Obama, AIG's announcement -- that it would pay more than $100 million in bonuses to the executives involved in the exotic financial instruments that helped trigger the broader financial crisis -- has become a critical political test. The president's budget blueprint for this year includes a $250 billion placeholder to cover as much as $750 billion in additional bailout funds. But anger over the bonuses could make it harder for the administration to extract any additional funds it needs from Congress. The Senate Banking Committee's top Republican, Richard Shelby, said the government's handling of AIG is compounding the negative sentiment toward more rescue money. "There's been no accountability, no transparency to speak of," he said in an interview. "Whatever we've gotten...we've had to extract it piece by piece, little by little. There's too much secrecy." On Monday, nearly 80 House Democrats wrote Mr. Obama to say they were pleased that he intended to block the bonuses, and hinted that a failure to do so would have consequences. "For the sake of the President's ability to continue to take the steps that may be necessary to rebuild our economy, there must be a stronger response than simply decrying this development," the lawmakers wrote. But administration officials also worry that taking too hard a line with AIG and other companies could discourage top financial experts and institutions from joining the government efforts to fix the financial system. That's one argument that AIG itself has used to justify the bonus payments: that if certain executives leave at this point, their departures would complicate efforts to wind down the financial-products division. The unit's books contain many transactions that are "difficult to understand and manage," according to an AIG document explaining the retention plan the company submitted with the Saturday letter to Mr. Geithner. "This is one reason replacing key traders and risk managers would not be practical on a large scale," the document continued. The controversy over the AIG payouts is the latest manifestation of a political tempest the White House has struggled to manage. Over the administration's objections, Congress imposed strict compensation limits for executives at firms receiving federal bailout money. In turn, administration aides have spent the past month trying to craft rules that would appease lawmakers without discouraging top talent from working for those companies. Payments to other recipients of federal funds, from banks to auto companies, are being closely watched on Capitol Hill, and could touch off future protests. White House aides said that administration officials had been consistent in their statements on the issue over the past few days. But the tone did appear to shift. Appearing Sunday on ABC's "This Week," the president's top economic adviser, Lawrence Summers, called the bonuses "outrageous," yet left the impression that little could be done. "The easy thing would be to just say, you know, 'Off with their heads,' and violate the contracts," he said. "But you have to think about the consequences of breaking contracts for the overall system of law." A little more than 24 hours later, the president seemed to promise much bolder action. Then by late afternoon Monday, White House and Treasury officials echoed the Summers position that nothing could be done about payments already made.
Asked why Mr. Obama's language was more pointed than Mr. Summers's comments, White House senior adviser David Axelrod said in an interview: "The president and Larry aren't identical twins." While Mr. Summers must weigh how the AIG bonuses and their fallout could impact the economy and the markets, Mr. Axelrod said, "The president's job is to speak for the country. The president explained himself in simple and direct sentences." How the AIG bonuses will be resolved "is now in the hands of the lawyers at Treasury," Mr. Axelrod added. Monica Langley and Liz Rappaport contributed to this article. Write to Jonathan Weisman at jonathan.weisman@wsj.com, Sudeep Reddy at sudeep.reddy@wsj.com and Liam Pleven at liam.pleven@wsj.com
Rage at AIG Swells As Bonuses Go Out

Fed Decided Payouts Couldn't Be Stopped
By Brady Dennis and David Cho Washington Post Staff Writers Tuesday, March 17, 2009; A01
A tidal wave of public outrage over bonus payments swamped American International Group yesterday. Hired guards stood watch outside the suburban Connecticut offices of AIG Financial Products, the division whose exotic derivatives brought the insurance giant to the brink of collapse last year. Inside, death threats and angry letters flooded e-mail inboxes. Irate callers lit up the phone lines. Senior managers submitted their resignations. Some employees didn't show up at all. "It's a mob effect," one senior executive said. "It's putting people's lives in danger." Politicians and the public spent yesterday demanding that AIG rescind payouts that they said rewarded recklessness and greed at a company being bailed out with $170 billion in taxpayer funds. But company officials contend that the uproar is scaring away the very employees who understand AIG Financial Products' complex trades and who are trying to dismantle the division before it further endangers the world's economy. "It's going to blow up," said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. "I have a horrible, horrible, horrible feeling that this is going to end badly." President Obama yesterday vowed to "pursue every legal avenue to block these bonuses." But that pledge might have come too late. About $165 million in retention payments started to go out Friday to employees at Financial Products, after numerous discussions with the Treasury Department and the Federal Reserve. Attorneys working for the Fed had been examining the matter for months and determined that the retention payments couldn't be touched because AIG would face costly lawsuits and be subject to penalties from states and foreign governments. Administration officials said over the weekend that they agreed with that assessment. AIG disclosed its retention-payment program more than a year ago, and the amount of the bonuses -- more than $400 million for Financial Products alone -- had been widely reported. But as the payments were coming due in recent days, the White House began to express its indignation. Pressure on the 370-person Financial Products unit, based primarily in Connecticut and London, grew even more intense yesterday when New York Attorney General Andrew M. Cuomo threatened to issue subpoenas if the company failed to provide details about recipients of the retention payments. The payments represent only the most contentious of a larger group of bonuses being paid throughout AIG. The company's top seven officials, including chief executive Edward M. Liddy, agreed in November to forgo bonuses through this year.
After a Wednesday call between Liddy and Treasury Secretary Timothy F. Geithner, AIG agreed to restructure payments for the next 43 highest-ranking officers at the company, who are to receive half of their bonuses -- which total $9.6 million -- immediately, one-quarter July 15 and the rest Sept. 15. The last two payments would depend on whether the company makes progress in restructuring its business and paying back taxpayers. In addition, the company is set to pay another $600 million in retention awards to about 4,700 people throughout its global insurance units. But each dollar remains in question after the president's reprimand yesterday and the deluge of rage from legislators and the American public. Government leaders already say they plan to recoup some of the bonus and retention pay while restructuring the company. In addition, administration officials said that the Treasury is planning to try to recover some of the bonus money by adding provisions to the additional $30 billion it gave AIG access to earlier this month. The payment plan had been no secret. Beginning in the first quarter of 2008, AIG disclosed the plan to offer retention awards at Financial Products. The unit had already begun to hemorrhage money, a problem that would later grow exponentially. The unit's executives, fearing they might lose valuable employees in the tumultuous months to come, successfully negotiated more than $400 million for their workers, to be paid this month and again next year. At the Federal Reserve Bank of New York, which has directly overseen AIG since its federal takeover in September, officials have studied the possibility of rescinding or delaying the bonuses. They even brought in outside lawyers for advice. The conclusion: If the bonuses weren't paid, the AIG staffers would be able to sue the company and probably would win, not just what they were owed but also punitive damages that would make the ultimate cost perhaps two to three times as high as the bonuses themselves. Moreover, Fed officials also hope to keep current employees with the company. The senior executives whose decisions caused the company's collapse are long gone. Most of those left behind are trying to unwind complicated derivative contracts. Completing that process correctly is essential to preserving as much value as possible for taxpayers, officials at both the government and AIG have argued. If it is mishandled, it could expose taxpayers to billions of dollars in additional losses. Law professors agreed with the Fed's assessment but said AIG employees could still agree to reduce their own bonuses. And the outrage expressed by the president and lawmakers was designed to put pressure on these officers to do just that, the legal experts said. Jonathan Macey, a professor at Yale Law School, said it was unlikely that any AIG employees would end up suing the company for changing compensation contracts, mainly because their names would be revealed publicly in a lawsuit and they would then be excoriated.
Macey added that the government is caught in a difficult position, squeezed between public outrage over the bonuses and the need to keep AIG Financial Products going so the company can restructure and the government can recoup some of its money. "What's good for AIG is definitely not good for the country," Macey said. "But now that the government is invested, it may have to do what's good for AIG." Liddy is scheduled to appear tomorrow in front of a House financial services subcommittee. Staff writers Neil Irwin and Tomoeh Murakami Tse contributed to this report.
Obama in Effort to Undo Bonuses at A.I.G.

By EDMUND L. ANDREWS and JACKIE CALMES WASHINGTON President Obama and his top economic advisers scrambled to calm a nationwide furor on Monday over bonuses paid at the American International Group, even as administration officials acknowledged they had known about the issue for months. One day after the economic advisers insisted that their hands had been tied by contracts requiring the payments, Mr. Obama ordered the Treasury Department to pursue every single legal avenue to block these bonuses and make the American taxpayers whole. In the last six months, A.I.G. has received substantial sums from the U.S. Treasury, Mr. Obama said. How do they justify this outrage to the taxpayers who are keeping the company afloat? But as anger from lawmakers escalated and criticism of the retention bonuses overshadowed other news for a second consecutive day, White House and Treasury officials offered only a general sense of how they would carry out Mr. Obamas order and few explanations for why they had not acted earlier. White House officials said the Treasury would recapture the bonus money by writing new requirements into a $30 billion installment of government aid scheduled to go soon to the ailing insurance conglomerate. The government has already provided $170 billion in taxpayer assistance to keep A.I.G from failing and now owns nearly 80 percent of the company. But administration officials conceded that almost all of the most recent round of bonuses, totaling $165 million, had been paid last Friday, one day before the Treasury publicly acknowledged that it had reluctantly approved the payouts. The officials said that people who received the bonuses would probably be able to keep them. By seeking to link repayment of the bonus money to the coming $30 billion in assistance, the administration seemed to leave open the possibility that the company would effectively be repaying taxpayers with taxpayer money. A Treasury official disputed that taxpayers would be repaying themselves, but could not specify how else the company would give back the money. Increasing the pressure on the company, Andrew M. Cuomo, the New York attorney general, said he would subpoena A.I.G. for the names, job descriptions and performance evaluations of the employees receiving the bonuses. You could argue that if taxpayers hadnt bailed out A.I.G., the contracts wouldnt be worth the paper they were signed on, Mr. Cuomo said. For all of the furor since details of the bonuses became public over the last several days, the issue of retention payments to A.I.G. employees globally has been percolating publicly since A.I.G. was bailed out in mid-September. About $1 billion in retention payments for 2008 and 2009 are in question, but the controversy involves about half of that, about $450 million over two years, that was intended for employees of A.I.G.s financial products unit. That unit was the source of the financial derivatives blamed for the near-collapse at the heart of the economys downturn.
The Treasury and Federal Reserve officials said they had known about the bonus program as far back as last fall. The program has provoked public protests from a handful of critics and at least one Democratic lawmaker in Congress Representative Elijah E. Cummings of Maryland, a member of the House Committee on Government Oversight, who demanded without success in December that A.I.G. provide information about the bonuses. Mr. Cummings said he had been communicating regularly with A.I.G.s chief executive, Edward M. Liddy, about the bonuses ever since December. Mr. Cummings said he was particularly concerned that the bonuses were supposed to be paid by March 15, adding that he assumed Treasury officials had the same worries. I assumed that they were well aware of it and would take appropriate action before the March 15 deadline, Mr. Cummings said. In light of the biggest quarterly loss in history, you would think that A.I.G. and Mr. Liddy would have been able to convince folks who were supposed to be getting these retention payments, based at least in part on performance, that they might want to voluntarily not take all or part of them. Treasury and Fed officials said they knew that A.I.G. paid $55 million in bonuses in December. But administration officials said that the Treasury secretary, Timothy F. Geithner, did not personally become aware until last week that an even bigger round of payments was due on March 15. Administration officials said Mr. Geithner learned of the deadline early last week, when the Federal Reserve Bank of New York alerted him that the bonus payments were coming due. Mr. Geithner, according to Treasury officials, insisted that the bonus plan was unacceptable and called Mr. Liddy on Wednesday to demand changes. A.I.G. executives said they would never have proceeded with the bonus payments before getting approval from the Treasury and the Federal Reserve. We would never make any important business decisions without discussing them with our government managers and owners, said one executive, who did not want to be identified because of the sensitivity of the matter. A.I.G. has so far declined to identify the employees receiving the bonuses, some of whom are thought to be foreigners who worked out of offices in London. The tangle over bonuses highlighted a broader confusion over who actually controls the insurance conglomerate. The Treasury and the Federal Reserve have both pumped vast amounts of money into the company, but the two agencies have never made it clear which of them is in charge. Both agencies have insisted that neither of them owns A.I.G., or controls its management decisions, even though the federal government owns almost 80 percent of the company. As a result, the Treasury and Fed officials have repeatedly resisted forcing the company to disclose more about how A.I.G. was spending taxpayer money.
It was only on Sunday, after Democratic lawmakers had criticized the Fed and Treasury for weeks for being too protective of the company, that A.I.G. released the names of the companies that it had repaid with money it received from the government. Since November, A.I.G.s financial products unit has been led by Gerry Pasciucco, a former vice chairman of Morgan Stanley who was brought in by Mr. Liddy with instructions to wind down the unit. Company executives said they faced a need to keep skilled professionals in the business unit, which traded trillions of dollars worth of financial derivatives, because it would take great expertise to shut down the business in an orderly manner and without causing more turmoil. Christina Pretto, a spokeswoman for A.I.G., said Mr. Pasciucco was traveling on Monday and was unavailable. But she said that since his arrival, the company had reduced the volume of its financial positions by more than 25 percent, starting with the complex and difficult-to-manage positions. Contributing reporting were Helene Cooper in Washington and Mary Williams Walsh, Michael J. de la Merced and Louise Story in New York.
BNA3/17/09 Financial Institutions Obama Says $165 Million in AIG Bonuses Should Be Rescinded; CEO Says Not Possible President Obama has called for blocking bonus payments at American International Group Inc., the giant insurance company that has received about $163 billion in federal aid, he said March 16. The company, which also bowed to pressure and named counterparties that ultimately received tens of billions of dollars in public aid in a March 15 announcement, has created a furor with separate news of $165 million in bonuses paid to employees. The contracts were in place before the AIG bailout began. In the last six months, AIG has received substantial sums from the U.S. Treasury, Obama said, and I've asked Secretary Geithner to use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers whole. AIG first received $85 billion in government aid late last summer, in the form of a loan from the Federal Reserve. Further federal funding has since been provided to AIG, including an additional $37.8 billion from the Fed followed by more favorable loan terms and $70 billion in money from Treasury's Troubled Asset Relief Program, or TARP. Total government exposure to the company, which lost nearly $62 billion last quarter, approached $163 billion at the time of the most recent AIG action (39 DER EE-9, 3/3/09). This is a corporation that finds itself in financial distress due to recklessness and greed, Obama said. Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. One of the president's top economic advisers, National Economic Council Director Lawrence Summers, called the situation outrageous during a March 15 interview on CBS Face the Nation. But he also conceded that contracts governing the bonuses cannot be abrogated. Bernanke Articulates Anger The criticism by Obama and Summers echoed that of Fed Chairman Ben Bernanke, who in an interview on CBS 60 Minutes that aired March 15 expressed consternation with the situation, similar to remarks he made in congressional testimony earlier this month (40 DER EE-10, 3/4/09). It makes me angry, he said, adding that he slammed his phone more than a few times when discussing AIG. I understand why the American people are angry. It's absolutely unfair that taxpayer dollars are going to prop up a company that made these terrible bets, that was operating out of the sight of regulators, but which we have no choice but to stabilize, or else risk enormous impact, not just in the financial system, but on the whole U.S. economy.
Bernanke also repeated his forecast for an eventual economic turnaround during the interview. He said he expects the recession to end later this year, assuming the financial sector stabilizes, allowing a return to growth to take hold next year. But Bernanke warned that unemployment would worsen in the meantime. CEO Says' Hands Are Tied Job retention was at the core of the bonuses AIG pledged to employees, according to a March 14 letter AIG Chairman and Chief Executive Officer Edward Liddy sent to Geithner. And while he said it was distasteful and difficult, he said he was compelled to recommend proceeding with the bonuses, considering in part the need to retain employees central to unwinding operations. The company's hands are tied, he said. Outside counsel has advised that these are legal, binding obligations of AIG, Liddy wrote, and there are serious legal, as well as business, consequences for not paying. But going forward, he said the company would have more flexibility to lower contractual payments. For example, some employees from AIG's Financial Products division, the center of most of the company's troubles, will depart as their operations are divested, they leave voluntarily, or they are terminated. Further, the 25 highest paid employees within the financial products group agreed to cut their remaining salary for the year to $1. Liddy also said AIG would take efforts to cut expected retention payments by nearly a third, and non-cash compensation would be reduced or eliminated. Outrage Among Lawmakers On Capitol Hill, AIG criticism came from the leadership of both parties, with both Senate Majority Leader Harry Reid (D-Nev.) and Senate Minority Leader Mitch McConnell (R-Ky.) saying March 16 that the insurance giant's actions would not be tolerated. Reid, speaking on the floor only minutes after the Senate came into session, said the bonuses are even beyond outrageous and said he fully supports the actions taken by the Obama administration. Every American is justified in their outrage in this breach of the public trust, Reid said. McConnell also said he found AIG's move absolutely appalling and said it is hard to overstate the outrage he and other lawmakers feel about the matter. McConnell said on the Senate floor he had been fearful late last year that such abuses would occur and had written more than five months ago to former Treasury Secretary Henry Paulson urging the department to keep close tabs on companies receiving financial assistance from the government. McConnell suggested that Treasury did not follow that advice and he urged the Obama administration to get the message and make those companies accountable for how they use the money.
The Republican leader said Obama must press AIG and other firms in order to provide complete certainty that taxpayer money is not wasted. Cuomo Cries Foul New York Attorney General Andrew Cuomo demanded information on the bonuses, which he said were issued March 13, and issued a subpoena to get requested material. In a March 16 letter he sent to Liddy, Cuomo requested the names of employees receiving the bonuses, their positions at AIG, a description of their roles, their performance summaries, the contracts Liddy cited as obligatory, the names of contract negotiators, and those who developed the retention plan at the heart of the bonuses. He also requested a status report as to whether the payments were made or remain outstanding; Liddy's letter to Geithner indicated some of the payments were due March 15. We need this information immediately, Cuomo wrote, indicating that an investigation would be forthcoming. AIG did not adhere to a 4 p.m. deadline, triggering the subpoena. Cuomo said the company previously agreed to make no payments from a $600 million deferred compensation pool for the financial products group. This is taxpayer money, and taxpayers are entitled to the facts, he said on a conference call with reporters. I also want other institutions to be aware that when you're spending TARP money, we require diligence, we require accountability, and we require transparency. No one is trying to micromanage anyone's business. But we do want fairness, and we want to prevent the absurd use of tax dollars. Shining Light on Counterparties After months of pressure from congressional members and other bailout critics, AIG relented and identified certain credit default swap counterparties, municipal counterparties, and securities lending counterparties. One of Wall Street's former investment banks, Goldman Sachs Group Inc., received more than any other firm, with an aggregate of $12.9 billion. AIG's total support to financial firms was $93.2 billion from the date its government assistance began, Sept. 16, through the end of the year. Several European banks were also among the top recipients. They include Societe Generale, which received $11.9 billion, Deutsche Bank AG with $11.8 billion, and Barclays plc with $8.5 billion. Among municipalities that were AIG counterparties to receive a total $12.1 billion, both the state of California and commonwealth of Virginia received more than $1 billion. By Aaron Lorenzo
CQ TODAY ONLINE NEWS BANKING AND FINANCIAL SERVICES March 17, 2009 11:17 a.m. Lawmakers Eye Tax Code as Means to Recoup AIG Bonuses By Phil Mattingly, CQ Staff A day after anger at American International Group, Inc., appeared to boil over, members of Congress got down to work Tuesday exploring legislative avenues to recoup $165 million in bonus money handed out by the company. AIG, which is now 80 percent owned by the federal government and on the receiving end of $170 billion of taxpayer bailout money, has cut the checks for the huge retention bonuses, making it legally difficult to recoup the money. Breaking contracts, even for a firm virtually owned by the government, would have legal ramifications that could echo throughout the banking and judicial systems for years to come, experts said. So lawmakers are looking at other options. Senate Majority Leader Harry Reid, D-Nev., said Tuesday morning on the Senate floor that Finance Committee Chairman Max Baucus, D-Mont., will release a proposal on AIG within the next 24 hours that will certainly send a message. Baucus, speaking at Finance Committee hearing, said he was looking very closely at tax options to go after the bonuses, indicating he may look to impose an excise tax on the company. The country is angry, Baucus said. Individual Americans are angry. I am angry. Sen. Charles E. Grassley, R-Iowa, the panels ranking member, said he supported Baucus efforts. I want to back you up on looking into that and doing what we can to make sure these things dont happen in the future, Grassley said. Monday night, Senate Banking Chairman Christopher J. Dodd, D-Conn., and Charles E. Schumer, D-N.Y., one of his senior panel members, both indicated they were open the idea of tax-based legislation to recoup the bonus money. Things appear to be moving even faster across the Capitol, where several House members introduced or signed onto legislation designed to recapture the money. Michigan Democrat Gary C. Peters introduced legislation (HR 1527) Monday night that would create a 60 percent surtax on bonuses over $10,000 paid by any company in which the government has a 79 percent or greater equity stake. AIG is the only company that meets those requirements. Peters staff estimates the proposed surtax, when combined with the normal income tax rate and state and local taxes, could recoup as much as 100 percent of the bonuses. Rep. Steve Israel, D-N.Y., introduced legislation Monday night that would impose a higher tax rate on bonuses paid out to employees of institutions on the receiving end of federal bailout funds. That bill (HR 1518) already has four co-sponsors.
I look forward to working with other colleagues on the tax law that will impose a substantial surtax on excessive compensation paid to executives of bailed out firms, especially AIG, said Rep. Brad Sherman, D-Calif. Sherman said there was no need to rush legislation through, however. We have until April 15, 2010, to act on the 2009 tax code, Sherman said. Richard Rubin and Catharine Richert contributed to this story. Source: CQ Today Online News Round-the-clock coverage of news from Capitol Hill. 2009 Congressional Quarterly Inc. All Rights Reserved.
CNN.com3/17/09
Dodd suggests tax to recoup AIG bonuses

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Story Highlights Sen. Chris Dodd suggests tax provision crafted toward recipients of bonuses President Obama says he will try to block AIG bonuses Sen. Charles Grassley suggests executives follow Japanese model Attorney General Andrew Cuomo threatens to issue subpoenas to AIG
WASHINGTON (CNN) -- Sen. Christopher Dodd on Monday suggested a tax provision to recoup the bonuses for executives of ailing insurance giant AIG. Dodd, D-Connecticut, said the notion is in the "earliest of thinking" and has not been settled on as a way to resolve the issue, which has set off outrage in Washington and across the country. The tax would apply only to those at AIG who have received bonuses. The provision would help the government get back the money in the form of tax revenue. President Obama on Monday expressed dismay and anger over the bonuses to executives at AIG, which has received $173 billion in U.S. government bailouts over the past six months. "This is a corporation that finds itself in financial distress due to recklessness and greed," Obama told politicians and reporters in the Roosevelt Room of the White House, where he and Treasury Secretary Tim Geithner were unveiling a package to aid the nation's small businesses. Obama received support from fellow Democrats, including Dodd, who is the chairman of the Committee on Banking, Housing and Urban Affairs. "This is another outrageous example of executives -- including those whose decisions were responsible for the problems that caused AIG's collapse -- enriching themselves at the expense of taxpayers," Dodd said. He noted in a written statement that executives at other companies that received bailout funds have volunteered to forgo bonuses. "There's no reason why those at AIG shouldn't do the same," he said. Obama said he will attempt to block bonuses for AIG, payments he described as an "outrage." "Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?" Watch why Americans have a right to be angry Obama was referring to the bonuses paid to traders in AIG's financial products division, the tiny group of people who crafted complicated deals that contributed to the shaking of the world's economic foundations. See a snapshot of facts, attitudes and analysis on the recession
The president said he has asked Geithner to "pursue every single legal avenue to block these bonuses and make the American taxpayers whole." Obama spared AIG's new CEO, Edward Liddy, from criticism, saying he got the job "after the contracts that led to these bonuses were agreed to last year." But he said the impropriety of the bonuses goes beyond economics. "It's about our fundamental values," he said. Watch Obama say he's outraged by bonuses "All across the country, there are people who are working hard and meeting their responsibilities every single day, without the benefit of government bailouts or multimillion-dollar bonuses. You've got a bunch of small-business people here who are struggling just to keep their credit line open," Obama said. "And all they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules. That is an ethic that we have to demand." Obama said he would work with Congress to change the laws so that such a situation cannot happen again. Then, coughing, he added in jest, "I'm choked up with anger here." Republican Sen. Charles Grassley of Iowa didn't appear to be joking, however, when he spoke with Cedar Rapids, Iowa, radio station WMT. "I would suggest the first thing that would make me feel a little better toward them [AIG executives] is if they follow the Japanese example and come before the American people and take that deep bow and say, 'I am sorry,' and then either do one of two things: resign or go commit suicide," he said. "And in the case of the Japanese, they usually commit suicide." Under pressure from the Treasury, AIG scaled back the bonus plans and pledged to reduce 2009 bonuses -- or "retention payments" -- by at least 30 percent. That has done little to temper outrage over the initial plan, however. In the House, Democrats are trying to shame AIG executives into forgoing the bonuses. They're also investigating possible legal avenues Congress can take to force the company to return money used for bonuses, a House Democratic leadership aide and a House Financial Services Committee aide said Monday. The committee is trying to determine whether Congress can force AIG to renegotiate the bonuses, which the company says it is legally required to give employees under contracts negotiated before the company received its first infusion of bailout dollars in September, according to the committee aide. Both aides said it is unclear what authority Congress might have to force AIG to take back the bonuses. Complicating the issue, said the committee aide, is that the first infusion of cash to AIG was authorized by the Federal Reserve before Congress passed the $700 billion bailout bill, also
known as the Troubled Assets Relief Program, which included some restrictions on executive pay. Liddy will face intense questioning about the bonuses when he testifies Wednesday before the House Financial Services subcommittee on capital markets. On the floor of the Senate on Monday, Majority Leader Harry Reid, D-Nevada, issued a stinging rebuke of AIG, calling executive bonuses "beyond outrageous." "Our financial sector will never heal unless the financial companies who helped create this economic crisis begin to regain the public trust. The actions of AIG do just the opposite, and every American is justified in their outrage at this breach of public trust," he said. Who's insured by AIG? New York Attorney General Andrew Cuomo said in a letter to Liddy that was distributed to the news media that he was "disturbed to learn" of the bonus plan. And he threatened to issue subpoenas if the company failed to send him detailed information about who received bonuses and for how much. Read the letter to AIG (PDF) "Previously, AIG had agreed at our request to make no payments out of its $600 million Financial Products deferred compensation pool," he said. He said he had already asked for the names and titles of the people who are to receive the payments, "and it is surprising that you have yet to provide this information." "Covering up the details of these payments breeds further cynicism and distrust in our already shaken financial system." He added that he also is seeking "whatever contracts you now claim obligate you to make these payments" and the names of whoever negotiated them. "Finally, we demand an immediate status report as to whether the payments under the retention plan have been made," he said. The information was needed, he said, to determine whether bonus recipients "were involved in the conduct that led to AIG's demise and subsequent bailout"; whether the company is "truly required" to pay them; whether the contracts "may be unenforceable" because of fraud or other reasons; and whether "any of the retention payments may be considered fraudulent conveyances under New York law."
Wall St. Journal Online3/17/09

MARCH 17, 2009, 12:55 P.M. ET
Senate Finance Chairman Suggests Excise Tax on AIG Bonuses

By MARTIN VAUGHAN and COREY BOLES
WASHINGTON -- Senate Finance Committee Chairman Max Baucus (D., Mont.) suggested Tuesday he and other lawmakers will pressure the Internal Revenue Service to impose hefty excise taxes on bonuses paid to executives of American International Group Inc. that have stirred outrage. "We need to find out the answer to this question: What is the highest excise tax we can impose that is sustainable in court?" Sen. Baucus said to IRS Commissioner Doug Shulman during a hearing Tuesday. Mr. Shulman declined to give a specific answer, saying he couldn't go beyond President Barack Obama's statement on Monday, in which Mr. Obama expressed "outrage" over the bonuses. But Mr. Shulman said he recognized the finance committee wants to address the issue of the AIG bonuses, and "we stand ready for IRS to do what it can." Sen. Bill Nelson (D., Fla.) said it may be possible to impose excise taxes as high as 90% on the bonuses. At issue are $165 million in bonuses paid to employees of AIG's financial-products division, after the U.S. government has poured billions of dollars into AIG to shore up the foundering insurance giant. House Majority Leader Steny Hoyer (D., Md.) said he was unsure whether it would be possible for Congress to draft a law specifically targeted at the AIG executives. He suggested one possibility might be to pass a measure taxing all executives who received taxpayer funds through the Treasury's financial rescue plan. But, Sen. Hoyer said, there was no question in his mind the AIG executives should give the money back, saying if "they had any common sense at all," they would. "If they were at all sensitive to what the American people had done to keep their company afloat they would simply give this money back." Senate Banking Committee Chairman Christopher Dodd (D., Conn.) said he would support the idea of taxing bonus pay. But taxing AIG would be akin to "taxing ourselves," because more than $173 billion in taxpayer funds have been pumped into the company, giving the U.S. government an 80% stake. Sen. Hoyer said all options were on the table, and lawmakers were looking at what actions could be taken, and were in discussions with Obama administration officials over how to proceed to recoup some of the money paid out to the executives.
House Minority Leader John Boehner (R., Ohio) reserved his anger for the Obama administration's handling of the AIG situation. At a press conference Tuesday morning, he questioned why officials agreed to give the beleaguered company a further $30 billion only weeks ago, without ensuring there were sufficient controls in place to limit how the firm used the money. "I think this is outrageous, and I think the American people are rightly outraged that their tax money is going to pay bonuses to the very people that got this company in trouble," Rep. Boehner said. Jessica Holzer contributed to this article. Write to Martin Vaughan at martin.vaughan@dowjones.com and Corey Boles at corey.boles@dowjones.com
Financial Times3/17/09
Bonuses overshadow foreign bank payments

By Andrew Ward in Washington Published: March 17 2009 02:00 | Last updated: March 17 2009 02:00 When it emerged on Sunday that foreign banks had received more than $50bn of US federal funds as part of the AIG bail-out, big beneficiaries such as Deutsche Bank and Socit Gnrale must have braced themselves for an outcry in Washington. Instead, the reaction has been muted as US politicians focus instead on revelations about the $165m of bonus payments to AIG employees in spite of the insurance group's multi-billion dollar losses. Andrew Cuomo, New York attorney-general, said he would subpoena the insurer for more information, including the names of those benefiting from the bonuses. Barney Frank, chairman of the House financial services committee, said questions would be raised about the payments to foreign banks at a planned hearing on AIG tomorrow. But he acknowledged that anger about taxpayer money flowing overseas had been "displaced" by the bonus issue. More than 20 banks in Canada and seven European countries benefited from the bail-out as counterparties to derivatives contracts and financial deals with AIG. The biggest winners were French banks, with Socit Gnrale receiving $11.9bn and BNP Paribas $4.9bn. Deutsche Bank of Germany received $11.8bn and Barclays of the UK $8.5bn. Most prominent figures on Capitol Hill appeared to accept that the payments were unavoidable given how interwoven AIG was in the global financial system. Mr Frank said it was "legitimate" to query why so much bail-out cash had ended up in foreign hands but said the US had to avoid measures that could "drive away foreign investment". Even Elijah Cummings, a Democratic congressman who has criticised AIG payments to Goldman Sachs, the US investment bank, which received $12.9bn, stopped short of condemning the foreign pay-outs. He said: "We cannot afford to adopt a protectionist strategy when it comes to the global banking system, because taking actions against global banks would only speed the fall of the world economy in which we are all intricately linked". Socit Gnrale said it acted "in full conformity with our counterparty agreements with AIG". Deutsche Bank declined to comment. UBS, the Swiss bank, received $5bn from US taxpayers via AIG - dwarfing the $780m it agreed to pay the US government last month after admitting to helping US clients avoid taxes. Other beneficiaries included Calyon of France, HSBC of the UK and Banco Santander of Spain.

MARCH 17, 2009
Wall Street Pursues Pay Loopholes

Compensation Caps Drive Some Firms to Weigh Options; Higher Salaries?
By KATE KELLY and DAVID ENRICH
Some Wall Street firms are looking for ways to sidestep tough new federal caps on compensation. In response to expected bonus restrictions, officials at Citigroup Inc., Morgan Stanley and other financial institutions that got government aid are discussing increasing base salaries for some executives and other top-producing employees, people familiar with the situation said. The crackdown, part of the economic-stimulus package passed by Congress and signed into law by President Obama last month, limits bonus pay for the top five executives of any recipient of taxpayer capital through the Troubled Asset Relief Program, plus the 20 next-highestcompensated employees.
The discussions are at an early stage, partly because the government hasn't yet issued specific rules on the bonus payments that will be allowed at companies that received TARP aid. The talks also are proceeding cautiously because of the political volatility of pay, bonuses and perks on
Wall Street, including outrage over American International Group Inc.'s promise to pay $450 million in bonuses to employees in the insurer's financial-products unit. Most traders and bankers on Wall Street get a base salary of anywhere from $200,000 for managing directors to $1.5 million for a chief executive. But the lion's share of their pay comes in the form of a bonus, a tradition that began when most firms were private partnerships and partners shared directly in the annual income of the firm. As banks and securities firms wrestle with growing regulation of compensation practices, substantially increasing the base salaries of top employees could become a popular response, some industry officials say. A larger salary would reduce the relative importance of bonuses but also help financial companies increase those payments, since they usually are calculated as a percentage of total annual compensation. "The trend is to increase the base pay in light of the reduced bonuses," said Scott Talbott, senior vice president of government affairs at the Financial Services Roundtable. "Without the revenue" that top performers provide, he adds, "these companies can't survive." Under the forthcoming rules, bonuses could come to no more than one-third of the total annual compensation paid to employees covered by the restrictions. Some compensation experts view the bonus limits as a mistake that turns the notion of pay for performance on its head, despite Wall Street's culpability for the recession and credit crisis. "These are not bureaucratic positions where you're paying individuals high salaries," said Michael Karp, chief executive of Options Group. "How can you pay a banker a really high salary without knowing what kind of revenue that person generates?" Still, critics are ready to pounce on any potential maneuver around the federal limits. Raising base salaries would play into "a long and dishonorable tradition of responding to any attempt to curb pay excess by just putting it in a different pocket and calling it something else," said Nell Minow, editor of the Corporate Library, a research firm focusing on corporate-governance issues. Any attempt to get around bonus curbs "can expect pushback from shareholders," she predicted. At Morgan Stanley, discussions about raising base pay levels are preliminary, and the New York company hasn't fleshed out a formal strategy, according to people familiar with the matter. Citigroup officials have considered designating which 25 executives will be subject to bonus limits, people familiar with the discussions said. In that scenario, the new rules might not apply to lower-ranking yet still highly lucrative traders and investment bankers, these people said. "We will comply with the restrictions, in addition to the substantial changes we have already made to our compensation structure," said a Citigroup spokeswoman. Citigroup has received $45 billion in taxpayer-funded capital do far, while Morgan Stanley has received $10 billion. The latest U.S. rescue of Citigroup will leave the federal government holding as much as 36% of the company's common stock. Inside banks and Wall Street firms, some executives are hopeful that the Treasury Department will water down the curbs on bonuses, inserted into the stimulus bill by Sen. Christopher Dodd (D., Conn.), during the department's rule-making process.
One possibility that banks would applaud is that the pay restrictions apply to top executives and other managers, instead of less-senior but crucial rainmakers. Treasury officials are expected by the end of March to issue guidance on how to interpret the new law. A Treasury spokesman declined to discuss the agency's opinion of raising base salaries. The Dodd provision sent shockwaves across Wall Street. Some bankers and compensation experts contend that top revenue-producers could bolt to non-U.S. banks or hedge funds that aren't subject to TARP-related restrictions. "It's possible we will lose some people," J.P. Morgan Chase & Co. Chairman and Chief Executive James Dimon said in a recent speech. "I'll be very sorry if that happens." Raising base pay at J.P. Morgan isn't being discussed, people familiar with the matter said. Wells Fargo & Co., the San Francisco bank that got $25 billion in government capital, disclosed last week that it increased the base salaries of CEO John Stumpf and two other executives. A bank spokeswoman declined to comment on the raises. A person familiar with the matter said the increases were decided at about the same time that the new curbs were signed into law. Robin Sidel contributed to this article. Write to Kate Kelly at kate.kelly@wsj.com and David Enrich at david.enrich@wsj.com
Anger Over Firm Depletes Obama's Political Capital

By Michael D. Shear and Paul Kane Washington Post Staff Writers Tuesday, March 17, 2009; A01
President Obama's apparent inability to block executive bonuses at insurance giant AIG has dealt a sharp blow to his young administration and is threatening to derail both public and congressional support for his ambitious political agenda. Politicians in both parties flocked to express outrage over $165 million in bonuses paid out to executives at the company, demanding answers from the president and swamping yesterday's rollout of his efforts to spark lending to small businesses. The populist anger at the executives who ran their firms into the ground is increasingly blowing back on Obama, whom aides yesterday described as having little recourse in the face of legal contracts that guaranteed those bonuses. White House press secretary Robert Gibbs, peppered with questions about why the president had not done more to block the bonuses at a company that has received $170 billion in taxpayer funds, struggled for an answer yesterday afternoon. He explained that government lawyers are "looking through contracts to see what can be done to wrest these bonuses from their recipients." Obama himself sought to channel the public's sense of disbelief yesterday. "How do they justify this outrage to the taxpayers who are keeping the company afloat?" he said, declaring the bonuses an "outrage" that violate "fundamental values." White House aides grasped for actions that could soothe sentiment on Main Street and in the halls of Congress, where the fate of the new president's sweeping agendas on health care, climate change and education will be decided. They suggested that the government will use its latest pledged installment of $30 billion for the ailing company to recover the millions in bonuses paid Friday. But the damage control did not seem to satisfy incredulous lawmakers in both parties, who said the image of financial executives taking huge bonuses from a taxpayer-funded rescue puts the president in a politically impossible position. "I warned them this would be met with an unprecedented level of outrage," Sen. Christopher J. Dodd (D-Conn.), the chairman of the banking committee and part of a group of senators who pressed Treasury Secretary Timothy F. Geithner to stop the bonuses, said yesterday. House Minority Leader John A. Boehner (R-Ohio) said the bonus issue added to his belief that there will be almost no Republican support for any expansion of a bank-bailout program that passed Congress last fall with broad bipartisan support. "What is the government's exit strategy from this sweeping involvement in private business?" he asked in a statement, adding that "taxpayers are not receiving an adequate accounting from either the Treasury or the management of the companies that received taxpayer funds. Unfortunately, we have not yet seen such a plan."
The rhetoric grew so heated yesterday that Sen. Charles E. Grassley (R-Iowa) suggested in a radio interview that AIG executives ought to "follow the Japanese model . . . resign, or go commit suicide." An aide later explained he does not actually want executives to kill themselves. More than 80 House Democrats signed a letter demanding that the money used to pay the bonuses be recouped from AIG. New York Attorney General Andrew M. Cuomo announced that he will subpoena the Manhattan-based company, seeking data documenting who received the bonuses and the justification for them. "You could argue that if taxpayers hadn't bailed out AIG, the contracts wouldn't be worth the paper they were signed on," Cuomo said. The Obama administration was already facing a skeptical public and members of Congress critical of the huge sums of money the government has allocated to shoring up the devastated financial system. News of the latest AIG bonuses only compounded the political problems that the huge expenditures pose for the president. The administration has tried to manage the public anger by expressing empathy with the outrage over the large outlays to financial firms, while explaining that they are necessary to stabilize the economy. Earlier this month, the administration added to the bailout money needed to keep AIG functioning, saying failure of the company would be disastrous for the larger economy. And the administration is all but certain to return to Congress for hundreds of billions of dollars more to aid the financial system. But the bonus issue, in particular, is hounding Obama as he pursues his larger goals, in part because of the president's own repeated declarations of outrage -- offered again yesterday -aimed especially at the firms that are feeding at the public trough. In February, Obama announced tough new restrictions on executive compensation that promised an end to massive salaries for executives of failing companies. Similar rules were eventually written into legislation and hailed as evidence that executive compensation would be checked. But reports about the latest AIG bonuses quickly undermined whatever political capital Obama has earned with his past efforts. Over the weekend, White House officials expressed outrage at the bonuses paid out by AIG but said there was nothing they could do to stop them. After news of the bonuses dominated news coverage for two days, the administration took a newly aggressive stance. Asked why the administration is attempting to claw back the bonuses now but did not do more to block the payments earlier this month when it was authorizing the latest $30 billion in new loans to the struggling insurer, Gibbs was unresponsive. "The administration is taking the steps today to go back and see what can be done," he said. Staff writers Michael A. Fletcher and Scott Wilson contributed to this report.
Washington Post3/18/09 Editorial
The Big Bash

Politicians of both parties pile on AIG.
Wednesday, March 18, 2009; A12
YESTERDAY, we were more skeptical than most about the "populist" backlash against the $165 million in bonuses that went to some employees of government-owned AIG. The events of the past 24 hours have only confirmed our view. We don't love the fact that the men and women of this disgraced company are insisting upon the compensation they signed up for before the company collapsed into the arms of the taxpayers. But whether they are being greedy, or simply human, is hardly relevant to what is in the public interest now. AIG's demagogic critics in both parties should keep that in mind. For better or worse, the U.S. government -- i.e., all of us -- now owns AIG. The firm is hemorrhaging knowledgeable employees at precisely the time when it -- and therefore we -- need them most. No matter how morally satisfying, taking back bonuses now, as proposed yesterday in belated outrage by Senate Majority Leader Harry M. Reid (D-Nev.) and House Speaker Nancy Pelosi (D-Calif.), would probably accelerate the exodus, with the likely effect that the country would lose much more money on AIG than it would otherwise. Yes, $165 million is a lot of money. But it is 0.09 percent of the total AIG bailout cost, $173 billion. The relevant policy question here is not whether we feel like spending $165 million on bonuses; it is whether doing so will help wrap up the AIG rescue as cheaply and quickly as possible. The company's chief executive, Edward M. Liddy, who was brought in from outside at $1 per year to unwind AIG on behalf of the government, seems to think that it will. Others who are not in his position of responsibility are fully exploiting their freedom to disagree. Thus, the attorney general of New York, Andrew M. Cuomo, among other Democrats, floated the argument that the AIG employees should get stiffed because "it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money." True. But the bonuses were set in motion well before the U.S. takeover of AIG, which was done to avoid a Lehman Brothers-like meltdown that would have cost taxpayers a lot more than $165 million, and the compensation plan has been public information for a year. And then there is Sen. Charles E. Grassley (R-Iowa), who first suggested that the folks at AIG should consider committing suicide, samurai-style -- before saying he would settle for some "contrition." Under the circumstances, we can understand why President Obama feels that he must join this opportunistic chorus rather than resist it. Still, this has not been a stellar moment for the man who came into office arguing that "the time has come to set aside childish things." With hundreds of billions of dollars in necessary repairs to the financial system still to come, Mr. Obama must find a way to explain those costs in terms that neither inflame the public nor insult its intelligence. The best we've heard so far came from a non-politician, Federal Reserve Chairman Ben S. Bernanke. AIG's irresponsible behavior angers Mr. Bernanke, too, but he's not losing his cool. On CBS's "60 Minutes" last Sunday, he likened the firm to a neighbor who sets his house on fire by smoking in bed; the town has a choice between letting the place burn down to teach him a lesson, or dousing the flames to prevent them from consuming the homes of non-
smoking neighbors. "That's where we are now," he said. "We have a fire going on." This is no time to be throwing more fuel on it.
Wall Street's Dangerous Refusal to Learn

By Steven Pearlstein Wednesday, March 18, 2009; D01
You have to wonder what else has to go wrong, how much more wealth will need to be destroyed, before the people on Wall Street get the message that it's no longer business as usual. The latest outrage, of course, is over the $400 million in retention bonuses promised to those financial geniuses at AIG's Financial Products unit last year, months before the insurance giant was essentially taken over by the government in a bailout that already has required an injection of $170 billion in taxpayer money. The legal argument for honoring these ill-considered contracts is that a deal is a deal and that trying to abrogate them will only wind up costing the government even more in legal fees and punitive damages. But that doesn't mean the government and its handpicked new management team at AIG were powerless to renegotiate those contracts long before last weekend's deadline. After all, if the government hadn't stepped in, AIG would have gone bankrupt and those whizbang traders could have lined up with all the other unsecured creditors at the bankruptcy court to see how much money they might receive three or four years down the road. And the government could still put the company into bankruptcy anytime it chooses. Moreover, the Justice Department would surely have been within its rights to launch an extensive civil and criminal investigation into whether those bonuses were granted as part of an ongoing conspiracy to defraud shareholders -- a conspiracy in which the traders were knowing participants. As part of that investigation, prosecutors could have also prepared a public report to the Treasury, the Federal Reserve and Congress listing the names and home addresses of all the traders who were slated to receive the bonuses, along with a detailed description of their role in creating the mess that brought down the company. There could even be a chart listing their salaries, bonuses and other perks over the past decade. Call me a cockeyed optimist, but I suspect that when confronted with the prospect of a bankruptcy and a prolonged and public investigation, the sharpies in London and Connecticut might have been receptive to the idea of renegotiating those bonuses in favor of new contracts -contracts that increased their base pay but tied their bonuses to success in reducing future taxpayer liabilities at AIG. Unfortunately, none of this seems to have occurred to Eddie "Good Hands" Liddy, the former Allstate executive who was supposedly brought in to dismantle AIG and sell it off in pieces for the benefit of the taxpayers and creditors. So far, all Eddie seems to have served up is a litany of complaints about what a bad hand he was dealt. A tougher and more creative executive, I suspect, could have found a way to quickly sell off the healthy insurance businesses and the valuable AIG franchise, even if it meant persuading the government to finance the deals or offer some risk-sharing arrangements.
A more hard-knuckled executive would have gone to the counterparties of those derivatives contracts and suggested that it would be a real shame if AIG were forced to file for bankruptcy, and offered some sort of workout. If nothing else, he certainly could have been more upfront with his new owners -- the taxpayers - about not only the bonuses but also the identity of the counterparties to those derivative contracts, who were the indirect beneficiaries of the government's bailout. Instead, Eddie has not only left us wondering whose side he's really on, but also, because of the bonus backlash, he has managed to put the entire financial rescue effort in political jeopardy. That's harsh criticism, I realize, especially for a respected business executive who volunteered to leave a comfortable retirement to take a $1-a-year job at the request of his government. But at some point you have to ask whether we've hired Gary Cooper for a role better suited to Clint Eastwood. Liddy is hardly the only one on Wall Street who can't quite grasp the idea that extraordinary times require a different way of doing things. One of the reasons AIG gave for offering retention bonuses in the first place was that the employees who had negotiated the infamous derivatives contracts are the best people to help the company unwind those positions at the lowest cost. Indeed, over the weekend, it was reported that some of the employees were being recruited by other banks and hedge funds, which hope to use the inside information to inform their own trading strategies. This is, of course, a time-honored tradition on Wall Street, whereby uncovering the trading strategies of counterparties can reap huge profits. But it surely speaks volumes that other Wall Street players still think it not just their right but their duty to their investors to try to take advantage of AIG's weakness, even if it is the taxpayers who will suffer. Then there is Richard "Is This America?" Kovacevich, the chairman of Wells Fargo. Late last week, Kovacevich gave a talk at Stanford University, complaining about how unfair it is that the government forced his bank to take $25 billion in bailout money last year when it could have easily raised private capital -- and then compounded that outrage by changing the terms of the deal and forcing Wells to cut its dividend. Kovacevich said it was "asinine" for the Treasury to order his and other big banks to undergo a special "stress test," explaining that well-run banks like Wells were routinely doing their own stress tests. Kovacevich apparently believes that because his bank is still relatively healthy, he and his shareholders shouldn't have to assume the same costs and burdens as banks that aren't, particularly when those costs and burdens are imposed by incompetent government officials. That's the way it works in America. Except, of course, when it doesn't. The reality is that, if the government had not stepped in to take over Fannie, Freddie and AIG; had not recapitalized Citigroup and Bank of America; had not provided the guarantees to allow for the orderly sale of Merrill Lynch and Bear Stearns; had not become the buyer of last resort for commercial paper and home mortgages, then the entire financial system would have melted down by now and taken Well Fargo and its arrogant chairman with it. Rather than bellyaching about how un-American it all is, Kovacevich ought to be thanking the government and asking what more he could do to help.
Like it or not, we're all in this together now. It's cooperation and compromise, not the usual every-man-for-himself competition, that is going to get us out of this mess. And the sooner people on Wall Street embrace that reality, the better it will be for everyone. Steven Pearlstein is moderator of a new Web site, On Leadership, at http://washingtonpost.com. He can be reached at pearlsteins@washpost.com.
The Costs of Bailout Rage

By Ruth Marcus Wednesday, March 18, 2009; A13
Could we put down the pitchforks for just a moment and have a reasonable discussion about the bonuses at American International Group? No, I didn't think so. Here goes anyway. I get the outrage. It's galling to pay $165 million to a bunch of wealthy traders to clean up a mess that they, or at least their company, made. I get the political fix in which President Obama finds himself. The sums are staggering -- if not to Wall Street, then to everyone else who's ever worked for a living. The public is worked up, increasingly convinced that its money is being flung around recklessly, to a gang of extortionists at AIG and at European banks, without any hint that the fundamental problem is being fixed. As a result, the administration's already dim prospects for obtaining another boatload of money for the bank bailout have gotten even dimmer. This presents a huge problem because of the likelihood that another enormous sum will be needed. The president's budget envisions $750 billion, and even that may not be enough. So I understand Obama's railing against the bonuses -- but I think he may be making a mistake, both short-term and long-term. "This is a corporation that finds itself in financial distress due to recklessness and greed," the president said on Monday. "Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?" Well, because in the short run, hammering the AIG employees to give back their bonuses risks costing the government more than honoring the contracts would. The worst malefactors at AIG are gone. The new top management isn't taking bonuses. Those in the bonus pool are making sums that for most of us would be astronomical but that are significantly less than what they used to make. Driving away the very people who understand how to fix this complicated mess may make everyone else feel better, but it isn't particularly cost-effective. In the longer term, having the government void existing contracts, directly or indirectly, as with the suggestions of a punitive tax on such bonuses, will make enterprises less likely to enter into arrangements with the government -- even when that is in the national interest. This is similarly counterproductive. Remember, the contracts were negotiated long before the government put a cent into AIG. "The plan was implemented because there was a significant risk of departures among employees at [the company]," AIG wrote in a paper explaining the plan, "and given the $2.7 trillion of derivative positions at [the company] at that time, retention incentives appeared to be in the best interest of all of AIG's stakeholders."
And federal legislation explicitly states that compensation limits for companies receiving bailout funds do not apply to preexisting contracts. Not to mention that the existence of the retention bonuses has been known for more than a year. "That was then and this is now" is not a valid legal principle. "We are a country of law," Obama economic adviser Lawrence Summers said Sunday. "There are contracts. The government cannot just abrogate contracts." He was right. But, you ask, what about autoworkers who are being squeezed to renegotiate their contracts? Those renegotiations mostly involve the future terms of employment, though, it is true, they also could affect retiree health benefits. If an autoworker doesn't want to show up on the assembly line under the terms of a new deal, he or she doesn't have to. That's different from telling AIG employees they're not getting the amount on which they agreed for work they've already performed. So what about cram-down proposals to allow bankruptcy judges to change the terms of mortgages? This is more analogous, but bankruptcy is a legal mechanism designed precisely for the abrogation of contracts. It is intellectually consistent to support expanding the power of bankruptcy courts to rewrite mortgages on primary homes -- as they can with vacation property - but balk at reneging on the AIG contracts. The administration argues that anger over the bonuses, among the public and members of Congress, was at such a level that the president needed to say something to show that he understood the fury. Perhaps, but there is a countervailing risk in stoking this populist rage -especially if the administration needs to come back to Congress for more money for the banks. Once the pitchforks are out, it's awfully hard to convince the mob to put them down. marcusr@washpost.com
Our Mission at AIG: Repairs, and Repayment

By Edward M. Liddy Wednesday, March 18, 2009; A13
The government rescue of American International Group (AIG) and other financial firms has produced a palpable wave of anger on the part of Americans and a rising public demand for accountability from corporate and government leaders. The anger is understandable, and I share it. I have been fortunate in more than three decades in business to see firsthand the wealth creation that well-managed American companies bring to their employees and their communities. I have seen the good side of capitalism. But over the past six months, since agreeing to take the reins of AIG and reviewing how it was run in prior years, I have also seen instances of the bad side of capitalism. Mistakes were made at AIG, and on a scale that few could have imagined possible. The most egregious of those began in 1987, when the company strayed from its core insurance competencies to launch a credit-default-swaps portfolio, which eventually became subject to massive collateral calls that created a liquidity crisis for AIG. Its missteps have exacted a high price, not only for the company and its employees but for the American taxpayer, the federal government's finances and the global economy. These missteps brought AIG to the brink of collapse and to the government for help. When I answered the call for help and joined AIG in September 2008, one thing quickly became apparent: The company's overall structure is too complex, too unwieldy and too opaque for its component businesses to be well managed as one entity. So the strategy we continue to pursue, in close cooperation with the Federal Reserve and the U.S. Treasury, is to isolate the value in the company's component parts, capture that value to pay back money owed to the government, and allow AIG's healthy insurance companies to continue to prosper for the benefit of policyholders and taxpayers. What also became clear is that once AIG's relationship with the government and taxpayers changed, our behavior as a company needed to change. So, of our own initiative, we suspended our federal lobbying activities and halted corporate political contributions. We also restricted executive compensation. In all, total 2008 compensation for the top 47 executives is 56 percent lower than their total 2007 compensation. My annual salary is $1. My only stake is my reputation. No one knows better than I do that AIG has been the recipient of generous amounts of government financial aid. We are acutely aware not only that we must be good stewards of the public funds we have received but that the patience of America's taxpayers is wearing thin. Where that patience is especially thin is on the question of compensation. I am mindful of the outrage of the American public and of the president's call for a more restrained compensation system. I am also mindful that every decision we make at AIG has consequences for the American taxpayer. We weigh decisions with one priority in mind: Will this action help or hurt our ability to pay money back to the government?
Although we have wound down more than $1 trillion in the portfolio of the AIG Financial Products unit that is at the root of the company's troubles, there remains substantial risk in that portfolio. The financial downside for taxpayers is potentially very large, and that's why we're winding down this business. To prevent undue risk exposure in the meantime, AIG has made a set of retention payments to employees based on a compensation system that prior management put in place. As has been reported, payments were made to employees in the Financial Products unit. Make no mistake, had I been chief executive at the time, I would never have approved the retention contracts that were put in place more than a year ago. It was distasteful to have to make these payments. But we concluded that the risks to the company, and therefore the financial system and the economy, were unacceptably high. Where does that leave us? Taxpayers should know that the government's assistance to AIG has had a beneficial effect. The assistance has provided stability to the company and to the entire financial system. Taxpayers should also know that AIG has a plan to return money to the government, and we are making progress. We have transferred to the government securities or equity interests that have real value and prospects for future appreciation. We are selling assets and significantly reducing our risk exposure. The business unit that was the source of our greatest losses is being shut down. And we have agreed with the Federal Reserve and the Treasury to pay off AIG's existing loan through a combination of asset transfers, securitization of the cash value of certain life insurance businesses, and cash from the sale of businesses. What lessons can we draw from AIG's experience? There must be safeguards against the systemic consequences of failures of large, interconnected financial institutions. Where safeguards are lacking, such companies need to be restructured or scaled back so they no longer come close to posing a systemic risk. We have seen all too clearly where the brink lies; our corporate structures need to be pulled back from that edge. In America, when you owe people money, you pay them. We are pressing forward with our plan to return money to taxpayers, protect policyholders, and give employees a vision of success and a path for achieving it. With the understanding and patience of the American people and the continued support of the Federal Reserve and the Treasury, we can resolve AIG's challenges and help its businesses contribute to a global economic recovery. The writer is chairman and chief executive of American International Group.
The Nationalization Option

By Harold Meyerson Wednesday, March 18, 2009; A13
You might think that having anted up $173 billion of our own money, we taxpayers would have some leverage at AIG, now that we own 80 percent of the shares. You might think that when chief executive Edward Liddy, a holdover appointee of Hank Paulson's, told Treasury Secretary Tim Geithner that he had just mailed $165 million of our money as bonuses to the geniuses at the firm's financial products unit -- who probably did more on a per-banker basis to destroy global capitalism than any other kindred group -- that Geithner, upon hearing this news, would have responded, "Liddy, you're fired." But Geithner's indulgence of bankers' indulgences is fast becoming the Obama administration's Achilles' heel. The AIG debacle is the latest in a series of bewildering Geithner decisions that threaten to undermine the administration's efforts to restart the economy. So long as it's Be Kind to Bankers Week at Treasury -- and we've had eight straight such weeks since the president was inaugurated -- American banking, and the economy it is supposed to serve, will remain paralyzed. The Geithner plan to restart the banks provides huge taxpayer subsidies to hedge funds, investment banks and private equity companies to buy the banks' toxic assets without really having to assume the risk. That's right -- the same Wall Street wizards who got us into this mess, using the same securitization techniques that built mountains of debt within a shadow financial system that remains unregulated, are the saviors whom Geithner has anointed to extricate us -- with our capital, not theirs -- from the mess that they created. A more plausible solution would be for the government to assume control of those banks that are insolvent, as it routinely does when banks go under. It could then install new management, wipe out the shareholders, take the devalued assets off the banks' books, restart lending and restore the banks to private control at a modest profit for the taxpayers. There may be reasons that Geithner's plan makes more sense than this one, but if they exist, Geithner has failed to explain them. It's certainly not because Americans are dead set against bank nationalization: A Newsweek poll this month found that 56 percent of respondents supported it. Hell, Alan Greenspan supports it. But Geithner seems unable to imagine a banking system not run by its current leaders or owned by its current shareholders or engaged in the same arcane securitization practices that led to its collapse. An administration that is busily creating alternatives to our health-care system and our energy policies is being dragged down by a Treasury secretary who cannot conceive of an alternative to our catastrophic system of banking. Fortunately, Geithner is not the only public servant grappling with banking's daily outrages. In the Senate, Vermont's Bernie Sanders, joined by Illinois' Dick Durbin, has introduced a bill to cap the interest rates on credit cards. Even as banks are borrowing funds from the Fed interestfree and are counting on taxpayer largess to keep them from going bust, they are still charging usurious rates of interest. In 2007, the Demos Foundation found that one-third of credit card holders were paying rates in excess of 20 percent, in some cases as high as 41 percent, and the rates have not dropped notably since then.
Once, states were able to regulate their banks' rates, but in 1978 the Supreme Court ruled that banks operating nationwide could charge whatever they wished if they moved their operations to states that had no usury laws, such as South Dakota. Shortly thereafter, Citigroup moved its credit card headquarters to South Dakota, and, as we know, Americans began funneling more and more of their money to the banks. Sanders's bill would cap interest rates at 15 percent, which is the same rate cap that Congress set 30 years ago for federal credit unions. In 1991, New York Republican Alphonse D'Amato authored a bill to cap credit card rates at 14 percent. It passed the Senate 74 to 19, but died in the House. Today, as populist rage at the banks rises, Congress and the administration should be racing to pass the Sanders bill. Sanders and Durbin have two things that Tim Geithner sorely lacks: a capacity to envision a less predatory, more salutary form of banking and a determination to enact such reforms. No one expects Tim Geithner to become a born-again populist, but is it asking too much of him that he come up with a plan that doesn't throw our money at the same bankers engaged in the same old practices that brought us to this pass? Is it too much to ask that he nationalize the insolvent banks and stop shoring up a bankrupt system? meyersonh@washpost.com
New York Times--March 18, 2009 Op-Ed Columnist
Obamas Real Test

By THOMAS L. FRIEDMAN When you hear a sitting U.S. senator call for bankers to commit suicide, you know that the anger level in the country is reaching a Bonfire of the Vanities, get-out-the-pitchforks danger level. It is dangerous for so many reasons, but most of all because this real anger about A.I.G. could overwhelm the still really difficult but critically important things we must do in the next few weeks to defuse this financial crisis. Let me be specific: If you didnt like reading about A.I.G. brokers getting millions in bonuses after their company 80 percent of which is owned by U.S. taxpayers racked up the biggest quarterly loss in the history of the Milky Way Galaxy, youre really not going to like the bank bailout plan to be rolled out soon by the Obama team. That plan will begin by using up the $250 billion or so left in TARP funds to start removing the toxic assets from the banks. But ultimately, to get the scale of bank repair we need, it will likely require some $750 billion more. The plan makes sense, and, if done right, it might even make profits for U.S. taxpayers. But in this climate of anger, it will take every bit of political capital in Barack Obamas piggy bank as well as Michelles, Sashas and Malias to sell it to Congress and the public. The job cant be his alone. Everyone who has a stake in stabilizing and reforming the system is going to have to suck it up. And that starts with the brokers at A.I.G. who got the $165 million in bonuses. They need to voluntarily return them. Everyone today is taking a haircut of some kind or another, and A.I.G. brokers surely can be no exception. We do not want the U.S. government abrogating contracts the rule of law is why everyone around the world wants to invest in our economy. But taxpayers should not sit quietly as bonuses are paid to people who were running an insurance scheme that would have made Bernie Madoff smile. The best way out is for the A.I.G. bankers to take one for the country and give up their bonuses. I live in Montgomery Country, Md. The schoolteachers here, who make on average $67,000 a year, recently voted to voluntarily give up their 5 percent pay raise that was contractually agreed to for next year, saving our school system $89 million so programs and teachers would not have to be terminated. If public schoolteachers can take one for schoolchildren and fellow teachers, A.I.G. brokers can take one for the country. Lets not forget, A.I.G. was basically running an unregulated hedge fund inside a AAA-rated insurance company. And like Madoff, who was selling phantom stocks A.I.G. was selling, in effect, phantom insurance against the default of bundled subprime mortgages and other debt insurance that A.I.G. had nowhere near enough capital to back up when bonds went bust. It was a hedge fund with no hedges. Thats why taxpayers have had to pay the insurance for A.I.G. so its bank and government customers wont tank and cause even more harm. Unfortunately, all the money we have already spent on A.I.G. and the banks was just to prevent total system failure. It was just to keep the body alive. Thats why healing the system will likely require the rest of the TARP funds, plus the $750 billion the administration warned Congress in the new budget that it could need.
Best I can piece together, the administrations recovery plan due out shortly will look something like this: The U.S. government will create a facility to buy the toxic mortgages off the balance sheets of the major banks. They will be bought by a public-private fund or funds in which taxpayers will, in effect, be partners with hedge funds and private equity groups. The hedge funds will be there to provide expertise in pricing and trading the assets. The taxpayers will be there to guarantee gulp that the hedge funds wont lose money if they take the early risks and to also lend them money to make some of the purchases. Taxpayers will benefit from any profits these partnerships make. Once the banks sell their toxic assets, many will need capital, because, while they may be carrying these assets on their books at 85 cents on the dollar, they initially may have to sell them for less. So, the government will probably have to inject capital into more banks to maintain their solvency, but once the banks begin to clear their balance sheets of those toxic assets, they will likely attract the private capital they need and relieve the government of having to put in more. Will it work? We can only hope. But I know this for sure: unless the banks are healed, the economy cant lift off, and that bank healing is not going to happen without another big, broad taxpayer safety net. The only person with the clout to sell something this big is President Obama. The bankers and Congress will have to help; every citizen will have to swallow hard. But ultimately, Mr. Obama will have to persuade people that this is the least unfair and most effective solution. It will be his first big leadership test. It is coming soon, and it is coming to a theater and a bank near you.
New York Times--March 18, 2009 Commentary Economic Scene
Paying Workers More to Fix Their Own Mess

By DAVID LEONHARDT We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses which are now being operated principally on behalf of American taxpayers ifemployees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury. Edward Liddy, chief executive, American International Group Ah, retention pay. It has been one of the great rationales for showering money on chief executives and bankers regardless of how well they are doing their jobs. Its just that the specific rationale keeps changing. In the booming 1990s, companies supposedly had to pay retention bonuses because executives had so many other job opportunities. There was a war raging a war for talent, said McKinsey & Company, the consulting firm. Then came the aftermath of Enron, when new scrutiny and regulations apparently made some chief executives wonder if they still wanted their jobs. Im thinking of actually getting out, David DAlessandro, the head of John Hancock Financial Services, reported hearing from one fellow chief executive. The antidote to such doubts? Retention pay, obviously. Now comes Mr. Liddy, the government-appointed chief of A.I.G., defending multimillion-dollar bonus payments for the people who run the small division that brought down the company. If the government doesnt let them have their money, they will walk away, Mr. Liddy says, and nobody else will know how to clean up their mess. Well get to the merits of his argument in a moment, but its first worth considering the damage that the current system of corporate pay has wrought. The potential windfalls were so large that executives and bankers had an incentive to create rules that would reward them no matter what. The country is now living with the consequences. So any attempt to build a new financial system, one thats less susceptible to bubble, bust and bailout, will have to include a new approach to pay. Yes, the issue is thorny. Some past attempts to rein in pay have ended up being feckless or even counterproductive. But that is no reason to give up. Nothing highlights the fiction of performance-based pay quite so well as retention bonuses. It turns out that, at least for chief executives, retention bonuses are almost entirely unnecessary. A few years ago, when the economy was still expanding, I looked into every large company that had changed chief executives over the previous six months. Not a single boss at any of them had left for another job. Such departures are so rare that Booz & Companys annual study of
executive turnover doesnt even include a category for them. The benefits of the job the pay, the perks, the gratification that comes from running a company well are too good to leave, even for a similar job. The situation is a little different for jobs below the top level, particularly on Wall Street. Surely, if the employees of A.I.G.s notorious financial products division were to be denied their bonuses a big chunk of their annual compensation many might leave. The nub of Mr. Liddys argument is that these departures would be a terrible thing. But there are several weaknesses with this argument. The first is that the original explanation for these bonuses was rather different. When they were devised in early 2008, months before the first bailout, as Mr. Liddys letter to the government on Saturday explained, A.I.G. Financial Products was expected to have a significant, ongoing role at A.I.G. The idea, he said, was to guarantee a minimum level of pay for both 2008 and 2009. So the rationale for A.I.G.s retention bonuses is as malleable as the rationale for chief executives bonuses. Most amazingly, the A.I.G. bonuses havent even accomplished their stated goal. Andrew Cuomo, New Yorks attorney general, said Tuesday that 52 employees who received bonuses had since left A.I.G. The second problem with Mr. Liddys argument has to do with Mr. Liddy himself. His defenders have noted that the government brought him out of retirement to fix A.I.G. and that he presumably puts a higher priority on doing a good job than pleasing A.I.G.s employees. And he probably does. But he is also a product of the current, broken executive pay system. As the chairman of Allstate from 1999 to 2007, when the companys stocks underperformed those of its rivals, he made $137 million. Almost $14 million of that, according to the Corporate Library, came in the form of stock that the company called a a tool for retaining executive talent. Which means Mr. Liddy may not be entirely objective about retention bonuses. Finally, there is the question of how hard replacing those A.I.G. employees would be. Certainly, some of them must have particular insight into unwinding the toxic portfolio they built. But I doubt that anywhere near all 418 financial products employees who have received bonuses worth $395,000 on average are indispensable. Simon Johnson, a former chief economist at the International Monetary Fund, has pointed out that in financial crises, bankers often exaggerate the difficulty of cleaning up their mess. They do so partly to justify their own continued importance and also to fight off calls for a government takeover of banks. In reality, Mr. Johnson says, the mechanics of cleaning up hobbled banks turned out to be fairly straightforward during other recent crises, like the Asian one in the 90s. Its entirely understandable, then, that the Obama administration, the Federal Reserve and Congress are looking for creative, legal ways to claw back some of the bonuses. That bonus money is really taxpayer money: absent a bailout, no A.I.G. would exist to pay bonuses. The larger question is how to change the rules on corporate pay to reduce the odds of future crises. Throughout this crisis, policy makers, starting with President George Bush and Ben Bernanke and now including President Obama, have been a bit too deferential to Wall Street.
That deference has fed populist anger, which threatens the political viability of the necessary continuing bailout of the credit markets. The bonus scandal offers Mr. Obama and Mr. Bernanke a chance to get ahead of the curve long as they come up with changes that extend well beyond A.I.G. so
The starting point would be a rigorous analysis of whether the government can take specific steps to restrain pay. Some thoughtful management experts think any such efforts are doomed to fail. Others are more optimistic. There are ways to do it, says Lucian Bebchuk, a Harvard Law professor. Across-the-board caps on pay dont make sense. But perhaps the government can prevent companies from claiming a corporate tax deduction on any pay above a certain threshold. The current limit, which is $1 million, applies only to base salaries and thus has little meaning. Or perhaps companies can be penalized if they pay bonuses based on short-term profits, as A.I.G., Lehman Brothers and just about every other company recently has. The Fed made a suggestion along these lines recently, but it didnt do anything more than ask nicely. If no such ideas proved workable, there is still one more option. Todays tax code makes no distinction between income above $373,000 and income above, say, $5 million. Both are taxed at 35 percent. That is a legacy of the tax changes of the early 1990s, when far less of the nations income went to millionaires. Today, you can make a good argument for a new, higher tax bracket on the very largest incomes. In the past, the economist Thomas Piketty says, higher marginal tax rates tended to hold down salaries and bonuses, because executives had less incentive to angle for multimillion-dollar pay. Do these ideas stem in part from anger and bitterness? Of course they do. How can you not be a little angry and bitter about the role that huge, unjustified pay played in causing the worst recession in a generation? In fact, thats sort of the point. Given the damage thats been caused by our decidedly unmeritocratic system of paying executives, the most irrational course of all would be the status quo. E-mail: Leonhardt@nytimes.com
New York Times--March 18, 2009 Op-Ed Contributor
A.I.G.s Bonus Blackmail

By LAWRENCE A. CUNNINGHAM Washington PRESIDENT OBAMA on Monday instructed the Treasury Department to pursue every single legal avenue to recover $165 million in bonus payments the insurance giant A.I.G. recently made to nearly 400 employees in its financial products unit. A.I.G. has, of course, received $170 billion in bailout funds and yet continues to incur extraordinary losses some $62 billion last quarter alone. A.I.G. insisted it was legally obligated to make the bonus payments and that failure to pay would breach its contracts with employees and expose it to penalties under state employee protection laws. The company also warned thatbreaching the agreements would amount to defaulting on numerous other business contracts, at staggering cost. Amid this standoff, there has been an explosion of outrage against perceived excessive compensation to those who precipitated the financial crisis. Some lawmakers have threatened to impose a 100 percent tax on the A.I.G. bonuses and Senator Chuck Grassley, Republican of Iowa, even wildly suggested that the companys executives consider suicide for their culpability. But moral outrage and public rebuke do not provide legal grounds for backing out of a contract. If the government is serious about finding a legitimate basis for abrogating these payments, officials must look to basic legal principles. And if A.I.G. is serious that it is legally bound to pay these bonuses, it must do more than say nonpayment would expose it to damages or penalties. Nor is it enough to invoke the sanctity of contracts, because our legal and business system recognizes plenty of valid excuses from contractual duty and even justification for breaching. There are numerous issues both sides must contend with to evaluate whether A.I.G. was bound to or excused from its payment duties. First, the specific promises that employees made or conditions stated in their agreements must be examined. Determining what promises exist requires only reading the contracts; identifying conditions (which will likely offer more wiggle room in A.I.G.s duty to pay) requires both reading the contracts and understanding any negotiations that preceded them. Subpoenas issued by Andrew Cuomo, the New York attorney general, have put much of this vital information into the hands of government officials. Those officials would do well to compare the provisions in these contracts to the job performance of the employees who received bonuses. If employees did not meet stated performance goals, they would be in breach of contract and A.I.G. would not have to pay. Likewise, A.I.G. has stated that these agreements expressly state that if employees are terminated for cause, they are not entitled to any bonus payments. It follows then that the contracts may preserve the companys power to deny bonuses to employees who could be terminated for cause but have not yet been.
Apart from specific contractual terms, there are other reasons A.I.G. might rescind these bonuses. They include the nondisclosure of important material information for instance, if an employee failed to be absolutely candid about the size and risk of trading positions taken on the companys behalf. Findings of fraud on the part of an employee would certainly also excuse A.I.G.s duty to pay. This isnt to say that any A.I.G. employee engaged in such activity. But given the scale of problems that A.I.G. has confronted, and credible allegations of serious misconduct within the organization, its worth investigating. There is also at least some chance, given A.I.G.s functional insolvency and the government takeover, that these agreements may be rescinded either on the basis of impracticability or by virtue of unforeseeable and uncontrollable circumstances. A credible fact supporting both excuses is precisely the companys huge loss last quarter. Courts excuse contract duties when governmental action essentially destroys the original purpose of a contract and the taxpayers 80 percent stake in A.I.G. is a more extreme sort of governmental action than usually appears in such cases. A final potential legal basis for rescinding these payments is fraudulent conveyance law. This generally limits the right of a financially troubled company to transfer property to favored claimants on sweetheart terms when doing so would hurt the interests of other claimants, like lenders and shareholders in this case, perhaps even taxpayers. Again, this is not to say that these payments violate this doctrine, but it is a relevant question for the government to probe. Without reading the contracts, understanding their background and learning about employee performance, one cannot say whether A.I.G. is legally bound to pay or legally excused from paying these bonuses. But we wont resolve this question by simply trading nebulous assertions and hysterical threats. Lawrence A. Cunningham is a professor at George Washington University Law School.
No Boiled Carrots
By MAUREEN DOWD WASHINGTON Barack Obama even needs a teleprompter to get mad. On St. Patricks Day, the president spoke a bit of Gaelic, dyed the White House fountains green and talked about his distant relatives in the tiny Irish town of Moneygall, aptly named since money and gall are the two topics now consuming him. But Mr. Obama is still having trouble summoning a suitable flash of Irish temper at the gall of the corrupt money magicians who continue to make our greenbacks disappear into their bottomless well. Hes got to lop off some heads. As he watches the fury of ordinary Americans bubble up at those who continue to plunder our economy, he should keep in mind one of my dads favorite Gaelic sayings: Never bolt the door with a boiled carrot. His lofty team of economic rivals is looking more like a team of small forwards and shooting guards. At the White House on Monday, the president read reporters some tough talk from the teleprompter about the chuckleheads at A.I.G., accusing them of recklessness and greed. But it was his own boiled carrots who acted shocked at bonuses that they should have known were coming, and should have dismantled before handing A.I.G. another $30 billion two weeks ago. It is bad enough that the billions are being laundered through A.I.G. to the likes of bailout double-dippers Goldman Sachs, Citigroup and Bank of America, not to mention foreign banks. Mr. Obama belatedly tried to stop the tumbrels that began rolling toward the Potomac after Larry Summers went on Sunday talk shows to assert that there was nothing the administration could do about the blood-sucking insurance monstrositys venal payout. Summers, who inspires lusty dreams of A.I.G. tormentor Eliot Spitzer, asserted that the government cannot just abrogate contracts with financial vampires. It seems as though it would be pretty easy to upend a bonus contract that must read something like: If you ruin the world economy, well pay you an extra million. As Andrew Cuomo pointed out on Tuesday, 11 of the A.I.G. executives who received retention bonuses of $1 million or more including one who received $4.6 million were not even retained. Theyre no longer working at A.I.G. Bonuses were paid to 52 people who have left the company. At first, on the nutty bonuses, Team Obama thought it could get away with the same absurd argument used to justify the nearly $8 billion in unnecessary earmarks it allowed Congress to jam into this years overdue spending bill: It was written last year; were just signing off on it; well do better in the future.
What President Obama should have said to the blood-sucking bums at A.I.G., many of them foreigners who were working at the louche London unit, was quite simple: We stopped the checks. Theyre immoral. If you want Americans hard-earned cash as a reward for burning up their jobs, homes and savings, sue me. He also should have saved a dollar a year and fired Ed Liddy. There must have been ways to avoid rewarding the perpetrators of our financial crisis and Liddy seems to have seriously explored none of them. Barney Frank told reporters: I think the time has come to exercise our ownership rights ... and then say as owner, No, Im not paying you the bonus. You didnt perform. You didnt live up to this contract. Cuomo, who seems far more intent on transparency than Mr. Obama, and Tim Geithner, the Treasury secretary who reluctantly signed off on the bonuses, issued subpoenas for the names of the bonus babies. Cuomo started an investigation of whether the payments were fraudulent because the company knew it did not have the funds to cover them. The president needs to brush back the arrogant, greedy creeps who kneecapped capitalism, rather than cosseting Wall Street for fear of looking like an avatar of socialism. Geithner, who comes from the cozy Wall Street club, and Liddy believe its best to stabilize the company and keep on board the same people who invented the risky financial tactics so they can unwind their own rotten spool. Isnt that like giving bonuses to the arsonists who started a fire because they alone know what kind of accelerants they used to start it? Their mythology starts with the false premise that these are irreplaceable geniuses, says Cuomo. Boiling mad that A.I.G. made more than 73 millionaires in the unit that felled the firm, Cuomo called the companys counsel on Monday to demand that she stop payment on the checks. Cuomo was informed that the money had already been direct-deposited in the accounts of the derivative scoundrels with the push of a button.
New York Times--March 18, 2009 Commentary
A.I.G.s Bailout Priorities Are in Critics Cross Hairs

By GRETCHEN MORGENSON Every day, insurance companies sell policies to homeowners to cover the cost of damage in the case of fire. Why would those companies agree to pay out in full to a policyholder even if a fire had not occurred? That is the type of question being asked about the federal governments bailout of American International Group in which the insurance company funneled $49.5 billion in taxpayer funds to financial institutions, including Deutsche Bank, Goldman Sachs and Merrill Lynch. The payments, which amount to almost 30 percent of the $170 billion in taxpayer commitments provided to A.I.G. since its near collapse last September, were disclosed by the company on Sunday. The company had resisted identifying the recipients of the taxpayers money for months, citing confidentiality agreements. But instead of quieting the controversy, the disclosure of the amounts paid to A.I.G.s customers has created still more questions and unease over the insurers rescue, arranged by the Federal Reserve Bank of New York and the United States Treasury. Critics argue that the governments decision to pay buyers of A.I.G. credit insurance in full and across the board was an inappropriate use of taxpayer money. In addition, these people say, options not pursued by the government could have allowed taxpayers to benefit from future gains or at least have done a better job of limiting the potential for losses. The criticism surrounds the action taken by the government on credit insurance that A.I.G. had written and sold to large and sophisticated investors, mostly financial institutions. The banks that did business with A.I.G. bought credit insurance to protect against possible defaults on debt securities they held or had underwritten. But when A.I.G.s credit rating was cut last year, the company was required to post collateral on these insurance contracts. The need to quickly deliver cash that it did not have created the downward spiral that brought it to the brink. What upsets some people is that the government paid the counterparties in full even though the underlying securities had not experienced widespread, or perhaps even any, defaults. It is inappropriate to be giving money to A.I.G. for them to give it out to their counterparties equally, said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn., and an expert in insurance. If we decide that another bank will be in trouble because A.I.G. fails, then we should decide explicitly that the bank should be supported. We should not simply give everybody 100 cents on the dollar.
When the government bought the underlying securities to cancel the insurance, the taxpayer became the owner of these pools of debt issues. Because the government chose to pay par or 100 percent of the face value, the taxpayer has downside risk if the securities lose value but virtually no upside. Even if none of the debt securities in the pools experience a default, the taxpayer is likely to receive no more than par what the government paid when they mature. Had the government negotiated for a lower price, say 75 cents on the dollar, the taxpayer might have been able to reap gains down the road. The top three recipients of money from the government related to the credit insurance A.I.G. had written are Socit Gnrale, a French bank, at $11 billion; Goldman Sachs, at $8.1 billion; and Deustche Bank, at $5.4 billion. A.I.G.s disclosure of payments to its counterparties did not provide any details of how the government arrived at the prices it paid for the underlying securities. If it overpaid, the taxpayer is at greater risk of loss and the recipients may have received more than they were due. Another troubling aspect to some is that so many of the counterparties are foreign institutions. Indeed, of the 22 institutions that have received either collateral from the government or cash payments to close out credit insurance deals, 16 are foreign. I find it impossible to understand why we as taxpayers are bailing out foreign banks, said Thomas H. Patrick, a founder of new Vernon Capital and a former top executive at Merrill Lynch. If the shoe was on the other foot and major U.S. institutions were exposed to those banks, would the U.K. or the E.U. tax their citizens to pay off JPMorgan? There has to be some explanation of why we decided to do that. The decision to protect foreign institutions from losses in an A.I.G. collapse may reflect how interrelated the global financial markets have become. That is the view of Adam Glass, a partner at Linklaters in New York and co-head of the firms structured finance and derivatives practice. It is an interconnected world, Mr. Glass said. If UBS or these French banks collapsed, it is not just their problem. It is our problem because world economic activity would have been further impaired. Even though A.I.G. finally disclosed the names of the institutions that received so much of the government money that was thought to be going to A.I.G., the idea that it took six months still rankles some market participants. The system was undermined by asking the American people, under the veil of secrecy, to bail out one company when in fact they wanted to bail out someone else, said Sylvain R. Raynes, an authority in structured finance and a founder of R & R Consulting, a firm that helps investors gauge debt risks. The prospectus for the bailout was not delivered to the people. And it was not delivered because if it had been, the deal would not have gone through.
Clawbacks can't scratch AIG

Washington wants to tax AIG bonuses into submission. So much for provisions meant to protect taxpayers from excessive compensation in the first place.
By Colin Barr, senior writer Last Updated: March 18, 2009: 11:18 AM ET NEW YORK (Fortune) -- The latest spectacle in the AIG circus is a supposedly tough federal rule on executive compensation that has drawn no blood. The troubled insurer has provoked another round of outrage by paying out $165 million in bonuses -- to the employees of a subsidiary that caused AIG's (AIG, Fortune 500) near collapse, no less. The payments to workers at AIG's derivatives-happy financial products group have been widely condemned in Washington. President Obama told Treasury Secretary Tim Geithner to explore legal avenues to block the so-called retention bonuses. Late Tuesday night, Geithner said would force AIG to pay back the government an amount equal to the bonuses. And New York Attorney General Andrew Cuomo subpoenaed AIG to find out who is getting how much and why. With AIG having received $170 billion in federal funding altogether, the bonus case - in which 73 workers got at least $1 million each, after a year in which AIG lost $99 billion - would seem to be a perfect test for the clawback provisions inserted in the bailout legislation Congress passed last fall and updated last month in the stimulus bill. Those provisions allow firms receiving federal aid to demand repayment of disputed funds from employees in certain circumstances. Since Treasury Secretary Henry Paulson first asked Congress for $750 billion in bailout funds last September, policymakers have been saying clawback provisions would help to protect the taxpayers. But it seems that the clawback provisions were written so narrowly -- they apply primarily to the top executives at firms receiving federal funds and for cases in which those executives appear to have misled investors -- that the government has concluded it should not use the rules to go after the previous AIG bonuses. Geithner did say late Tuesday night that he would use these provisions to limit future AIG bonus payments. But there is still anger about the bonuses that AIG has already agreed to pay. So some legislators find themselves looking to treat AIG as if it were Al Capone -- the gangster who was brought to justice when he was convicted for tax evasion instead of murder -- and proposing to use tax policy to fix their unpopular taxpayer-funded bonus problem.
Senate Finance Committee Chairman Max Baucus, D-Mont., is expected to propose a special tax for the bonuses and Sen. Bill Nelson, D-Fla., said the tax could be as high as 90%. Not everyone is on board. Rep. Charles Rangel, D-N.Y., said Tuesday he doesn't agree with calls to tax the bonuses. "It is tough to me to think of the tax code as a political weapon," he told reporters in Washington. "The tax code is not sacred, but it should have enough credibility so people can depend on it." Still, the fact that lawmakers are discussing possible changes to tax rules is proof of how little teeth the clawback rules have - something foreseen by some skeptics of the bailout. "I've communicated with members of Congress already that I think the clawback provision, the severance provision ... and compensation -- they all could have been much stronger," Lynn Turner, the former chief accountant of the Securities and Exchange Commission, told the House Committee on Oversight and Government Reform back on Oct. 7. Still, some tax experts think Treasury is not using the full extent of its bonus-busting authority. Henry Oehmann, the director of national executive compensation services at Grant Thornton in Raleigh, N.C., said provisions in the stimulus bill could give the government the right to review bonuses whose payment impairs the value of firms receiving federal aid. It wouldn't be hard to make the case that the bonus case at AIG has done just that, Oehmann said. "It seems to me they have some tools here," he said of the Treasury's ability to influence bonus payments at AIG. "Who would argue that this whole mess hasn't hurt shareholder value?" But it appears Treasury has decided that it doesn't want to pick a fight with AIG, and instead let Congress levy taxes on the unpopular bonuses. And after years of watching traders rake in obscene profits with their escapades, some observers say why not. "There are no constitutional obstacles to taxing this money at very high rates," said Lee A. Sheppard, a tax attorney and contributing editor at the tax journal Tax Notes. "What's remarkable here is just how tone deaf Wall Street can be." First Published: March 17, 2009: 5:35 PM ET

MARCH 18, 2009, 11:34 A.M. ET
AIG's Liddy Calls Some Bonus Payments 'Distasteful'

Congress Wants to Subpoena Names of Executives
By MICHAEL R. CRITTENDEN and PATRICK YOEST
WASHINGTON -- U.S. lawmakers plan to subpoena the names of American International Group Inc. executives who received $165 million in bonuses that even the company's top executive called "distasteful" Wednesday. House Financial Services Chairman Barney Frank (D., Mass.) said he would ask AIG Chairman and CEO Edward Liddy for the names of bonus recipients. If the company doesn't provide those names, he said, Congress will formally subpoena them from the company. "We also will be asking Mr. Liddy to give us the names of the recipients," Rep. Frank said at a hearing. "If [he] declines to give us the names, then I will convene the committee and have a vote to subpoena the names." The comments came as Mr. Liddy was set to appear before the House Financial Services panel's capital markets subcommittee. In his testimony, Mr. Liddy said that the "cold realities of competition" for customers and employees played a role in the firm's decision to make the payments, which have spurred a public backlash given the roughly $170 billion the government has used to prop up the troubled insurer. "Because of this, and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful," Liddy said in prepared remarks before the House Financial Services panel's capital markets subcommittee. (See Liddy's prepared text.) The remarks didn't assuage the anger expressed by both Democrats and Republicans in response to the bonus payments to workers at AIG's financial products unit. Frank called the payouts "wholly unjustified," while other lawmakers took aim at the firm's management. "AIG now stands for arrogance, incompetence and greed," Rep. Paul Hodes (D., N.H.) said. Rep. Paul Kanjorski (D., Penn.) said AIG management ignored warnings from him and other lawmakers not to make the payments because of the potential public outcry. "Something is seriously out of whack, and AIG needs to fix it now," Rep. Kanjorski said at the hearing. Mr. Liddy, acknowledging the criticism in his testimony, said the public's "patience is especially thin" and that the company is working to repay taxpayers "to the maximum extent possible."
"We are acutely aware not only that we must be good stewards of the public funds we have received, but that the patience of America's taxpayers is wearing thin," Mr. Liddy said. Describing the financial products division, Liddy called it an "internal hedge fund" that exposed the company to extreme market risk. The result, he said, was that "mistakes were made at AIG on a scale few could have ever imagined possible." "Those missteps have exacted a very high price, not only for AIG but for America's taxpayers, the federal government's finances and the economy as a whole," said Mr. Liddy, who took over AIG as part of the government's rescue of the firm in September. Some lawmakers said Liddy should not be the target of all the criticism. Rep. Spencer Bachus (R., Ala.), the top Republican on the House Financial Services Committee, said little could be done by the government except to allow AIG's new management to repair problems at the company and to recover as much taxpayer funds from the company as possible. "You can vilify this new management if it makes you feel better, but resolving a company as large and complex as AIG is no easy task," Rep. Bachus said. "The government trying to get more involved than it is is just going to be a sad experience."

MARCH 18, 2009
Treasury Will Make Grab to Recoup Bonus Funds

By JONATHAN WEISMAN, NAFTALI BENDAVID and DEBORAH SOLOMON
WASHINGTON -- The Obama administration said Tuesday it would seek to recoup from American International Group Inc. the $165 million in bonuses paid to employees of the bailedout insurance titan as it tried to contain a national furor over the payments. White House officials are looking to use an executive-pay provision inserted into the recently passed stimulus law. The administration has seized on language that would allow the Treasury secretary to claw back payments if they were "inconsistent with the purpose" of the Troubled Asset Relief Program or "otherwise contrary to public interest." In a letter to Congress Tuesday, Treasury Secretary Timothy Geithner said the Treasury planned to use the law to deduct the cost of the bonuses from the government's pending $30 billion cash infusion, and will also extract additional penalties from AIG operating funds. With angry emails and letters pouring into Congress, a number of legislators had earlier expressed support for a special tax on the so-called retention bonuses paid to 73 AIG employees. Recipients of the funds, at AIG's financial-products subsidiary, include 11 people who no longer work for the company.
Senate Finance Committee Chairman Max Baucus (D., Mont.) and Sen. Charles Grassley (R., Iowa), the committee's top Republican, proposed a 35% tax on employees receiving bonuses and
another 35% on the firm that paid it. In a move likely to further unnerve banks, the bill would apply to bonuses earned or paid after Jan. 1, 2009, and would cover not just AIG but all companies that received funds from the government's financial bailout fund. An AIG spokeswoman has repeatedly declined to comment, except to point to AIG CEO Edward Liddy's letter Saturday to Mr. Geithner, in which he said he found the payments "distasteful." Mr. Liddy was appointed by the Bush administration last year. The bonuses have crystallized public anxiety over the economic downturn and frustration at the government bailouts, creating a firestorm for the White House. President Barack Obama knew he had little power to stop AIG from issuing the bonuses, even as he stood before television cameras and vowed Monday to "block these bonuses," White House officials said. By the end of the day, the White House acknowledged its limited options. Its back-and-forth response to the scandal poses a potential threat to Mr. Obama's broad agenda -- especially his ability to wrest fresh bailout funds from Congress, lawmakers say. The bonus flap is also another blow to Mr. Geithner, following criticisms concerning his tax history and the launch of his bank bailout revamp. White House officials say the president's comments Monday reflected his intention to express personal outrage, even if nothing more could be done to block the payouts. He also wanted to start a new legal review of the AIG contracts, the officials say. Lawmakers received thousands of calls and emails Tuesday about the bonuses paid to executives in the unit that caused AIG's near collapsed. "It smacks of greed, arrogance and worse," said Sen. Sherrod Brown (D., Ohio). Mike Markey, an electrician in Swanzey, N.H., emailed his representative and both senators to express frustration that lawmakers hadn't acted sooner. "Why don't you people look into these things before you make a law?" he wrote. "It's not like we're getting a bailout," says Dana Meier, 46 years old, of Rogue River, Ore., who works out of her home for a company that sells supplements for horses and other animals. "Why is AIG allowed to get away with this?" Some Republicans, while just as angry as Democrats at the bonuses, were less enthusiastic about a tax penalty, with some questioning the propriety and even the legality of interfering with private contracts. The law generally allows high taxes on bonuses, even for narrowly defined groups of executives, according to legal experts. Directly singling out executives of AIG in legislation might raise a constitutional issue, however, said Robert Cudd, a partner with Morrison & Foerster LLP in San Francisco. The fact that AIG was set to pay bonuses to employees at the financial-products division wasn't a secret. AIG disclosed the retention payments in May 2008 in a securities filing, and lawmakers routinely criticized them. "Fed and Treasury officials have coordinated closely on all aspects of the U.S. government's support for AIG during this extraordinary period," a New York Fed spokesman said.
Though the U.S. government controls AIG through an 80% equity stake and as a major lender, it doesn't have legal authority to freeze payments on its own. The U.S. has committed $173.3 billion to AIG, including $70 billion from Treasury's rescue fund. In negotiating rescues of AIG late last year, some within the government argued the bonuses should be curtailed. Others said that such a move could cause employees to flee and prompt the firm's collapse. Instead, the government looked for other ways to limit executive compensation, including capping severance pay. AIG set up a committee in November to examine the bonus issue, says one person familiar with the committee. The group included representatives from the Federal Reserve and Ernst & Young, the Fed's auditor. "If they had wanted to reject the bonuses, they had four months to do so," said this person. Created in 1987, the financial-products business sold insurance-like contracts to cover a variety of risks using the insurer's triple-A credit rating. In 2007, the business recorded a $10.6 billion operating loss, reflecting the falling value of contracts protecting other firms against losses on assets backed by mortgages. The retention packages in question were tied to levels of pay in 2007 that didn't reflect certain losses incurred by the unit, according to company disclosures. An administration official said that despite having engineered the first two rescues of AIG while president of the New York Fed, Mr. Geithner didn't know about the pending bonuses until last week.
AIG Bonuses
New York Attorney General Cuomo provided details of bonuses awarded at AIG. Here are the details he provided. See the letter.
x x x x
The top recipient received more than $6.4 million; 22 individuals received bonuses of $2 million or more, and combined they received more than $72 million; 73 individuals received bonuses of $1 million or more; and Eleven of the individuals who received "retention" bonuses of $1 million or more are no longer working at AIG, including one who received $4.6 million
On March 5, just days after AIG received its fourth round of government aid, the New York Fed informed a Treasury official the payments would be made on March 15, according to an administration official. That information wasn't conveyed to Mr. Geithner until last Tuesday, the official said. The next day, Mr. Geithner called Mr. Liddy and had him perform a legal analysis about whether the payments had to be made. Treasury began its own review of whether it could break the contracts. On Friday, Messrs. Geithner and Liddy conferred again, and the Treasury secretary didn't protest when the AIG chief said the contracts were inviolable.
By the time National Economic Council Director Lawrence Summers appeared on the Sunday morning talk shows, the bonuses were already in the works, said White House spokesman Robert Gibbs. Government lawyers concluded abrogating the contracts would cost more in legal fees than letting the bonuses go forward. White House officials say the economic team was reflecting the administration's position. But news of the AIG retention bonuses had hit the newspapers that morning, and anger was building. Some Obama advisers said the economists' language needed to be translated into plainer English. On Sunday evening, the president met with his economic and legal team and told them to keep looking for options on the bonuses. Sudeep Reddy, John McKinnon, Michael Crittenden and Kelly Evans contributed to this article. Write to Jonathan Weisman at jonathan.weisman@wsj.com, Naftali Bendavid at naftali.bendavid@wsj.com and Deborah Solomon at deborah.solomon@wsj.com
Bonuses and Bailouts

Key dates in AIG's bonus controversy
x x x x x x
May 8, 2008: AIG discloses in an SEC filing a plan to pay retention bonuses to Financial Products employees Sept. 16: The government extends AIG a two-year loan of up to $85 billion, and gets a 79.9% stake in return. Oct. 8: Bailout loans increase to nearly $123 billion due to problems in AIG's securitieslending program. Nov. 9: The rescue package increases to $150 billion, including a new $40 billion federal investment. March 2, 2009: The government makes $30 billion in TARP money available. March 10: Treasury receives list of payments due to AIG executives from the New York Fed. A White House official says Treasury Secretary Timothy Geithner didn't learn about the pending bonuses until then. March 11: Mr. Geithner discusses bonuses and compensation with AIG's government appointed CEO Edward Liddy. March 14: In a letter to Mr. Geithner, Mr. Liddy says AIG will "use best efforts" to reduce the pending payments by "at least 30%."
x x
Outcry Builds in Washington for Recovery of A.I.G. Bonuses

By JACKIE CALMES and LOUISE STORY WASHINGTON The bonuses that the American International Group awarded last week were paid to 418 employees and included $33.6 million for 52 people who have left the failed insurance conglomerate, according to the office of the New York attorney general. The company paid the bonuses, including more than $1 million each to 73 people, to almost all of the employees in the financial products unit responsible for creating the exotic derivatives that caused A.I.G.s near collapse and started the government rescue to avoid a global financial crisis. A.I.G. has received nearly $200 billion in federal bailout funds. The information adds to the firestorm confronting the Obama administration and Congress since the weekend disclosure that A.I.G., almost 80 percent owned by the government, paid out $165 million in bonuses. Even before the New York attorney general, Andrew M. Cuomo, divulged the new data on bonus payments in a letter to Representative Barney Frank, the Massachusetts Democrat and chairman of the Financial Services Committee, the White House and Congress separately were rushing to get out in front of the mounting public furor. Officials and lawmakers condemned A.I.G., pointed fingers at each other and promised speedy action to recoup the taxpayers money. The outcry will probably find an outlet on Wednesday, when Edward Liddy, the A.I.G. chief executive who took over after the bailout for $1 a year, testifies before a subcommittee of the House Financial Services Committee. New Yorks efforts against A.I.G. have overshadowed those of the Treasury secretary, Timothy F. Geithner, the official who is responsible for the financial bailout, along with the Federal Reserve. The White House and Treasury have been besieged by questions about why Mr. Geithner did not know sooner about the bonus payments due this month, and whether he could have done more to stop them, prompting White House officials to assert President Obamas continued confidence in Mr. Geithner. He more than has the presidents complete confidence, said Rahm Emanuel, the White House chief of staff. As angry as the president is at the news about A.I.G., which he learned Thursday, Mr. Emanuel said, his main priority is getting the financial system stabilized, and he believes this is a big distraction in that effort. The House speaker, Nancy Pelosi, on Tuesday asked three committee chairmen, including Mr. Frank, to come up with legislation to recoup the bonus money, and suggested the House might pass a measure as early as this week. But the reaction of another of the chairmen, Representative Charles B. Rangel of the tax-writing Ways and Means Committee, underscored the legal and political complexities facing Democrats as they scramble for a solution. Mr. Rangel, a Democrat from New York, objected to one of the
most popular ideas being floated a confiscatory income tax on the recipients. The tax code is not a political weapon, he told reporters. A.I.G. has refused to identify the current and former employees on privacy grounds, including one who received $6.4 million, but Mr. Cuomo is seeking to obtain and publicize their names. The employees took salaries of $1 in exchange for receiving the bonuses, which were supposed to keep them from leaving A.I.G., according to Mr. Cuomos office. That, he suggested, undercuts A.I.G.s claims that it could not renegotiate the bonus contracts agreed to early in 2008, and that the payments were retention bonuses. The only justification they had for this was, well, we needed to keep these people, but there are 50 people who left anyway or who they decided they didnt need to keep, Mr. Cuomo said in an interview. A spokeswoman for A.I.G., Christina Pretto, declined to confirm the number of people reported to have received retention bonuses before leaving the financial products unit. She said it was common knowledge that A.I.G. was eliminating jobs in that division. Late Tuesday, Mr. Geithner and White House officials sent a letter to Congress seeking quick action on legislation to give the government more power to intervene and wind down companies like A.I.G., which are huge players in the financial system, but are not regulated the way banks are. The administration had planned to seek such regulatory powers as part of a broad revamping of financial regulations, but it is expediting this piece in response to the A.I.G. uproar. In the letter, Mr. Geithner confirmed that the government would subtract $165 million the amount of the bonuses from the latest $30 billion loan to A.I.G. that would bring the total loans to $200 billion, from the original $85 billion. Mr. Geithner reiterated the Treasury position that lawyers inside and out of government had agreed that it would be legally difficult to prevent these contractually mandated payments. That position was being questioned at the Capitol. Congressional Republicans, eager to implicate Democrats, initially blamed Senator Christopher J. Dodd, the Connecticut Democrat who heads the banking committee, for adding to the economic recovery package an amendment that cracked down on bonuses at companies getting bailout money, but that exempted bonuses protected by contracts, like A.I.G.s. Mr. Dodd, in turn, responded Tuesday with a statement saying that the exemption actually had been inserted at the insistence of Treasury during Congresss final legislative negotiations. While the administration has been mostly on the defensive, the competing expressions of outrage in Congress throughout Tuesday belied the fact that a few less-prominent Democrats had tried to draw attention to the A.I.G. retention bonuses since last November. Except for their condemnations last December, response has been sparse on A.I.G.s disbursement of an initial $55 million in retention payments.
While House leaders were calling for immediate legislation to recoup payments, Senate Democrats sent a letter to Mr. Liddy demanding that A.I.G. renegotiate the employees compensation contracts and return the bonuses. The Senate majority leader, Harry Reid, and other Democratic leaders proposed new taxes, some as high as 91 percent, on the bonuses. But some of the A.I.G. employees are thought to be foreigners based in offices abroad, and not liable for United States taxes. Congressional Republicans, despite the Bush administrations role in setting the terms of the A.I.G. bailout six months ago, blamed the Obama administration for lax oversight. Senator Richard Shelby, a Republican of Alabama, seemed to hint that Mr. Geithner should resign. This is just another example of where he seems to be out of the loop, Mr. Shelby said. Treasury should have let the American people know about this." David Axelrod, senior adviser to the president, dismissed such talk, citing the financial mess that Mr. Geithner had inherited. He has been confronted with a situation and challenges that are unparalleled in modern history, and to put it all on his shoulders is not fair and not right, Mr. Axelrod said. Hes a brilliant and committed guy with a great deal of experience in this area, and were standing with him. Jackie Calmes reported from Washington, and Louise Story from New York. Edmund L. Andrews and David M. Herszenhorn contributed reporting from Washington.
CQ TODAY PRINT EDITION March 17, 2009 9:02 p.m. Hill Attack on Bonuses Gains Steam By Richard Rubin and Phil Mattingly, CQ Staff Democratic leaders are moving in a two-stage approach to try to recoup bonuses paid to employees by the troubled insurer American International Group Inc.: First, shame AIG executives into returning the bonus money and if that fails, act quickly to use steep excise taxes to reclaim the cash. Senate Finance Chairman Max Baucus, D-Mont., is readying a tax bill that would become the vehicle for responding to public frustration and preventing further erosion in public support for the governments attempts to prop up the financial sector. House Speaker Nancy Pelosi, D-Calif., asked the Ways and Means, Financial Services and Judiciary committees to produce legislation as early as this week. The bills could authorize the attorney general to reclaim the bonuses, use the tax code to get the money back or prohibit abuses of retention bonuses by companies receiving federal money. The Judiciary Committee could mark up legislation Wednesday. Treasury Secretary Timothy F. Geithner wrote Pelosi late Tuesday saying AIG would be forced to pay back the amount of the bonuses from its operating funds as a contractual commitment to the government. AIG, which has received more than $180 billion in taxpayer money and is now 80 percent owned by the government, paid $165 million in bonuses designed to retain key employees who are helping wind down the convoluted credit derivatives that imperiled the company and threatened the world financial system. The revelations about AIG have infuriated members of Congress, who are planning to use excise taxes of more than 90 percent to reclaim the money while trying to avoid violating valid, legal contracts. Most of the Senate Democratic caucus wrote to Edward M. Liddy, who was installed as chairman and CEO of AIG after the bailouts began last year, telling him to renegotiate the bonus contracts or face legislative action. Baucus and committee ranking Republican Charles E. Grassley, R-Iowa, said Tuesday evening that their bill would place a 35 percent excise tax both on AIG for its bonus costs and on the bonus income of recipients. Combined with regular tax levels, that should allow for the recovery of nearly 100 percent, Baucus said. It would also impose a 20 percent surtax on any deferred compensation over $1 million annually. The bill would apply to companies that have received federal bailout money or companies in which the federal government has an equity stake. It would apply to all payments from Jan. 1, 2009, forward. Legislation could move very quickly, particularly in light of details about the bonuses released Tuesday by New York Attorney General Andrew Cuomo, who reported that 73 people received more than $1 million each in retention bonuses, including 11 people who have since left the company.
From my standpoint, its irresponsible for corporations [receiving federal aid] to give bonuses at this time, said Grassley, who suggested on Monday that executives resign or commit suicide. (Story, p. 34) Addressing Bailout Fatigue The AIG episode taps into the publics bailout fatigue. Any response even if symbolic may be an important step to shore up badly eroded support for the Obama administrations efforts to stabilize the financial system. We have to restore peoples confidence in the effort to stabilize the financial markets, said Rep. Chris Van Hollen, D-Md., who said lawmakers could consider extending any taxes on bonuses to apply to all recipients of federal bailout money. AIGs Liddy spent Tuesday circulating through Republican members offices in advance of a Wednesday morning hearing of the House Financial Services Committee. Liddy met the lawmakers in tightly scheduled, 30-minute increments. Approached on his way out of the office of Rep. Michael N. Castle, R-Del., Liddy declined to comment. The emerging legislation seems likely to mirror an amendment in the Senate-passed version of the economic recovery bill (PL 111-5) aimed at penalizing bailout recipients perceived to be abusing taxpayers funds. That amendment, offered by Ron Wyden, D-Ore., and Olympia J. Snowe, R-Maine, would have given companies a choice: pay back money received through the Troubled Asset Relief Program or face a 35 percent excise tax on bonuses. (Of the $180 billion of taxpayer funds that AIG has received, about $40 billion is attributable to TARP, according to recent figures.) That approach, Wyden said, handles the constitutional concerns about retroactivity and violating contracts. The proposal was dropped by the conference committee in favor of an alternative from Senate Banking Chairman Christopher J. Dodd, D-Conn., that specifically prevented the government from touching bonuses received pursuant to contracts signed before Feb. 11. Asked why his provision was dropped, Wyden said: It was clear that everybody we talked to said, Oh, my goodness, I certainly wasnt against it, but maybe somebody else was. Suffice it to say, were not going to let that happen again. Senate Majority Leader Harry Reid, D-Nev., did not answer directly Tuesday when asked whether dropping the Wyden-Snowe provision was a mistake. I think we should look at what we did put in the bill, Reid said, noting the Dodd language as well as provisions mandating that Treasury develop guidelines for bonuses. Possible Hurdles Any new legislation could face some opposition, depending on how it is worded. Senate Minority Whip Jon Kyl, R-Ariz., said he had not seen details of Baucus bill yet, but said he worried about using the tax code to reclaim legally awarded pay. I need to understand what hes talking about, because ordinarily, retroactive tax policy is avoided, he said.
Dodd and Charles E. Schumer, D-N.Y., both indicated they were open to the idea of tax-based legislation to recoup the bonus money. But Dodd pointed out several potential pitfalls to consider in designing the legislation. A number of the people may not be U.S. citizens, which may cause a problem, Dodd said. The second issue is, if we tax the company we own the company are we taxing ourselves? Which raises some issues as well, he added. In addition to Baucus, several other lawmakers are filing AIG-related bills, and House Majority Leader Steny H. Hoyer, D-Md., indicated leadership is backing such efforts. Hoyer said hed consider supporting legislation to create a surtax on bonuses paid to all companies helped by federal taxpayers. Hoyer conceded that the AIG executives, whose bonuses were agreed to before the companies received the huge infusion of federal help last fall, are probably unlikely to voluntarily decline their bonuses. Based upon their performance, it doesnt give you a lot of hope. At some point in time I would think they would have some sense of sensibility to the outrage of the American public, he said. Financial Services Chairman Barney Frank, D-Mass., said Tuesday that the government needed to assert its ownership power over the insurance giant. The time has come to act as the owner, Frank said. He said that asserting the majority ownership stake could bypass concerns about the legal difficulties posed by some legislative options. Another key House chairman, Charles B. Rangel of Ways and Means, indicated he was open to ideas, but offered no specifics. There is no question that AIG should not have used taxpayer funds to pay bonuses to executives, Rangel, D-N.Y., said in a statement. Republicans have used the furor over the AIG bonuses to attack the Obama administration for lax oversight and to call for an end to more federal assistance to troubled financial firms. Before Geithners letter to Pelosi was released, House Minority Leader John A. Boehner, R-Ohio, said the secretary had had opportunities to stop the AIG bonuses, or at least to alert the public, but had failed to do so. Mr. Geithner was chairman of the New York Federal Reserve when they decided to put this money into AIG. It was Mr. Geithner who in February said they had a plan to break up AIG and sell the parts, he said. But then Geithner put another $30 billion into the company as its losses continued. I dont understand why he didnt make it clear they couldnt use the money for bonuses. Boehner repeated his call for an exit strategy from bailouts. Michigan Democratic Rep. Gary Peters has introduced legislation (HR 1527) that would create a 60 percent surtax on bonuses over $10,000 paid by any company in which the government has a 79 percent or greater equity stake. AIG is the only company that meets those requirements. Peters staff estimates the proposed surtax, when combined with the regular income tax rate and state and local taxes, could recover as much as 100 percent of the bonuses. Rep. Steve Israel, D-N.Y., introduced legislation (HR 1518) that would impose a higher tax rate on bonuses paid out to employees of all institutions on the receiving end of federal bailout funds.
A group of GOP freshmen announced the introduction of a bill that would require Treasury to recoup the bonuses within two weeks of enactment. That bill, sponsored by Leonard Lance of New Jersey, does not detail how Treasury would go about recouping the money. Separately, the House Oversight and Government Reform Committee sent a letter to the head of Bank of America, asking for details about $3.6 billion in bonuses paid by Merrill Lynch last year. Bank of America, which has received $45 billion in TARP money, acquired Merrill on Jan. 1. Edward Epstein, Catharine Richert, Kathleen Hunter and Benton Ives contributed to this story. Source: CQ Today Print Edition Round-the-clock coverage of news from Capitol Hill. 2009 Congressional Quarterly Inc. All Rights Reserved.
CongressDaily3/18/09 TAXES
Congress Moves Quickly To Punish AIG

Wednesday, March 18, 2009 by Peter Cohn, with Humberto Sanchez and Carrie Dann contributing Senate Finance Committee leaders Tuesday announced they were preparing legislation to impose steep excise taxes, perhaps 70 percent or more, on bonuses granted by firms like American International Group Inc., and others receiving government aid. "Financial institutions that in our judgment accept federal funds to avoid bankruptcy should watch every penny, not give million-dollar bonuses," Finance Chairman Max Baucus said. "We believe this is the right thing to do. American taxpayers are justifiably outraged at what AIG has done." At the same time, House Democratic leaders are preparing a more expansive three-pronged approach involving multiple committees, even as Ways and Means Chairman Charles Rangel expressed some unease at going after executive bonuses through the tax code. The House's chief tax-writer said "I don't know" if an excise tax was the right approach, but Speaker Pelosi appears to be barreling ahead, and several House Democrats have announced bills to impose as much as 100 percent excise taxes on bonuses. Pelosi announced Tuesday that the Ways and Means, Financial Services and Judiciary committees were working on a joint bill, which could be on the floor this week. In addition to "special taxation legislation," it would authorize the attorney general to recover "excessive" compensation payments made by firms that received federal aid and prohibit abuse of retention bonuses. The Obama administration made some moves of its own. Treasury Secretary Geithner wrote to congressional leaders Tuesday that "as part of our provision of recently announced taxpayer funds, we will impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of retention awards just paid. In addition, we will deduct from the $30 billion in assistance an amount equal to the amount of those payments." Rangel met with Baucus to discuss the AIG situation Tuesday afternoon. Rangel indicated that a decision still needs to be made among the House leadership, let alone on a bicameral deal. "There is no question that AIG should not have used taxpayer funds to pay bonuses to executives," Rangel said in a statement. "The question we have to deal with now is how do we repair this damage? I have met with members and House leadership to discuss legislative options, and will continue these discussions tomorrow to develop a legislative response to this problem." House Ways and Means Select Revenue Measures Subcommittee Chairman Richard Neal, DMass., appeared to share Rangel's unease.
"I don't know ... how you punish them through the tax code, but at the same time we all acknowledge the accurate sense of outrage that people feel everyplace," Neal said. "I suppose one could argue you could do a rifle shot, but I think a more comprehensive response is necessary." In the Senate, it is unclear if GOP leaders will throw their weight behind the bill. Minority Whip Kyl said he was opposed to retroactive tax increases, arguing they could hinder businesses' decision-making. The measure Baucus is working on with Finance ranking member Charles Grassley would impose a 35 percent tax on each corporation receiving funds out of the $700 billion Troubled Asset Relief Program, or others in which the government has taken an equity stake, that have paid bonuses since Jan. 1. That includes federally backed mortgage financiers Fannie Mae and Freddie Mac, as well as AIG, into which the government has pumped about $170 billion and owns 80 percent. On top of the 35 percent corporate excise tax, individuals receiving retention bonuses of the sort being paid out to AIG employees that have aroused public outrage would face a 35 percent excise tax of their own on the entire amount of the bonus. Individuals receiving other types of bonuses, including performance incentives, would face the 35 percent additional tax on bonuses worth more than $50,000. Those excise taxes would be non-deductible. The measure is modeled after an amendment from Sens. Olympia Snowe, R-Maine, and Ron Wyden, D-Ore., adopted by the Senate to the stimulus package, "only tougher," a senior Finance Committee aide said. That provision was dropped during final negotiations. Finance Committee leaders had not yet decided the exact structure of the excise tax, such as whether the tax would apply on top of ordinary income taxes paid by bonus recipients, or just on the bonus itself. Assuming an individual earns enough to be in the 35 percent income tax bracket, adding the 35 percent excise tax bonus plus additional state and local taxes could bring the total tax burden for bonus recipients under the bill to around 80 percent. "It's going to end up being north of 70 percent," Baucus said. Baucus likened executives at organizations like AIG's now-infamous financial products division to being in a "cocoon," out of touch with millions of taxpayers who have lost jobs. "Give me a break," he said. "What were they thinking? Which is part of the problem -- they're not thinking." An enraged Grassley -- who has been in rare form this week -- told reporters that "from my standpoint, it's irresponsible for corporations to give bonuses at this time when they're sucking the tit of the taxpayer." The bill contains safeguards ensuring that foreign employees of firms like AIG -- and those who leave the country after receiving bonus pay -- could not escape the tax. The money would be withheld from an employee's paycheck, or would be collected from the company itself. Also,
firms could not restructure the bonuses as base salary or deferred compensation to escape the 35 percent levy. Baucus and Grassley said they reviewed the measure with lawyers and are confident it would pass constitutional muster, despite concerns about abrogating legally binding contracts. When asked about concerns that the provision would deter firms like AIG from being able to hire and keep talented staff, a Finance aide replied: "We're talking about giving retention bonuses to the financial products group at AIG ... if they're the people that are going to get us out of this mess, then we're in a world of hurt." House Oversight and Government Reform Chairman Edolphus Towns has dispatched committee investigators to look into AIG's contracts with the executives who received millions in bonuses -- particularly the 11 recipients no longer employed by the company. The probe is intended to pinpoint when the contracts were written and the bonuses paid in relation to the influx of Troubled Asset Relief Program stabilization funds into the insurance giant's coffers. Towns has scheduled a hearing -- at which AIG CEO Edward Liddy will be asked to testify -April 2. Liddy is testifying before the House Financial Services Committee today.

MARCH 17, 2009, 9:52 P.M. ET
AIG Bonus Controversy: Questions and Answers

By LIAM PLEVEN, ASHBY JONES, RANDALL SMITH and LIZ RAPPAPORT
American International Group Inc. paid about $165 million in retention bonuses last week to employees in its financial-products unit, the division responsible for the derivatives transactions that nearly took down the company last year. Here are some answers to questions about why the company committed to and made the payments. Q: When did AIG agree to make these payments? A: In the first quarter of 2008, according to AIG, around the time losses at the unit were mounting. In late February 2008, the company reported a $5.3 billion quarterly loss, largely because of a massive writedown at the unit. Q: If things were already going south, why did the company scramble to retain these employees? A: AIG's current CEO, Edward Liddy, installed in September 2008 after the arrangements were made, said in a letter Saturday to Treasury Secretary Timothy Geithner that the payments were part of "significant retention steps" at the unit, which at that time was "expected to have a significant, ongoing role at AIG." Q: Is that a good explanation? A: It's unclear. "With the benefit of hindsight," Mr. Liddy wrote," I would have designed these differently and at significantly lower levels." Martin Sullivan, the CEO at the time the arrangements were struck, did not respond to a request for comment. Q: Is it true, as AIG says, that the company is legally obligated to make these payments? A: Private lawyers generally confirm AIG's assessment of the legal landscape but note that the broader circumstances, including government control of the company, are highly unusual. On Tuesday, New York's Attorney General Andrew Cuomo said "it is not at all clear that [the company's lawyers] even considered the argument that it is only by the grace of American taxpayers that members of Financial Products even have jobs, let alone a pool of retention bonus money." Mr. Cuomo has suggested that AIG had leverage to negotiate. On Tuesday, the Treasury Department was still exploring novel legal theories to wrest back the cash payments. Q: What if the company broke the contracts? A: The company and lawyers say that under state law in Connecticut, where the financialproducts unit is headquartered, an employee could recover double damages and attorneys' fees
where an employer withholds wages and the employee can show bad faith or unreasonableness. So not paying could prove more costly than paying. Q: Mr. Liddy, while saying he doesn't like the arrangements, also says that the financialproducts unit's derivatives portfolio stands at about $1.6 trillion and remains a significant risk. Failure to pay the retention payments could have "very significant business ramifications," he says. Is Mr. Liddy's assessment that these people remain critical to AIG valid? A: Mr. Liddy maintains that the unit's books contain a significant number of complex transactions that are "difficult to understand and manage. This is one reason replacing key traders and risk managers would not be practical on a large scale." Some disagree. Several traders say that winding down derivatives trades can be complex because they are often tailor-made for specific clients, but they add that pretty much anyone with an understanding of derivatives or structured finance could undo such trades. Q: What is the view of the employees getting these payments? A: We don't know, but Mr. Liddy noted in his letter that the "25 highest-paid active contract employees" at the unit have agreed to reduce their remaining 2009 salary to $1. He also noted that the "remaining 2009 salary of all other officers that is, anyone with a title of associate vice president or higher will be reduced by 10%" subject to local law requirements. Q: Is it really critical that these people remain at AIG? A: Mr. Liddy, while saying he doesn't like the arrangements, also says failure to pay the retention payments could have "very significant business ramifications." He says the financialproducts unit's $1.6 trillion derivatives portfolio contains a significant number of complex transactions that are "difficult to understand and manage. This is one reason replacing key traders and risk managers would not be practical on a large scale." Some disagree. Several traders say that winding down derivatives trades can be complex because they are often tailor-made for specific clients, but they add that pretty much anyone with an understanding of derivatives or structured finance could undo such trades. Write to Liam Pleven at liam.pleven@wsj.com, Ashby Jones at ashby.jones@wsj.com, Randall Smith at randall.smith@wsj.com and Liz Rappaport at liz.rappaport@wsj.com
White House Calls Bonuses a Late Surprise

Congress Moves to Impose Hefty Tax on Executives Who Don't Return Money
By Shailagh Murray, Paul Kane and Michael D. Shear Washington Post Staff Writers Wednesday, March 18, 2009; A01
Senior White House officials said last night that President Obama did not learn that bonuses worth $165 million were to be paid to executives of American International Group until Thursday, one day before they were issued and two days after his Treasury secretary was informed that the payments were going forward. Obama aides defended Timothy F. Geithner's handling of the situation yesterday, with White House press secretary Robert Gibbs saying the president has "complete confidence" in the Treasury chief. In a letter to congressional leaders last night, Geithner said that in addition to pressing the company on compensation issues, the Treasury Department will deduct an amount equal to the total bonuses paid from a pledged $30 billion commitment to the troubled insurance company. As Geithner and other Obama aides continued to scramble to pull back the bonuses and calm the public furor they sparked, Congress was preparing its own remedies. In what they acknowledged would be an extraordinary move, leading Democrats proposed using the tax code to punish executives at the firm, in which the federal government controls an 80 percent stake, unless those payouts are surrendered voluntarily. Action on the legislation could begin as early as today in the Senate. A proposal from Senate Finance Committee Chairman Max Baucus (D-Mont.) and the panel's ranking Republican, Charles E. Grassley (Iowa), would levy an excise tax on AIG and the executives who received the payments, adding up to more than 90 percent of the total of the bonuses. That tax would also apply to future bonuses awarded, either by AIG or by other firms receiving federal aid. Similar proposals taking shape in the House would target as much as 100 percent of the bonus money, which was distributed Friday to 73 AIG employees in sums ranging from $1 million to $6.4 million, according to New York Attorney General Andrew M. Cuomo, who provided details of the payments -- although not the identities of specific recipients -- in a letter to House Financial Services Committee Chairman Barney Frank (D-Mass.). The bonus scandal has inflamed lawmakers in both parties and could have broad repercussions, and lawmakers warned that it could serve as the death knell for further aid to the ailing sector. Obama's budget calls for allocating an additional $750 billion to bail out troubled firms, and his administration had hoped to quietly "wind down" operations at AIG without an excess of intervention from Congress, but both of those ambitions could be in doubt after the explosion of attention drawn by the bonuses. Although the bonuses were permitted under the terms of the 2008 bailout bill, the payments have triggered alarm, particularly among Republicans, about oversight of the way the money is spent. With the prominent exception of Grassley, GOP leaders were noncommittal yesterday about embracing the tax approach and declined to offer their own proposals for recouping the $165
million. But they rebuked Geithner for not stopping the bonuses, and they made it clear that further requests for aid would be rejected out of hand. "No more bailouts," said House Minority Whip Eric Cantor (R-Va.). "The American people have had it. They want this Congress to get back to fiscal discipline and restraint and the belief that the freedom to succeed includes the freedom to fail." House Speaker Nancy Pelosi (D-Calif.) said the House will consider its own AIG tax bill, along with measures authorizing Attorney General Eric H. Holder Jr. to recover excessive compensation payments made by companies that received federal financial assistance and to block further bonuses at such companies. Pelosi predicted "tough questioning" today when AIG's chairman and chief executive, Edward M. Liddy, appears before Frank's committee. A company official said Liddy is expected to issue a letter today to AIG employees asking them to return the bonus payments they received. Democratic lawmakers raced to put their proposals on the table. Reps. Steve Israel (N.Y.) and Tim Ryan (Ohio) introduced the Bailout Bonus Tax Bracket Act to create a 100 percent tax on bonuses over $100,000 that are distributed to employees of financial firms receiving federal bailout money. Rep. John D. Dingell (Mich.) offered a version that would tax such bonuses at a 95 percent rate. Some Democrats expressed concerns about the tax approach. House Majority Leader Steny H. Hoyer (Md.) told reporters that he worried about running afoul of the Constitution's equalprotection clause, which forbids laws that treat certain groups differently. For now, Hoyer advocated a course of action that centered on a campaign of public pressure to persuade the AIG executives to surrender the bonuses. House Ways and Means Committee Chairman Charles B. Rangel (N.Y.) also raised doubts about the tax idea. "It's difficult for me to think of the code as a political weapon," he told reporters outside his office. "Is this an indictment or a bill?" Although anti-Wall Street sentiment is high on Capitol Hill, AIG has earned special wrath because of the force of its collapse. The company took huge risks with its investments in credit default swaps, an unregulated market that imploded in the credit crisis, and has received more bailout money than any other firm. The executive bonuses, guaranteed through employment contracts that had been made public to government officials earlier, were offered as a way to lure or keep top talent to help restore AIG's financial condition, company officials said. Recipients worked for the financial products division, the unit at the center of the firm's collapse. But when news of the payments surfaced over the weekend, lawmakers turned to the Obama administration, demanding that it attempt to recoup at least some of the money. In addition to the $165 million paid to division employees, including 11 who have left the company, an additional $230 million in bonus payments are scheduled to be made next year, according to Senate Democratic leaders. On Monday, Obama expressed his unhappiness with the bonuses and directed government lawyers to review the company's contracts to determine whether provisions guaranteeing the
payments could be overturned. Last week, the administration persuaded the company to restructure some of the payments, and AIG's top seven executives had agreed earlier to forgo their bonuses through this year. Yesterday, Gibbs said Obama is open to the idea of a special tax on the bonuses, along with other options that lawmakers are floating, including legal action against AIG. "Obviously, the president is committed to working as quickly as possible with Congress to find ways to recoup this money," Gibbs said. Aides continued to insist that the president and his team are doing everything possible to recover the money used to pay the AIG bonuses, while arguing that the law is stacked against their efforts. Gibbs called the efforts by the president and Geithner "extraordinary actions" taken to "protect the American taxpayers in accordance with all that we could do." But Senate Majority Leader Harry M. Reid (D-Nev.) said yesterday that the legislative branch of government may be better equipped to do the job. "We as a Congress are not defenseless," he said. "We can also do things."
AIG Firestorm Raises Alarm For Other Firms

By David Cho and Binyamin Appelbaum Washington Post Staff Writers Wednesday, March 18, 2009; A01
The firestorm over bonuses paid by insurance giant American International Group has triggered alarm at other financial firms, threatening federal efforts to draw private investors into economic recovery programs. It is a critical juncture for the Obama administration. Officials at the Federal Reserve and the Treasury Department are increasingly worried that the controversy could discourage investors from joining a new government effort to revive consumer lending as well as a separate plan that relies on private money to buy toxic assets from banks, sources familiar with the matter said. Treasury officials planned to outline that second program as early as this week. The attack by lawmakers on AIG pay has provoked renewed complaints from some financial company executives that federal involvement in business decisions is making it difficult for struggling firms to return to profitability. In particular, executives say they need to offer bonuses to keep and motivate their most valuable employees and are already seeing an exodus of talent. But lawmakers are outraged that many financiers continue to be rewarded despite their role in fueling the current crisis. Some on Capitol Hill say the financial industry should be smaller and its jobs less lucrative. AIG, which received more than $170 billion in emergency federal aid, has become the chief exhibit for both sides of the debate. Executives say they must pay retention bonuses to keep employees who are unwinding its Financial Products division, which nearly brought down the insurance giant with trading in exotic derivatives. But a former senior Financial Products executive who spent eight years at the firm disagreed. Because the division is shrinking and no longer seeking new business, many workers have lost their relevance. The only key positions are employees who are working to extricate AIG from $2 trillion worth of outstanding contracts, the executive said. "The guys who are getting paid all the big money are not really the ones who are important to the company," he said. The government's rescue of AIG, which began a federal takeover of the firm in September, has been a mixed blessing. The company is being pressed to pay back the federal money in the next few years, forcing executives to try selling company assets for what some say are fire-sale prices. AIG customers have also been bolting the company, increasing doubts about the firm can survive. AIG, once the world's largest insurer, now is in decline. Some administration officials say they would like new authority from Congress to wind down the company.
Several industry executives, observing the pressure being exerted on AIG and other big banks, say they are worried about joining in government efforts to rescue the financial system in the newly charged political environment. "Am I afraid of the populist outrage? Yes," said Lynn Tilton, chief executive of Patriarch Capital, a private-equity firm that has weighed making such an investment. A senior executive at one of the nation's largest banks said he had heard from several hedge funds that they would not partner with the government for fear that lawmakers would impose retroactive conditions on their participation, such as limits on compensation or disclosure requirements. Other firms want to bide their time to see how early participants in the rescue programs are treated before they decide whether to sign up, said the executive, who spoke on condition of anonymity. "Why do you think Hong Kong is a better place to do business than Shanghai? Because of the certainty of the contracts," said another executive at one of the nation's largest private-equity firms. "Once the uncertainty factor goes up, the less interested you are in doing business because it becomes a more risky proposition." The government's effort to revive consumer lending launched last night with a $1.3 billion package of auto loans issued by Nissan's finance arm. Bidding by private investors was heavy, a positive sign for the program. Morgan Stanley is also feeling heat for some of its bonus payments. Sen. Robert Menendez (D-N.J.) sent a letter to Treasury Secretary Timothy F. Geithner yesterday charging that a compensation plan announced by Morgan Stanley in January raised the same concerns as in the case of AIG and deserved the same response. "I urge you to use every legal means available to stop these retention awards at Morgan Stanley, so long as those firms are in receipt of taxpayer dollars," Menendez wrote. Morgan Stanley fashioned a joint venture with Citigroup's Smith Barney unit and offered up to $3 billion to about 6,500 high-performing brokers if they stayed with the company. Anyone who leaves the firm within nine years must repay a portion of the money. Morgan Stanley said it will not use bailout funds to make the payments. "The retention program is not a bonus," Morgan Stanley said in a statement yesterday. "The program is necessary because our financial advisers are being poached by competitors." New York Attorney General Andrew M. Cuomo yesterday questioned the value of bonus payments in retaining employees at AIG. He noted that of 73 people who received bonuses of $1 million or more, 11 no longer work at the company. The top bonus recipient at Financial Products got more than $6.4 million, while the top seven earners received payouts of more than $4 million each, he added. Cuomo had also requested the names of the recipients and expressed indignation that AIG had not disclosed them.
AIG declined to comment. But a person familiar with the situation said the company did not want to release the names because of privacy issues and also out of concern for the safety of the individuals. The company has been flooded with irate phone calls and death threats in the past few days. Officials added yesterday that their ability to restrict compensation at AIG was limited by holes in existing financial regulations. There is a well-established process for liquidating troubled banks through the Federal Deposit Insurance Corp. -- a process that parallels bankruptcy and provides the necessary power to restructure compensation -- but there is no such process for dealing with the collapse of other kinds of financial firms, such as AIG. As a result, the government was forced to prop up the company by injecting huge amounts of money, while continuing to honor AIG's commitments and contracts. "There is in existing law no remedy with which to unwind and resolve the problems that exist, in order to protect taxpayers," Obama's press secretary Robert Gibbs said yesterday. He said the president wants Congress to write such a law as part of a broader reform of financial regulations. Staff writers Neil Irwin, Brady Dennis and Tomoeh Murakami Tse in New York contributed to this report.

MARCH 19, 2009, 10:41 A.M. ET
Believe It or Not, Treasury Has a Plan to Fix Banks

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By DAVID WESSEL
Yes, Virginia, the U.S. Treasury does have a plan to fix the banks and reignite markets in which loans are turned into securities. It exists as certainly as fear and greed exist, and you know that they abound and give the economy recurrent bouts of euphoria and despondency. You hear from pundits and other all-knowing observers that the Treasury has no detailed plan. These people have been affected by the skepticism of a skeptical age. Their vision is clouded by a bewildering number of acronyms and proliferating "term sheets." Their attention is distracted by the spectacle of taxpaying families (typical income: $63,000) financing AIG "retention bonuses" (73 people: $1 million or more each on top of their salaries). Obama's treasury plan to stabilize the financial system is like a giant jigsaw puzzle. WSJ's Economics Editor David Wessel breaks down the plan into its components and gives the big picture. The Treasury has thrown pieces of the jigsaw puzzle on the table, but few outsiders can see the whole of its plan. Here's a modest attempt to show the cover of the jigsaw-puzzle box. The problem: No one has confidence in the financial strength of the nation's big banks. Even banks don't trust other banks. No one is sure what the loans and securities on their books are worth. No one knows which banks are strong enough to survive the recession. The market in which consumer and real-estate loans (made by banks or others) are turned into securities and sold to investors is moribund. Borrowers have trouble getting loans. Banks can't sell loans or securities they don't want. Fixing banks and securities markets is even trickier in the wake of the uproar over bonuses paid by American International Group after the company was propped up with taxpayer money. President Barack Obama and Treasury Secretary Timothy Geithner cannot expect Congress to approve more bailout money even though they probably need it. So they must leverage the taxpayer money that their predecessors have already secured by luring private money and relying on the Federal Reserve's amazing ability to come up with unlimited sums without congressional consent. The Treasury's bank strategy is twofold. One, get enough capital into the 19 biggest banks so everyone believes each can withstand a really bad recession. Two, get toxic assets off their books so banks will pick up the pace of new lending, and savvy big-money investors will put money into the banks and help achieve the first objective. The unfortunately named "stress test" -- which conjured up images of Citigroup collapsing on a treadmill -- was meant to be a confidence builder, though announcing it seems instead to have
magnified doubts and uncertainty about the banks. The notion is to figure out by the end of April how much capital cushion each of the 19 big banks needs to survive a bad recession (that's the "stress test") and then give those that need more capital six months, until Oct. 31, to raise it privately or take a bigger taxpayer investment on different terms than former Treasury Secretary Henry Paulson offered. Until then, the Federal Deposit Insurance Corp. will guarantee bank debt so no one need worry about lending to them, or so the Treasury hopes. None of the 19 banks will flunk the test; the only question is which will need taxpayer capital in the fall. Once upon a time, if you wanted a loan you went to a bank. But the "shadow banking system," where loans are turned into securities, did 40% of consumer lending before the crisis. To restart that dead market, the Fed and Treasury finally are beginning an initiative they announced four months ago to lend money to hedge funds and others on very sweet terms to buy packages of securities made up of new loans. Look for them to offer to do the same with old loans. The last piece of the Geithner plan comes soon: Buying toxic loans and securities, mostly linked to real estate, from the banks and others. One challenge is putting a fair price on them. The Paulson Treasury spent months trying to fashion auctions in which the government would buy these assets. It never bought any. The Geithner Treasury decided that approach wouldn't work. What's more, it hasn't nearly enough taxpayer money to buy enough of the assets to make a difference. So the plan is to form joint ventures between the Fed and money managers like Pimco or BlackRock. The Treasury kicks in, say, $1 for every $1 the private guys put in. The private investors, not the government, decide what securities to buy from the $1 trillion or so in securities linked to real estate or consumer loans. The private guys decide what price to pay. That's their business. Taxpayers and the investors would share the profits, if any. If the Fed lends to these ventures, they'll be able to buy more securities and pay more for them. A separate set of joint ventures will shop among the $1 trillion or so in toxic loans on bank books. This effort will be leveraged by FDIC lending. The hope is that some banks will make themselves more attractive to private investors by selling toxic assets to the new joint ventures, and thus ease both parts of the banking problem simultaneously. The Paulson Treasury pondered this approach, but feared a political backlash from giving taxpayer money to private investors to manage. (That's no small worry. Imagine the grilling money managers would face from Congress for making megasalaries and killer profits with taxpayer money.) The Geithner Treasury couldn't find an alternative it preferred, and it looked. The Geithner plan might not work. It does exist. Write to David Wessel at capital@wsj.com
Wall St. Journal3/19/09 Editorial

MARCH 19, 2009
Obama's AIG Panic

The AIG Beltway bonfire continued yesterday with the spectacle of Ed Liddy, AIG's government-appointed CEO, enduring the wrath of Congress for embarrassing the Members with post-bailout bonuses. What we now have is a full-blown political panic ignited by no less than President Obama himself that is threatening to engulf his attempts to revive the financial system, and is undermining confidence in his leadership. This is no way to promote an economic recovery. As recently as Sunday morning, White House economist Larry Summers was saying the bonuses were regrettable but there wasn't much that could be done to stop them. "We are a country of law. There are contracts. The government cannot just abrogate contracts," he said, with great good sense. Assorted Congressmen then did what comes naturally, which is declare their mock outrage. Rather than keep his legendary cool, Mr. Obama and the White House panicked as well and joined the braying pack. Speaking on Monday of the $165 million paid to members of AIG's Financial Products division, the President asked, "How do they justify this outrage to the taxpayers who are keeping this company afloat?" Treasury Secretary Tim Geithner, who had known about the bonuses, was also trotted out to express his "outrage" and declare that Treasury would somehow try to claw back the bonuses. By shouting "greed" in a crowded and panicky Washington, our supposed financial stewards thus gave license to everyone in the media and Capitol Hill to see who could claim to be most shocked and appalled at AIG. We've now got a full-fledged mob on our hands, with Congress looking to string up bankers in whatever bunker they can be found. Senators Chuck Grassley and Max Baucus want to double the current income tax on these bonuses, to 70% from 35%, and that's one of the more reasonable proposals. Congresswoman Carolyn Maloney, the Democrat from silk-stocking Manhattan, wants to tax it all -- at 100%. Senator Chris Dodd, down in the 2010 election polls after his sweetheart Countrywide mortgages, is busy rewriting the TARP compensation limits he only recently stuck in the stimulus bill. His last-minute measure explicitly exempted from compensation limits bonuses agreed to prior to the passage of the stimulus bill: "The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009 . . ." So Senator Hedge Fund is suddenly morphing into Huey Long to save his career. This is all too much even for Rep. Charlie Rangel, the House's chief tax writer, who says the tax code shouldn't be deployed as a "political weapon." He's right. AIG's managers may be this week's political target of choice, but the message to every banker in America, indeed every business in America, is that you could be next. At least we haven't yet seen the resolution that was proposed in the English parliament, in 1720 in the aftermath of the South Sea bubble, that bankers be tied in sacks filled with snakes and tipped into the Thames. But it's still early days.
One consequence will be that every bank executive in America will try to repay his Troubled Asset Relief Program, or TARP, money as rapidly as possible. The political punishment for accepting public money is becoming higher than the benefits of the extra capital cushion. According to Wells Fargo Chairman Richard Kovacevich, "If we were not forced to take the TARP money, we would have been able to raise private capital." On Tuesday, Bank of America CEO Ken Lewis joined the rush for the TARP exits, saying he hoped to pay back the $45 billion BofA has received by 2010 if not sooner. It's hard to argue with the sentiment. For the larger banking system, however, this is exactly the wrong time to be shedding capital. The main point of the TARP was to backstop the financial system against systemic failure. Treasury botched the roll out and the execution, but with the economy still in recession and housing prices still falling, banking losses will surely grow. Mr. Geithner has projected the need for more than $1 trillion more in public capital, and the FDIC has asked Congress to increase its credit line to as much as $500 billion. If we're lucky, the banks will be able to use today's steep yield curve to earn their way out of this mess, but no one can be sure and before this is over the FDIC and Treasury are going to need more public capital to protect depositors of failed institutions. The last thing we need is for this year's political panic to recreate the circumstances for another financial panic like the one we had last fall. The Beltway's banker baiting seems to increase in direct proportion to the government's incompetence in nurturing a financial recovery. Anger rises when Americans learn after three bailout revisions that they haven't been told the truth that the AIG nationalization was a conduit to save counterparties, and even hedge funds, that gambled on housing. Only two weeks ago, Federal Reserve Vice Chairman Donald Kohn told Congress he couldn't disclose who AIG's counterparties were. Americans also wonder why taxpayer guarantees should be provided to Citigroup, a three-time loser, but with little accountability for the board and managers who brought the company low. Reviving a financial system is a long process that requires a combination of capital support, workout ability and discipline for mistakes. The public has to believe the end result will be a better, sturdier system in return for taxpayer support, while at the same time being assured that gamblers aren't saved from their own mistakes. If this balance is beyond the ability of Mr. Obama's current economic team, he needs a better team. The worst mistake he can make is to deflect attention away from government's mistakes by joining the attack on the very bankers he needs to lead an economic recovery. That's how a deep recession becomes a Depression.
Financial Times3/19/09 Editorial
Geithner needs to be given a chance

Published: March 19 2009 02:00 | Last updated: March 19 2009 02:00 Barack Obama has pledged unwavering confidence in his Treasury secretary. As a rule, such expressions of loyalty would signal Tim Geithner's imminent departure, but one hopes not in this case. Mr Geithner has had a far from flawless two months, but his difficulties are mainly not of his own making. If he should have to step down, it would be a serious blow to an administration which the US and the world desperately needs to succeed. The Treasury secretary's difficulties began before he even had the job, when errors in his taxes came to light during his confirmation. He survived, but some other forgetful tax-filers were not so lucky, which served to heighten his embarrassment and diminish his authority. He has had to cope with ambiguity over whether he or Lawrence Summers, Mr Obama's adviser on economic policy, is really in charge. Partly because of the rigours of an out-of-control confirmation process, he still lacks a team of senior officials to help him cope with a crushing workload. Paul Volcker, head of Mr Obama's Economic Recovery Advisory Board and former chairman of the Federal Reserve, has called that situation "shameful". Until this week, Mr Geithner's worst moment came when he and the White House bungled the presentation of his financial stability plan last month, by leading the markets to expect a detailed proposal before he was ready to announce it. Wall Street tanked as he spoke. His newest setback is the outrage over bonuses paid to employees at AIG, the collapsed insurance group and hedge fund that is now 80 per cent owned by the US government. The Treasury and White House have both vacillated over whether these payments could be clawed back. Mr Geithner's critics are asking whether he was aware of the bonuses before they were disclosed to the public, and if not why not. There are calls for his dismissal. No US Treasury secretary has ever taken office in more testing circumstances. Any occupant of the post would have struggled to impress under these conditions. Mr Geithner, previously head of the New York Fed, was a good appointment, and still is, because of his exceptional expertise in banking and finance, the issues which will decide whether Team Obama sinks or swims. To lose so capable a figure so soon might seriously destabilise the administration, calling into question Mr Obama's judgment. Aside from some staff, what Mr Geithner most needs is a chance to do his job. For its own sake, the country should grant it. Copyright The Financial Times Limited 2009
L. WILLIAM SEIDMAN Founding chairman of the Resolution Trust Corp.; chief commentator for CNBC The AIG episode proves that the government should take over and run failed financial institutions rather than be a part owner while trying to have the institutions run themselves. It also shows that the government should take more time. We paid off huge debts that AIG had in the swaps market, which we probably did not have to do. We honored AIG's bonus agreements, which we probably did not have to do. We bought a number of assets from AIG at high prices, which we probably did not have to do. That kind of haste with that kind of taxpayer money is illconsidered. The government is a long way down the trail now, and at this point there's not much we can do differently. We have already committed to buying AIG's assets. We have already paid out all the swaps to foreigners. The big lesson? Don't rush into these disasters. DOUGLAS HOLTZ-EAKIN Former director of the Congressional Budget Office; senior economic adviser to Sen. John McCain's presidential campaign The AIG debacle teaches us two things: First, it does not make sense to try to save any single financial institution. Failed enterprises should fail -- and go away. The government should only be in the business of preventing too much collateral damage to the economy. Had this been the focus from the beginning, taxpayers would not face the specter of their funds going to pay bonuses. And they would have been prepared to see their money flow to banks, hedge funds and every other sort of creditor of AIG as part and parcel of appropriately minimizing financial contagion. The second lesson is that no matter how bad you think market capitalism is, the federal government has proved it is worse. Congress originally banned these very bonuses, then stripped the ban out of the stimulus bill and is now threatening confiscatory taxes on the lawful recipients. The Treasury knew about the bonuses and vouched for their legality but now wants double the money back somehow. How, exactly, the Treasury expects any straight-thinking financial entity to enter into a voluntary public-private "partnership" to solve the financial crisis given this track record is a mystery to me.
Populism's Virtues
By E.J. Dionne Jr. Thursday, March 19, 2009; A15
Conservatives have argued for decades that the sins most dangerous to our society were rooted in lust when in fact they were rooted in greed. We are at the beginning of a great popular rebellion against those who showed no self-restraint when it came to lining their own pockets. Their entitlement mentality arose from an inflated sense of their own value and of how much smarter they were than everyone else. The sound you are hearing in response to the AIG payoffs -- excuse me, bonuses -- is the rancorous noise of their arrogance crashing to earth. Yet there is much hand-wringing that this populist fury is terribly perilous, that the highfliers who could not control their avaricious urges have skills essential to repairing the damage they caused in the first place. Beware populism, we are told. Honor those AIG contracts. Forget about any moral reckoning and just fix the economy. This view is wrong on almost every level, especially about populism. Of course not all forms of populism are attractive. But as historian Michael Kazin argued in "The Populist Persuasion," the "language of populism in the United States expressed a kind of idealistic discontent" and "a profound outrage with elites who ignored, corrupted and/or betrayed the core ideal of American democracy." Is this not an entirely appropriate reaction to elite decisions dating to the 1980s that ultimately ran our economy into the ground? The Obama administration has sent thoroughly ambivalent signals on this question. Its initial response to the $165 million in AIG bonuses (the president's lieutenants said there was little to be done about them) suggested that it did not want to join in the populist anger and maybe didn't even realize that it was there. On Monday, President Obama made clear that he got it, denouncing the bonuses. It was the right first step. He should build on this by showing that he shares in the public's morally justified intuition that our society's rewards to the very wealthy are totally out of line with their contributions to the common good. A study of compensation levels in 2007 found that average CEO pay at S&P 500 companies was 344 times higher than the average worker's wage, and that the top 50 investment fund managers took home 19,000 times -- yes, that's with three zeroes -- as much as typical workers earned. Now, I am not against people getting rich or entrepreneurs reaping profit from their investments of time and energy. But there is no moral or practical justification for such levels of inequality. Capitalism worked extremely well in the three decades after World War II without such radical
inequities. It's when inequalities soar that the system runs into trouble -- precisely what happened at the end of the 1920s, when inequality reached levels similar to today's. With the populist furies unleashed, the Obama administration has two choices. It can try to fight the public. Or it can use the public's outrage to move the country in a better direction. Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, points to the irony that populism threatens to work against Obama even though the president has proposed "a populist budget." It's a budget that raises taxes on the wealthy, cuts them on almost everyone else and spends money on programs -- notably health care -- that are of benefit to the poor and the middle class. Obama needs to show that his budget is itself a direct response to the injustices aggravating the country. The president needs to do two things at once. The administration has no choice but to spend piles of money to unwind the financial mess. A share of the largess, as Frank acknowledges, may indirectly benefit some of the malefactors in this saga. But Obama has to be unambiguous in asserting that the purpose of this spending is not to reward those who got us into this fix but to solve a problem that affects us all. To make this case, the administration should be unafraid to use its proposals on health care, taxes, education, energy and financial regulation to argue that it is building a new economy on the ashes of the old -- an economy based on fair rewards to capital and labor alike, not on an ethic of greed and excess. Obama can work with the populist wave or he can be overwhelmed by it. As Kazin notes, American progressives have succeeded in improving the "common welfare" only when they "talked in populist ways -- hopeful, expansive, even romantic." Kazin cites the line popularized by Ralph Waldo Emerson, "March without the people, and you march into the night," and then adds: "Cursing the darkness only delays the dawn." postchat@aol.com Read E.J. Dionne's tribute to Ron Silver on The Post's opinion blog, PostPartisan.
AIG's Chief Punching Bag Takes the Blows

By Dana Milbank Thursday, March 19, 2009; A03
Embattled AIG Chairman Edward Liddy was being ordered to name names. "Send us the names of those who received bonuses who have not given them back," directed Barney Frank (D-Mass.), chairman of the House Financial Services Committee, at a subcommittee's ritual flaying yesterday of the profligate insurance company. "I will, if I can be absolutely assured that they will remain confidential," bargained Liddy, who fiddled with his pen enough to blister his fingers. "I won't give you that assurance," Frank said, threatening a subpoena. The red-faced executive, voicing fear for the "safety of our people," looked down to read samples of death threats received, including: "All the executives and their families should be executed with piano wire around their necks." "I am not persuaded," Frank said. It had a whiff of congressional blackmail for AIG's bonus babies: Give back the money or your safety cannot be guaranteed. But, considering the public fury directed at the company this week over the $165 million in bonuses paid by the bailed-out insurer, Liddy might consider himself lucky that the lawmakers didn't take out some piano wire themselves. They waited for up to eight hours for the chance to vent their rage at Liddy, who, though he's only a dollar-a-year man brought in to rescue the company, signed off on the taxpayer-funded bonuses. "There's a tidal wave of rage throughout America," announced Gary Ackerman (D-N.Y.). Judy Biggert (R-Ill.) called it a "travesty," Carolyn Maloney (D-N.Y.) found AIG "morally reprehensible," Shelley Moore Capito (R-W.Va.) perceived "an insult," and Paul Hodes (D-N.H.) contributed the words "ridiculous" and "unconscionable." The lawmakers couldn't quite agree on a solution for AIG; proposals included lawsuits, bankruptcy, tax legislation and fraud prosecution. Neither could they decide who deserved the blame, but it was hard to argue with Spencer Bachus (R-Ala.) when he said, "There's plenty of blame to go around." One thing they could agree on: their outrage. They traded expressions of this emotion in a sort of mass catharsis. "I certainly join my constituents in their outrage," submitted Ron Klein (D-Fla.). "I, like all my friends, are outraged," proffered Charlie Wilson (D-Ohio). "I'm going to go ahead and say that I'm outraged as well," proposed Randy Neugebauer (R-Tex.).
Seats in the hearing room were the hottest ticket on Capitol Hill this year. Even Terry Moran of "Nightline" had to scrounge for a seat. In the hall outside, CNN was broadcasting live, while crews from Japanese TV and "Inside Edition" were among the 50 cameras awaiting Liddy's arrival. During the mayhem, Zippy Duvall, president of the Georgia Farm Bureau, happened to be walking down the corridor. "It's Liddy!" somebody called out. Suddenly, Duvall was surrounded by lights, television cameras and microphones. "Do you think they're going to treat you fairly?" somebody shouted. Duvall, wearing a peanut-print tie, stopped to chat. "If I knew I was going to get all this attention, I'd have gotten my hair cut," said the farm bureau president, who, unlike the whitemaned Liddy, is almost completely bald. Inside the hearing room, things were only slightly more orderly. Representatives of the Code Pink protest movement waved signs at Liddy that read "A.I.G. -- Jail" and "Ain't It Greed." Liddy turned to reason with them: "Before you get too angry, just listen to my answers," he pleaded. Paul Kanjorski (D-Pa.), the subcommittee chairman conducting the hearing, intervened. "Pink Ladies back there: Respond properly or please exit the room." When the sign-waving persisted, Kanjorski issued an order: "Officers, take the signs!" Liddy, escorted into the room by a lawyer wearing a neck brace and an arm sling, adopted a suitably unhappy expression when he stood to take the oath. He reminded lawmakers that "six months ago, I came out of retirement to help my country." He also surprised the panel with an announcement that he had asked bonus recipients to "return at least half of those payments." The disclosure disarmed the lawmakers, who now had to find kinder ways to criticize Liddy. Ackerman played good cop. "I want to try to help you," he said. "I need all the help I can get," Liddy replied. But the help wasn't helpful; the congressman advised Liddy to take the bonus money and "eat it now." "My fear is the damage is done," Liddy said. "That we will get the bulk of that money back. . . . But they will return it with their resignations." "I'd just as soon you get rid of them," retorted Michael Capuano (D-Mass.). Wounded, Liddy told the lawmaker about "people working at AIG very hard for the American taxpayer. . . . You would be proud of them." "Not right now I'm not," was Capuano's sour reply. And it got worse from there. Stephen Lynch (D-Mass.) charged AIG officials with "malfeasance," "violation of fiduciary duty," "arrogance" and "probably illegal" behavior. "Do you have anything to say for yourself?" Lynch asked.
"I take offense, sir, at the use of --" The congressman cut him off. "Well," Lynch said, "offense was intended, so you take it rightfully."

MARCH 19, 2009
Uproar Over Geithner's Role in Bonuses Could Vex Rescue

By DEBORAH SOLOMON
WASHINGTON -- The furor over $165 million in bonus payments to employees of American International Group Inc. has ensnared Treasury Secretary Timothy Geithner, adding to his list of woes and potentially complicating the administration's efforts to contain the financial crisis. Lawmakers in both parties Wednesday questioned why Mr. Geithner didn't do more to derail the bonus payments and two Republicans called on him to resign. The uproar comes on top of a skeptical reception to Mr. Geithner's plan to ameliorate the financial crisis and concern about his slowness in building a team. From the outset, Mr. Geithner's tenure was clouded by questions about his failure to pay personal taxes. Now, seven weeks into the job, he also finds himself pilloried by late-night comics. On Wednesday, President Barack Obama expressed confidence in Mr. Geithner, saying the Treasury secretary is dealing with more crises early on than any of his predecessors, perhaps with the exception of the first Treasury secretary, Alexander Hamilton. "He is making all the right moves in terms of playing a bad hand," the president said. Mr. Obama took ultimate responsibility for the bonus flap, saying "the buck stops with me." The missteps threaten to complicate Mr. Geithner's ability to fix the financial crisis. Already, lawmakers are seeking to impose even tougher restrictions on firms receiving bailout aid, something Treasury officials worry will further damp participation in programs aimed at restoring the financial system's health. Mr. Geithner has been operating with a skeleton crew of advisers. Despite that handicap, he has launched a new bank-bailout plan, including "stress tests" for the nation's largest banks, rolled out an effort to assist troubled homeowners and a plan to boost the availability of consumer loans. He didn't stop the AIG bonus payments, but he did slash or nix hundreds of millions of dollars in additional payments. Critics say Mr. Geithner stumbled badly on AIG, endangering the president's broader agenda. "The President cannot afford to lose the public's confidence that his administration is a careful steward of the public's money," Robert Reich, a former labor secretary under President Clinton, wrote on his blog. The public "may balk at other ambitious undertakings such as health care or education or the environment," he wrote. Mr. Geithner was one of the original architects of the AIG rescue while president of the Federal Reserve Bank of New York. The New York Fed has had primary oversight of the firm and has been involved in numerous revisions of the bailout, which now includes a loan of $173 billion.
Administration officials say they didn't have enough time to deal with bonuses before AIG was required to pay them March 15. They say Mr. Geithner learned of the payments on March 10 -just a few days after the Treasury loaned another $30 billion to AIG. Mr. Geithner asked Edward Liddy, AIG's chief executive officer, to determine whether the bonuses could be canceled and had government lawyers look into it as well. Both Mr. Liddy and the government agreed they were contractual obligations. Mr. Geithner ultimately decided there was nothing he could do to stop the bonuses, but demanded Mr. Liddy cancel or curtail additional payouts. The administration is now trying to recoup the $165 million through other avenues. Republicans, in particular, are offering up tough criticism of Treasury. House Minority Leader John Boehner (R., Ohio) said the secretary is on "thin ice." "It was Treasury's responsibility to watch how these funds were used," said Senate Minority Leader Mitch McConnell of Kentucky in a statement. "Obviously, they fell asleep on the job." Mr. Geithner, along with the Obama administration, is trying to govern at a moment of crisis and is reliant on support from both Congress and the public. Mr. Obama has already said his administration will likely ask for additional money beyond the $700 billion Congress approved last fall. Write to Deborah Solomon at deborah.solomon@wsj.com
A.I.G. Uproar Is a Defining Moment for Geithner

By JACKIE CALMES WASHINGTON All three of President Obamas top economic advisers were on message when they appeared Sunday on separate television talk shows. Treasury Secretary Timothy F. Geithner, they said, had concluded, based on lawyers advice, that he could not stop the $165 million in bonuses that the American International Group was even then doling out to hundreds of employees. But when Mr. Geithner and other officials met at the White House that night, the presidents political advisers who had agreed to the days message decided the growing outcry left Mr. Obama no choice but to publicly second-guess his Treasury secretary. The next morning on camera, the president said he had directed Mr. Geithner to find a legal way to block these bonuses and make the American taxpayers whole. Thus began perhaps the worst week in a string of bad weeks for the Treasury secretary. The mixed messages on A.I.G. gave further ammunition to critics who had begun questioning Mr. Geithners credibility as the administrations point man on the economy, an essential commodity if he is to help restore consumer confidence. Fair or not, questions about why Mr. Geithner did not know sooner about the A.I.G. bonuses and act to stop them threaten to overwhelm his achievements and undermine Mr. Obamas overall economic agenda. Edward M. Liddy, chief executive of A.I.G., told Congress on Wednesday that he generally deals with Fed officials, figuring they would keep Treasury informed. The controversy comes as Mr. Geithner is about to announce details of the restructured bank rescue program, and it clouds prospects for more rescue funds that the administration is all but certain to need. Mr. Geithners once-heralded credentials with Wall Street were already marred by false starts in revamping the Bush administrations bank rescue program, even as his perceived closeness to financiers he is the former president of the Federal Reserve Bank of New York and unease with populist politics left Main Street skeptical. On Wednesday, a junior Republican in Congress and some traders on Wall Street went so far as to call for him to quit or be fired. The Republican leader of the House, Representative John A. Boehner of Ohio, told a conservative talk-radio host that the secretary is on thin ice. But Mr. Geithners boss, the president, interjected a vote of complete confidence. Tim Geithner didnt draft these contracts with A.I.G., Mr. Obama told reporters as he left for California on Wednesday. There has never been a secretary of the Treasury, except maybe Alexander Hamilton right after the Revolutionary War, whos had to deal with the multiplicity of issues that Secretary Geithner is having to deal with all at the same time. He is making all the right moves in terms of playing a bad hand, the president continued. And what we need to be doing is making sure that we are providing him the support that he needs.
Mr. Geithner is shouldering more crises on his slight frame than most Treasury secretaries ever have. And he is doing so without the usual complement of Treasury assistants because of administration delays in vetting potential nominees a consequence in part of its efforts to avoid embarrassments like the disclosures of Mr. Geithners past tax lapses. Since before his confirmation in late January, Mr. Geithner has juggled a crushing workload: overhauling the Bush administrations discredited financial bailout program; helping with Mr. Obamas nearly $800 billion economic stimulus plan; and managing the government effort to salvage the auto industry. Mr. Geithner is now fashioning a new federal regulatory structure for the financial industry to replace the one that failed. He has developed a housing program that aims to avert up to nine million more foreclosures, and programs for getting credit flowing to small businesses and consumers as well as the major financial giants. At 47, the same age as the president, Mr. Geithner works out at 5:30 a.m., gets to his desk by 6:30 and leaves 15 hours later. On Tuesday last week, as he prepared for a meeting in London of the finance ministers of the Group of 20 nations, Mr. Geithner learned that A.I.G. by Sunday would send out the bonuses to employees at its financial products unit, which developed the risky derivatives now blamed for the global credit crisis. With few senior political appointees on hand, the word came from one of the numerous career civil servants who keep the Treasury functioning through changes of administration, according to an official. Mr. Geithner consulted lawyers. They told him the government could not override the contracts that the insurance conglomerate had signed in early 2008, when its financial products unit was fast losing money. On Wednesday evening, Mr. Geithner called Mr. Liddy, and demanded that he renegotiate payments. The next morning, Mr. Geithner informed White House advisers. Later that day a senior adviser, David Axelrod, informed the president. On Friday, Mr. Liddy said he could not block the bonuses; he did agree to reduce executive bonuses set for July 15 and Sept. 15. With Mr. Geithner in London, Treasury officials tried to manage the potential criticism by leaking word to news media on Saturday. On Sunday, the economic advisers went on TV. The A.I.G. tempest has been especially explosive for Mr. Geithner because, as president of the New York Fed, he was the one administration official who had been involved in the Bush-era bailouts. Once A.I.G. was under the Feds control, its compensation plans hardly came up, according to officials. In December, an initial $55 million in bonuses went out with hardly a stir. Administration officials Mr. Geithners instincts are that government should not dictate compensation issues to businesses. As Treasury secretary, however, Mr. Geithner since has developed executive compensation limits, which Congress in turn toughened.
How the Fed Failed to Tell Obama About The Bonuses

By David Cho and Michael D. Shear Washington Post Staff Writers Thursday, March 19, 2009; A01
Federal Reserve officials knew for months about bonuses at American International Group but failed to tell the Obama administration, according to government and company officials, exposing problems in a relationship that is vital to addressing the financial crisis. As pressure mounted on AIG employees to return the bonuses, new details emerged yesterday about what the Fed, the Treasury Department and the White House knew regarding the payments and when. AIG executives said the Fed was informed three months ago by the company that it would pay $165 million by March 15 to employees working at its most troubled division. The Treasury and White House said they learned of the payments from Fed officials only days before they were due. Close coordination between the Fed and the administration is now more important than ever as they near the launch of two signature programs to rescue the financial system, which together could reach $2 trillion and are aimed at reviving consumer lending and purchasing soured assets and loans from ailing banks. Treasury Secretary Timothy F. Geithner, a central figure in the decision to bail out AIG last fall as president of the Federal Reserve Bank of New York, said in an interview yesterday that he had not been aware of the size of the bonuses and the timing of the payments. "I was stunned when I learned how bad this was on Tuesday [March 10]," Geithner said. "I shouldn't have been in that position, but it's my responsibility and I accept that." Two days later, Geithner told the White House. The last-minute disclosure irked some of the president's senior advisers, but they refuse to point fingers now, saying the timing had little impact on the outcome or the president's public statements this week. "Would I have liked an earlier warning system on this? Yeah," said David Axelrod, a senior White House adviser. "Would it have markedly changed things? Probably not. The legal constraints are the legal constraints." One source familiar with the discussions said the company had provided details about the bonuses to senior Treasury officials at least a month ago. A Treasury spokesman said last night that was not true. Democrats and Republicans in Congress are increasingly questioning how Geithner could not have known about the bonuses, given his past role in AIG's bailout, which has totaled more than $170 billion. "I'm sick and tired of hearing the administration and the Secretary of the Treasury say, 'I just found out about it,' " Rep. Paul E. Kanjorski (D-Pa.) said yesterday. The dispute over AIG's payouts represents the most pressing controversy confronting the administration as it addresses the financial crisis. Some private firms say the furor has made
them wary of joining the federal initiatives to help save the economy. Government officials add that the newly charged political environment will make it difficult to ask Congress for more rescue funds. When the government rescued AIG in mid-September, no one was more central to the decision than Geithner. AIG officials met with Geithner and then Treasury Secretary Henry M. Paulson Jr. in New York on Sept. 14 to warn them of the dire threat posed by the derivative business developed by AIG's Financial Products unit. Executives told the two men the firm needed help but had at least a week before it faced collapse, sources said. Paulson left for Washington. But Geithner stayed up all night with officials at the New York Fed to examine AIG's situation. He discovered not only an enormous number of complicated trades, estimated at $2 trillion, but that AIG had backed retirements funds across the nation. He also realized that a collapse of AIG was imminent, and that the fallout would ripple across the banking system, sources familiar with the episode said. Geithner, with Paulson and Fed Chairman Ben S. Bernanke, decided to lend the company $80 billion in exchange for an 80 percent ownership equity stake. About a month later, Geithner redesigned the bailout package for AIG, which raised the total to about $123 billion. During this period, Geithner's primary concern was keeping the financial system from collapsing, not what firms were paying their employees, a source said. Other staff members at the Fed and Treasury were in charge of the compensation issues and only briefed Geithner, two sources said. Once nominated for the Treasury post in December, Geithner recused himself from affairs related to specific firms. AIG executives said they disclosed in a quarterly filing late last year to federal regulators that employees at Financial Products would receive retention bonuses but the filings, with the Securities and Exchange Commission, did not detail how much individuals would be paid or the dates of the payments. The company revealed those details in meetings with New York Fed officials in January, AIG chief executive Edward M. Liddy said at a congressional hearing yesterday. "What we've assumed is that, in our discussions with the Federal Reserve, that they were properly communicating with others," Liddy said. "It appears that we need to improve upon that process." While declining to answer questions about the AIG bonuses, Fed spokeswoman Michelle Smith said in a statement: "The Fed and Treasury officials have coordinated closely on all aspects of the U.S. government's support for AIG during this extraordinary period." The Fed officials did not anticipate the political firestorm that would erupt over the bonuses, a senior government official said. "They clearly underestimated the matter," the source said. AIG executives say the Fed had been intimately involved in reviewing the contracts before the first dime was paid. The payments, which were due by March 15, were ready to be distributed
last Tuesday, a senior AIG executive said. But the firm didn't get the go-ahead from government officials to make the payments until late last week. "We weren't authorized until Thursday night," the AIG executive said. "We were negotiating with the Treasury and the Federal Reserve. Treasury indicated that they needed it cleared by the White House, as well. We hit the go button for the payments on Friday." Geithner said the Fed did not tell him about the bonuses until March 10. He immediately huddled with his senior staff, examining options, but ultimately concluded that the government could not change contracts for work that had already been done. He confronted Liddy over the phone March 11, demanding that he renegotiate the bonus contracts. Some minor changes were made, but the bulk of the bonuses were paid. Company and Treasury officials say they will seek changes to bonuses promised for work done this year. Obama learned of the bonuses March 12, the day before they were paid out, from Axelrod, whom Geithner had briefed on the situation. The president was "aggravated" and "a little bit disbelieving," Axelrod said in an interview yesterday. For the new administration, the bonuses were a distraction from what senior aides called the main focus: getting the economy working and people back to work. "People are not sitting around their kitchen tables thinking about AIG," Axelrod said. "They are thinking about their own jobs." Obama's top economic aides -- including Geithner -- sought to identify any recourse. The task was made more difficult Friday, when millions of dollars were disbursed. Their message to the president when the group assembled for their first extended conversation about AIG in the Roosevelt Room on Sunday was not optimistic: They told him they had "done and will do what we legally can," Axelrod said. But Obama made clear at that meeting that he was unwilling to throw up his hands. He instructed Geithner and the others to seek legal ways that the government might recover the bonuses. And he made plans to tell the public what he thought the next day. That decision ran counter to the belief among some in his inner circle that the bonus issue while an outrage was a small problem compared with the economic issues confronting his young presidency. "The first and most important job we have is to get this economy moving again," Axelrod said. "As galling as this is, it doesn't go to the main issue." Over the following days, Obama came out swinging, denouncing the bonuses while expressing "complete confidence" in Geithner. Yesterday, he continued the effort, saying that "I don't want to quell anger. I think people are right to be angry. I'm angry."

MARCH 19, 2009
Dodd's Amendment at Crux of Bonus Issue

By JONATHAN WEISMAN
WASHINGTON -- A provision in President Barack Obama's stimulus law might have forestalled payment of $165 million in bonuses to employees of American International Group Inc., but was altered before final passage at the request of the Obama administration, Senate Banking Committee Chairman Christopher Dodd said Wednesday night. Mr. Dodd, a Connecticut Democrat, introduced a provision into the stimulus that capped executive pay, among other things. But the final language specifically excluded bonuses included in contracts signed before the bill's passage -- a broad category that included the AIG bonuses. At the time, few objected to that move, which was designed to ensure the measure was constitutional. "I did not want to make any changes to my original Senate-passed amendment but I did so at the request of Administration officials, who gave us no indication that this was in any way related to AIG," Mr. Dodd said in a statement. "Let me be clear -- I was completely unaware of these AIG bonuses until I learned of them last week." After the recent furor relating to the AIG payments, lawmakers returned to make a forensic examination of the provision seeking to assign blame for what some called a secret agreement to spare the tottering insurance giant, which has received more than $170 billion in federal aid. The provision and its genesis consumed Capital Hill Wednesday. "The president goes out and says this is not acceptable and then some backroom deal gets cut to let these things get paid out anyway," said Sen. Ron Wyden, (D., Ore.), author of an earlier, alternative pay amendment, told the Associated Press. The Obama administration had not tried to hide its concern about the moves to clamp down on executive compensation. Both Treasury Secretary Timothy Geithner and National Economic Council Director Lawrence Summers lobbied Mr. Dodd to make changes. Administration officials said the Treasury didn't suggest any language or say how the amendment should be changed. They said they noted legal issues that could likely lead to challenges, but was the end of their involvement. The official said Mr. Dodd and Congress made the final changes on their own. At issue were competing provisions in the stimulus bill that capped executive compensation for recipients of bailout funds. One, drafted by Sens. Wyden and Olympia J. Snowe (R, Maine), would have capped bonuses at $100,000, retroactive to 2008. Companies awarding bonuses above that level would face the choice of returning those funds to the Treasury or having them taxed at 35%.
Another, by Mr. Dodd, slapped sharp limits on all compensation of top employees, including bonuses. Both amendments passed the Senate easily, but during House and Senate negotiations, the Wyden-Snowe amendment dropped out of the bill with little fanfare. Lawmakers and the administration raised constitutional objections, since it would have taxed 2008 income retroactively. Its authors argued that because companies were given a choice whether to return the bonuses or face a tax, the measure was not actually taxing past income but would "tax" a company's future decision -- made with full knowledge of the consequences. After the retention bonuses at AIG came to light this weekend, the Wyden-Snowe efforts were hailed as tragic heroism, with Republicans and the media demanding to know who was responsible for its backroom execution. Mr. Dodd was criticized for his role in the matter, a problem considering his already difficult reelection run next year. Mr. Dodd is the top all-time beneficiary of AIG campaign contributions, with a total of $280,000 in donations from the company's employees and fund-raising arm since 1990, according to campaign finance data collected by the nonpartisan Center for Responsive Politics. A Dodd spokesman had no immediate comment on the campaign contributions Wednesday. In an irony, Mr. Dodd managed to sharpen other language in the provision while acceding to the administration's request. That new language clarified that contracts existing before passage of the stimulus bill could be violated in the extraordinary circumstance of "national interest." That's the language the administration hopes now to use to claw back the AIG bonuses. Deborah Solomon contributed to this article. Write to Jonathan Weisman at jonathan.weisman@wsj.com
AP3/19/09
Dodd: Administration sought bonus limit revision

By JIM KUHNHENN The Associated Press Wednesday, March 18, 2009; 9:56 PM
WASHINGTON -- For a while, the disappearance of an executive bonus restriction from last month's economic stimulus looked like sleight of hand worthy of a Las Vegas stage. No one could explain how the provision faded into thin air. On Wednesday, Sen. Chris Dodd, D-Conn., acknowledged that his staff agreed to dilute the executive pay provision that would have applied retroactively to recipients of federal aid. However, Dodd said he was not aware of any American International Group Inc. bonuses at the time the change was made. The provision was the subject of new attention this week because, had it survived, it would have prevented AIG from granting $165 million in bonuses to employees of its financial products division. "I'm the one who has led the fight against excessive executive compensation, often over the objections of many," said Dodd, the chairman of the Senate Banking Committee. "I did not want to make any changes to my original Senate-passed amendment, but I did so at the request of administration officials, who gave us no indication that this was in any way related to AIG." He added: "Let me be clear: I was completely unaware of these AIG bonuses until I learned of them last week." Dodd did not name the administration officials in his statement, which came a day after he told CNN that he had nothing to do with the change in the provision. In his statement Wednesday, Dodd said he was referring to action to protect AIG. "When I saw that my comments had been misconstrued, I felt it was important to set the record straight _ that this had nothing to do with AIG," he said. Over the years, Dodd has been the top recipient of campaign contributions from AIG employees. During 2007-2008, when he ran for president, he received nearly $104,000 from AIG employees and their families, according to the Center for Responsive Politics, a nonpartisan group that monitors money in politics. While the House and Senate reconciled their different stimulus bills last month, the Treasury Department expressed concern with a Senate restriction on bonuses, noting that if it applied to existing compensation contracts it could face a legal challenge. Dodd told CNN on Wednesday that rather than lose the entire section on executive excessive compensation, he reluctantly agreed to modify the legislation. An administration official said Treasury made Dodd's staff aware of the potential for litigation but did not demand that the provision be removed from the final bill. The official spoke on the condition of anonymity because he was not authorized to discuss the matter in public.
The legislation does include a provision that allows Treasury to examine past compensation payments to determine if they were "contrary to the public interest." Treasury Secretary Timothy Geithner on Tuesday said he was using that provision to determine whether the government could somehow recoup the AIG bonuses. 2009 The Associated Press
BNA3/19/09 Financial Institutions Panel Hears Testimony on AIG Payments, Signaling Major Structural Changes Ahead The House Financial Services Capital Markets Subcommittee March 18 heard testimony on bonuses paid to holdover employees at American International Group's London-based financial products unit, with witnesses and lawmakers signaling that major structural changes could be in store for financial services firms and their regulators. AIG, a major insurance firm that has received massive federal financial assistance, is now headed by Edward M. Liddy, a retired insurance executive who took the helm of AIG late in 2008 at the request of the Bush administration. Subcommittee Chairman Paul Kanjorski (D-Pa.) called the hearing to examine payment of $165 million in bonuses to employees of the financial products unit, which has been blamed for writing financial contracts said to have put the global financial system at severe risk. Kanjorski, in an unusual move, put all of the witnesses under oath. AIG Chief Defends Payments Liddy defended the payments, saying they were not performance bonuses for employees who brought about AIG's collapse. Instead, he said, they were retention bonuses paid to employees at the financial products unit who stayed on and had the expertise to help wind down the company in an orderly manner. According to Liddy, who has an annual salary of $1, those employees have reduced a portfolio that once totaled $2.7 trillion down to its current level of $1.6 trillion. Liddy called the payments distasteful, but said they were implemented before he came on board at AIG. He also said the $165 million in payments were based on contract, and that their use helped ensure stability of the remaining $1.6 trillion in assets. I'm trying desperately to prevent an uncontrolled collapse of that business, Liddy told the subcommittee, voicing worries about a systemic shock to the economy. Nevertheless, Liddy said he is asking recipients to return at least half of their bonus amounts. Some are being asked to return the full amount, he said. Employees Threatened, Liddy Says But, in response to questions by Rep. Barney Frank (D-Mass.), who chairs the full committee, Liddy declined to name those who received bonuses and have not paid them back. He also said he would prefer not to disclose the names even at the urging of the full committee, saying AIG employees and their families have been the subject of explicit threats.
I'm just really concerned about the safety of our people, Liddy told Frank. Frank said he may seek a subpoena for those names from the committee, which he said would require a formal markup. But he acknowledged the security concerns, and said he will consult with law enforcement officials on various options. Action Too Little Too Late, Cuomo Says Liddy also said he probably will comply with a subpoena that may be issued by New York Attorney General Andrew Cuomo, who claims AIG paid bonuses of $1 million or more to 73 employees at its financial products division, including 11 who no longer work for the company. According to Cuomo, the top 10 bonus recipients received a total of $42 million. It would be our intent to comply with the subpoena, Liddy told Rep. Gary Ackerman (D-N.Y.). But in a March 18 statement released after Liddy's testimony, Cuomo said the AIG chief's offer to return part of the bonus payments is simply too little too late. Mr. Liddy's proposal to take half back from those who got more than $100,000 will cover some 298 out of 418 bonus recipients. Rather than take half-measures, AIG should immediately turn over the list, which we have subpoenaed, of who got what and when, Cuomo said. Frank and others on the panel, while voicing disagreement with key decisions by Liddy, said the negotiations that led to the bonus contracts cannot be laid at his feet. Mr. Liddy is in no way responsible for these bonuses being agreed to, Frank said. In addition, Liddy said major decisions for the past three months or so were always reached in consultation with the Fed, saying Fed officials sit in on AIG board meetings. Everything we do, we do in partnership with the Federal Reserve, Liddy said. The same is not true of the Treasury Department, he said, adding that he assumed that communications to Fed officials were then shared by the Fed with the Treasury. In response to a request by Rep. Brad Sherman (D-Calif.), Liddy said he will share with the subcommittee any documents he shared with the Fed. Democratic Leaders Set March 19 Floor Vote Meanwhile, Democratic House leaders March 18 said they would take a bill to the floor for a vote March 19 that would use the federal tax code to essentially claw back the bonuses to AIG workers. It would apply to major beneficiaries of the Troubled Asset Relief Program (TARP) as well as the two government-sponsored housing finance enterprises, Fannie Mae and Freddie Mac, which have come under federal supervision. The American people are very upset about what they have heard about bonuses being paid by institutions which received taxpayer funds, whether its TARP or whether it's from the Fed, said House Speaker Nancy Pelosi (D-Md.).
The bill does not include language proposed by Rep. John Conyers (D-Mich.), chairman of the House Judiciary Committee. Conyers' committee was set to mark up H.R. 1575, the End Government Reimbursement of Excessive Executive Disbursements Act, on March 18. Conyers said the bill would create a federal-level fraudulent transfer statute that would allow the U.S. Attorney General to recover prior excessive compensation and bonus payments and limit executive payments at companies that have received federal aid to levels seen in bankrupt companies. No timeline was announced for action on Conyers' proposal, though House Majority Leader Steny Hoyer (D-Md.) said the House planned further action on the bonus issue in addition to the tax clawback bill. I would urge the United States Senate to pass the legislation that we passed a few weeks ago which said this could not and should not happen, Hoyer said, referring to H.R. 384, the TARP Reform and Accountability Act that passed the House Jan. 21 and has since languished in the Senate. Other Options Being Weighed Other options are on the table in terms of government efforts to reach the bonus retention payments. Frank said the committee is researching whether the U.S. government, which has the biggest ownership interest in AIG, can sue to undo those agreements. According to Frank, that would avoid the policy complications that might arise if Congress sought to legislatively abrogate the bonus contracts. Thus far, he said, the debate has focused too little on the role of the United States as the lender to AIG, and too little on the United States as the main owner of the troubled firm. Separately, Treasury Secretary Timothy Geithner late March 17 told congressional leaders that Treasury is now working with the Justice Department to determine what avenues are available by which we can recoup the retention awards that have been paid. He also said the Treasury will impose new obligations on AIG to make extra payments in the amount of the retention bonuses, and deduct a like amount from $30 billion in federal assistance already in the pipeline. Efforts Could Pay Off, Liddy Says Liddy said AIG does have an exit strategy that he said could eventually recoup the costs to taxpayers. According to Liddy, AIG now has roughly 24 different portfolios of assets for which certain employees take responsibility. Everyone has a book [of business] they have to wind down, he said.
The goal, according to Liddy, is to sell assets and use the proceeds to pay back amounts extended by the Fed under its loan program, and to the Treasury for amounts AIG received under the TARP. Assets that cannot be sold will be segregated and handed over to the Fed, which will then do its best to sell them, he said. Once the financial products division is wound down, the rest of AIG's insurance businesses will be sold, with the proceeds given to the government. Liddy expressed optimism that taxpayers will eventually be made whole, but only if financial and capital markets return to health. The markets have to behave, he said. Frank has scheduled a second hearing, this time on March 24 before the full committee, to hear more testimony on the federal government's intervention in connection with AIG. The March 24 hearing will feature testimony by Geithner and Fed Chairman Ben Bernanke. Significant Restructuring Ahead Testimony by the witnesses and reaction by lawmakers signaled that the ongoing AIG drama will be a key driver of regulatory reform in the financial services area. In comments to reporters as he left for California to press the case for his budget proposal, President Obama said the AIG episode highlights the need for accelerated legislative action to establish a clear resolution regime for nonbank firms that present a risk to the overall financial system. So my economic team is going to be consulting with the Hill. We're going to be moving that on a fast track, Obama said, saying he spoke earlier in the day with Frank, who has tagged legislation to address systemic risk as the first order of business in connection with regulatory reform. In his March 17 letter to congressional leaders, Geithner also said the AIG situation shows the need for regulatory tools to address collapses of systemically significant institutions. This situation dramatically underscores the need to adopt, as a critical part of financial regulatory reform, an expanded resolution authority for the government to better deal with situations like this, Geithner said. Fed May Face New Limits and Scrutiny Also on the horizon are proposals to limit the Fed's emergency loan authority, and to establish a new level of scrutiny for the central bank. Frank March 18 reiterated his plans, first announced Feb. 10, to examine the Federal Reserve Board's emergency lending authority under Section 13(3) of the Federal Reserve Act (26 DER EE-14, 2/11/09) .
The Fed has used its Section 13(3) authority frequently in recent months, including an initial $85 billion credit line to AIG in the fall of 2008, shortly after Lehman Brothers filed for bankruptcy protection. Frank, who has voiced concerns about the broad discretion that the Fed has under Section 13(3), spoke about those plans during the March 18 hearing, and earlier in the day on the CBS Early Show. Now, it is my hope that before too much further, we will amend that statute. That's far too much power for them to have, Frank said, according to a transcript of the CBS program. But Frank said, as he has in the past, that any such legislative action would come only when markets have regained a measure of stability. GAO May Gain More Oversight Authority The Fed's exercise of emergency powers, first granted in 1932, also could mean a new level of scrutiny. In her testimony, Orice M. Williams, director for financial markets and community investment at the Government Accountability Office, said the GAO would be helped by a change that would allow the GAO to audit the Fed under certain circumstances. By law, the GAO is prohibited from exercising oversight of the Fed's activity in the monetary policy arena. But asked whether legislation to change that would be helpful, she said it would. In this current environment, I would say yes, she said. According to Williams, the Fed's exercise of emergency powers makes those issues more relevant. I think we are in extraordinary times, she told the subcommittee. Ackerman Hints at Tough Measures Congressional action is possible on an even wider front. Ackerman, who said revelations about bonus payments and other AIG-related matters have produced a tidal wave of rage in America, hinted that much tougher measures are on the way. You've got legislation coming down the pike they're going to call, I can't believe it's not waterboarding,' Ackerman told Liddy. Among other points, he compared companies that write credit default swaps like those at AIG's financial products unit to financier Bernard Madoff, who has pleaded guilty to securities fraud, perjury, and other charges and is now behind bars awaiting a June sentencing, when he faces up to 150 years in prison. The credit default industry is Madoff writ large, Ackerman said, describing those firms as people sitting around playing craps without a wallet. A Cure or a Curse?
But some Republicans warned that the response to the AIG situation may create bigger problems. Rep. Spencer Bachus (R-Ala.), the full committee's ranking member, said the best course is to allow the existing AIG team to do their best. Do you think Congress can manage AIG? I don't think so, he said. And Republican Study Committee Chairman Tom Price (R-Ga.), who also sits on the Financial Services Committee, said Obama and a Congress controlled by Democrats are only leading us further down the road to more reckless bailouts. This is what a political economy looks like. It's an agenda that rewards corporate losers and is entirely counterproductive to economic growth. Investors have no reason to capitalize the market when the government may dilute their investment or prop up failing competitors, Price said in a statement. By R. Christian Bruce and Jonathan Nicholson
CQ TODAY PRINT EDITION March 18, 2009 9:40 p.m. Bonus Tax Bills Move Forward By Phil Mattingly and Richard Rubin, CQ Staff While American International Group Inc.s chief executive says the firm could recover millions in bonuses via voluntary means, thats not slowing a legislative effort to recoup the money and shift the incentive-based pay structure traditionally used by financial institutions. The House is scheduled to act Thursday on legislation (HR 1586) that would impose a 90 percent tax on bonuses given to highly paid employees not only of AIG, but of all recipients of more than $5 billion in federal bailout funds, a group expected to include about a dozen financial institutions, according to Ways and Means Chairman Charles B. Rangel, D-N.Y. Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. would likely be among the affected companies. I expect to see an overwhelming vote, House Majority Leader Steny H. Hoyer, D-Md., told reporters Wednesday afternoon. The House response, and Senate legislation also likely to see action in the coming days, will largely change the incentive structure for many banks on the receiving end of federal bailout funds. The bills represent a continuation of a huge shift in the governments approach to corporate management that began last fall, when the government started to take stakes in private firms. They are also a quick pivot on an issue that could reverberate throughout Wall Street for years to come, something that has sparked criticism from a battered banking industry questioning the motives of lawmakers. The government should have to prove [that the surtaxes on bonuses] add value to the institution which strengthens the governments investment, said Scott Talbott, the senior vice president of government affairs of the Financial Services Roundtable, an industry group representing 100 of the largest financial institutions in the country. But for lawmakers barraged with calls and e-mails from critical constituents, the corporate bonuses are part of a larger problem surrounding the troubled institutions the idea that there is no financial accountability for risk-taking. The problem is not the dollar amount, but the incentive structure, said Massachusetts Democrat Barney Frank, the chairman of the House Financial Services Committee. Its a headsthey-win, tails-they-break-even. Edward M. Liddy, the chief executive of AIG, caught onlookers and committee members alike off guard when he broke from prepared testimony Wednesday in front of a House Financial Services subcommittee and announced a request that all recipients of more than $100,000 of the $165 million in bonuses return at least half of the money. Leaders of the battered AIG financial products division have been asked to return 100 percent of their bonuses, Liddy said. But that is unlikely to satisfy lawmakers.
The House Rules Committee on Wednesday paved the way for consideration of the tax bill, unveiled late Wednesday by Rangel under suspension of the rules, an expedited procedure that bars amendments and requires a two-thirds vote for passage. On the Senate side, legislation being written by Finance Chairman Max Baucus, D-Mont., and ranking Republican Charles E. Grassley of Iowa would place a 35 percent excise tax on AIG for its bonus costs and a 35 percent tax on the bonus income of recipients. It would impose a 20 percent surtax on any deferred compensation over $1 million annually and apply to companies that have received federal bailout money or companies in which the federal government has an equity stake, possibly affecting nearly 400 companies. It would apply to all payments from Jan. 1, 2009, forward. Baucus said Wednesday the timing for floor consideration of his bill remains up to Senate leadership. Sen. John Ensign, R-Nev., said the first focus should be on analyzing the details coming out about the bonuses and determining what government officials knew, and when. Careful Drafting Lawmakers must be careful as they try to craft laws that can pass constitutional muster. Imposing too high a tax rate could risk a lawsuit calling the tax a taking without due process. Reaching too far back in time could also violate the Constitutions prohibition on ex post facto legislation. And targeting too narrow a group could also be constitutionally suspect. Rep. John Yarmuth, D-Ky., a member of the Ways and Means Committee, said he wasnt sure the proposed approach was constitutional, though he said tax writers were being careful in their drafting. The publics demanding we do something, so its the best alternative, Yarmuth said. Separately, the House Judiciary Committee approved, by voice vote, a bill (HR 1575) that would use the bankruptcy code to go after the bonuses. But several senior Democrats, including Melvin Watt, D-N.C., questioned the measures constitutionality. It is not expected to reach the floor until next week, said Chairman John Conyers Jr., D-Mich. There is ample precedent, however, for imposing retroactive tax increases, such as the rate increases (PL 103-66) pushed by President Bill Clinton, which were enacted in August 1993 but applied to the entire tax year. As long as any tax law applies to the current tax year, there should not be a problem with retroactivity, said Leslie B. Samuels, who was a Clinton administration Treasury official and is now a partner at Cleary Gottlieb Steen & Hamilton in New York. However, Samuels said, lawmakers loud public comments about taking back the bonuses could come back to hurt them in future litigation. If a court considers the constitutional issue of a taking without appropriate compensation, these statements of the legislators and the intent of Congress, I believe, would be likely to be taken into account in court, he said.
Rangel, who had expressed skepticism on Tuesday about using the tax code to go after the bonuses, said Wednesday that the situation called for setting aside his usual preference against retroactive tax policy. The depth of the damage that has been done requires very unusual and unique retaliation, Rangel said. Broader Question Rangels comment pointed to a broader question: the role of the federal government in the private market. The Treasury Departments capital injections into financial institutions, beginning in 2008, changed the nature of the economic debate in Congress, making government intervention more common. But populist anger is overtaking a more measured response to the grave economic crisis, some lawmakers say. This is exactly why the federal government should not be in the business of bailing out private companies, Rep. Tom Price, R-Ga., said of the current frenzied state of Congress. This is what a political economy looks like. And its a very dangerous place to be. While there was plenty of outrage directed Liddys way during the testimony Wednesday AIG now stands for arrogance, incompetence and greed, said Rep. Paul W. Hodes, D-N.H. some lawmakers sought to dig deeper. The bonuses are important, the bonuses are shocking, but the bonuses are not the only element here, said Rep. Paul E. Kanjorski, D-Pa. Liddy, who was installed in his position last year by federal regulators, warned that the return of the money could have negative effects, since it would likely mean the resignations of employees largely responsible for winding down the most systemically risky aspects of the company. We will get the bulk of that money back, they will return it, but they will return it with letters of resignation, Liddy said, warning that a dire situation still confronts the insurance giant. Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke are expected to testify at a full committee hearing on AIG on March 24, Kanjorski said. Liddy, who gave no indication before the hearing that he would request repayment from his employees, also appeared to grasp the dangerous road his company was moving down should the bonus money not be recouped. We are acutely aware, Liddy said, that the taxpayers patience is wearing thin. Benton Ives and Edward Epstein contributed to this story. Source: CQ Today Print Edition Round-the-clock coverage of news from Capitol Hill. 2009 Congressional Quarterly Inc. All Rights Reserved.
CQ TODAY PRINT EDITION March 18, 2009 9:45 p.m. House Bonus Tax Bill Details The tax bill (HR 1586) introduced Wednesday night by Ways and Means Chairman Charles B. Rangel, D-N.Y., will be considered on the House floor, under suspension of the rules, on Thursday. The bill would apply to bonuses received in 2009 and beyond by employees of companies receiving more than $5 billion in federal bailout funds, plus Fannie Mae and Freddie Mac. The bonuses would not be subject to the regular federal income tax. Instead, recipients would pay a special 90 percent federal tax on the bonuses. Recipients could avoid the tax by waiving their right to the money or returning it to their employer by the end of the year. The tax would not apply to income of joint filers below $250,000 (or to income of less than $125,000 for married individuals filing separately). Source: CQ Today Print Edition Round-the-clock coverage of news from Capitol Hill. 2009 Congressional Quarterly Inc. All Rights Reserved.
CongressDaily3/19/09 FINANCE
House To Slap AIG Bonuses With Taxes

Thursday, March 19, 2009 by Bill Swindell and Peter Cohn, with Michael Posner contributing Congressional Democrats are taking the first step today to stem the political fallout over the federal government's $182 billion role in propping up American International Group with a House vote today on legislation to tax executive bonuses at the insurance carrier. The House bill is the first effort to reclaim $165 million in retention bonuses paid to AIG executives, an action that has served as a tipping point for populist anger against the federal government's efforts to allocate more than $1 trillion in loans since September to at-risk firms whose potential collapse could have threatened the overall economy. "Because they could not use sound judgment in the use of taxpayer funds, these AIG executives will pay the Treasury in the form of this tax," House Speaker Pelosi said. "I urge all my colleagues to vote in favor of this legislation and in favor of recovering taxpayer dollars and protecting Americans from the continued poor judgment of some of America's largest companies." The outrage over the bonuses has become the first major challenge of the Obama presidency as Republicans seek the scalp of Treasury Secretary Geithner, who they claim should be the fall guy because he did not stop the bonuses -- some that went to individuals who already left the company -- before they were distributed. "Secretary Geithner either didn't know about the bonuses and was grossly negligent or he did know and failed to bring this to the president's attention," said Rep. Darrell Issa, R-Calif. "Either way, the end result has been a significant waste of taxpayer dollars and he should take immediate responsibility and resign." But beyond the political broadsides lies the vote-counting reality: The Obama administration must stem the controversy over continuing funding of the AIG bailout in order to pick up support for any further funding it might request from Congress to help buoy the banking industry and get credit flowing. The Obama budget request would allow Treasury to provide up to $750 billion in new aid to the financial industry to help buy off the toxic mortgage debt that is dragging down banks. It is a request many analysts think the administration will have to make, but would have trouble passing in the current environment. The AIG case has been problematic because the Federal Reserve and Treasury have authorized seven different programs to keep the insurance conglomerate solvent with no end in sight. "This AIG bonus scandal is simply the outrage of the week and the week is not yet half over," said Rep. Jeb Hensarling, R-Texas. "The greater outrage should be the almost $180 billion of taxpayer exposure, and growing. The greater outrage ought to be four bailouts later no end in sight and no plan of sustainability or exit strategy that has been explained to this [House Financial Services] Committee."
To that end, Financial Services Chairman Barney Frank and the Obama administration are working on legislation to create an authority similar to the FDIC that could take over nonbank entities like AIG and place them in receivership so they could unwind the assets, reorganize and emerge as a smaller firm that could make a profit. AIG moves into credit default swaps -- a very risky and complicated insurance contract -- led to its downfall because they were based largely upon faulty subprime mortgages. "It may not be the same agency for all institutions. You want to get some expertise. The model [of] how the banks do it is a good model," Frank said. The first action will be today's House vote on a bill that would impose a 90 percent tax on individuals receiving bonuses at companies taking $5 billion or more in government aid, limited to those earning more than $250,000 annually. That would increase taxes on bonuses paid by AIG and others to levels not seen since 1963. "It's basically taxing the hell out of the bonuses. And if you do that, you in effect make people more or less disgorge these bonuses," said Rep. Artur Davis, D-Ala., a Ways and Means member. "It's confiscatory taxation, and it should be confiscatory taxation because we're trying to undo unjust enrichment." The obvious target of the Democrats' ire is AIG, but placing the $5 billion threshold in the bill would sweep in about a dozen other firms that have received taxpayer assistance. That includes financial institutions like Morgan Stanley, which received $10 billion as part of the Troubled Asset Relief Program and is considering $3 billion in retention bonuses, which drew a rebuke this week from Sen. Robert Menendez, D-N.J., and others. Bank of America Corp. and Citigroup Inc., which received $45 billion each, would be covered by the bill, as would JPMorgan Chase & Co. and Wells Fargo & Co., at $25 billion each. Automaker General Motors Corp. could be subject to the restrictions, as would federally backed mortgage financiers Fannie Mae and Freddie Mac. Fannie Mae plans to give retention bonuses of at least $1 million to four key executives as part of a plan to keep hundreds of employees from leaving the government-controlled company, according to a recent filing with the SEC. Other firms receiving more than $5 billion in aid from the TARP include Goldman Sachs Group, U.S. Bancorp and PNC Financial Services Group. "Make no mistake about it; we will not tolerate these abuses. We will send the clearest of signals, a solid red light, to say 'Stop, do not go there,'" Ways and Means Chairman Charles Rangel said. The bill would cover any bonus awarded to government beneficiaries since Jan. 1. It would not apply to the $18 billion in bonuses paid out last year by Wall Street firms. The measure would not distinguish between retention and nonretention bonuses, such as performance incentives, and firms that repay TARP funds would be exempt.
Rangel's approach is different than a bill authored by Senate Finance Chairman Max Baucus and ranking member Charles Grassley, which would slap a 35 percent excise tax on companies that pay out the bonuses as well as the individuals receiving them. Retention bonuses would be subject to the full tax, while other bonuses would be exempt up to $50,000. The Senate could take up its bill soon, but Baucus said he hoped it didn't come to that and that AIG employees return the bonuses. "There's so much pressure on AIG right now ... but we'll introduce the bill as leverage," he said. Thus far, other than Grassley, few Republicans are jumping on board. They prefer to blame the Treasury, the Federal Reserve and the Obama administration. But there is no unanimity among Democrats that the tax angle is the best course to recoup the bonuses. The House Judiciary Committee Wednesday approved legislation that would allow the Justice Department to file civil lawsuits to recover prior excessive payments for all companies receiving more than $10 billion in federal financial assistance since Sept. 1. It is tailored to seek recovery of AIG's $165 million in bonuses. Critics of the bill questioned whether it was constitutional, including its reliance on the commerce clause within the Constitution. They argued that ordering the recovery of the money could violate the Fifth Amendment takings clause that limits confiscation of property. But Judiciary Chairman John Conyers argued that he has been told by attorneys the bill is constitutional. The congressional pressure has had some effect. AIG CEO Edward Liddy testified Wednesday that he has asked those AIG employees who received more than $100,000 in bonuses to return at least half of the payment and that several have done so. Frank said it is a better option for the federal government to bring a shareholder lawsuit against the employees who do not return the bonuses, noting taxpayers own about 80 percent of the firm. "That ought to reassure people who worry that the Congress is going to abrogate contracts. We are the major shareholder there. We ought to bring a lawsuit as the shareholders against the people who are getting our money and didn't deserve it," Frank said. Geithner met with Frank Wednesday night to talk about how to go forward on legislation this spring on the FDIC-like agency to place troubled firms into receivership. The idea seems to have some support across the aisle. Hensarling said he was receptive to that idea because he believes AIG should be placed into receivership because it is a failed firm. If "as majority shareholders, we have the ability to place AIG into receivership, then we ought to do it," Hensarling said. Meanwhile, Senate Banking Chairman Christopher Dodd said Wednesday night that, at the request of administration officials, he agreed to changes in his Senate-passed amendment to the stimulus bill to ban bonuses for executives of firms who got federal assistance.
But he said administration officials "gave us no indication that this was in any way related to AIG. Let me be clear -- I was completely unaware of these AIG bonuses until I learned of them last week."
A.I.G. Seeking Return of Half of Its Bonuses

By MARY WILLIAMS WALSH and DAVID M. HERSZENHORN WASHINGTON Two chief executives with much on the line in the furor over Wall Street bonuses President Obama and Edward M. Liddy of the American International Group made concerted efforts on Wednesday to tamp down the populist anger, but faced continued outrage on Capitol Hill and elsewhere. At a highly charged Congressional hearing, Mr. Liddy said he had asked employees making more than $100,000 a year who just shared in a $165 million bonus payout to give half the money back, reflecting the public and political disgust at the idea of rewarding the same people who had helped drive the company and the economy into distress. Some have already volunteered to give back 100 percent, said Mr. Liddy, who was installed by the Federal Reserve when it rescued A.I.G. last September and is being paid $1 a year. But he did not provide any details, and resisted releasing the names of those who had received the bonuses, saying some employees had received death threats. Mr. Obama, at the White House, said his goal was to channel our anger in a constructive way and called for legislative authority to take over and close troubled nonbank financial institutions like A.I.G. Even as he said that nobody here had drafted the bonus deals A.I.G. agreed to last year, the president said he took responsibility for cleaning up the mess, deflecting some of the criticism being directed at Treasury Secretary Timothy F. Geithner and trying to limit any damage to his ability to get more money from Congress for bank bailouts. The buck stops with me, Mr. Obama said. And my goal is to make sure that we never put ourselves in this kind of position again. But furious Democratic leaders in Congress said they would not wait for A.I.G. to act on good faith, and instead said they would head to the House floor on Thursday with a bill to tax 90 percent of bonuses paid out since Jan. 1 by A.I.G. or any other company that had accepted more than $5 billion in government bailout funds. The House speaker, Nancy Pelosi, at a hastily called news conference with Representative Charles B. Rangel of New York, the chairman of the tax-writing Ways and Means Committee, and other leaders, said Congress would do what was necessary to assure that taxpayers did not pay for bonuses. This money doesnt belong to A.I.G., said Representative Steve Israel, Democrat of New York. It belongs to the American taxpayer and we are going to get it back. Senate leaders have proposed legislation that would impose a 35 percent tax on recipients of the A.I.G. bonuses, and a 35 percent tax on the company. House leaders said that they had kept the White House informed of their plans, but that the administration had not been involved in developing the legislation.
Faced with demands for disclosure of the names of the people who received the bonuses, Mr. Liddy said hesitantly at the Congressional hearing, before a subcommittee of the House Financial Services Committee, that he would be willing to supply the names, but only if they were not released publicly. He explained that there had been death threats, and read an example: All the executives and their families should be executed with piano wire around their necks, it said. That is our only hope. The committees chairman, Representative Barney Frank, Democrat of Massachusetts, said he was dismayed to hear about the threats, but he was unwilling to guarantee the confidentiality of the names. He warned that if he did not get the information, he would try to have Mr. Liddy subpoenaed. I think the time has come for the federal government to assert greater ownership rights, Mr. Frank said. Likewise, the New York attorney general, Andrew M. Cuomo, signaled that he would make the names public when he received them in response to a subpoena. Another uproar could emerge if Fannie Mae and Freddie Mac, the mortgage-finance giants that have been taken over by the government and have received billions in taxpayer money, pay similar retention bonuses to top executives, as they have indicated that they would do in recent regulatory filings. As Congress sought to tighten its grip on A.I.G. and other companies aided by the taxpayers, Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Senate banking committee, sought to explain how legislation aimed at limiting executive compensation at firms receiving bailout help was changed at the last minute to allow certain bonuses that were contained in employment contracts before Feb. 11, 2009. Mr. Dodd initially said he did not know how that change was made to the compensation limits that were included in the economic recovery bill adopted by Congress last month. But in an interview Wednesday with CNN, he said that the Treasury Department had requested the change and that his staff had helped to write it into the bill, as part of a deal to keep other pay limits in the legislation. It was their suggestion, Mr. Dodd told CNN. We wrote it together at the time. But it is far from clear that the change mattered in the case of A.I.G. The payouts have roused particular fury because they went to employees of A.I.G.s financial products unit the part of A.I.G. that dealt in the credit derivatives that were its downfall. A horde of cameras and reporters awaited Mr. Liddy outside the hearing room, subjecting him to the sort of gantlet reserved for major felons and celebrities after an unfortunate night out. But Mr. Liddy, who chatted with protesters as he entered the session for hours of testimony, repeatedly tried to make clear that he was not responsible for getting A.I.G. into this mess. Six months ago I came out of retirement to help my country, said Mr. Liddy, a former Allstate executive who no doubt has questioned that decision on more than one occasion. At the governments request Ive had the duty and extraordinary challenge of serving as chairman and chief executive officer of American International Group, or A.I.G.
Representative Paul E. Kanjorski, the Pennsylvania Democrat who is chairman of the subcommittee, sought to make the distinction clear as well, saying that Mr. Liddy had responded to a plea to help out and should be spared any abuse. We do not intend to harass you, Mr. Kanjorski said. Yet members of both parties sharply questioned Mr. Liddy. This is like the captain and the crew of the ship reserving the lifeboats saying to hell with the passengers, said Representative Stephen F. Lynch, Democrat of Massachusetts. To Mr. Liddy, Mr. Lynchs observation went too far. I take offense, sir, he responded, reminding lawmakers that he was not in charge when the bonuses were arranged but believed he was legally bound to pay them. Well, offense was intended, Mr. Lynch retorted. So you take it rightfully, sir. In response to questions about who in the federal government A.I.G. consulted with on its business decisions, Mr. Liddy said that he normally spoke with the Fed, and believed the Fed then kept the Treasury in the loop. The Fed has appointed three trustees to represent the governments stake in A.I.G., but when asked their names Mr. Liddy could not recall them. He said it was his impression that Mr. Geithner had not known about the bonuses until two weeks ago. Carl Hulse and Helene Cooper contributed reporting.
AIG Chief Asks That Awards Be Returned

On Hill, He Is Urged To Name Executives Who Kept the Money
By Amy Goldstein and Carol D. Leonnig Washington Post Staff Writers Thursday, March 19, 2009; A01
The chief executive of American International Group, trying to quell the wrath of the public and politicians over millions of dollars in bonuses, told Congress yesterday that he had just asked a few hundred employees of the beleaguered insurance company to give back at least half of the extra pay. Edward M. Liddy, brought in last fall to lead the giant firm the government had just rescued from the brink of insolvency, arrived on Capitol Hill with an understanding of the outrage that has erupted over the bonuses -- but not complete acquiescence. "We've heard the American people loudly and clearly these past few days," Liddy told an irate House subcommittee, saying that he found the bonuses "distasteful." But he defended the rationale behind the payments, totaling $165 million to AIG's troubled Financial Products division, reiterating that they were intended to prevent the company from collapsing by deterring vital employees from leaving. He said that "some" of the Financial Products employees have returned their bonuses but did not specify how many. Asked by Rep. Barney Frank (D-Mass.) to provide the names of those who have kept the money, Liddy balked, saying he feared for their safety in light of written threats, including one that said, "All the executives and their families should be executed with piano wire around their necks." Liddy went before the subcommittee to try to stanch AIG's latest crisis: public anger that has spiraled since the disclosure over the weekend that the company, which has received $170 billion in emergency federal funding, paid scheduled bonuses late last week. The bonuses included more than 70 that were $1 million or more in the division responsible for the company's downfall. Liddy said he asked Financial Products employees who received at least $100,000 in bonuses to relinquish some of the money. But from the testy mood in the House hearing room, to the White House and the New York attorney general's office, it was plain that AIG's strategy was not containing the crisis. Rep. Paul E. Kanjorski (D-Pa.), chairman of the House Financial Services subcommittee, scolded the chief executive, saying the decision to go ahead with the bonuses promised in employee contracts could bring down the company -- and ultimately others as well. He said corporations that have received bailout funding are likely to run out of that money soon and will need to ask the government for more. "Do you realize that the actions that you take at AIG . . . may have jeopardized our ability to get a majority of this Congress to support further largess to provide funds to prevent a recession, depression or meltdown?" Kanjorski asked Liddy. The House scheduled a vote for today on a measure that would impose an income tax of 90 percent on bonuses that AIG employees received this year. And the Senate Finance Committee is
preparing legislation that would capture 90 percent of the bonus money through excise and income taxes. Attorney General Eric H. Holder Jr. announced yesterday that the Justice and Treasury departments are jointly exploring "tools" to recover the money. Meanwhile, New York Attorney General Andrew M. Cuomo continued to lash out at AIG, saying Liddy's request that employees return part of their bonus money "is simply too little too late." Cuomo's office said that 418 Financial Products employees have received the bonuses and that 298 of them were paid at least $100,000. The once-storied division at the center of the storm nearly brought down its corporate parent, the world's largest insurance company, through billions of dollars in losses in its credit default swap business. In that business, the division insured risky mortgage investments by other banks and corporations and considered the insurance premiums its clients paid to be "free money," never expecting those investments to lose value. David Axelrod, senior adviser to President Obama, stopped short of saying the White House had directed Liddy to request that employees give back bonus money. But he said Treasury Secretary Timothy F. Geithner, in conversations with Liddy in recent days, had "made clear that he would like to see as many of the bonuses recovered as possible." In his opening remarks on Capitol Hill, Liddy emphasized that he understands the anger that has welled up. "We are acutely aware not only that we must be good stewards of the public funds we have received, but that the patience of the American -- of America's taxpayers -- is, indeed, wearing thin," said Liddy, who came out of retirement at government request to become AIG's chairman and chief executive for a salary of $1 per year. "The payment of large bonuses to people in that very unit that caused so much of AIG's financial troubles does not sit well with the American taxpayer in any way, shape or form, and for a good reason." He predicted that many executives will "return the bulk of the money that's been given them, and it will come with their resignations." With intense public sentiment bearing down on them, neither Democrats nor Republicans sounded fully satisfied. Frank, chairman of the House Financial Services Committee, asked Liddy to send the House a list of employees who do not return their bonuses. Liddy replied that he would, if the names would remain confidential. "I won't give you that assurance, sir," Frank shot back. "And if you feel unable to do that, then I will ask the committee to subpoena them." Dozens of employees at the Financial Products division, reached at their offices or homes, declined to comment on the public outrage over the bonus payments -- or whether they would give back the money. A few pleaded that their names not be publicized, saying they are afraid for their families' safety. Some company officials have said they would have preferred not to make the payments. "In today's environment, it's not defensible to pay these guys this amount of money at a company
that's taxpayer-financed, and everybody knows that," said a senior AIG executive, speaking on the condition of anonymity. But the executive noted that about half of the $165 million in bonuses went to Financial Products employees working abroad, raising the legal issue of whether the government will be able to recover the money. Staff writers Brady Dennis, Paul Kane, Shailagh Murray and Amit R. Paley and staff researchers Lucy Shackelford and Madonna Lebling contributed to this report.
Key Argument for Incentives Questioned

Payouts Came After Worst Had Passed, With Riskiest Bets Settled by December
By Binyamin Appelbaum and Brady Dennis Washington Post Staff Writers Thursday, March 19, 2009; A01
The work of defusing the most dangerous bets placed by American International Group was largely concluded by December, according to documents and interviews, long before the company gave bonuses to employees it said it needed to retain to avoid a financial meltdown. AIG used almost $50 billion from the Federal Reserve to end contracts with other financial firms by the end of 2008, a massive and far-reaching bailout designed to remove the company from a central role in the financial system with minimal collateral damage. The largest beneficiaries included Goldman Sachs and Bank of America. The government relied on AIG employees to carry out much of this work. The most explosive contracts largely were the creations of AIG's Financial Products unit, and employees of that division -- the recipients of the controversial bonuses -- worked through the fall to unwind old deals. By the end of December, the outstanding volume of the riskiest kind of bet, on highly complex derivatives, had been reduced to roughly $13 billion from $78 billion, according to the company's financial filings. The Federal Reserve has since completed its planned purchases of assets from AIG's trading partners. Two Financial Products executives said the hardest work has been completed and their focus has shifted to the resolution of a vast but less risky portfolio of bets on more straightforward financial instruments. One said most of those trades are protected against loss and have caused few problems. That progress contrasted with the testimony before Congress yesterday of the company's chief executive, Edward M. Liddy, who said the payment of $165 million in retention bonuses last week was necessary because the departure of key employees could result in catastrophic losses. "The risk assessment was we've made great progress in winding down this business, but there is still $1.6 trillion of stuff in that portfolio. There's risk that that could blow up. And if it were to explode, it can cause irreparable damage to that progress that we've already made," Liddy said. "I know $165 million is a very large number. It's a very large number. In the context of $1.6 trillion and the money that's already been invested in us, we thought that was a good trade." The company in recent statements has credited Financial Products with making "substantial progress," and a spokeswoman said yesterday that Liddy simply wanted to underscore the seriousness of the remaining challenge. The division began with bets valued at about $2.7 trillion, which it divided into 22 portfolios. The five riskiest portfolios are basically unwound, but AIG says the remaining portfolios still pose significant risks.
The two executives, who spoke on the condition of anonymity, said they were particularly concerned that the loss of experienced employees would reduce the company's ability to secure the best prices in negotiations with other financial firms. "We're unwinding all of our businesses. We're going out of business, and all of our counterparties know that," one executive said. A former Financial Products executive, however, said the employees already are less inclined to haggle because they are playing with government money. He said that government officials, who are closely involved in the process, also have favored pricing that helps other financial firms by giving them more money. "It doesn't look like the government is trying to protect AIG," the former executive said, adding that paying full price on the amounts demanded by trading partners "is a way of lending them money." AIG, once the world's largest insurer, traded on its reputation for stability in order to sell a much wider range of financial products. Firms around the world came to depend, to a degree that was not fully appreciated at the time, on the company's promises. But the financial crisis quickly exposed that AIG had made more promises than it could keep. The government took control of the company in September to preserve the health of many of other financial firms. The unit at the heart of the troubles was Financial Products, and none of its products were more problematic than its sales of insurance-like contracts called credit-default swaps. Companies bought the insurance from AIG on the performance of investments called collateralized debt obligations, which ultimately depend on borrowers to repay loans. At the end of 2007, the division had guarantees outstanding of about $78 billion. If enough borrowers defaulted and the investors lost money, AIG was on the hook. Under the government's rescue plan, the Federal Reserve created a special entity to buy the insured investments from AIG's customers, allowing the company to cancel the contracts. The entity was called Maiden Lane III, after the street that runs alongside the headquarters of the Federal Reserve Bank of New York. A collapse in the market for such assets has massively depressed prices, but the companies were compensated at the full original value. The Fed did not pay the full price. AIG had already provided other assets to the companies as collateral for its guarantees. The companies were allowed to keep those assets, and the Fed made up the difference between the value of the original asset and the value of the collateral. Through the end of December, the government and AIG had paid about $62.1 billion for assets valued in December at $29.6 billion, basically rewarding the former holders of AIG insurance policies with more than $30 billion in value they would not have received if the assets had defaulted and AIG was unable to meet its obligations. The Fed expects to get a return on the investment by holding the assets until they recover their full value.
The greatest beneficiaries were the French bank Societe Generale, which got more than $16 billion for assets valued at about $8 billion in December, and Wall Street giant Goldman Sachs, which was paid almost $14 billion for assets valued in December at about $6 billion. Other large beneficiaries included Deutsche Bank and Merrill Lynch, which was acquired by Bank of America. Goldman Sachs and other banks have said that they were separately protected against losses related to these AIG contracts and therefore they would not have been damaged if AIG had not bought the assets at full value. A second Fed vehicle, Maiden Lane II, also has completed its purchases of about $22.4 billion in mortgage-related securities. AIG still can borrow money from the Fed to meet collateral calls from other trading partners, but the Fed's work with the company is substantially complete. Dennis reported from Wilton, Conn.

MARCH 19, 2009
'Outrage' Overflows on Capitol Hill as Lawmakers Denounce Bonuses

By MICHAEL M. PHILLIPS
WASHINGTON -- Lawmakers really want the American people to know that they, too, are "outraged" about the $165 million in bonuses paid to American International Group executives. They were so outraged, in fact, that they turned Wedndesday's congressional hearing on AIG into a daylong expression of outrage. Members of the House Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises mentioned their outrage at the big insurer 18 times. And that was during 45 minutes of opening remarks, even before the immediate target of their outrage, AIG Chief Executive Edward M. Liddy, entered the room. "I certainly join my constituents in their outrage," offered Rep. Ron Klein, a Florida Democrat. The subcommittee chairman, Rep. Paul Kanjorski, gave Rep. Randy Neugebauer, a Texas Republican, only one minute to speak, so he didn't waste any time. "I'm going to go ahead and say I'm outraged as well," he began. WSJ's Liam Pleven and Dennis Berman discuss the growing controversy over AIG's decision to award bonuses to several executives, after government funds were used to boost the troubled insurer. Some Republicans wanted credit for their earlier outrage, saying they aimed it at those who supported bailouts of AIG and others in the first place -- presumably Democrats. None mentioned the role of former President George W. Bush, who was in the White House when the rescue money started flowing to AIG. Rep. Jeb Hensarling (R., Texas) forecast more anger to come. The furor over AIG bonuses is "simply the outrage of the week, and the week isn't half over yet." The anger spread to the audience, as well. House Finance Committee Chairman Barney Frank, a Massachusetts Democrat, warned visitors: "There will be no heckling." Members of Code Pink, an antiwar group that has diversified its anger, arrived before dawn to secure seats behind the witness table, where the cameras aimed at Mr. Liddy would catch their hot-pink feather boas and posters. The hottest anger had to wait until afternoon. Mr. Liddy was scheduled to appear after a panel of witnesses that included representatives from the Office of Thrift Supervision and the National Association of Insurance Commissioners. The pink-clad protesters checked their email.
The arrival of Mr. Liddy, silver-haired in a charcoal-gray suit, loosed a thunderclap of camera shutters. Mr. Kanjorski, a Pennsylvania Democrat, warned protesters to behave. "The pink ladies back there -- respond properly or please exit the room," he intoned sharply. He slammed his gavel on the desk. "Signs down," he yelled. Mr. Kanjorski began by expressing sympathy with Mr. Liddy, a dollar-a-year man who took over AIG at the government's request -- after the bonus contracts had been signed. "I'm sure you and your family have [taken] a great deal of abuse, especially in the last few days," Mr. Kanjorski said. Then he quickly reminded Mr. Liddy that he had warned two months ago about the ramifications of paying bonuses to the people whose investment decisions sank the company. Mr. Liddy reminded lawmakers he was doing them a favor. "Six months ago, I came out of retirement to help my country," he said. He defended efforts to retain AIG's financial wizards, but acknowledged the pervasive outrage, and announced that, earlier in the day, he had asked most executives at AIG Financial Products to "do the right thing" and return at least half of their bonuses. Behind him, a pink-clad protester waged silent guerrilla warfare, slowly leafing through a series of posters. After half an hour, Mr. Kanjorski appeared to notice, and forced the Code Pink members to give up their signs, which they did -- while flashing them for the cameras. "Given your method of dealing with this," Mr. Frank told the chairman, "I'm glad nobody was wearing a T-shirt." Rep. Stephen Lynch, a Massachusetts Democrat, blamed Mr. Liddy personally for AIG's bonus terms. Mr. Liddy shot back that those contracts predated his hiring. "I take offense, sir," Mr. Liddy responded. "Offense was intended," Mr. Lynch retorted. At one point, Mr. Frank asked for the names of AIG executives who haven't repaid their bonuses. Mr. Liddy resisted, saying he was worried such a move would endanger his employees. He recited a few of the threats they have received already: "All the executives and their families should be executed with piano wires around their necks," read one. All in all, Mr. Liddy perceives this as "a high point of public anger." Louise Radnofsky contributed to this article. Write to Michael M. Phillips at michael.phillips@wsj.com
Hired to Salvage A.I.G., Liddy Becomes a Target

By GRAHAM BOWLEY and CARL HULSE When the government made its stunning takeover of American International Group in September, it turned to Edward M. Liddy, a hard-charging insurance executive, to salvage the enterprise that had become a symbol of all that was broken in the American financial system. Now, in the minds of many, Mr. Liddy has become the personification of A.I.G.s disaster. On Wednesday, Mr. Liddy, 63, the man who was tapped for his behind-the-scenes financial savvy found himself at the center of public wrath of the President Obama, the Congress, and the American public, after revelations that he had approved the payout of lucrative bonuses to the very employees thought to have driven A.I.G. to its knees. At the Congressional hearing, a horde of cameras and reporters awaited Mr. Liddy, subjecting him to the sort of limelight usually reserved for major felons or celebrities after an unfortunate night out. But Mr. Liddy, who chatted with protesters as he entered the hearing room to testify before members of a House Financial Services subcommittee, repeatedly tried to make clear that he was not responsible for getting A.I.G. into this mess. Six months ago I came out of retirement to help my country, said Mr. Liddy, 63, a former chief executive at Allstate insurance. At the governments request Ive had the duty and extraordinary challenge of serving as chairman and chief executive officer of American International Group, or A.I.G. Mr. Liddy has no doubt questioned that decision on more than one occasion. By many accounts, Mr. Liddys background is one of a competent manager and a solid insurance man with the wherewithal to oversee a corporate makeover of A.I.G. His strategy is to sell off assets to pay back the billions of dollars the company received in bailout from the government and shrink A.I.G. into a more sustainable, though much smaller company. He has one of the toughest jobs in corporate America, said Donald Light, senior analyst at the research firm Celent. Its got a whole lot tougher in the last four to five days. Unfortunately for him, A.I.G. has become the focus for a lot of anxiety on a lot of issues. As the longtime head of Allstate, he combed through a hidebound culture and raised the insurers profitability, in part by firing 6,000 workers. The insurance agents sued Allstate and the Equal Employment Opportunity Commission sued Allstate twice. Mr. Liddy fought, and Allstate won. He expanded into new businesses, and introduced new technologies. When the company was badly hit by Hurricane Andrew in the early 1990s, he rolled back the companys exposure to catastrophe insurance. He was known then as a fair-minded, practical negotiator, according to executives who knew him at the time. Philip J. Purcell, the former chief executive of Morgan Stanley, knew Mr. Liddy
since the 1980s. They both worked at Sears managing opposite sides of Searss split from Dean Witter/Discover in the early 1990s. During those negotiations, Mr. Liddy showed characteristic objectiveness and balance, Mr. Purcell said, even as they disagreed over which part of the company would get the lower-interest rate debt and how they would divide the companys pension fund. You could sit down in things like that with Ed and work through them, Mr. Purcell said. His banditos were saying he was giving away the ship, and my banditos were saying I was giving away the ship, but we got it done. Another analyst, who met Mr. Liddy on several occasions in his time at Allstate, said, He turned a company that was quite mediocre into one of the best personal insurance companies. The analyst requested anonymity because he did not wish to be associated with the furor over A.I.G. Henry M. Paulson Jr., the former Treasury secretary who put Mr. Liddy in the A.I.G. job, also tapped him for the board at Goldman Sachs. Mr. Liddy also worked at the Ford Motor Company before joining G.D. Searle & Company in 1981, when Donald H. Rumsfeld was the chief executive. Now Mr. Liddy, who has held a number of directorships in addition to his chief executive role, will probably face unceasing questions about his own corporate record; his own bonuses and compensation have raised eyebrows in the past. In an opinion piece published Wednesday in The Washington Post, Mr. Liddy said that he would not have approved A.I.G.s retention bonuses had he been heading the enterprise. But critics point out he did just that during the reorganization at Allstate in 2000. According to data compiled by Bloomberg, Mr. Liddys 2007 pay package at Allstate totaled $20.26 million, including salary, stock and options awards and other compensation. He also was paid about $1 million mostly in the form of stock for serving as a director of Goldman, 3M and Boeing. In coming out of retirement to take the job at A.I.G., Mr. Liddy agreed to the nominal salary of $1. A spokesman for A.I.G. said Mr. Liddy was entitled to no further compensation like stock, stock options, bonuses or severance fees. Mr. Purcell suggests that Mr. Liddy was more interested in doing a job that was good for his country than in his own wallet. When Mr. Liddy told him that he had decided to leave retirement to take the job, Mr. Purcell said he told Mr. Liddy he was a great American, but warned him that taking on A.I.G. would be a monstrous problem. At no time was that more evident than under the glare of the spotlight Wednesday. Given the rising political liability of A.I.G. and its bailout, however, nothing Mr. Liddy could say was going to mollify lawmakers who have been inundated with calls from constituents who have lost their savings, their jobs, their homes and their confidence, and are demanding to know why executives of a company that ran the economy into the ground are still riding high.
This is like the captain and the crew of the ship reserving the lifeboats saying to hell with the passengers, Representative Stephen F. Lynch, Democrat of Massachusetts, said. To Mr. Liddy, who repeatedly sought to make clear that he was not responsible for creating the mess at A.I.G., Mr. Lynchs observation was one criticism too far. I take offense, sir, Mr. Liddy responded, reminding lawmakers that he was not in charge when the bonuses were arranged but believed he was legally bound to pay them. Well, offense was intended, Mr. Lynch retorted. So you take it rightfully, sir. That may be only the beginning of what is surely to be a contentious period for A.I.G., which was built into a colossus by Maurice R. Greenberg. Mr. Greenberg focused on big acquisitions that took A.I.G. into areas considered unusual at the time, like insurance against kidnappings and environmental spills. Mr. Liddy maintains a difficult relationship with Mr. Greenberg, who remains the companys largest shareholder after the government, and they are at odds on a strategy for the company. Mr. Liddy must now take the company in a different direction from Mr. Greenberg that he is the man to do it. Louise Story contributed reporting. and prove
Inside AIG-FP, Feeling the Public's Wrath

By Brady Dennis Washington Post Staff Writer Thursday, March 19, 2009; C01
WILTON, Conn., March 18 -- A solitary flat-screen television hangs on the back wall of the trading floor inside the headquarters of AIG Financial Products here. Wednesday afternoon, the most-talked-about employees in America huddled around it to find out just how despised they have become. They watched quietly as members of Congress referred to them as greedy and incompetent. They heard more than one demand that their names be released to the seething American public. They heard the chairman of American International Group, Edward M. Liddy, tell lawmakers that people, in e-mails sent to AIG-FP, suggested that the firm's leaders "should be executed with piano wire around their necks." The evening before, the firm's chief operating officer, Gerry Pasciucco -- whom Liddy recruited in November from Morgan Stanley to shut down Financial Products before it could do more harm to the economy -- had gathered them together in the same spot. Pasciucco urged them to keep their heads down, to act professionally and to continue working to extricate Financial Products from its more than $1.6 trillion in outstanding derivative contracts. He acknowledged that the past few days have been like being "inside the piata." In reply, they told him that they worried mostly about getting shot, despite the guards now patrolling the parking lot, the front door and some of their homes. A sense of fear hung in the room -- the palpable, unsettling kind that flashes across people's eyes. But there was anger, too. No one would express it publicly, of course. Who wants to hear a wealthy financier complain? And yet, within those walls off Danbury Road lies a deep sense of betrayal -- first by their former colleagues, now by their elected leaders. The handful of souls who championed the firm's now-infamous credit-default swaps are, by nearly every account, long since departed. Those left behind to clean up the mess, the majority of whom never lost a dime for AIG, now feel they have been sold out by their Congress and their president. "They've chosen to throw us under the bus," said a Financial Products executive, one of several who spoke on condition of anonymity, fearing reprisals. "They have vilified us." They say what is missing from this week's hysteria is perspective. The very handsome retention payments they received over the past week were set in motion early last year when the firm's former president, Joe Cassano, was on his way out the door. Financial Products was already running into trouble on its risky credit bets, and the year ahead looked grim. People were weighing offers from other firms, and AIG executives feared that too many departures could lead to disaster.
So AIG stepped in with an offer to employees of Financial Products. Work through all of 2008, and you'd get a lump payment in March 2009. Stick around through 2009, and you'll get paid through 2010. Almost all other forms of compensation -- bonuses, deferred payments and the like -- have vanished. "People are trying to do the right thing," the same Financial Products executive said. "Guys have worked their [tails] off to try to get value for the taxpayer. This isn't money that's being advanced to us. People have performed the work and done it exactly as we asked them to do." Pasciucco cringed at the notion, articulated by many lawmakers and even President Obama, that Financial Products is a firm of nearly 400 reckless and greedy derivatives traders. In actuality, he said, nearly all the troublesome sectors of the business -- namely, the risky credit derivatives written on mortgage-backed securities -- are now out of the equation, as are the people who worked on them. That leaves a small number of employees to untangle the remaining trades in four main areas: commodities, interest rates, currency and equities -- most of which were fully hedged and have caused little problem. The effort also requires a sizable number of "back office" staff, such as systems, computing, accounting, human resources and legal teams. "Everybody, including my secretary and including the guy down the hall that serves lunch, gets a payment," said Pasciucco, who added that he received no retention payment and has no contract. But what about the argument made by top AIG officials that the people receiving retention bonuses have unique skills and knowledge that make them indispensable? "They are replaceable," Pasciucco acknowledges. "If we were running a long-term business, we could probably replace them over time, not all at the same time." But it would be impractical at best, dangerous at worst, to get rid of everyone at Financial Products, according to AIG officials. If everyone leaves, Pasciucco said, "you don't have people that really, truly understand the book [of business]. We're still big enough that that matters." If they did walk out the door, who would volunteer to work at the Chernobyl of the financial world? And what would become of the mammoth portfolio that remains? "It would become the biggest naked position on Wall Street," one longtime Financial Products executive said, "and everybody would exploit it." Before he waded into the circus on Capitol Hill on Wednesday, Liddy e-mailed a letter to the employees of Financial Products, asking them to "step up and do the right thing." He asked that anyone who received more than $100,000 in retention payments return at least 50 percent. The Financial Products staff met twice Wednesday inside one of the firm's large, glass-walled conference rooms to discuss the boss's letter. Numerous employees indicated that they would be willing to return the money, but most wanted nothing more to do with the firm. It was a preview of the possible exodus to come, one that concerns Liddy himself. "My fear is that the damage is done," he told a congressional subcommittee. "That they will return [the money], but that they will return it with their resignations." There is little doubt within Financial Products that he's right about that.
"Nobody is going to give it back and then stay," said one of the firm's employees. "If they give back the money, then they will walk. And they will walk into the arms of AIG's counterparties." In the meantime, the e-mails from the public have continued to roll in, including death threats and calls to blow up the firm's Wilton headquarters. Reporters and photographers have camped out in front of the offices in London and Connecticut. They have staked out employees' houses. The New York Post identified one executive and labeled him "Jackpot Jimmy." Another employee had to relocate his family after a London tabloid printed his address. A protest group is organizing an "AIG magical mystery tour" Saturday, loading up a 47-seat bus to stop at Financial Products and at the homes of some of its executives. "People are really upset. Everybody's calling them," one Financial Products employee said. "College roommates are calling. In-laws, relatives, cousins nobody has heard from. Because people are reading this around the world and saying: 'Oh, my God, you work for that place?' "
Many in Government Knew Weeks Ago About A.I.G. Bonuses

By EDMUND L. ANDREWS and JACKIE CALMES WASHINGTON The question was direct and prescient. Representative Joseph Crowley, Democrat of New York, asked the Treasury secretary in an open hearing what could be done to stop American International Group from paying $165 million in bonuses to hundreds of employees in the very unit that had nearly destroyed the company. Timothy F. Geithner, the Treasury secretary, responded by saying that executive pay in the financial industry had gotten out of whack in recent years, and pledged to crack down on exorbitant pay at companies like A.I.G. that were being bailed out with billons of taxpayer dollars. The exchange took place before the House Ways and Means Committee on March 3 one week before Mr. Geithner claims he first learned that the failed insurance company was about to pay a round of bonuses that have since caused a political uproar. A Treasury spokesman, Isaac Baker, said in a statement on Thursday night, Although Congressman Crowley raised the issue of the bonuses two weeks ago, Secretary Geithner was not aware of the timing or full extent of the contractual retention payments or the other bonus programs until his staff brought them to his attention on March 10. Mr. Baker said that after Mr. Geithner had been briefed on the bonuses, he called Edward M. Liddy, the chief executive of A.I.G., and insisted that they be renegotiated and restructured, in light of the extraordinary assistance being provided by taxpayers. Mr. Baker added that Mr. Geithner takes full responsibility for not being aware of these programs before last week. Interviews with senior Federal Reserve and Treasury officials, as well as members of Congress, leave little doubt that the bonus program was a disaster hiding in plain sight. Mr. Geithner is not the only one who appears not to have understood the populist fury the bonuses would set off. Career staff officials at the Treasury, Fed and Federal Reserve Bank of New York exchanged email messages about the A.I.G. bonus program as early as late February, according to a person familiar with the matter. A.I.G. itself revealed the bonus plan in regulatory filings last September. In November, when the bailout of A.I.G. was restructured, Treasury and Fed officials negotiated the terms under which A.I.G. could make the retention payments. And in December, Democratic lawmakers sought a hearing about the payments. A.I.G., which incurred staggering losses through its sale of complex financial instruments tied to mortgage-backed securities, has received more than $170 billion in capital infusions, loans and
credit lines from the federal government since last September, and is about to get $30 billion more. A.I.G. executives have insisted that they informed the New York Fed about the bonus plan, and that they assumed the New York Fed was informing the Treasury. Treasury officials have suggested that the New York Fed and the Federal Reserve Board in Washington failed to alert the Treasury staff until March 5. And Fed officials said that they not only alerted the Treasury staff weeks earlier, but discussed the issue with them via e-mail. Despite the interagency discussions in February about A.I.G.s ill-starred bonus plan, as well as Mr. Geithners exchange on the matter in a hearing, Mr. Geithner continued to insist on Thursday that he had not really understood the magnitude of the bonuses until one week ago. I was informed by my staff of the full scale of these specific things on Tuesday, March 10, Mr. Geithner said in an interview with CNN on Thursday. As soon as I heard about the full scale of these things, we moved very actively to explore every possible avenue legal avenue to address this problem. As early as December, two Democratic lawmakers had vociferously and repeatedly complained about the bonuses, and one of them went so far as to demand the resignation of A.I.G.s chief executive. But both Mr. Geithner, and the chairman of the Federal Reserve, Ben S. Bernanke, were preoccupied at the time with multiple crises. The nations banks were reeling from as much as $2 trillion in mortgage-related losses. The recession was deepening and unemployment was soaring. Mr. Bernankes team at the Fed and Mr. Geithners team at Treasury, moreover, were reluctant to impose what they viewed as punitive and possibly self-defeating pay restrictions on companies being bailed out. In early February, Mr. Geithner opposed a provision in the economic stimulus bill that would have slapped a steep tax on the kind of bonuses that A.I.G. was about to pay. If A.I.G.s plan to pay out an additional $165 million in bonuses came as a surprise to Mr. Geithner, it did not come as a surprise to staff at the Treasury, the Federal Reserve in Washington or the New York Fed. Staff at all three agencies had been in daily communication with each other about A.I.G. ever since the Fed agreed to lend the company $85 billion in September in exchange for almost 80 percent of the company. In late November, after A.I.G.s plight became worse and the Treasury jumped in with a $40 billion capital infusion, the three agencies negotiated cuts in bonuses and salaries for many of the companys top executives. Officials at the New York Fed carried out the most direct oversight of A.I.G., and they were well aware of the coming bonus payments, said a person familiar with the matter. Alain Delaqueriere contributed research.
CNNMoney3/20/09
Geithner defends bonus action

Treasury Secretary explains his role in stimulus bill talks. At issue: Loophole that allowed $165 million in bonuses to go to AIG executives.
By Catherine Clifford, CNNMoney.com staff writer Last Updated: March 20, 2009: 6:53 AM ET NEW YORK (CNNMoney.com) -- Treasury Secretary Tim Geithner told CNN Thursday that his department, concerned that language about bonuses would not hold up to a court challenge, asked Sen. Chris Dodd to include an executive pay provision in the stimulus bill. The loophole allowed bailed-out insurance giant American International Group to pay out $165 million in bonuses. In an interview with CNN's Ali Velshi, Geithner said the Treasury Department was concerned the government would face lawsuits if contracts were breached for the bonuses. "We wanted to make sure it was strong enough to survive legal challenge," Geithner said. "But we also worked with [Dodd] to strengthen the overall framework, and his bill has this very important provision we're relying on now to go back and see if we can recoup payments that were made that there was no legal ability to block. Sen. Dodd, chairman of the Committee on Banking, Housing and Urban Affairs, admitted to CNN Wednesday he'd added the controversial provision after a Treasury official pushed for it. Earlier in the week, Dodd had said he had not played any role in the addition of the loophole. Geithner told Velshi Thursday the bonus situation is his issue to deal with. "You know, it's my responsibility," he said. "I was in a position where I didn't know about those sooner, I take full responsibility for that." The Treasury Secretary has been under scrutiny as to when he became aware of the bonus cash going to AIG executives. Testifying before a House Financial Services subcommittee on Wednesday, AIG chief executive Edward Liddy said Geithner was aware of the bonuses two weeks ago - a week before the secretary has said he first heard of the bonuses from his staff. But Geithner reiterated when he knew about the payments. "I was informed by my staff of the full scale of these specific things on Tuesday, March 10th," he told CNN. Ali Velshi's fulll interview with Secretary Geithner airs tonight on Campbell Brown: No Bias No Bull at 8 p.m. ET. First Published: March 19, 2009: 5:08 PM ET
Connecticut Senator Draws Voters Ire for His Bonus Role

By RAYMOND HERNANDEZ and THOMAS KAPLAN Clarence Randolph, a 50-year-old dump truck driver from New Haven, has been out of work for two months. He is not happy that financial firms bailed out by the government are paying bonuses to their executives. And he does not understand why one of his senators, Christopher Dodd, allowed it to happen. Why would he do it? he said as he was about to enter the New Haven Free Public Library to search online for jobs. Why are they going to take taxpayers money my money and give all these people bonuses? I think thats terrible. Across Connecticut, anger is erupting against Mr. Dodd, the chairman of the Senate Banking Committee, whose stature in Washington once reflected the states beneficial ties with the financial industry. Now, he finds himself a symbol of the political establishments coziness with tainted corporations and a target of populist wrath over their excesses. On Thursday, the senator sought to defuse the furor over the latest revelation, holding a conference call with reporters to explain how legislation meant to limit executive compensation was changed at the last minute. That change exempted bonuses protected by contracts, like those at American International Group, a big campaign contributor to Mr. Dodd that received billions in federal bailout money. Mr. Dodd said that his staff revised the bill at the urging of Treasury officials, who he said were concerned that the compensation limits, which he had written in the original legislation, went too far and might invite lawsuits. While he knew the language was being rewritten, the senator said he had no idea the revision would allow for the bonuses at A.I.G. Had I known at the time that there were any A.I.G. bonuses involved that this was somehow going to assist in that matter I would have rejected it completely, he said. On Thursday, Treasury Secretary Timothy F. Geithner came to Mr. Dodds defense, saying in an interview with CNN that his staff had raised concerns about whether the legislation limiting executive compensation was vulnerable to legal challenge. The fierce reaction back in his home state, however, underscores the peril the usually politically invulnerable senator faces. In dozens of interviews, residents said they were appalled by Mr. Dodds ties to financial firms and believed that he had damaged himself as he prepares to run for re-election next year.
Even some who have been steadfast supporters worry that after 28 years in the Senate, Mr. Dodd, 64, has been seduced by the power of Washington and grown distant from his constituents in this heavily Democratic state, which has been hit hard by the economic downturn. What he needs to do is try to get some jobs out here for people, said Henry Ford, 44, a painter from New Haven. There are a lot of people out here who have bought houses and cant afford them. This weeks uproar was triggered largely by Mr. Dodd himself, when he provided conflicting answers about the provision that allowed the bonuses at A.I.G. According to the Center for Responsive Politics, the companys employees, political action committees and subsidiaries have made campaign contributions of nearly $300,000 to Mr. Dodd since 1989. Initially, Mr. Dodd said he did not know how the loophole got into the legislation that sought to crack down on executive compensation. But then in an interview Wednesday with CNN, he acknowledged that his staff helped write the revisions after receiving a request from the Treasury Department. Newspaper headlines that greeted morning commuters throughout Connecticut on Thursday underscored Mr. Dodds problems. Dodds Flip-Flop, declared The Hartford Courant. Dodd Takes Bonus Blame, announced The Advocate of Stamford. Dodd Admits Bonuses Role, trumpeted The Norwich Bulletin. The firestorm has encouraged Republicans, who see an opportunity to pick up a Senate seat in next years election. Last week, Quinnipiac University released a poll showing Mr. Dodd trailing former Representative Rob Simmons, who has jumped into the race, railing against the senators ties to the financial industry. He is certainly out of touch with Connecticut, Mr. Simmons said in an interview. The problem for Mr. Dodd is that the A.I.G. affair is just the latest episode in which he has been accused of being too chummy with powerful corporate executives. Last year, he was criticized for receiving preferential treatment from Countrywide Financial Corporation after it was disclosed that the mortgage lender assigned him to a V.I.P. program in 2003 when he refinanced mortgages on his homes in Connecticut and Washington. Mr. Dodd insisted he had done nothing wrong, saying that he did not get favorable pricing from the lender. But the issue was politically explosive, given that Countrywide and its executives had been criticized for contributing to the national housing crisis with aggressive subprime lending. A short-lived presidential run, during which he moved his family to Iowa, did not help either, leaving some in Connecticut feeling that he abandoned the state for a quixotic adventure. To be very honest with you, I thought he was nuts, said Mary Spaulding, 79, a retired nurse from Waterford, who said she had always supported the senator, but would not do so again. I think in Connecticut, a lot of people are very frustrated with him, she said.
The backlash is a remarkable development for a senator once known for championing populist initiatives like the 1993 Family Leave Act. Elected to the Senate in 1980, Mr. Dodd is the longest-serving senator in the states history and has won all his re-elections by sizable margins. Troy Beers of New London remembered how he felt in 1985, when the senator spoke at his graduation from Ella T. Grasso Southeastern Technical High School in Groton and took a moment to shake his hand. He was inspiring back then, said Mr. Beers, 41, a lifelong Democrat who is unemployed. Now, hes a dinosaur. There needs to be a change. That sentiment was echoed by Jasmine Coleman, 21, of New Britain, whose mothers house went through foreclosure last year. Ms. Coleman, a Democrat, expressed dismay over Mr. Dodds connection with A.I.G. I cant believe he actually approved of that, she said, as she shopped in Meriden with her two small sons. For them to get bailed out, its just not fair. Im from New Britain, and every street has at least three houses going through foreclosures. People are poor. Unemployment is a problem. Its hard to find a job, a good paying job.
CQ TODAY PRINT EDITION March 19, 2009 8:30 p.m. Republicans Vow to Slow Bonus Bill By Phil Mattingly and Richard Rubin, CQ Staff Despite congressional fury, the House-passed bill that would slap a 90 percent tax on employee bonuses paid this year by companies receiving substantial bailout money faces an uncertain future in the Senate, where a group of senior Republicans has vowed to slow its progress. If legislation is going to be proposed, who all should it apply to? Can it be written in a broad enough fashion to not violate the Constitution? asked Senate Minority Whip Jon Kyl, R-Ariz. Until we have hearings and understand all of this, were not going to know what kind of fix to implement. Kyl blocked an attempt by Majority Leader Harry Reid, D-Nev., to bring up the bill via unanimous consent in the Senate on Thursday afternoon. Senate Democrats indicated Thursday that they expected to pass legislation before the spring recess. Despite vehement criticism by some Republicans, the House passed the legislation, deemed by many to be unconstitutional, on a 328-93 vote. The House bill (HR 1586) is the first legislative response to the public outrage over the compensation practices of American International Group Inc. It targets a narrow group of individuals, topped by executives and other employees at AIG, on the receiving end of $165 million in bonus checks. The final vote surpassed the two-thirds majority needed to pass the bill under suspension of the rules, an expedited procedure that bars amendments and limits debate. In the end, 85 Republicans voted for the bill while 87 voted no. Numerous GOP members changed their votes from no to yes as the roll call proceeded. Six Democrats who represent more conservative districts than their party colleagues generally do voted no: Melissa Bean of Illinois, Larry Kissell of North Carolina, Michael E. McMahon of New York, Walt Minnick of Idaho, Harry E. Mitchell of Arizona and Vic Snyder of Arkansas. Minnick, whose state is a conservative bastion, said after the vote, Tinkering with the tax code is not the solution. . . . Instead, we need the Treasury Department to use its full weight and authority in administering the rules already in place to better regulate the companies receiving our money. Jonathan Lipman, a spokesman for Bean, said that she came to Congress to work on commonsense legislation that would not have unintended consequences that could cost the taxpayers, who own stakes in all of these TARP-backed institutions, even more in the long run. Opposition a Gift? But Democratic leaders spent the morning preparing blast e-mails to the home districts of GOP lawmakers who voted against the legislation.
It would be a gift if [Republicans] voted against it, a senior Democratic aide said before the vote. The retention bonuses were paid to executives and other AIG employees who are winding down the companys Financial Products division. Although he has asked recipients to voluntarily return half of their bonuses, AIGs chief executive, Edward M. Liddy, has warned that a heavy tax could lead to resignations of employees responsible for trying to curtail the companys riskier ventures. The company has received more than $180 billion in federal money under the 2008 bailout law (PL 110-343) and other federal efforts to prevent a collapse that officials believe would threaten the world financial system. Republican leaders did not try to persuade their caucus to vote against the bill, Minority Leader John A. Boehner of Ohio said, but he assailed the measure, as did other GOP members who took the floor to attack Democrats handling of the bonus issue. Its nothing more than an effort to cover somebodys rear end because of the political damage thats out there, Boehner said. But even with Republican ire pointed in the direction of the legislation, GOP leaders, while publicly opposing the bill, quietly supported a different course of action behind the scenes. House Minority Whip Eric Cantor, R-Va., spent much of the morning urging freshmen and vulnerable members of the caucus to vote with the Democrats, according to a Republican aide familiar with the discussions. Cantor himself voted with the Democrats. Uncertain Senate Outlook It remains unclear what will happen in the Senate, where Finance Chairman Max Baucus, DMont., and ranking member Charles E. Grassley, R-Iowa, have drafted a version (S 651) somewhat different from the Houses that targets AIG and other bailed-out companies as well as the bonus recipients themselves. Senate Majority Whip Richard J. Durbin, D-Ill., said the Baucus bill rather than a Housepassed measure is likely to be the base bill that the Senate considers. But senior Senate Republicans indicated they were cool to the idea of passing such legislation in an expedited fashion, preferring to hold a series of hearings before moving anything to the floor for consideration. Republican Sen. Judd Gregg of New Hampshire blasted the House bill, saying its a bill of attainder, its blatantly unconstitutional, it sets a precedent just if it even gets to the Senate of pettiness thats hard to equal. Its everybody grab their pitchforks, Gregg added. Unlike the Senate version, the House bill applies only to those working for companies that took more than $5 billion in federal aid.
It would not affect bonus recipients with adjusted gross income below $250,000 for couples and $125,000 for individuals or married people filing separately. Executives also could avoid the tax by waiving any right to the bonuses or returning the money by the end of the year. To avoid constitutional concerns about writing a law that applies retroactively, the new rate would apply only to bonuses received in 2009. There is ample precedent for enactment of tax provisions that apply for an entire year even if they are not enacted until midway through year. You Disgust Us House Ways and Means member Earl Pomeroy, D-N.D., acknowledged that the measure was unlike any tax bill he had ever seen. But he said it was necessary and spoke directly to AIG employees. You disgust us, he said. By any measure, you are disgraced professional losers. And, by the way, give us our money back. Many Republicans opposed the bill, citing the confiscatory tax rate and, as did Gregg in the Senate, the Constitutions ban on bills of attainder targeted at a specific person or small group. People have to understand that using the tax code for punishment is a horrible, disastrous precedent, said John Campbell, R-Calif. Republicans promoted an alternative that sought to prevent any additional money from going to AIG and require Treasury Secretary Timothy F. Geithner to develop a plan to get all of the bonus money back from its employees. Geithner has already said he will deduct $165 million from the next $30 billion that AIG is slated to receive. Republicans repeatedly assailed a Democratic decision to remove a similar tax proposal from the economic recovery legislation (PL 111-5) and replace it with language that specifically prevented restrictions on bonuses paid pursuant to contracts signed before Feb. 11. Senate Banking Chairman Christopher J. Dodd, D-Conn., said Wednesday that he had added the language in question at the request of the administration. Speaker Nancy Pelosi, D-Calif., insisted Thursday that the House was blameless for the stimulus bill language that protected the controversial AIG bonuses. This is Senate-White House language. . . . We are already on record as passing legislation that limited executive compensation, she said. For his part, Dodd, vilified for his bonus role by Republicans on both sides of the Capitol, said he was supportive of the idea of repealing the very date that was included in [the stimulus language] now that we know that there are bonuses being sought excessively. Source: CQ Today Print Edition Round-the-clock coverage of news from Capitol Hill. 2009 Congressional Quarterly Inc. All Rights Reserved.
Senate Finance Members Unveil Bonus Bill

Friday, March 20, 2009 by Peter Cohn with Dan Friedman contributing Senate Finance Committee members Thursday formally unveiled their version of legislation to tax away the bonuses paid by financial institutions, including American International Group, unless they are repaid. Senate leaders said they expect to bring a rival version approved by the House on Thursday to the floor next week as the vehicle to make the changes. The changes will have to be reconciled before final passage. The Senate bill would impose a 35 percent excise tax on bonuses paid this year, on both the company paying out the bonus and the individual receiving it. It would apply to all firms that have received Troubled Asset Relief Program funds except community banks or other firms that took less than $100 million. Employees of affected companies could only defer compensation up to $1 million free of tax. "We must act quickly on this proposal -- for the sake of the American taxpayer, for the sake of what's right to do. I will work with my colleagues in both the House and Senate to make sure that's what happens," Finance Chairman Max Baucus said in a statement. The bill is the product of negotiations between Baucus and ranking member Charles Grassley, and panel members Ron Wyden, D-Ore., and Olympia Snowe, R-Maine. Wyden and Snowe sponsored a similar proposal last month during stimulus talks that would have applied to bonuses awarded by Wall Street firms last year, but that was dropped in negotiations with the Obama administration. Democrats tried to move to the bill Thursday by unanimous consent, but Minority Whip Kyl objected, saying Republicans needed time to review it. Baucus said he had wanted to exempt companies that were pressured by then-Treasury Secretary Henry Paulson to take TARP funding from the bill, but Treasury declined to list those firms. "I've tried to get that list from Treasury, but they will not help us," Baucus said, though he said it was understandable to deny the request to avoid disclosing which TARP recipients are in worse shape than others. Snowe emphasized that the bill would cover firms that received 97 percent of TARP funds, more than the estimated 79 percent the House bill would cover. Asked if the bill was intended to block bonuses by taxing them at nearly 100 percent, Snowe said, "That's about the size of it." The Senate bill differs from a version passed by the House on Thursday that would impose a 90 percent tax rate on bonuses paid to individuals employed by AIG, Fannie Mae, Freddie Mac and
other companies receiving $5 billion or more in government aid. That includes major recipients of TARP funds like Bank of America Corp., Citigroup Inc., and General Motors Corp. Unless the company repays government funds, or an individual returns his or her bonus, the House bill would tax the bonuses received by individuals earning more than $250,000 annually. "The buck stops here and this bill sends a clear signal -- a red light -- showing that this abuse must stop and the IRS will enforce the law," said Ways and Means Chairman Charles Rangel. "We are not trying to punish anybody, but rewards should be subjective, and you don't reward greed with taxpayer money." The House bill passed 328-93, easily enough to clear the chamber under suspension of the rules, which requires two-thirds of those present to support a bill. Most GOP speakers during debate, including Minority Leader Boehner and Republican Conference Chairman Mike Pence of Indiana, opposed the measure. In a release, President Obama praised the measure: "Today's vote rightly reflects the outrage that so many feel over the lavish bonuses that AIG provided its employees at the expense of the taxpayers who have kept this failed company afloat." Opponents derided the bill as setting a dangerous precedent. "What happens when Speaker Pelosi finds eating beef reprehensible and, without warning, taxes all proceeds from its sale with a 90 percent tax. This would devastate hard-working ranching families and communities in east Texas," said Rep. Jeb Hensarling, R-Texas. In the end, the Democratic bill split the minority party about evenly, with 85 Republicans for the bill and 87 against. Minority Whip Cantor and Ways and Means ranking member Dave Camp voted for it. Six House Democrats voted 'no' on the bill: Reps. Melissa Bean of Illinois, Larry Kissell of North Carolina, Michael McMahon of New York, Walt Minnick of Idaho, Harry Mitchell of Arizona and Vic Snyder of Arkansas.

MARCH 20, 2009
House Passes Bonus Tax Bill

90% Hit Would Affect Major Banks; Senate Mulls Similar Action Amid AIG Furor
By GREG HITT and AARON LUCCHETTI
WASHINGTON -- The House passed legislation Thursday that would significantly curb Wall Street bonuses this year, as lawmakers from both parties echoed popular outrage over big payouts to employees of American International Group Inc. after the ailing insurance giant took billions of dollars in taxpayer money. The House measure was approved on a 328-93 vote and would impose a 90% surtax on bonuses granted to employees who earn more than $250,000 at companies that have received at least $5 billion from the government's financial rescue program. The bonus tax, if approved by the Senate and signed into law, would be retroactive to Dec. 31, 2008. Wall Street firms last year paid more than $18.4 billion in bonuses in New York City, according to the New York state comptroller, and pay experts estimated that thousands of employees would likely be affected. Eight banks -- Citigroup Inc., J.P. Morgan Chase & Co., Wells Fargo & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, PNC Financial Services Group Inc. and U.S. Bancorp -- have each received more than $5 billion from the government's Troubled Asset Relief Plan, known as TARP. For individuals, congressional aides stressed the new levy would be in addition to the existing tax system, both the regular income tax and the alternative minimum tax. The so-called AMT is designed to ensure wealthy individuals don't avoid federal tax liability. The House bill would also apply to the troubled mortgage giants Fannie Mae and Freddie Mac, which have received federal funds from a different program. Congressional aides said auto makers could be snared in the future if they receive government capital infusions. The Senate will take up a similar measure, as early as next week, that is less punitive but would tax a larger number of employees and firms. That bill, jointly crafted by Democratic and Republican leaders of the Senate Finance Committee, would impose a 70% surtax on most bonuses -- half paid by employees and half by firms. In both the House and Senate bills, companies could escape the tax by repaying enough government aid. Some Wall Street firms have formally applied to repay the government ahead of schedule, and the new tax is spurring talk among others. But regulators have been leery of allowing firms to repay, in part because it could complicate efforts to promote stability in the financial system.
Some Republicans pleaded to slow down the unusually rapid legislative action. Lawmakers had returned to work bristling on Monday, after the weekend's revelation that AIG paid big bonuses to employees of the very units that got the firm into financial trouble. "We need to have hearings," said Senate Minority Whip Jon Kyl (R., Ariz.). "Why the rush?" But the sponsorship of Iowa Republican Sen. Charles Grassley, the ranking minority member of the Senate Finance Committee, gives the measure strong momentum. "Using bailout dollars for bonuses after companies have been run into the ground adds insult to injury against taxpayers," Mr. Grassley said when introducing his bill, co-written with Senate Finance Chairman Max Baucus of Montana. While the attacks on Wall Street bonuses were seen in Washington this week as good politics, many financial analysts -- and some Obama administration officials -- worried the rush to pass the measures may prove to be bad policy and undermine the government's financial rescue plans. The bills would kill Wall Street's ability to bounce back, said Gustavo Dolfino, who runs recruiting firm WhiteRock Group. "It's like they're throwing a grenade at the problem, hitting the good and the bad at the same time." Responding to public outrage over AIG's bonuses, Washington lawmakers are weighing a tax as high as 90%. Fox News reports. President Barack Obama issued a statement that aides said was intentionally lukewarm. In it, he said the House vote "rightly reflects the outrage that so many feel" over the bonuses, but it didn't mention the substance of the bill. In an appearance later on "The Tonight Show with Jay Leno," Mr. Obama said he understands the frustration. "Everybody's angry," he said. "But I think that the best way to handle this is to make sure that you close the door before the horse gets out of the barn. And what happened here was the money's already gone out, and people are scrambling to try to find ways to get back at them." But privately, there's concern within the Obama administration that the angry political atmosphere now surrounding the federal bailout program will scare away private participants the government needs to help bolster the financial system. Treasury Secretary Timothy Geithner's financial rescue plan is heavily reliant on hedge funds and private-equity funds, for example, to buy up the toxic assets at the heart of the financial crisis. Mr. Geithner is expected to soon unveil details of the so-called Public-Private Investment Fund, which will rely on private capital to buy bad loans and other assets. Members of the administration question whether the appearance of unpredictability by Congress gives potential investors the idea the government program is too risky. Already, many banks are wary of participating in the government's voluntary $250 billion capital-injection program. More than 200 banks have withdrawn their applications to receive government cash. The government, which has already pumped $198.5 billion from the Treasury's capital-injection program into more than 500 financial institutions, is expected to spend even more after a series of "stress tests" to determine firms' financial health.
Administration officials are worried banks won't participate in the program or won't be able to attract talented managers to run the firms because of the bonus restrictions. Officials are looking for ways to blunt the bill's impact if it becomes law, this person said. Some Wall Street firms said the bonus tax could drive away top talent. At one large U.S. financial firm, an executive complained that headhunters representing foreign banks had already been calling the firm's employees. George Pataki, the former New York governor, warned that New York could lose ground as a financial center if the bill passed. "It's very disappointing that it passed the House," he said, "and I hope it doesn't pass the Senate." During congressional debate Tuesday, some Republicans opposed the Democratic-led effort. "This is a bad bill with bad consequences," said House Minority Leader John Boehner of Ohio. He warned of the potential damage from using the federal tax code to punish companies. But unlike earlier efforts this year, where congressional Republicans were largely unified in their efforts to oppose Democratic action, House Republicans split, with 85 Republicans voting in favor of the bill and 87 opposed. Two top House Republicans -- Eric Cantor of Virginia and Dave Camp of Michigan -- split with Mr. Boehner. Just six Democrats opposed the bill while 243 supported it. Naftali Bendavid, Peter Lattman, Deborah Solomon contributed to this article. Write to Greg Hitt at greg.hitt@wsj.com and Aaron Lucchetti at aaron.lucchetti@wsj.com
Congress Moves to Slap Heavy Tax on Bonuses

90% Levy for Biggest Payouts at Bailed-Out Firms
By Shailagh Murray, Paul Kane and David Cho Washington Post Staff Writers Friday, March 20, 2009; A01
Congress moved yesterday to levy punitive taxes on bonuses paid by financial firms receiving government aid, threatening to undermine federal efforts to rescue the financial system by driving away participants in the programs. A quickly assembled House bill was approved 328 to 93. It struck hard at Wall Street's compensation system, which has come under fire because of the $165 million in bonuses distributed last week by American International Group to executives of the troubled unit that helped lead the insurance giant to the brink of collapse. Under the legislation, those who received bonuses of more than $125,000 would surrender 90 percent of their payments to a special income tax. But the bill's reach would extend to bonuses paid to tens of thousands of employees at the nation's nine largest institutions that have received at least $5 billion in assistance under the $700 billion financial rescue package Congress approved last year. The measure also applies to Fannie Mae and Freddie Mac, the mortgage giants the federal government took over in September. Because virtually all Wall Street employees receive bonuses -- in many cases making up the majority of their compensation -- firms would rather back out of the government's rescue programs than be subject to such harsh tax measures, industry officials said. The banks could still survive, but without federal assistance they would not have enough capital to restart lending, which is considered central to reviving the economy. Senate leaders aim to act next week on an even tougher bill that would affect all large banks that have received more than $100 million in asset relief payments. Collecting the tax is not necessarily the intent of the measure, lawmakers and aides said yesterday. Some AIG employees have returned their bonuses, and some Democratic leaders said they may forgo the tax effort and turn to other measures already in the works to limit executive compensation at recipient firms. "It will have a chilling effect on participation in any government recovery effort," warned Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, an industry group. "It harms middle management and the rank-and-file sales force, thereby weakening the very firms we are working to strengthen." Lawmakers said they were aware of the potential consequences but were unfazed. "Frankly, bonuses for what?" said Sen. Olympia J. Snowe (R-Maine), a co-sponsor of the Senate bill. "They have to engage in more financially prudent behavior." "Let's take a step and say we want our money back," House Speaker Nancy Pelosi (D-Calif.) said moments before the vote. "Here's one way to get it."
But other lawmakers said they want the legislation to go forward regardless of whether AIG bonuses were returned. The actions signaled that many on Capitol Hill have run out of patience with the administration's handling of the financial rescue. Some lawmakers said even a return of all the bonuses would be unlikely to prompt Congress to drop the measure. House Democratic leaders described White House officials as "active observers" who had asked to see language of the bill as it emerged earlier in the week, but had not engaged in negotiations. President Obama struck a somewhat neutral tone after the vote, noting that it "rightly reflects the outrage that so many feel over the lavish bonuses that AIG provided its employees at the expense of the taxpayers who have kept this failed company afloat." He continued: "I look forward to receiving a final product that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated." Although leading Democrats thought the bill's chances were threatened when House Minority Leader John A. Boehner (R-Ohio) condemned it, about half of the GOP House members backed the measure. The lopsided House tally sent shock waves across the financial sector. Officials predicted dire results, saying the brightest talent could flee institutions that remain wobbly as the firms themselves leave the rescue program prematurely. The Senate measure would apply to the banks and investment firms that received 97 percent of the federal rescue money issued to date, capturing far more institutions than the House legislation, although small banks would be exempted. "It's about public accountability. This isn't the time for the status quo mentality," Snowe said. The Senate legislation represents a dramatic step toward dismantling the bonus structure that has made banking and investment highly lucrative professions. But that same structure is blamed as a chief contributor to the current crisis. The Treasury Department issued guidelines, based on executive compensation caps approved last fall, that limited compensation to $500,000 for only the top officials of the largest recipients of future federal rescue money. Last month, in the $787 billion stimulus legislation, Congress imposed those limits on all federal rescue fund recipients, past and present, and limited bonuses to a third of annual compensation, payable in company stock. Republicans voiced strong objections to the tax approach, calling it a smokescreen for the administration's faulty oversight of the Troubled Assets Relief Program. "It sounds to me like these guys are trying to cover their tracks," said Sen. Jon Kyl (Ariz.), the No. 2 Republican leader. But in the House, GOP members bowed to the public outrage that the bonuses have stoked. Eighty-five Republicans voted in support of the bill, and bipartisan backing is expected in the Senate as well. Along with Snowe, the Senate measure is cosponsored by Sen. Charles E. Grassley (Iowa), the ranking Republican on the tax-writing Finance Committee. The AIG crisis exploded this week after news broke of the long-planned bonuses, which were promised in employment contracts as a way to retain employees as they worked to "wind down" activities in the derivatives division. Finance Committee Chairman Max Baucus (D-Mont.),
sponsor of the Senate bill, said he hoped the threat of the legislation would prove sufficient to persuade AIG employees to relinquish the bonuses. At a tense hearing Wednesday on Capitol Hill, AIG chief executive Edward M. Liddy said that he had asked his employees to give back at least half of the bonus money, and that some had agreed to do so. Said Baucus: "We're going to introduce the bill. I think it's sufficient leverage to get these paid back." AIG responded yesterday to a subpoena from New York Attorney General Andrew M. Cuomo and turned over a list of employees from its Financial Products division who had received bonuses. Cuomo said he was performing a "risk assessment" before releasing any names, saying in a statement: "We are aware of the security concerns of AIG employees." Liddy told Congress on Wednesday that the company, which has received threats, is concerned for employees' safety. Eager to blame Democrats as not preventing the bonuses, GOP lawmakers pointed to a lastminute tweak last month to the $787 billion stimulus package that allowed for bonuses that were signed in contracts before Feb. 11. No Democrat accepted authorship of the timing provision until Sen. Christopher J. Dodd (Conn.), chairman of the Senate banking committee, acknowledged Wednesday night that his staff had worked with Treasury officials to craft the timing language. Dodd accepted the provision "at the request of administration officials, who gave us no indication that this was in any way related to AIG. Let me be clear: I was completely unaware of these AIG bonuses until I learned of them last week." Rep. Barney Frank (D-Mass.) introduced a separate measure last night that would give the administration the authority to retroactively change bonus contracts and ban such payments until a financial firm repays government aid. Staff writer Steven Mufson contributed to this report.
House Approves 90% Tax on Bonuses After Bailouts

By CARL HULSE and DAVID M. HERSZENHORN WASHINGTON The House overwhelmingly approved on Thursday a near total tax on bonuses paid this year to employees of the American International Group and other firms that have accepted large amounts of federal bailout funds, rattling Wall Street as lawmakers rushed to respond to populist anger. Despite questions about the legality of the retroactive 90 percent levy, Democrats and some Republicans said the tax on bonuses for traders, executives and bankers earning more than $250,000 was the quickest way to show angry Americans that Congress intended to recoup the extra dollars. Even backers of the measure noted it was an extraordinary step. The House vote sent some employees into a panic about the prospect of, in effect, having to give up money they might already have spent. And it had regulators fearing it could undermine the Treasurys efforts to stabilize the financial system if banks tried to flee the bailout program or if other firms refused to participate in coming rescue operations to protect their bonuses, some executives said. Vikram S. Pandit, chief executive of Citigroup, lobbied against the legislation in a meeting Thursday with the Senate majority leader, Senator Harry Reid, according to an industry official. But the rush to curb the bonuses by lawmakers, many of whom have previously been torn about limiting executive compensation, reflected Congressional anxiety about heightened public dismay over the bailout. The Senate is expected to consider a similar tax on bonuses but has some differences with the House, which could slow final action. In a statement, President Obama suggested he was supportive of the legislation, urging Congress to deliver a final product that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated. In an appearance later on The Tonight Show on NBC, Mr. Obama was measured in his reaction, saying he understood that Congress was responding, I think, to everybodys anger but that the best way to handle the situation was to make sure youve closed the door before the horse gets out of the barn. The legislation would apply to bonuses paid to executives at companies holding at least $5 billion in bailout money and would essentially wipe out the phenomenal paydays that have been a tradition on Wall Street, at least until the firms reduce the amount they owe taxpayers to less than $5 billion. According to a tally by The New York Times of bailout recipients, employees at 11 institutions including Goldman Sachs, Bank of America, Citigroup, Wells Fargo and JPMorgan Chase would face restrictions immediately.
The current version of the Senate bill would apply to an even wider array of companies. It would tax bonuses at companies that received as little as $100 million in federal bailout assistance, though at a lower rate. In response, financial institutions that have received federal bailout money mounted a broad assault Thursday on the House legislation, which was opposed by leading Republicans. But nearly half of House Republicans joined Democrats in supporting the measure, which was approved by a 328-to-93 vote. Its backers said the companies had forced Congress to act by inexplicably handing out generous rewards to employees after tapping taxpayer funds to survive an economic calamity brought on by irresponsible and risky executive decisions. A.I.G. gave out $165 million in bonuses, saying the payments were essential to retain employees who could help the company sort out its financial problems. Have the recipients of these checks no shame at all? asked Representative Earl Pomeroy, Democrat of North Dakota. Summing up his personal view of the so-far-anonymous A.I.G. executives, he said: You are disgraced professional losers. And by the way, give us our money back. But several executives at Wall Street banks said they were being unfairly caught up in a hasty response by Washington that would ultimately deliver a sharper blow to their companies than to A.I.G., which set off the furor. One bank executive said employees were coming into his office in tears. Several banks are considering refusing to participate in government financial rescue programs if the bill passes, according to a person briefed on the banks plans. Hedge fund and private equity firms may also be hesitant to work in partnership with the government to purchase bad assets from banks a central component of the Treasury Departments coming financial recovery plan if they think the government might later add restrictions on their pay. If this stands, you will destroy the value of institutions where the government is an owner, said Orin Kramer, who runs a hedge fund and helps oversee the New Jersey pension plan. You will drive people away from being willing to do business with the government, said Mr. Kramer, a prominent fund-raiser for Mr. Obama. Members of both parties raised doubt about whether the legislation could survive a court challenge, saying it was tantamount to a retroactive bill of attainder, which is banned by the Constitution. Even backers of the bill acknowledged it amounted to an extraordinary use of tax law. It is an extreme use of the tax code to correct an extreme and excessive wrong done to the American taxpayer, said Representative Dave Camp of Michigan, senior Republican on the taxwriting Ways and Means Committee, who backed the measure despite reservations. But experts on constitutional and tax law said it was likely the House bill could pass muster. Numerous court rulings have upheld retroactive tax provisions, particularly over short periods. The House bill applies back only to Jan. 1, 2009. The measure is also strengthened by the fact
that it does not apply to just one company or group of individuals, and does not take aim only at past bonuses but also bonuses to be paid in the future, experts said. The effort to impose the tax was led by the House Ways and Means Committee chairman, Representative Charles B. Rangel, Democrat of New York, who just days earlier had expressed reluctance at using the tax code for this purpose. Mr. Rangel has also sought donations from A.I.G. for a public policy institute at City College in New York that will bear his name. But on Thursday Mr. Rangel said that the executives were getting away with murder. They are getting paid for the destruction they have caused our communities, he said. Bank executives, who requested anonymity because they did not want to further alienate lawmakers, said their employees were on edge and many would face severe financial hardship if they were severely taxed on money already paid. Itll impact tens of thousands or maybe hundreds of thousands of people, said Alan Johnson, managing director at Johnson Associates, a compensation consulting firm in New York, noting that the tax would apply to a bonus recipient with family income of more than $250,000. If youre a receptionist and your husband is a doctor, your $5,000 bonus just vaporized. Its not just the C.E.O.s. Led by Representative John A. Boehner of Ohio, the party leader, several House Republicans assailed the legislation, calling it a diversion by Democrats eager to escape scrutiny for failing to block the bonuses. They also pointed to a last-minute addition to the economic stimulus legislation approved in February that appeared to restrict the federal governments ability to block bonuses for the most senior executives if they were negotiated into contracts before Feb. 11, including some at A.I.G. This bill is nothing more than an attempt for everybody to cover their butt up here on Capitol Hill, Mr. Boehner said. Its full of loopholes. A lot of these people who are getting these bonuses likely live in London. And its not clear how raising this tax is going to recover that money. But their attacks were somewhat undermined by the fact that 85 Republicans, including Representative Eric Cantor of Virginia, the No. 2 party leader, ended up backing the new tax, suggesting they wanted to be seen as restricting the bonuses even as others in the party were trying to hit Democrats over the issue. In all, 87 Republicans opposed the bill. Senator Reid said he hoped Congress could send a final tax bill to Mr. Obama by Easter. Louise Story and Jonathan D. Glater contributed reporting from New York, and Helene Cooper from Burbank, Calif.
House OKs Steep Tax on Tarp Recipient Bonuses

American Banker | Friday, March 20, 2009 By Cheyenne Hopkins WASHINGTON The congressional backlash against American International Group Inc. continued to affect the banking industry Thursday, as the House passed a bill only hours after it had been introduced to constrain executive compensation at firms receiving government assistance. The legislation, approved in a 328-to-93 vote, would apply a 90% tax rate to bonuses paid by companies that received $5 billion or more under the Troubled Asset Relief Program. That would include Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Goldman Sachs, Morgan Stanley, PNC Financial Services Group Inc., U.S. Bancorp and GMAC LLC. Though banking industry representatives objected, saying the restrictions would prompt banks to repay government funds early, House Financial Services Committee Chairman Barney Frank promised more penalties are still to come. "We are now being criticized in the press and by some of the recipients for being too tough on them. I welcome that kind of criticism," Frank said in a speech on the House floor. "This resolution is a beginning of what we will be doing." The tax bill was passed just a day after the House Judiciary Committee passed a separate measure that would allow the Justice Department to sue to recover "previously excessive payments" by companies that received more than $10 billion in government money. The House is expected to vote on that legislation next week. Frank also said Thursday that he is working on another bill targeting executive compensation, which he hopes to hold a vote on next week. Details were not released by deadline, but Frank said restrictions would apply "both prospectively and retrospectively." Industry lobbyists privately expressed horror at how quickly legislation is moving through Congress, but said they had little power given growing populist outrage over bonuses paid by AIG. Observers said bankers many of whom were encouraged by regulators to take Tarp money would rush to pay it back. "If you ever wanted an incentive to convince banks to quickly repay Tarp, you have one in this legislation," said Jaret Seiberg, a policy analyst at Washington Research Group. The legislation passed Thursday applies to individual employees with household income exceeding $250,000 a year. It affects bonuses received after Jan. 1, 2009.
Ways and Means Committee Chairman Charles Rangel, the tax bill's sponsor, said, "the whole idea" that executives of failed companies "should be rewarded millions of dollars is repugnant to everything decent people believe in." Such anger echoed throughout the Hill, but some Republicans said Democrats had not given enough the legislation thought. "Do we have to have this political charade of bringing this bill out here? I don't think so," House Minority Leader John Boehner said during floor debate. "This is a bad bill with bad consequences. We didn't see the bill until last night. Nobody marked it up. No one debated it and nobody understands the consequences of what we are about to do," he added. Still, observers said the bill was headed for quick enactment. A Senate version of the tax bill could be voted on by next week. "Regardless of whether you are Democrat or Republican, you need to show the voters back home that you are not going to let the big Wall Street banks take large bonuses," Seiberg said. The industry said it was too early to grasp the full scope of the measures, but they said they were concerned it could push institutions away from the government's rescue efforts. "This is moving through so fast I don't think anyone has thought through the impact," said Floyd Stoner, the head lobbyist for the American Bankers Association. Phil Corwin, a partner at Butera & Andrews, said these measures are a signal of the types of restrictions Congress will begin imposing on all Tarp recipients. "The conclusion to be drawn is if you are a financial institution of any type and have received funds from the government or are considering participating in a program then you are exposing yourself to unquantifiable risk in how the government may intervene to affect your internal operations," he said. "We don't know what the effect this will have, and Congress doesn't either."
BNA3/20/09 Executive Compensation AIG Turns Over List of Recipients Of Bonuses to New York Attorney General NEW YORK A list of individuals receiving retention bonuses from American International Group Inc. that has been sought by attorneys general in New York and Connecticut, as well as other state and federal officials, was turned over March 19 to the office of New York Attorney General Andrew Cuomo (D). Both Cuomo and Connecticut Attorney General Richard Blumenthal said March 19 that their states had issued subpoenas separately to AIG demanding that the embattled firm provide a list of bonus amounts and recipients. In announcing that his office had received the requested list, Cuomo noted the concern expressed by AIG Chairman and Chief Executive Officer Edward M. Liddy during a March 19 Capitol Hill appearance by Liddy about possible personal harm to AIG employees if the list of individuals receiving bonuses is made public. We are aware of the security concerns of AIG employees, and we will be sensitive to those issues by doing a risk assessment before releasing any individual's name. The Attorney General's Office is a law enforcement agency and is experienced in making these assessments, a March 19 Cuomo statement said. The Attorney General's Office will responsibly balance the public's right to know how their tax dollars are spent with individual security, privacy rights, and corporate prerogative. At this moment, with emotions running high, it is important that we proceed diligently, with care, reflection, and sober judgment, said the statement, which also thanked AIG for complying with the subpoena. Blumenthal, whose office said late March 19 that it had not yet received the list of names from AIG, said he would take steps to enforce a subpoena issued by the Connecticut Department of Consumer Protection on March 19, if AIG fails to provide the information promptly to Connecticut. Connecticut Gov. M. Jodi Rell (R) said she had ordered Consumer Protection Commissioner Jerry Farrell Jr. March 18 to subpoena the employment contracts that AIG cited to justify the bonuses in order for the state to determine whether the payments can be voided under the Connecticut Unfair Trade Practices Act (CUTPA). Because AIG's financial products subsidiary is located in Wilton, Conn., AIG cited Connecticut General Statutes Section 31-72 as obligating AIG to pay the bonuses. The company cited Connecticut law and they will be held to Connecticut law all of it, Rell said in a statement. Commissioner Farrell will use the information obtained by this subpoena to determine whether the AIG bonuses can be voided as against public policy under CUTPA. Institutions' Bonus Practices Being Investigated
Cuomo said during his conference call to reporters his office is investigating the bonus practices of all financial institutions receiving taxpayer assistance under the Emergency Economic Stabilization Act's Troubled Asset Relief Program, or TARP. In addition, Cuomo said during the conference call his push to obtain the names of individuals receiving the 200 largest bonuses at Merrill Lynch & Co. Inc. before its acquisition by Bank of America Corp. could be successful as early as March 19. On March 18 the New York Supreme Court ordered Bank of America to release the names. I want to review [the information] first, and then we'll make a decision about how to proceed with the ongoing investigation into the Merrill bonuses, Cuomo told reporters. The uproar over the AIG and Merrill bonuses has in part led to a lack of confidence, a lack of trust, and a lack of integrity in institutions that people rely on, Cuomo said during the conference call. Releasing the information on bonuses at Merrill and AIG would help restore the public's confidence in financial institutions, enhance transparency that would help educate the marketplace about how to best compensate employees, and determine which practices are fair and which are unfair, Cuomo said. Referring to initial moves taken by AIG and Bank of America aimed at frustrating efforts to obtain the names of individuals receiving bonuses, Cuomo said when you hide the ball, you make people suspicious. Taxpayers have a right to know where their money is going. Frank Says Binding Bonus Legislation on Way Meanwhile, in Washington March 19, House Financial Services Committee Chairman Barney Frank (D-Mass.) called a sense of Congress resolution being considered in Congress a forerunner to binding legislation, yet to be introduced. Frank said the new legislation will address constitutional issues affecting the effort to deal with the AIG bonuses retroactively. Frank indicated that the bill, once it is introduced, will be brought before his committee. Frank made the statements during the debate on H. Con. Res. 76, a sense of Congress resolution regarding bonuses paid by AIG and other companies assisted under the TARP. That resolution failed by a vote of 255-160 to get the two-thirds majority required to suspend the rules to consider it. Later March 19, the House resumed consideration of H.R. 1586 to impose an additional tax on bonuses received by TARP recipients (see related report in Section G). By Stephen Joyce (New York), Martha Kessler (Boston) and Heather Rothman (Washington).

MARCH 20, 2009
Lawyer at Center of Troubled Unit Got Top Bonus

By RANDALL SMITH and LIAM PLEVEN
In August 2007, Douglas Poling sat in on a meeting at which Joseph Cassano, then-head of American International Group Inc.'s financial-products unit, berated an in-house auditor for raising questions about the accounting for a joint venture Mr. Poling led. The auditor, Joseph St. Denis, resigned the next month after his reporting lines were changed to limit his communications with auditors at the parent company, according to an account of AIG's dealings he detailed in a letter he wrote to Congress last October. Mr. Poling referred calls to AIG, which declined to comment. A lawyer for Mr. Cassano said the questions raised went beyond the job responsibilities of Mr. St. Denis. Mr. St. Denis didn't respond to a request for comment. Mr. Poling, 48 years old, has been at the center of the action at AIG's financial-products division for years. As former general counsel and chief administrative officer, he served as a top lieutenant for Mr. Cassano, former AIG staffers say. Now, he has been thrust into the spotlight as the highest-paid beneficiary of a controversial "retention" bonus plan for about 400 employees of the AIG unit, receiving more than $6.4 million before he offered to return the money after a political and public firestorm this week, according to a person familiar with the matter. A former Wall Street lawyer who joined the AIG unit in the early 1990s, Mr. Poling oversaw legal work on the contracts that sat at the core of the unit's business -- such as customized insurance-like swaps and other derivative contracts that generated a steady stream of fees, according to former colleagues. But in the past year, the terms of such contracts, requiring AIG to put up more than $100 billion in collateral to reflect the falling value of toxic real-estate assets, have crippled AIG, required a massive $173.3 billion in government support and imperiled the soundness of the world financial system. The bonus plan, forged a year ago and aimed at keeping the division intact after Mr. Cassano stepped down after paper losses on the contracts topped $10 billion, covered the calendar years 2008 and 2009. Payouts under the plan prompted outrage from the White House and Congress, whose members denounced the bonuses. At a congressional hearing Wednesday, AIG's chief executive, Edward Liddy, refused to provide the names of the bonus recipients to legislators requesting them, citing threats to the firm's
executives. At the hearing, Mr. Liddy said he asked bonus recipients to return all or part of the money. New York Attorney General Andrew Cuomo on Monday subpoenaed AIG for the names. On Thursday, Mr. Cuomo's office said AIG had complied with his demand, and said he would be "sensitive" to possible security concerns before releasing any of the names of the bonus recipients. His said Mr. Cuomo will work with AIG, giving executives time to return their bonus money, as Mr. Poling and some other AIG executives have made known they would do. In a statement, AIG said: "We are pleased that we were able to resolve this issue with the attorney general in a manner that balances his need for the information with our legitimate and real concerns about the safety of our employees." In any case, it is all a turnabout for Mr. Poling, whose current title is executive vice president overseeing "energy and infrastructure investments," and who now reports to Gerry Pasciucco. In May 2007, as AIG's swaps problems began developing, Mr. Poling expressed confidence about the business approach of AIG's financial unit toward one of its products, in an investor presentation with Mr. Cassano. "We are very careful and disciplined and rigorous in the way in which we structure and document these transactions, and are very sensitive to ensuring that we have early termination rights so that if the rules change, we're able to unwind those transactions and move on to other segments of the business that are more attractive," Mr. Poling said, according to a transcript of the investor presentation. Mr. Poling is the son of Harold "Red" Poling, CEO of Ford Motor Co. from 1990 to 1993, himself a former finance specialist who put in place a series of cost controls that eventually helped make Ford the most profitable U.S. car maker throughout most of the 1990s. Both father and son enjoyed golfing together at well-known courses around the country, former colleagues recall. The Poling-led joint venture discussed at the meeting preceding Mr. St. Denis' resignation was a partnership announced in March 2007 between AIG's financial-products unit and closely held Tenaska Energy in Omaha, Neb. AIG began unwinding the partnership in January. Write to Randall Smith at randall.smith@wsj.com and Liam Pleven at liam.pleven@wsj.com

MARCH 20, 2009, 9:47 A.M. ET
BofA Provides Cuomo With Merrill Bonus List

By DAN FITZPATRICK and CHAD BRAY
New York Attorney General Andrew Cuomo received the identities Thursday of the 200 highestpaid bonus recipients at Merrill Lynch & Co. prior to a merger with Bank of America Corp. on Jan. 1. The delivery of names followed a Wednesday order from New York State Supreme Court Justice Bernard Fried denying Bank of America's request that such details be kept confidential. Mr. Cuomo's office is conducting a probe of the decision to award bonuses of more than $3.6 billion in December, when such awards are typically made in January. When he subpoenaed the bank for details about Merrill's year-end payouts, the bank initially agreed to produce the 200 highest bonus recipients but refused to provide the names, claiming that such disclosures would cause it harm, put it at a competitive disadvantage or cause some employees to leave because of privacy or security concerns if the list were made public. The judge, in denying the bank's confidentiality motion Wednesday, didn't restrict Mr. Cuomo from releasing the names of individuals or how much each person made. A Bank of America spokesman said the company would "continue to cooperate with the attorney general of New York." Mr. Cuomo is also examining whether Bank of America disclosed enough about Merrill's deteriorating financial condition prior to closing on its Jan. 1 purchase. Larger-than-expected fourth-quarter losses at Merrill forced the bank to accept $20 billion in additional federal aid and loss-sharing protections on $118 billion in assets. Write to Dan Fitzpatrick at dan.fitzpatrick@wsj.com and Chad Bray at chad.bray@dowjones.com
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 5 Wall St. Journal3/20/09 Commentary
MARCH 20, 2009
Lost in the AIG Hullabaloo Are Long-Term Lessons for U.S.

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By GERALD F. SEIB
At last there is bipartisan consensus on something in Washington. Everybody agrees they are furious at American International Group. Beyond that, though, the outrage over AIG's payment of $165 million in bonuses to employees within the unit that almost melted down the economy has descended into typical political fingerpointing about who should have done what to prevent the embarrassment. And while that makes for good indoor sport, it is obscuring the two big lessons this mess is teaching the nation: First, the government by and large has no business owning and running businesses -- and it is the majority owner of AIG. The cultures of the public and private sectors are simply too different. And second, there needs to be a system established for times such as these, when the government does have to step in and perform triage in the financial sector, so it's clear who is in charge and what the procedures are. As it is now, all sides are making up the rules as they go along. When the House passes, as it did Thursday, a tax bill designed specifically to extract money from 73 individuals who took large bonuses from AIG's financial-services unit, it's pretty clear that things have gotten out of hand. Jerry Seib discusses why the government has stumbled in its handling of AIG, including an inherent culture clash between the corporate and government worlds. Treasury Secretary Timothy Geithner, who is taking his lumps for failing to foresee and head off the bonus disaster, pointed out this need for a new system in a letter sent to Congress Tuesday night. "This situation dramatically underscores the need to adopt, as a critical part of financial regulatory reform, an expanded 'resolution authority' for the government to better deal with situations like this," he wrote leaders of both parties. Translation: We need an agency and some clear rules to handle winding down big financial companies. The ideal solution, of course, would be to avoid this kind of situation entirely. Governments aren't equipped to operate businesses, and businesses aren't prepared to operate amid the complicated sensitivities of the political sector. Governments run best by consensus, companies best by crisp decision-making at the top. Incentives are different in the two worlds; penalties and rewards are viewed differently, as the AIG flap illustrates. In fact, some of the wisest words President Barack Obama has spoken since being elected came during the transition period, when the question of whether the government should simply take over General Motors and Chrysler was in the air. "We don't want government to run companies,"
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 6 Mr. Obama said on NBC-TV's "Meet the Press" in December. "Generally, government historically hasn't done that very well." That sentiment explains why, despite rampant speculation to the contrary, the administration has been straining to avoid nationalizing any banks or directly taking over auto makers. Nationalization would distort markets, create unfair advantages and introduce either political considerations or suspicions of political considerations into business decisions. There is, in fact, a huge difference between the government injecting capital or taking a minority position in a business -- with a prospect of getting taxpayer money back but no confusion about who continues to run the company -- and nationalizing a firm or becoming a majority owner. This is the line the administration has tried not to cross. AIG is the exception to the rule. Because of AIG's dire straits, the government has invested so much bailout money that it now holds a stake of almost 80% of the company. Taxpayers are the majority owners. That has left poor Edward Liddy, AIG's chief executive, in an impossible position. He was recruited by the government to run the company after disaster struck, but he isn't really a government employee. He oversees a private-sector compensation structure (one he didn't design) that he's trying to justify to the political sector. Whose interests are paramount in his mind as he goes to work every day? Those of the government? Employees? Remaining private shareholders? Taxpayers? When can he make his own decisions, and when does he need to consult the Treasury and Federal Reserve? When does he need their permission to act? There is, in short, no mechanism to run such a company in such straits. That is the problem going forward. For, much as the government seeks to stay out of the business of running businesses, events have shown that it sometimes is inevitable. In fact, in most sectors, there's a proven mechanism in place to handle just that situation. If a bank fails, the Federal Deposit Insurance Corp. has the legal powers, expertise and experience to step in and wind it down. If a garden-variety business fails, it can go into bankruptcy, and a court with similar powers and experience can sort out the problems. But AIG -- and Citigroup and Bank of America and others -- represent new kinds of creatures. They are neither traditional businesses nor traditional banks, yet their financial products are so deeply entwined in the world's financial system that they can't be allowed to simply fail. Starting last March, when Bear Stearns failed, former Treasury Secretary Henry Paulson began telling us all that the federal government needed an institution and clear rules for winding down a big but failing financial institution. Now his successor, Mr. Geithner, is telling us the same thing -- as are all the headlines about AIG's bonuses. Write to Gerald F. Seib at jerry.seib@wsj.com
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 7 Wall St. Journal3/20/09 Commentary
MARCH 19, 2009, 11:31 P.M. ET
Mutiny on the Bounty

By PETER EAVIS
Taxpayers are demanding their money back. Banks would like to give it back. But can they? Bills in the House and Senate aim to levy punitive taxes on bonuses paid at firms that have taken large amounts of TARP capital from the U.S. The House bill would slap a 90% tax on bonuses received by individuals who have more than $250,000 of gross income. It applies to payments since the end of 2008, which means they capture almost all Wall Street bonuses for last year. Banks might hope this goes away. But the high outrage levels suggest a bonus tax of some form could pass. To escape the tax, banks that have received government capital could pay it back if the Federal Reserve would let them -- unlikely in a deep recession. Many of them need that capital. For instance, Wells Fargo would likely have a Tier 1 capital ratio below 6% -- the level for regulators to consider a bank well-capitalized -- if it paid back its $25 billion of taxpayer money. That leaves the banks boxed in. Raising new private-equity capital to replace TARP money would be impossible for some, extremely dilutive for others. Yet, for banks, the passage of this bill would throw their bonus-focused business model into disarray. They can only hope the Senate shows some mercy. Write to Peter Eavis at peter.eavis@wsj.com
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 18 Financial Times3/20/09 Editorial
Bonus bashing
Published: March 20 2009 02:00 | Last updated: March 20 2009 02:00 Bonus hysteria is reaching new heights. The House of Representatives wants to slap a 90 per cent tax on bonuses at bailed-out companies. Political tinkering with tax codes, however, is highly suspect. What is more, dishing out massive rewards is becoming trickier anyway, as companies run low on the usual readies - cash and stock. Citigroup, for example, yesterday asked shareholders to approve a quadrupling of its authorised shares and a (possible) reverse stock split to lift its share price. The former follows from Citi's upcoming exchange of preferred for common stock, which will increase its shares outstanding by up to 16bn. Citi is simply maintaining its ratio of authorised shares to those outstanding. But depressed prices mean more shares are needed for compensation packages, other things being equal. Companies risk exhausting shares set aside for payouts too quickly. Citi, say, last week asked that 250m shares be earmarked for a five-year incentive plan. In practice, it admitted, with a $3 stock price, most of those shares would be used in the first year. In 2007, in comparison, Citi awarded less than 90m shares at an average value of about $53. Banks know cash is scarce - and a political no-no. More, then, may consider alternatives, such as using subordinated debt as the Royal Bank of Scotland and Lloyds have. Some companies experimented with such securities in the 1970s and 1980s when equity markets were going sideways. Sure, debt is hardly a great motivator, but it (hopefully) retains some value even in worst-case scenarios. Sweeping restrictions are unhelpful. Creative thinking on incentivisation - Credit Suisse is even using illiquid assets - is needed for banks to return to health. And politicians need not holler to get their way: a shortage of stock, an excess supply of bankers and structurally lower returns will more than adequately do the job. Copyright The Financial Times Limited 2009
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 19 Washington Post3/20/09 Editorial
Washington Gone Wild

Congress's destructive reaction to the AIG bonuses
Friday, March 20, 2009; A18
"SHORTSIGHTED," "opportunistic" and "irresponsible" aptly describe the actions of those who fueled the debacle on Wall Street. They are also apt descriptors for lawmakers more focused on currying favor with a public outraged at the bonuses handed out by bailed-out companies than on fixing the fundamental and still potentially disastrous cracks in the financial system. By changing the terms of a deal months after it was entered into, Congress will show the government to be an unreliable partner, further draining confidence from the financial system and endangering longterm recovery. Yesterday, the House had the feel of a mob scene, with lawmaker after furious lawmaker vying for floor time to rail against the $165 million in taxpayer-funded bonuses lavished on employees of American International Group's disgraced Financial Products division. House members rushed through a bill to impose an effective tax rate of 90 percent on bonuses paid to AIG employees and employees of other firms that accepted at least $5 billion from the Troubled Assets Relief Program -- though when then-Treasury Secretary Henry M. Paulson Jr. pressed many of those firms to take the funds last fall, government interference in their compensation systems was not part of the deal. The legislation, approved by a vote of 328 to 93, would affect employees who received bonuses on or after Jan. 1 and whose household incomes exceed $250,000. Late yesterday afternoon, lawmakers on the Senate Finance Committee introduced their own, broader version of the bonus clawback that would affect firms that accepted as little as $100 million of government funds. We understand that legislators are hearing from furious constituents, and we understand why those voters are angry. It is unquestionably galling that some of the employees who crafted and pushed risky derivatives that wreaked financial havoc worldwide should line their pockets with some of the $173 billion in public funds meant to prop up the too-big-to-fail insurance behemoth and its global business partners. The bonus anger resonates, too, because of a larger sense many voters have that the people who helped trigger this whole economic mess are not the people paying the greatest price. But elected officials have a responsibility to lead, not just to pander; to weigh what makes sense for the country, not just what feels good. The effective confiscation of legally earned and contractually promised payments may well be unconstitutional. It is almost certain to be unhelpful. The bonuses paid at AIG represent less than one-tenth of 1 percent of the bailout provided so far; recouping those funds will have no discernible fiscal effect. But it will help drive away the best talent at the firm, and despite all the glib messages of "good riddance," that is a strange action for an owner -- and the American public now owns AIG -- to take. But the real damage goes well beyond any effect on AIG. The economy continues to suffer from a shortage of credit. The government needs financial institutions -- including relatively healthy ones -- to take public funds that will then be lent to responsible businesses and consumers. The Obama administration reportedly intends in the next week or two to announce the details of a "private-
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 20 public partnership" to buy troubled assets from ailing banks. The participation of private hedge funds, investment banks and other firms will be key to the plan's success. But what executive in his right mind will enter into a deal if he or she believes the rules can be changed six months or one year down the road purely on the basis of polls and politicians' fears? Rather than bringing reason to the debate, President Obama has stoked the anger, and last night, the White House commented favorably on the House action. Perhaps Mr. Obama believes that only by lining up with an angry public now can he persuade it, and Congress, to approve the hundreds of billions more he will need to right the credit system. But he might have expressed his sympathy with public anger over irresponsible behavior in the financial sector while also steering the government in a more constructive direction. The absence of backbone on either end of Pennsylvania Avenue this week could carry a steep price.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 21 Washington Post3/20/09 Commentary
Bonfire of the Trivialities

By Charles Krauthammer Friday, March 20, 2009; A19
A $14 trillion economy hangs by a thread composed of (a) a comically cynical, pitchforkwielding Congress, (b) a hopelessly understaffed, stumbling Obama administration, and (c) $165 million. That's $165 million in bonus money handed out to AIG debt manipulators who may be the only ones who know how to defuse the bomb they themselves built. Now, in the scheme of things, $165 million is a rounding error. It amounts to less than 1/18,500 of the $3.1 trillion federal budget. It's less than one-tenth of 1 percent of the bailout money given to AIG alone. If Bill Gates were to pay these AIG bonuses every year for the next 100 years, he'd still be left with more than half his personal fortune. For this we are going to poison the well for any further financial rescues, face the prospect of letting AIG go under (which would make the Lehman Brothers collapse look trivial) and risk a run on the entire world financial system? And there is such a thing as law. The way to break a contract legally is Chapter 11. Short of that, a contract is a contract. The AIG bonuses were agreed to before the government takeover and are perfectly legal. Is the rule now that when public anger is kindled, Congress will summarily cancel contracts? Even worse are the clever schemes being cooked up in Congress to retrieve the money by means of some retroactive confiscatory tax. The common law is pretty clear about the impermissibility of ex post facto legislation and bills of attainder. They also happen to be specifically prohibited by the Constitution. We're going to overturn that for $165 million? Nor has the president behaved much better. He, too, has been out there trying to lead the mob. But it's a losing game. His own congressional Democrats will out-demagogue him and heap the blame on the hapless Timothy Geithner. Geithner has been particularly maladroit in handling this issue. But the reason he didn't give the bonuses much attention is because he's got far better things to do -- namely, work out a rescue plan for a dysfunctional credit system that is holding back any chance of recovery. It is time for the president to state the obvious: This recession is not caused by excessive executive compensation in government-controlled companies. The economy has been sinking because of a lack of credit, stemming from a general lack of confidence, stemming from the lack of a plan to detoxify the major lending institutions, mainly the banks, which, to paraphrase Willie Sutton, is where the money used to be.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 22 Obama has been strangely passive about this single greatest threat to the country. In his address to Congress and his budget, he's been far more interested in his grand program for reshaping the American social contract in health care, energy and education. Obama delegates to Geithner plans for a bailout -- and Geithner (thus far) delivers nothing. Obama delegates to Nancy Pelosi and her congressional grandees the writing of all things fiscal - and gets a $787 billion stimulus package that is a wish list of liberal social spending, followed by a $410 billion omnibus spending bill festooned with pork and political paybacks. That bill, we now discover, contains, among other depth charges, a Teamster-supported provision inserted by Sen. Byron Dorgan that terminates a Bush-era demonstration project to allow some Mexican trucks onto American highways, as required under NAFTA. If you thought the AIG hysteria was a display of populist cynicism directed at a relative triviality, consider this: There are more than 6.5 million trucks in the United States. The program Congress terminated allowed 97 Mexican trucks to roam among them. Ninety-seven! Shutting them out not only undermines NAFTA. It caused Mexico to retaliate with tariffs on 90 goods affecting $2.4 billion in U.S. trade coming out of 40 states. The very last thing we need now is American protectionism. It is guaranteed to start a world trade war. A deeply wounded world economy needs two things to recover: (1) vigorous U.S. government action to loosen credit by detoxifying the zombie banks and insolvent insurers, and (2) avoidance of a trade war. Free trade is the one area where the world indisputably turns to Washington for leadership. What does it see? Grandstanding, parochialism, petty payoffs to truckers and a rush to mindless populism. Over what? Over 97 Mexican trucks -- and bonus money that comes to what the Yankees are paying for CC Sabathia's left arm. letters@charleskrauthammer.com
Commanding The Heights Of Hypocrisy

By Michael Gerson Friday, March 20, 2009; A19
The most famous piece of legislation passed by the 111th Congress may have nothing to do with health care or energy. It could be the Dodd amendment, also known as the Geithner amendment, or perhaps the low-level-anonymous-staffer-everyone-can-safely-blame amendment, reading in part: "The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009 . . . " AIG executives were foolish to use this loophole to "retain" employees, some of whom nearly destroyed the American financial system. But the company did not act with deception or secrecy. AIG's November SEC filing set out its intention to provide more than $469 million in "retention payments" to employees, eliciting a smattering of congressional protest. Concerns on the broader compensation issue were serious enough to ensure unanimous Senate passage of an amendment to the stimulus bill sponsored by Sens. Olympia Snowe and Ron Wyden that penalized bailout bonuses in excess of $100,000. But the Snowe-Wyden amendment disappeared into the misty bog of a House-Senate conference committee, only to be trumped by language that grandfathered in AIG's retention bonuses. At first, this seemed to be an example of immaculate legislation -- miraculously fatherless. After explicitly denying responsibility, Senate Banking Committee Chairman Christopher Dodd eventually admitted to including the exception under pressure from the administration. But it doesn't sound like there was much of a fight. Administration input came from unnamed staffers at the Treasury Department, not high-level officials. Dodd said he viewed these as "innocent modifications." The lack of focus, judgment and competence on the part of Congress and the administration has explanations -- for those dealing in trillions, millions must seem like dirty pennies on the street. But the hollow outrage and blame-shifting from Congress and the administration are inexcusable. President Obama vowed to "pursue every legal avenue to block these bonuses," when the proper "legal" avenue was to write a responsible law -- a process his own administration apparently undermined. "I'll take responsibility," says the president -- before, in the next few breaths, explaining, "We didn't grant these contracts." And, "We've got a lot on our plate." And, "It's my job to make sure that we fix these messes, even if I don't make them." So Obama seems to be saying: I'll take credit for taking the blame for something that is entirely the fault of others. Positively Clintonian. "This is an example," thunders Rep. Barney Frank, "of people at the commanding heights of the economy misbehaving, abusing the system" -- which is completely true . . . of the conference
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 24 committee that reshaped the stimulus bill in secret. Sen. Charles Grassley urged AIG executives to contemplate suicide. This combination of viciousness, shamelessness and cluelessness has consequences. It drains what little political will remains to confront the credit crisis -- an effort that may eventually require spending a trillion dollars or more to help purchase toxic debt. Thanks to AIG, Congress and the administration, Treasury Secretary Timothy Geithner may find his next round of necessary bailouts greeted by a revolt of left and right. And congressional demagoguery is compromising Geithner's own approach to resolving the credit crisis. Since the direct government purchase of toxic debt would be massively expensive, Geithner has floated the idea of enticing private investors to help buy that debt. The government would give loans or subsidies to mutual funds and hedge funds if they buy toxic securities. But few would make such a risky investment without the hope of large returns. If those returns are realized, it is easy to imagine how hedge fund managers would be treated when hauled before Congress. "Perhaps the witness can explain to us how he justifies such windfall profits with the people's money? Have you no shame? Give us the names, addresses and phone numbers of every millionaire you enriched at public expense so we can leak them to the press." What sane money manager would want to partner with a government that blames others for its mistakes, urges the violation of inconvenient contracts and threatens to tax benefits retroactively? One Wall Street expert told me, "Even if people trust the president, they don't trust Congress." This kind of trust and confidence is essential to the next stage of our economic recovery. It is also being actively undermined by the incompetence and hypocrisy of the government itself. michaelgerson@cfr.org
Bonuses on a Slow Boil

By Michael Kinsley Friday, March 20, 2009; A19
Maybe you don't spend your weekends perusing SEC filings, so perhaps you missed the one in November in which AIG, the world's most unloved big company, reported that it planned to distribute $469 million in bonuses to some employees. This was after the government began pouring billions into AIG to save it from the fate of Lehman Brothers but long before populist outrage over the bonuses exploded this week. And maybe you aren't a regular reader of Rep. Elijah Cummings's blog on the Huffington Post. His Nov. 27 entry, "A Bonus by Any Other Name Still Stinks," complains that "just one day after being told that top AIG executives would be forgoing bonuses this year," he had been "shocked" to learn that they would be getting "cash awards" as "retention payments." But surely you didn't miss the Oct. 8 article in this very newspaper headlined "AIG Spa Trip Fuels Fury on Hill; Pressing Executives to Concede Mistake, Lawmakers Blast Them About Bonuses." Or how about the New York Times on Oct. 17: "A.I.G. Agrees to Let New York Review the Propriety of Its Pay Packages"? In short, you knew about this, if you cared. So why didn't your self-righteous populist fury boil over before now? One of my favorite things about the news is the randomness of what becomes a big story. This is far from the first time some scandal that was reported with a yawn on Page D13 popped up months later on Page 1. In this case it's not entirely inexplicable. Part of the fury is precisely because public officials and AIG's executives knew or should have known about the bonuses and knew or should have known what the reaction would be -- and allowed them to go ahead anyway. This suggests, even more than if they were blindsided, that "they just don't get it." As an explanation for anything, "they just don't get it" has a know-nothing, bullying quality that I don't like. Obama and his colleagues had other things on their minds in October and November. In short, I want to be sympathetic. But they don't make it easy. Now, trying to get ahead of the story, AIG and the administration are just digging themselves a deeper hole. CEO Ed Liddy says that execs who received more than $100,000 will be asked to return half. Why half? No one is complaining that the retention payments are too large. The complaint is that they exist. As Cummings put it tartly in his blog, "These executives' bonuses are that they still have a job." If you buy the theory that "retention payments" are needed, then they need to be big enough to work. If $100,000 is the right amount to keep an AIG employee from leaving for one of the many job opportunities no doubt available in the middle of a depression at companies that wish to duplicate AIG's success in marketing securities too complicated for anyone but an AIG
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 26 employee to understand, then paying $50,000 is a waste. AIG will lose the employee and $50,000. Treasury Secretary Timothy Geithner said Tuesday that he is going to cut AIG's allowance. The AIG bonuses will be deducted from the government's next bailout check of $30 billion. The point, I suppose, is that the government can then say that no bailout money is being used to finance these bonuses. Except that money is fungible -- one dollar is as good as another -- and as long as the government is writing checks to AIG and AIG is writing checks to these employees, the government might as well be writing the employees' checks directly. Anyway, the money the government shells out to AIG is not supposed to be an allowance. It's supposed to be the minimum necessary to rescue the company, which is supposed to be absolutely necessary to save the economy. If $165 million or $469 million or any other amount can be trimmed from the bailout without serious harm to the country, why is AIG getting that $165 million or $469 million in the first place? Like everything about the bailout -- and Obama's economic policy in general -- these "retention bonuses" are being presented as a tragic necessity. You may not like it -- heck, we don't like it either -- but we have no choice. Earmarks in the budget? Look, let's just get past this so we can move on. In a way, this is terrific. Tragic necessity is a concept that has been missing from the American political dialogue. Generally, politicians present every proposal as wonderful in every way, with no downside. But tragic necessity is a get-out-of-jail-free card that loses value if it is used too often, and Obama is going to need it later, when he takes on health-care reform, entitlements, the budget deficit and other delights. kinsleym@washpost.com
Let's Put Down the Pitchforks

By Steven Pearlstein Friday, March 20, 2009; D01
We're angry. We're frustrated. We feel cheated and abused. We're not going to take it anymore. But then again, we don't have much choice, do we? Sure, we can demand that a few more heads roll on Wall Street, or at the Treasury, or that a few hundred million are clawed back from financiers who never deserved it. But the reality is that no matter what we do now, tens of trillions of dollars in wealth have been lost. All that's left is simply an elaborate exercise in settling up the accounts. At the end of the day, the thing to get outraged about is not the $440 million in bonuses at AIG or the $10 million that Citigroup is spending to redesign its shrunken executive suite. These may seem like princely sums, but they are almost insignificant compared with the real outrage: the hundreds of billion dollars of taxpayer funds that have been put at risk to keep AIG and Citi from failing and taking the whole financial system down with them. Let's keep our attention on the elephant rather than the pimples on its behind. I realize that collective expressions of public anger can serve a useful purpose. At times like these, it feels good and is a way for a political system to let off some steam before a more dangerous explosion occurs. More importantly, it builds political momentum for sweeping reform of the regulatory apparatus while scaring the bejeezus out of people on Wall Street, who will now think long and hard the next time they get the urge to take excessive risks with other people's money. But there's a danger in letting this outrage get to the point that it undermines the effort to contain the financial crisis. And with Congress now rushing to pass legislation taxing away the bonuses of every banker at every bank or financial institution that takes government money, that point seems to have been reached. A few things to keep in mind. First, as I've said in the past, this isn't about fairness. There's nothing remotely fair about using taxpayer money to rescue a free-market financial system from the mistakes of the financiers. But the reality is that we can punish the bankers or we can save the banking system, but we can't do both at the same time. Nor is it fair, as The Great Santelli has declared on CNBC, that homeowners who have paid their bills and have been careful not to take on too much credit are now being asked to provide relief to homeowners who have not. Unfortunately, the price of righteous indignation is a wave of foreclosures, a further decline in home values and billions of dollars of additional loan losses at banks that are already on government life support. Given the financial and economic hits they have already taken, that's a price that most "innocent" homeowners and taxpayers would probably prefer not to pay.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 28 During a financial crisis, fairness is a luxury we cannot afford. During the 1930s, bankers and financiers lost everything, but the outcome -- a decade-long depression -- was hardly fair to the ordinary American. The key question is not whether something is fair, but whether it helps get us through this mess faster and at a lower cost. At the moment, the Treasury is working (and working and working) on ways to entice private capital back into the banking and shadow-banking system by offering government financing and guarantees against losses. Every dollar of private capital that can be attracted back into the system is a dollar that the Treasury won't have to borrow or the Federal Reserve won't have to print. And only with the return of private capital will the government be able to get back the rescue money it has committed. But how eager do you think private equity and hedge funds will be to invest those billions of dollars if they fear that their participation will subject them to front-page accusations, congressional inquiries and public outrage over how much they might be paying for bonuses or employee travel or office decoration? Will they participate if they think that Congress, in a moment of populist pique, will try to tax back their profits if they earn more than originally expected? As the financiers see it, there's a big difference between the government that sets tough terms for participation in its financial rescue programs and a government that is a fickle and unreliable partner, that tries to micromanage their businesses and changes the rules of the game with every zig and zag of public opinion. That may be an exaggerated view, but it is the financiers' view and one we need to be mindful of, since at this point we need their money and cooperation as much as they need ours. A final point on outrage: We need to save some of it for ourselves. While it was Wall Street that got rich by peddling new ways for Americans to live beyond their means, the decision to do so was ours. It was we who ran up the credit card bills, we who drew down the equity in our homes and we who refused to tax ourselves for the government services we demanded. Wall Street bankers may have been the pushers, but it was we Americans who became addicted to the easy credit.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 29 Washington Posts Intelligent Leader Blog3/20/09 Commentary
How AIG's Bonuses Threaten All Stock Prices

John T. Landry is an editor of the Harvard Business Review. The furor over AIG's bonuses is ratcheting up taxpayer unrest over the big government bailout of banks. But it has the potential to disrupt all companies that depend on outside shareholders. That's because it's the culmination of a series of revelations that will shake investor trust in the stock market. As the newly released documents show, AIG's "guaranteed retention awards" were little more than salary. The plan's preamble aims to align employees with shareholders, but the actual details have so many qualifications that even large payouts that were required to be deferred had only a tenuous link to changes in AIG's stock performance. Like many bonus plans at companies even outside Wall Street, the arrangement allowed companies to tell investors that they tied executive pay closely to performance while burdening executives with little of the risk that real investors face. It's telling that AIG even allowed people to call the retention arrangement a bonus. A similar story came out last month, as scores of companies allowed managers to cash in their now deeply underwater stock options for new ones with low trigger prices. Even Google, which prides itself on not doing "evil," followed suit. Repricing makes a mockery of the idea of stock options linking executives with investors. Companies could have prevented this problem by issuing stock options indexed to the market, as HBR argued years ago, but they refused. As I've explained elsewhere, companies play these games because they think it would be unseemly for investors to know how much they are paying managers for just doing their job. Companies think executive talent is far more important than financing, so they want to pay executives a lot of the profits that might otherwise go to investors. But they try to have their cake and eat it by portraying the pay as performance-based. Now the extraordinary attention over AIG is showing the phoniness of of most incentive plans. (And just wait until the media dredges up the scandal of backdating options, which had little effect when the stock market was still hitting highs.) Meanwhile, investors are starting to hear about all the details of stock markets that insiders have known and not told them. Jon Stewart may have picked the wrong target in exposing Jim Cramer, but the attention to his show did send a strong message that the financial media dropped the ball in guiding investors through the complexities of investing. Investors may start concluding that the media is in cahoots with executives and financiers, or at least that the stock market is a game only for insiders. On top of all that, the stock market has plunged to mid-90s levels. For years, middle class people have been told to invest their money in equities because of the long-term annual returns around 7%. If you calculate real returns now, they look more like 3%, not so different from low-risk, unglamorous bonds.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 30 After the Great Depression, it took an entire generation before most investors went back into equities. Prices were flat from the mid '30s to the mid '50s, and didn't reach 1928 levels until 1960. Anyone over 40 (like me) has to be thinking seriously about shifting their retirement money into government or corporate bonds. After all, we investors might argue, companies are setting up their cash flow to steer more and more of the excess to executives. They devote only as much cash flow to investors as they need to keep us around. So let's formalize the process and go into the (relative) safety of bonds. That might make sense for you and me, but it would be a disaster for the economy. Not so much for big companies, which rely mainly on retained earnings for fresh capital, but for IPOs of the new companies that fuel much of our innovation. Let's hope we emerge from the recession with transparent executive pay practices that reassure stockholders that most of the profits will actually go into their pockets.
Does Geithner Get It?

By Eugene Robinson Friday, March 20, 2009; A19
President Obama's claim that Timothy Geithner faces a more daunting set of challenges than any Treasury secretary since Alexander Hamilton may be an exaggeration, but not by much. Geithner may indeed be the hardest-working man in Washington. But to survive, let alone succeed, he's going to have to make a more convincing case that he's part of the solution and not part of the problem. The case of the appalling AIG bonuses -- I was going to call them outrageous, but politicians and pundits have exhausted the nation's supply of outrage since the payments were revealed -- is the latest situation to raise the inconvenient problem-vs.-solution question about Geithner. Why didn't he know about the bonuses earlier? And when he did get clued in, why didn't he do anything to head off what was obviously going to be a distracting and perhaps damaging controversy? A simpler way of asking the Geithner question is: Does he get it? Does he understand the profound sense of betrayal that so many Americans feel as we learn that the supposed wizards of finance, the Masters of the Universe who shower themselves with unimaginable wealth, were safeguarding our economic well-being with the diligence and sobriety of a drunken high roller at a craps table in Vegas at 4 a.m.? Does he understand that the crisis is not just an economic watershed but a cultural one as well, and that what once was deemed perfectly acceptable behavior on Wall Street is now seen as reprehensible? Does he understand that outside of Lower Manhattan, the definition of a "retention bonus" is being spared from the latest round of layoffs? Geithner's troubles began shortly after he was nominated, when it was disclosed that he had failed to pay $34,000 in federal taxes between 2001 and 2004. It's reasonable to expect the secretary of the Treasury to have a record of faithfully paying his own taxes, and Geithner's excuse -- that he had used the computer software TurboTax to prepare his returns -- didn't sound likely to erase the scowl from an IRS auditor's face. But Obama pushed hard for the nomination and the Senate went along, largely because Geithner was president of the Federal Reserve Bank of New York and had been deeply involved from the beginning in the effort to contain the financial meltdown. He was one of the few people who truly understood how and why things were falling apart. One thing Geithner doesn't seem to understand, though, is how and why appearances matter. There has been a steady flow of news indicating that Wall Street doesn't realize that the Era of Excess is over, the latest coming yesterday with a Bloomberg News report that the CEO of troubled Citigroup, Vikram Pandit, plans to spend about $10 million redecorating the firm's executive offices. I know that the company has made economies and that Pandit is working for $1 a year. I just think that after accepting $45 billion in bailout money, I'd cancel any improvement project that couldn't be accomplished with a trip to Home Depot.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 32 Obama's job would be much easier if Geithner were more effective at communicating with the public about what happened to the economy and what the administration is doing to fix it. As things stand, Obama has to do all the explaining himself. Perhaps it's unrealistic to expect Geithner to be both a financial whiz and a silver-tongued orator. He does speak the language of Wall Street, though, and one of the nonnegotiable requirements in his job description should be to make the men and women who run our financial institutions understand that their behavior has to change. The basic strategy for handling the crisis, begun under the Bush administration and continued by Obama, is to hook up a fire hose to the Treasury and shower irresponsible and greedy financial institutions with money until the fire is put out. In political terms, to put it mildly, this is a hard sell. It becomes an impossible sell when Wall Street displays not gratitude but arrogance, reminding us how emotionally satisfying it would be -- if ultimately counterproductive and even disastrous -- to stand back and let the fire burn. The vast amount of money poured into Wall Street has bought American taxpayers the right to say that business-as-usual practices such as the AIG bonuses are over. Geithner needs to deliver this message. If he can't or won't, Obama should find somebody who can and will. eugenerobinson@washpost.com
Main Street Is Speaking Out. But Will Obama Listen?

Main Street Is Speaking Out. But Will Obama Listen?
By William Greider Sunday, March 22, 2009; B01
The president is getting what he asked for, but perhaps not what he had in mind. During the campaign, Barack Obama beckoned Americans to put aside their cynicism about politics and reengage as active citizens. They are now doing so with red-hot anger. They are outraged by events and forcing their way into congressional affairs and behind closed doors where policy wonks discuss issues with cerebral civility. The president is now trapped between these two realms -the governing elites who decide things and the people who are governed. Which side is he on? If he does not choose wisely, the popular anger could devour his presidency. The immediate impetus is the latest outrage from the financial sector. AIG, the failed insurance giant on government life support, proceeded to hand out $165 million in employee bonuses. Because Washington has pumped $170 billion into this zombie corporation, people quickly grasped that AIG was redistributing their tax money. On March 13, the White House sent out Larry Summers, the president's economic adviser, to explain things. Government has no choice, Summers said, because this is a government of laws and we must honor contracts. On Monday, the president scrapped that line, hoping to dodge the outrage. Something fundamental has been altered in American politics. Encouraged by Obama's message of hope, agitated by darkening economic prospects, many people have thrown off sullen passivity and are trying to reclaim their role as citizens. This disturbs the routines of Washington but has great potential for restoring a functioning democracy. Timely intervention by the people could save the country from some truly bad ideas now circulating in Washington and Wall Street. Ideas that could lead to the creation of a corporate state, legitimized by government and financed by everyone else. Once people understand the concept, expect a lot more outrage. Public anger is likely to be a recurring episode because the president has budgeted another $750 billion to rescue the financial system from its troubles. If Congress gives him the money, people will be watching where it goes. Obama is vulnerable to the blowback. In his address to Congress last month, he promised, "This is not about helping banks, it's about helping people." The first half of his statement is demonstrably not true, as people see for themselves and as bankers parade their arrogant excess. The second half is merely wishful. "Populist anger" is a condescending label pundits use to suggest an irrational, unruly temperament. But what's really going on is deeper and potentially more forceful. It will not be contained with good rhetoric or symbolic gestures. Populism was the highly creative, self-made movement formed by desperate farmers in the late 19th century. It is disparaged in elite circles, but it generated vital ideas that ultimately reshaped government and democracy. We are not there yet, not even close. But the impulse for small-d democracy could be very healthy -- if the political system learns to listen and respond.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 34 At the center of this story is Obama, who inherited the Democratic Party's awkward straddle between monied interests and working people. I voted for him joyfully and sympathize. His message to the nation last week reflected his dilemma. "I don't want to quell anger. People are right to be angry. I'm angry," he told reporters on Wednesday. Then he pivoted: "What I want us to do is channel our anger in a constructive way." What's changed the president's situation? During the past nine months, gigantic financial bailouts amid collapsing economic life made visible the crippling divide between governing elites and citizens at large. People everywhere learned a blunt lesson about power, who has it and who doesn't. They watched Washington rush to rescue the very financial interests that caused the catastrophe. They learned that government has plenty of money to spend when the right people want it. "Where's my bailout," became the rueful punch line at lunch counters and construction sites nationwide. Then to deepen the insult, people watched as establishment forces re-launched their campaign for "entitlement reform" -- a euphemism for whacking Social Security benefits, Medicare and Medicaid. Of course, popular alienation has been around a long time. But the stakes for the country are now far more grave. My new book -- "Come Home, America: The Rise and Fall (and Redeeming Promise) of Our Country" -- asserts that we're at the end of the long and mostly triumphant era that started with victory in World War II. We are going to change as a country, for better or worse, like it or not. If people and the president do not stand up for just solutions, politics as usual will prevail. Congressional leaders are once again rushing to enact hasty "reforms" that might get the financial monkey off their back, but will permanently damage our democracy. Elite opinion wants to empower the Federal Reserve to act as the "super-cop" protecting the financial system against systemic risk in the future. This idea is another instance of rewarding failure. The Fed was blind to the systemic risk accumulating during the past two decades and it failed utterly to head off the excesses -- the explosion of debt and Wall Street's fraudulent valuations. The central bank, in fact, with its erratic monetary policy, was a central source of what destabilized the economy. Why would politicians make this cloistered and unaccountable institution more powerful, when the Fed has been derelict in its historical obligation to protect the "safety and soundness" of the system? Reforms ought to head the opposite way -- forcing the Fed into daylight and the same regular order required of government agencies. Why would politicians make this cloistered and unaccountable institution more powerful, when the Fed was derelict in its formal obligation to protect the "safety and soundness" of the system? Reforms ought to head the opposite way -- forcing the Fed into daylight and the regular order required of government agencies. A few weeks ago, a freshman congressman, Rep. Alan Grayson (D-Fla.), became an Internet celebrity with the video of him grilling the Federal Reserve vice chairman at a House hearing. The Fed is in the process of handing out almost $3 trillion. Can you tell us which firms and banks are getting money? Grayson asked. Donald Kohn said that would be inappropriate. It
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 35 might discourage some banks from taking the public's money. More outrage ensued and last week, after a good pounding from citizens, the Fed folded and named some names. A new regulatory regime that puts the secretive central bank in charge of everything would sanctify the policy of "too big to fail" that Fed officials have long followed but never honestly acknowledged. It would also revive the Wall Street club, albeit smaller than before, with which the Fed has been so cozy. If the largest bank holding companies are given privileged proximity to the source of government protection, then everyone in finance and commerce will want to become a bank holding company, too. We are already seeing this happening as former investment houses like Goldman Sachs and non-bank financial firms decide to join the system. Why not General Electric and Microsoft? Where does this end? What does it mean for smaller enterprises that lack the scale and influence? Whatever the intentions, this "reform" would effectively legitimize the existence of a corporate state. This concentrated power would be neither socialism nor capitalism, but a grotesque hybrid that combines the worst qualities of both systems. Government and politics would become even more responsive to big money, but also able to tamper intimately with private enterprise, picking winners and losers based on political loyalties, not on performance. Capitalism with its inherent tendency toward monopoly would have the means to monopolize democracy. Barack Obama can resist all this, if he chooses, but he seems conflicted. Obama's approach so far is devoted to the restoration of Wall Street's famous names, and his economic advisers tell him this is the "responsible" imperative, no matter that it might offend the unwashed public. Obama evidently agrees. He does not seem to grasp that the tone-deaf technocrats are leading him into a dead-end. The president needs to hear a second opinion -- millions of them. People are angry, but they want this president to succeed. Mobilized citizens can help him to prevail. If he goes with the other side, they will bring him down.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 36 New York Times--March 20, 2009 Commentary High & Low Finance
The Money Is Gone. Now What?

By FLOYD NORRIS The losses from the worldwide financial implosion are only now being tallied up. Adjusting to the reality is proving hard. That difficulty is the unifying fact in much of the news these days as well as in the mass public outrage over Bernard Madoff, a man who stole primarily from the well-off. Much of the anger is coming from people who did not lose a dime from his Ponzi scheme but who have lost plenty in the stock and real estate markets and would dearly love to find someone to blame. All those who lost a lot and a lot is defined differently for each person now face similar decisions. Do they admit they are permanently poorer, and adjust both their spending and their sense of how successful they have been? Or do they seek to deny reality and hope that somehow the good old days will return? That problem can be seen in the scandal du jour, the bonuses paid to executives at the American International Group. They still think they deserve to be treated as highly successful people running a large financial company. The fact that it would have collapsed if not for the governments repeated bailouts is viewed as an insignificant detail. And it could also be seen this week in a legislative proposal being pushed by art museum directors in New York that would bar museums in financial difficulty from selling artwork to raise money to pay other bills. Even without such a law, one museum that sold artwork is to be punished by not being allowed to borrow art from other museums. There was outrage earlier this year when Brandeis University announced plans to close its art museum and sell the paintings. The universitys endowment was devastated by bad investments. What do people opposed to the sale of paintings think suddenly poor institutions should do? Close? Seek government bailouts? Should Brandeis close down a few academic departments, or cut back on scholarships, to keep its art? Brandeis is hardly the only college whose endowment has contracted sharply. I suspect that when the final numbers are in and colleges are not exactly rushing to disclose the sad details it will turn out that colleges as a group did far worse than the stock market while the market was doing horribly. That is because colleges followed the herd. They poured money into so-called alternative investments, which had appeared to be so successful for Harvard and Yale. Alumni clamored to know why their college could not show similar returns, and some colleges that could ill afford big losses put most of their endowment into hedge funds. It turns out such funds could be extremely risky.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 37 Those colleges, like many other suddenly less well-off investors, now face decisions. Should they shift to less risky investments with the money that is left, thus giving up the profits that will come if the market does bounce back, as some hope it has already begun to do? Or should they hang in there and risk even bigger losses? In the meantime, a host of college construction projects have been suspended because the money that was to pay for them is gone. Those decisions, rational as they may be, are putting further downward pressure on the economy just as the college building binge fueled by previous stock market profits helped to stimulate the economy. Colleges now fear that projects under way could drain endowments even more if donors are unable or unwilling to honor earlier pledges. Before it is all over, some trustees will no doubt be forced to resign as scapegoats for what turned out to be bad investment policies. State and local governments with pension plans are facing similar issues. Rather than raise taxes or hold back promised benefits, it was easier to assume generous stock market returns would continue forever. Faced with underfunded state pension plans, New Jersey even sold taxable bonds to raise cash to put into the funds. That would save the state money if profits from the funds investments exceeded the interest paid on the bonds. It would cost a lot if the market plunged. Now New Jersey wants to find villains to blame. This week it sued former officials of Lehman Brothers, saying they lied about the firms financial position before it collapsed. Gov. Jon Corzine, who used to run Goldman Sachs, said we intend to hold Lehman executives and directors accountable for the fraud and misrepresentation that caused more than $100 million in losses to New Jerseys pension funds. That sounds like a desperate effort to stave off facing reality. Even assuming that the directors and executives are liable, it is hard to see why New Jersey should rank ahead of other investors. If the money is split among all investors, none are likely to collect more than a small fraction of their losses, even if all the defendants are forced into bankruptcy. There has been a lot of talk about how much Richard Fuld, the former chief executive of Lehman Brothers, was paid, but he does not have bottomless resources. Much of his pay came in the form of stock and options that he never cashed out and that are now worthless. I was never a big fan of Mr. Fuld. He is responsible for Lehman taking large risks in mortgages and financing it with excessive borrowing. He did not understand how the world had changed by early 2008. The firm passed up chances to raise billions of additional dollars in capital. Some of the money it did raise went into buying depressed assets, on the assumption they would recover quickly. That now seems foolish, or worse, but it is evidence that Lehmans top management did not think the firm was in danger until it was too late. If this case goes to trial, it will provide a defense.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 38 As a society, we are not as rich as we thought we were. The Federal Reserve now estimates that American households as a group are poorer than they were four years ago, even before adjusting for inflation. That had not happened in any four-year period since the Fed began making those estimates more than half a century ago. It is not an easy reality to adjust to. But simply assuming that we deserve to live as if it had not happened will only make things worse. Floyd Norriss blog on finance and economics is at nytimes.com/norris.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 39 New York Times--March 20, 2009 Op-Ed Columnist
Perverse Cosmic Myopia

By DAVID BROOKS Youd think if some tiger were lunging at your neck, your attention would be riveted on the tiger. But thats apparently not how it works in the age of global A.D.D. As a tiger sinks its teeth into the worlds neck, we focus on the dust bunnies under the bed and the floorboards that need replacing on the deck. We live in the world of Perverse Cosmic Myopia, an inability to focus attention on the most perilous matter at hand. The tiger, of course, is the collapsing world financial system. Americans actually have a falsely mild view of this crisis because the economy is worse abroad. The U.N.s International Labor Organization projects between 30 million and 50 million job losses worldwide. Central European countries are teetering; Japans economy is horrifying; and the Chinese job creation machine is losing the race against its demographic pressures. There have been riots in Greece and China as well as huge protest rallies in Dublin, Paris, London and beyond. So far, the protesters express anger without an agenda, but if the global economy continues to slide through 2010, theyll discover one. A predictable result is a series of beggar-thy-neighbor exchange-rate policies, followed by rising trade barriers and the degradation of the entire global system. In times like these, youd expect prudent leaders to prepare for the worst. After all, the pessimists have recently been vindicated by events. But thats apparently too painful to think about. In normal times, leaders like to focus on the short term at the expense of the long term. But now the short term is really confusing, so leaders take refuge in projects that are years or decades away. The president of the United States has decided to address this crisis while simultaneously tackling the four most complicated problems facing the nation: health care, energy, immigration and education. Why he has not also decided to spend his evenings mastering quantum mechanics and discovering the origins of consciousness is beyond me. The results of this overload are evident on Capitol Hill. The banking plan is incomplete, and there is zero political will to pay for it. The presidents budget is being nibbled to death. The revenue ideas are dying one by one, while the spending ideas expand. By the latest estimate, the health care approach will cost $1.5 trillion over 10 years and the national debt will at least double, while the Chinese publicly complain about picking up the tab. The Obama administration is at least distracted by important things. The Washington political class has spent the past week going into made-for-TV hysterics over $165 million in A.I.G. bonuses. Were in the middle of a multitrillion-dollar crisis, and our political masters always willing to throw themselves into any issue that is understandable on cable television have decided to risk destroying the entire bank-rescue plan because of bonuses that account for 0.001 percent of the annual G.D.P.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 40 Even this is not the most idiotic of the distractions. For that, you have to look abroad. This is a global crisis, and a core lesson of the Great Depression is that a global crisis calls for a global response. As such, Tim Geithner and Larry Summers are preparing for the upcoming G20 summit with an agenda that has the merit of actually addressing the problem at hand: coordinate global stimulus, strengthen the International Monetary Fund, preserve open trade. But the G-20 process is heading toward global impotence because the Europeans are dismissing this approach. Instead, they want to spend this moment of peril working on a long-term architecture to regulate global finance. The world is in flames and they want directorates and multilateral symposia and vague plans for a powerless college of supervisors. This is what Marie Antoinette would be for if she were an annual Davos attendee. Why are they taking this position? First, many European leaders think the answer to every problem is more global architecture. Theyve got Jean Monnet on the brain. Second, they prefer to free-ride on the stimulus packages that the Americans and Chinese are already paying for. Third, the fiscally responsible European countries cant commit to a policy that their debt-ridden partners cant live up to. Fourth, some reject the idea of using fiscal policy to end recessions. Some of these reasons have merit, especially the last one. But one thing is for sure: The American agenda might work to ease the immediate crisis, but efforts to build a long-range global architecture certainly will not. After all the pious talk about post-Bush international cooperation, the current approach will lead to a big multilateral zero. Many people used to wonder how the worlds leaders could be so myopic at various points in history like during the Versailles Treaty or the turmoil of the 1930s. We dont have to wonder any more. We get to watch the cosmic myopia replay itself in our own times. Paul Krugman is off today.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 43 BreakingViews.com (via Fortune)3/19/09 Commentary
Why a bonus tax is a bad idea

It's a knee-jerk reaction that sends the wrong message to banks that are trying to turn themselves around.
By Richard Beales, breakingviews.com Last Updated: March 19, 2009: 3:50 PM ET (breakingviews.com) -- The pitchfork-wielding anti-bonus mob stirred up by American International Group is making for lousy tax policy. Outraged U.S. legislators are pushing through punitive taxes on bonuses not just at AIG but at all recipients of government funds. The hot-headed and unfairly retroactive changes could hurt investor confidence, undermine President Barack Obama's credibility and damage the still valuable U.S. finance sector. AIG (AIG, Fortune 500) has been especially irresponsible, both with its risk-taking during the credit boom and with its handling of its affairs since. Agreeing to extra bonuses and then paying them to employees of its financial products unit after receiving $170 billion-plus in government money - and failing to sufficiently forewarn Congress and others to boot - has rightly riled Americans and their elected representatives. Plans to tax bonuses at financial institutions that have been bailed out by the U.S. government are the knee-jerk result. The scheme passed on Thursday in the House would result in taxes of 90% on bonuses at institutions that have received funds from the government; in the Senate, which now has to consider the measures, thinking seems to be 35% levied on the employer, and an extra 35% on the employee. The bonus tax idea is bad for a range of reasons that senators should consider calmly, even if the House didn't do so. One is that it changes the rules - again - for recipients of government assistance. Government initiatives to kick-start clogged financial markets depend on investors and institutions participating. If they think that the rules of the game are going to change continually, they'll be reluctant. The tax plans are also retroactive to the beginning of this year. Bankers awarded bonuses for 2008 - and some payouts were both relatively modest and legitimately earned - received them earlier this year, net of prevailing taxes. They may in good faith have spent the cash, invested it or even given it away. Changing the rules now, and demanding a giant additional tax check, really isn't fair. Even more importantly, there's the longer-term impact on the U.S. financial industry. Wall Street's finest, together with AIG - admittedly a different beast - are now in the doghouse together. But the finance business is in fact one of America's global strengths. The planned taxes are just the kind of thing that will give foreign firms and non-U.S. bankers an edge.
Consumer Mortgage Coalition Financial Services ClipsCommentary and Editorials March 20, 2009 Page 44 In fact, U.S. institutions may be motivated to pay back funds received under the Treasury's Troubled Asset Relief Program so as to escape the new taxes. That sounds like a silver lining except that administration officials don't want that yet, for fear that firms will lose the capital cushion against further losses that TARP was designed to provide. That's just one example of the crossed wires inherent in the latest tax plans. And with so many bigger issues at hand, it's surely the kind of risk to credibility that Congress should make sure it avoids.
19. Administration Seeks Increase in Oversight of Executive Pay New York Times, p.49 20. Geithner Aides Worked With AIG for Months on Bonuses Wall St. Journal, p.52 21. Labours mount up for GeithnerFinancial Times, p.55 22. Give Geithner a chance, says McCainFinancial Times, p.57 23. For Cuomo, Financial Crisis Is His Political Moment New York Times, p.58 24. Bankers Press Case Against Punitive Tax Washington Post, p.62 25. Treasury Unveils Toxic-Asset Plan, Citing 'Acute Pressure' on Banks Wall St. Journal Online, p.65 26. Treasury Unveils Details of Plan to Relieve Banks of Toxic AssetsWashington Post Online, p.68 27. Treasurys New Plan for Toxic Assets Relies on Private InvestorsCQ Today, p.70 28. Warning over bonus crackdown Financial Times, p.72 29. Bonus Flap May Keep Investors on Sidelines American Banker, p.74 30. Fed Says TALF Lending Off to Good Start After Entities Borrow Initial $4.7 BillionBNA, p.77 31. Fed to Take Servicing Advances American Banker, p.79 32. As It Starts Programs, Fed Weighs How to Stop Them Wall St. Journal, p.80 33. Fed steps in again and buys time for White HouseFinancial Times, p.83 34. Capital Standards Need to Be Adjusted To Avoid Unintended Effects, Bernanke SaysBNA, p.85 35. Small Banks, Big Beefs Wall St. Journal, p.86 36. Fed Chief Calls for Scrutiny of Executive Pay Policies New York Times, p.88 37. Bair Seeks New Playbook to Resolve Plight Of Too Big to Fail Financial InstitutionsBNA, p.90 38. FDIC Increases Industry Loss American Banker, p.93 39. Two Big Credit Unions Seized Washington Post, p.94 40. How Many to Fail; Do We Hear 1,000? American Banker, p.96 41. Financial Regulators Seek More Power From CongressCongressDaily, p.98 42. Local Realty Executive to Direct FHAWashington Post, p.99 43. No Payment on Many FHA Loans American Banker, p.101
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44. Ginnie Ponders Rent-to-Own Idea American Banker, p.102 45. Obama Announces New Rules To Govern Approval of Stimulus ProjectsBNA, p.103 46. S.C. Governor Will Not Seek Portion Of Stimulus if It Cannot Be Used to Pay DebtBNA, p.105 47. Foreign Firms Eye Stimulus Dollars Washington Post, p.107 48. Traders Group Urges SEC, in Weighing Price Tests, to Avoid Unenforceable RuleBNA, p.110 49. Regulators Testify Congress Could Reduce Financial Fraud by Closing Regulatory GapsBNA, p.112 50. CME off to slow start in derivatives clearing race Financial Times, p.115 51. IASB Requests Views on Fair Value, Impairment FASB Position DocumentsBNA, p.117 52. ECB Chief Says Boost In Stimulus Not Needed Wall St. Journal, p.118 53. EU Backs Plan for G-20 Summit, Supports New Funding for IMF, Member State BailoutsBNA, p.121 54. IMF Gets $100 Billion Loan From EU To Bolster Lending CapacityBNA, p.123 55. German Parliament OKs Bank Rescue Law Allowing Nationalization of Hypo Real EstateBNA, p.124 56. China Squeezes Foreign Banks Wall St. Journal, p.126 57. Imbalance in Nations' Savings Clouds Forecasts for Recovery Wall St. Journal, p.127 58. Conference Board Economist Sees Meager U.S. Recovery in Second HalfBNA, p.129 59. Mass Layoff Events Hit Record High In February, as Idled Workers Also RiseBNA, p.132 60. Existing Home Sales Rise 5.1 Percent in FebruaryAP, p.134 61. Data Suggests Commercial Lending Is on the RiseAmerican Banker, p. 135 62. Moody's Downgrades Billions in CMBS Tranches Wall St. Journal Online, p.137 63. AIG Unit Files Suit Over Loans American Banker, p.138 64. AIG's Rivals Blame Bailout For Tilting Insurance Game Wall St. Journal, p.139 65. Insurer Made Tax Matters Significant Focus of Lobbying Wall St. Journal, p.144 66. Goldman Confirms $6 Billion AIG Bets Wall St. Journal, p. 146
67. No Financial or Material Losses to Occur At Goldman if AIG Fails, Goldman CFO SaysBNA, p.148 68. At A.I.G., the Brand Is Tarnished New York Times, p.150 69. New Role for Citi's Finance Chief Wall St. Journal, p.153 70. The fearsome become the fallen Financial Times, p.155 71. With Eyes Bigger Than Their Wallets, Homebuyers Are Forced to Revisit Old Rules New York Times, p.158 72. Locked Out of Refinancing Washington Post, p.160 73. Accelerating DebtWashington Post, p.163 74. Washington PeopleAmerican Banker, p.165
Commentaries and Editorials: March 23, 2009 1. My Plan for Bad Bank Assets Wall St. Journal, Commentary, p.3 2. A Smoot-Hawley Moment? Wall St. Journal, Editorial, p.6 3. The Bonus Tax Is Just Plain Stupid Wall St. Journal, Commentary, p.8 4. Rescuing the Economy Just Got Harder Wall St. Journal, Commentary, p.10 5. Why South Carolina Doesn't Want 'Stimulus' Wall St. Journal, Commentary, p.13 6. Too Much Bark, Not Enough Bite Wall St. Journal, Commentary, p.15 7. Financial Stocks: Will Good News Follow the Bad? Wall St. Journal, Commentary, p.16 8. Downpayment Insurance Could Stabilize Home Prices Wall St. Journal, Commentary, p.19 9. Rage at AIG bonus pay-out is no excuseFinancial Times, Editorial, p.21 10. Strike faster on death-wish financeFinancial Times, Commentary, p.22 11. Pain of broken financial contracts will be feltFinancial Times, Commentary, p.24 12. Goldman AIG exposureFinancial Times Lex Blog, Commentary, p.26 13. Maths and marketsFinancial Times, Editorial, p.27 14. Glimmers of hopeFinancial Times Lex Blog, Commentary, p. 28 15. Red Ink Red Alert Washington Post, Editorial, p.29
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16. Our Foundering Father Washington Post, Commentary, p.30 17. American Capitalism BesiegedWashington Post, Commentary, p.32 18. The Corporate Giants We Love to Hate Have Shrugged It Off BeforeWashington Post, Commentary, p.34 19. Upbeat Down Under Washington Post, Commentary, p.36 20. A Big Boost for Buyers Seeking Jumbo LoansWashington Post, Commentary, p.38 21. Affordable Housing Initiative Hits the WebWashington Post, Commentary, p.40 22. The Fed Does Battle, Again New York Times, Editorial, p.42 23. Financial Policy Despair New York Times, Commentary, p.44 24. Tax on Bonuses Will Hurt Sector New York Times, Commentary, p.46 25. The Problem With Flogging A.I.G. New York Times, Commentary, p.48 26. Are We Home Alone? New York Times, Commentary, p.51 27. Has a Katrina Moment Arrived? New York Times, Commentary, p.53 28. Anger Mismanagement New York Times, Commentary, p.56 29. Toxic R Us New York Times, Commentary, p.58 30. When the Economy Really Did Fall Off a Cliff New York Times, Commentary, p.60 31. Appraising the Appraiser New York Times, Commentary, p.63
Erin Frederick Senior Legislative Assistant Consumer Mortgage Coalition 101 Constitution Ave., NW, 9th Floor West Washington, DC 20001 CMC Main Phone: 202.742.4366 Direct Dial: 202.742.4368 Fax: 202.403-3926 erin@canfieldassoc.com
CONSUMER MORTGAGE COALITION
Financial Services ClipsCommentaries and Editorials March 23, 2009 1. My Plan for Bad Bank Assets Wall St. Journal, Commentary, p.3 2. A Smoot-Hawley Moment? Wall St. Journal, Editorial, p.6 3. The Bonus Tax Is Just Plain Stupid Wall St. Journal, Commentary, p.8 4. Rescuing the Economy Just Got Harder Wall St. Journal, Commentary, p.10 5. Why South Carolina Doesn't Want 'Stimulus' Wall St. Journal, Commentary, p.13 6. Too Much Bark, Not Enough Bite Wall St. Journal, Commentary, p.15 7. Financial Stocks: Will Good News Follow the Bad? Wall St. Journal, Commentary, p.16 8. Downpayment Insurance Could Stabilize Home Prices Wall St. Journal, Commentary, p.19 9. Rage at AIG bonus pay-out is no excuseFinancial Times, Editorial, p.21 10. Strike faster on death-wish financeFinancial Times, Commentary, p.22 11. Pain of broken financial contracts will be feltFinancial Times, Commentary, p.24 12. Goldman AIG exposureFinancial Times Lex Blog, Commentary, p.26 13. Maths and marketsFinancial Times, Editorial, p.27 14. Glimmers of hopeFinancial Times Lex Blog, Commentary, p. 28 15. Red Ink Red Alert Washington Post, Editorial, p.29 16. Our Foundering Father Washington Post, Commentary, p.30 17. American Capitalism BesiegedWashington Post, Commentary, p.32
101 Constitution Ave., NW; 9th Floor West; Washington, DC 20001 Phone: (202) 742 4366 Fax: (202) 403 3926
18. The Corporate Giants We Love to Hate Have Shrugged It Off BeforeWashington Post, Commentary, p.34 19. Upbeat Down Under Washington Post, Commentary, p.36 20. A Big Boost for Buyers Seeking Jumbo LoansWashington Post, Commentary, p.38 21. Affordable Housing Initiative Hits the WebWashington Post, Commentary, p.40 22. The Fed Does Battle, Again New York Times, Editorial, p.42 23. Financial Policy Despair New York Times, Commentary, p.44 24. Tax on Bonuses Will Hurt Sector New York Times, Commentary, p.46 25. The Problem With Flogging A.I.G. New York Times, Commentary, p.48 26. Are We Home Alone? New York Times, Commentary, p.51 27. Has a Katrina Moment Arrived? New York Times, Commentary, p.53 28. Anger Mismanagement New York Times, Commentary, p.56 29. Toxic R Us New York Times, Commentary, p.58 30. When the Economy Really Did Fall Off a Cliff New York Times, Commentary, p.60 31. Appraising the Appraiser New York Times, Commentary, p.63

MARCH 23, 2009
My Plan for Bad Bank Assets

The private sector will set prices. Taxpayers will share in any upside.
By TIMOTHY GEITHNER
The American economy and much of the world now face extraordinary challenges, and confronting these challenges will continue to require extraordinary actions. No crisis like this has a simple or single cause, but as a nation we borrowed too much and let our financial system take on irresponsible levels of risk. Those decisions have caused enormous suffering, and much of the damage has fallen on ordinary Americans and small-business owners who were careful and responsible. This is fundamentally unfair, and Americans are justifiably angry and frustrated. The depth of public anger and the gravity of this crisis require that every policy we take be held to the most serious test: whether it gets our financial system back to the business of providing credit to working families and viable businesses, and helps prevent future crises. Over the past six weeks we have put in place a series of financial initiatives, alongside the Recovery and Reinvestment Program, to help lay the financial foundation for economic recovery. We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -making it less likely that the more negative economy they fear will take place. We started a major new lending program with the Federal Reserve targeted at the securitization markets critical for consumer and small business lending. Last week, we announced additional actions to support lending to small businesses by directly purchasing securities backed by Small Business Administration loans. Together, actions over the last several months by the Federal Reserve and these initiatives by this administration are already starting to make a difference. They have helped to bring mortgage interest rates near historic lows. Just this month, we saw a 30% increase in refinancing of mortgages, which means millions of Americans are taking advantage of the lower rates. This is good for homeowners, and it's good for the economy. The new joint lending program with the Federal Reserve led to almost $9 billion of new securitizations last week, more than in the last four months combined. However, the financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many
assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers. Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system. The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government. The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate. Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets. The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury. This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience. Moving forward, we as a nation must work together to strike the right balance between our need to promote the public trust and using taxpayer money prudently to strengthen the financial system, while also ensuring the trust of those market participants who we need to do their part to get credit flowing to working families and businesses -- large and small -- across this nation. This requires those in the private sector to remember that government assistance is a privilege, not a right. When financial institutions come to us for direct financial assistance, our government

MARCH 23, 2009
A Smoot-Hawley Moment?
Congress on AIG and banks: 'Oppressive, unjust and tyrannical.'
When does a single policy blunder herald much larger economic damage? Sometimes it's hard to know ahead of time. Few in Congress thought the Smoot-Hawley tariff was a disaster in 1930, but it led to retaliation and a collapse of world trade. The question amid Washington's AIG bonus panic is whether Congress's war on private contracts and the financial system is a similarly destructive moment. It is certainly one of the more amazing and senseless acts of political retribution in American history. In its bipartisan rage, the House saw fit last week not merely to punish the employees of AIG's Financial Products unit that the company still needs to safely unwind credit default swaps. The Members voted, 328-93, to slap a 90% tax on the bonuses of anyone at every bank receiving $5 billion in TARP money who earns more than $250,000 a year. A draft Senate version is even broader. Never mind if the bonus was earned last year or earlier, or under a legally binding employment contract. The confiscatory tax will apply ex post facto. Never mind, too, that such punitive laws were expressly deplored by America's Founders. In Federalist 44, James Madison warned that "Bills of attainder, ex post facto laws, and laws impairing the obligation of contracts, are contrary to the first principles of the social compact, and to every principle of sound legislation." In 1827 in Ogden v. Saunders, the U.S. Supreme Court issued a similar warning about legislative limits under Article I, Section 10 of the Constitution: "The states are forbidden to pass any bill of attainder or ex post facto law, by which a man shall be punished criminally or penally by loss of life of his liberty, property, or reputation for an act which, at the time of its commission, violated no existing law of the land," wrote Justice Bushrod Washington. "Why did the authors of the Constitution turn their attention to this subject, which, at the first blush, would appear to be peculiarly fit to be left to the discretion of those who have the police and good government of the state under their management and control? The only answer to be given is because laws of this character are oppressive, unjust, and tyrannical, and as such are condemned by the universal sentence of civilized man." Yes, Article I, Section 10 applies to the states, and this is a federal law. Congress may also figure it avoids the "bill of attainder" objection by applying the law to individuals at several companies receiving TARP money. But Congress's willingness to wreak such vengeance against a specific class of Americans is still as offensive as a matter of principle as Justice Washington and the Federalist Papers noted. The Founders feared the punitive whim of the legislative mob as much as they did the tyranny of a King.
Financial Times3/21/09 Editorial
Rage at AIG bonus pay-out is no excuse

Published: March 20 2009 20:22 | Last updated: March 20 2009 20:22 Politicians acting in haste rarely act wisely, least of all when guided by rage. In response to outrage over retention bonuses paid to employees of AIG the failed insurer, now mostly owned by the government, which has received tens of billions in public support the US House of Representatives rushed to pass a punitive tax aiming to claw the bonuses back. It would apply to all groups receiving help under the governments financial stability plan, not just AIG. A similar measure is before the Senate. The outcry over these bonuses is entirely understandable, though less than fully thought through. Understandable or otherwise, the response smacks more of banana republic than good government. The country is furious at the idea of rewarding the very people, in AIGs now notorious financial products arm, who helped sink both their company and the wider economy. Yet these bonuses were paid not as a reward for past performance, which would indeed be absurd, but to retain people deemed necessary to the unwinding of its mistakes. That reasoning offends against the principle of fairness, but if one is more interested in stabilising the economy than striking back at supposed culprits, it should not be dismissed out of hand. In AIGs case, the US government is now the de facto owner. As such it has rights and responsibilities, and it should attend more conscientiously to both. The Treasury should decide whether the bonuses are necessary to retain people essential to the success of its stabilisation plan. If they are, much as one may recoil at the idea, the bonuses should be paid: the cost pales in comparison to the vastly larger sums at stake. If not, the people who received them those who have not already left, that is should be told to return them or be fired. The government is within its rights as a new owner to set new terms for its employees. The legislative blunderbuss about to be discharged by Congress, on the other hand, is likely to blow up in taxpayers faces. It forbids the case-by-case judgments on pay which are necessary to ensure that the stabilisation plan succeeds. And it expresses the tyrannical principle that Congress can use the tax code to void contracts that the executive branch has consented to, after the fact and with retrospective force. The measure is constitutionally dubious, as Congress well knows. All these considerations have been set aside for the purpose of venting the countrys anger. It is an abdication of responsibility. Barack Obama, asked whether he approves of this law, has declined to answer. It would have been better if things had not come to this pass, he says. Quite so, and indeed there are lessons here about the conditions that must be attached to future assistance. But things have come to this pass and the administration must resist this bad new law. Copyright The Financial Times Limited 2009
Financial Times3/23/09 Commentary
Strike faster on death-wish finance

By Clive Crook Published: March 22 2009 18:47 | Last updated: March 22 2009 18:47 The outcry in the US over bonuses paid by AIG, the stricken insurer, has been astonishing. By recent standards the sums involved are tiny but the story refuses to die down. Its implications could be, and should be, far-reaching. Responding to an onslaught of popular protest, the House of Representatives has passed an atrocious and probably unconstitutional law, using the tax system to void contracts that its own recent stimulus bill sought to protect. Tim Geithner, the Treasury secretary, is implicated in the scandal and may yet be driven from office. The surge of anger may also cripple the long-awaited financial stability plan that Mr Geithner is about to reveal. This plan will give an important role to private investors acting alongside the government in acquiring toxic assets. Good luck with that: the shredding of contracts and the use of the Internal Revenue Service as a bankers punishment squad are hardly conducive to the partnership the administration of Barack Obama seeks. Moreover, the government may be unable to take up the slack. The Treasury devised this scheme in the first place because taxpayers were so opposed to spending hundreds of billions more dollars to prop up the banks. Yet propped up they must be. The US president has vacillated between stoking the outcry and trying to calm people down. He should have condemned the Houses bill of attainder. If his financial repairs are to succeed, the president must foster a more calculating, less self-destructive mood. Regardless, AIG should remain at the front of the governments mind as it considers longer-term regulatory reform. It is striking if unsurprising that popular rage has centred on the bonuses. As Eliot Spitzer, former governor of New York, has pointed out, it is no less outrageous that a large part of the support AIG received maybe 250 times as much as it spent on the bonuses went to trading partners such as Goldman Sachs, recipients of public support in their own right, settling its obligations to them in full. Any company facing bankruptcy without taxpayer support should indeed be told to review its workers contracts; but the same goes for obligations to creditors. In an outright bankruptcy, all such claims are on the table and everybody is in line to take losses. Bankruptcy was tried, of course, in the case of Lehman, and was not a great success: many see that as a catalyst for the worst phase of this crisis. After the Lehman debacle, keeping counterparties whole to avoid systemic collapse was the entire point of coming to the rescue of AIG and the others. Apparently, the lesson of the Lehman case was drawn too hastily. Do not worry too much about moral hazard, many concluded. Letting banks that took excessive risks fail in order to encourage more prudent behaviour is all very well in theory; in practice, you pull the ceiling down on your head.
Yes, but then one must also understand that the AIG outcome keep everybody whole but taxpayers is the alternative, and this no longer looks so good either. It fails the test of fairness, which is what the outcry is all about. It fails the test of efficiency too. The companys death-wish business model, which involved insuring risks being taken by other financial groups on a literally insupportable scale, had moral hazard written all over its transactions. As James Hamilton of the University of California at San Diego has pointed out, if AIGs counterparties were betting that the government would stand behind those suicidal credit default swaps, which in turn allowed them to keep rolling the dice, they turned out to be right. So the question is this: if you cannot let a systemically significant bank or shadow bank collapse, and you cannot keep it whole at taxpayer expense, how do you dispose of it in an orderly way? How do you arrange a fair and efficient sharing of the losses? A template exists for US banks, though not for shadow banks or for hedge funds pretending to be insurance companies, in the resolution procedures of the Federal Deposit Insurance Corporation. The FDIC in effect devises pre-packaged bankruptcies for troubled banks. The most obvious failing in the regime that it applies to too narrow a set of institutions is certain to be addressed as regulatory reform proceeds. Indisputably, an orderly resolution regime is required for all financial institutions, banks and non-banks alike. But in light of the AIG fiasco, a less obvious aspect also needs to be kept in mind: the need for early intervention. The FDIC can cope with a few bank failures at a time; its procedures cannot cope with a system-wide collapse. Undercapitalised banks and shadow banks have to be shut down well before their capital is exhausted and well before the collateral damage to uninsured depositors and other creditors has grown big enough to set other dominoes falling. Regulators need to think this through, working backwards from AIG. No doubt rules can be devised to forbid AIG-like business models. That is important but not enough. Financial groups will still get into trouble. The regime we need is one that would have seen the risks that AIG was running, declared it critically undercapitalised according to announced criteria and put it into receivership. Intervene early or risk having to choose between Lehman and its consequences in 2008 and AIG and its consequences in 2009. More columns at www.ft.com/clivecrook Post comments at Clive Crooks blog clive.crook@gmail.com Copyright The Financial Times Limited 2009
Pain of broken financial contracts will be felt

By Aline van Duyn Published: March 21 2009 02:00 | Last updated: March 21 2009 02:00 In Aldous Huxley's Brave New World , influenced by the turbulent economics and politics of the Great Depression, the World Controllers have perfected the art of breeding Alpha-Plus mandarins to deal with complex jobs and Epsilon-Minus Semi-Morons to perform menial tasks. Everybody is created to be content with their lot in life. As bottled embryos, some are heat conditioned so they can emigrate to the tropics to be steel workers. Some are constantly rotated in order to be comfortable repairing rockets in mid air. "That is the secret of happiness and virtue - liking what you've got to do. All conditioning aims at that: making people like their inescapable social destiny," a group of students is told. For those of us lucky enough to live in free societies, destiny is not inescapable. People make choices, and in making those there are inevitable disputes and negotiations, which are settled though contracts, implicit or explicit. The extent to which contracts struck in a different era - the boom years of the credit bubble - are either adhered to or broken will play a huge part in determining what the next phase of our world will look like. The uproar about Fred Goodwin's pension and AIG's bonuses, and whether or not employment contracts can or should be broken, marks a turning point in the debate of what is and what is not subject to renegotiation. Not since the Great Depression have there been quite so many contracts that may need to be changed, either voluntarily or by force. The bonus payments of $165m to AIG's 400 derivatives traders are a tiny example. There are thousands and thousands of mortgages, bonds, preference shares - any number of financial contracts. The attempts to get GM workers to agree to concessions is another example; so are the efforts to get GM's bondholders to absorb a share of the losses the company faces. Just yesterday a person familiar with GM bondholder talks said that to induce thousands of bondholders to agree to changes to the terms, there would have to be an incentive. It is hard to get voluntary agreements. This is the reason that "restructuring" - essentially dividing losses between different types of people, from shareholders, to bondholders, to employees, to taxpayers - usually has to be imposed by a judge in a bankruptcy court or by a government. Large parts of the financial industry, that includes AIG's derivatives traders, have been conditioned to expect that they have a right to be paid a lot more than most people for their work. This cannot hold when the costs of poor financial decisions are in the trillions of dollars, and that ignores the human damage of unemployment and lost hopes of the economic downturn. Each individual person's case for why they have a valid claim may well seem perfectly reasonable, but once you step back and look at the aggregate picture, it can be far less compelling. The consequences of breaking contracts can be enormous: it may become harder and more expensive to borrow money, for homeowners and for banks; it may mean that taxpayers, not private
investors, foot a larger part of the repair bill. But the costs of the lack of flexibility by some, such as the AIG employees, can be even greater. "AIG has become the subject of considerable public scorn, and the public's interest in providing ongoing, sustainable support to repair our struggling financial system has plummeted," said Paul Kanjorski, a Republican congressman and head of the financial services subcommittee. The massive tearing up of contracts is far from unprecedented. President Roosevelt did it when it became illegal to own gold - it did not become legal again until 1974. The move meant vast numbers of contracts were broken and their value reduced. Even Mr Huxley, despairing in Britain in the early 1930s, argued the time had come to renounce parliamentary democracy and to submit to rule "by men who will compel us to do and suffer what a rational foresight demands". If the financial industry wants to avoid a similar subjugation - or new laws such as a 90 per cent tax on bonuses - it has to shrug off its conditioning and take blame and pain, voluntarily. aline.vanduyn@ft.com Copyright The Financial Times Limited 2009
Financial Times Lex Blog3/23/09 Commentary
Goldman AIG exposure

Published: March 23 2009 02:00 | Last updated: March 23 2009 02:00 Explain yourself, demanded an angry public, and Goldman Sachs responded. Chief financial officer David Viniar on Friday answered reporters' questions about the bank's relationship with AIG - namely why Goldman claims it protected itself against the insurer's possible failure and how it then ended pocketing several billion dollars of AIG bail-out funds. To recap, when AIG was taken over in September, Goldman had claimed $7.5bn of collateral against insurance written by AIG on a $20bn portfolio of debt securities. It topped that up with $2.5bn in hedges (predominantly credit derivatives written on AIG) because Goldman believed the securities' value was lower than AIG did (Goldman was right). Goldman received a further $2.5bn of collateral by the end of last year. The Federal Reserve handed it another $5.6bn to buy up the underlying AIG-insured securities for a bail-out vehicle, Maiden Lane III. Goldman continues to collect collateral on about $6bn of securities that could not be thrown into the bailout vehicle. The size of Goldman's exposure is unsurprising. After all, Goldman is a massive trading house and AIG the world's largest insurer. These types of linkages were why AIG was saved. Of course, it is easy to understand why US taxpayers are uneasy about funnelling federal dollars through AIG to banks. Taxpayers might rightly ask why there was no discussion about banks taking some pain by selling assets into ML III at a discount. But that is a question for the authorities, not Goldman, which had its own investors to think about (among them, in circular fashion, the US taxpayer). As a relative success story, it is worrying that Goldman felt obliged to put on a public relations dog and pony show to defuse the furore over AIG. Public outrage over bonuses and bail-outs can become self-defeating if it distracts executives and tramples staff morale. It also risks rendering less effective government's proposed cures. Damaging the banks that intervention was designed to protect means cutting off the system's nose to spite its face. Put down the knife. Copyright The Financial Times Limited 2009
Our Foundering Father

By Kathleen Parker Sunday, March 22, 2009; A17
What a relief to hear Barack Obama tell a California audience the other day: "I am the president of the United States of America." Who knew? Lately, it's been hard to tell whether Obama himself knows that he is the leader of the country formerly known as The Most Powerful Nation on Earth. Obama's self-identification centered around the American International Group's bonus problem, which, Obama reminded us, he did not create, but . . . "the buck stops with me." That cliche is awfully busy these days. Most presidents doubtless have to pinch themselves for a while after arriving at the White House. The campaign over, Mr. President suddenly realizes that he is, in fact, in charge. The successful courtship ultimately leads to marriage, and reality pitches a tent where hope once crooned the night away. Giving the man his length of slack, Obama has had more reality than most. As he has said more than once, he'd be delighted to have just one crisis or just one war to deal with, but he's got a couple of each. Still, one can't help wishing Obama would pinch himself a little harder and get on with it. The White House mess, to steal a title from a Christopher Buckley book, sure is. Who's in charge over there? "I think they're drinking water from a fire hose even more than we were," a Bush White House official said to me a few days ago. "I actually feel sorry for them." That fire hose apparently is tapped into the Dasani Aquifer. The plugging-leaks-in-the-dike metaphor is no longer adequate to the titanic episode now engulfing the nation's capital. Despite civic rage and political blame -- even death threats aimed at business executives -- there is a carnival air of unseriousness and grotesquery loose upon the land. Life has become one grand, comic burlesque, a vaudevillian game show where plumbers are journalists, war heroes twitter and the president hits the late-night circuit in the midst of crisis. Obama's appearance on Jay Leno's show Thursday night -- joking lamely that his bowling is "like Special Olympics or something" -- is symptomatic of a broader blending of the serious and the comic that makes sane people feel slightly displaced. Infotainment isn't a new topic, but the lines are becoming increasingly blurred. Tragicomedy, in which gods and men reverse roles, may be an honored dramatic genre, but is this any way to live?
Although Obama is the first sitting president to appear on "The Tonight Show," his presence is historically significant only if you believe that Jon Stewart is Edward R. Murrow and Rush Limbaugh is William F. Buckley. I don't begrudge Stewart his artful takedown of CNBC's Jim Cramer or his role in keeping audiences abreast of the news with humor. We need that. And a financial guru whose program has more bells and whistles than FAO Schwarz at Christmastime -- and who treats audiences like kindergartners at a Dow Jones Camp -- is surely fair game. Leave it to the comedian to point out to the former hedge fund manager that the financial market "is not a . . . game!" At least we're entertained as we try not to notice that no one's in charge. Except, of course, for Fox TV's Glenn Beck, who is now channeling televangelist Jimmy Swaggart, choking back tears on his Friday the 13th special -- "We Surround Them, You Are Not Alone." On his Web site, Beck asks: "Mob rule in Washington?" while he hawks T-shirts with pithy slogans such as "Hate U" and "Torches and Pitchforks." Whose mob goes there? Yes, we're all angry, especially at the AIG culprits who keep paying themselves bonuses with our money. That the payouts caught Obama by surprise does not bode well for confidence in his leadership, especially when, as Time reports, Treasury Department staff members knew of the bonuses as early as Feb. 28, and Treasury Secretary Tim Geithner knew at least two days before word reached the president. Even so, a little bit of outrage goes a long way, and those who crank out emotional pleas for populist retribution should beware what they hype. Mobs eventually want a prize for their trouble, and gladiators are in short supply. With the stage so crowded with actors, meanwhile, Obama may want to focus on the role for which he was elected, lest Beck's question become an assertion. Repeat: "I am the president of the United States of America." kparker@kparker.com
The Corporate Giants We Love to Hate Have Shrugged It Off Before

By Charles R. Geisst Sunday, March 22, 2009; B01
In the 1930s, the term "public enemy" was reserved for gangsters and bootleggers. Today, we have a new breed: the financiers. And no one fits the current definition better than American International Group Inc., better known to us all as AIG. Insurers aren't supposed to play the villain. They're usually known as conservative, helping businesses and individuals manage risk. Yet it was AIG's risk management that helped create the current crisis, which shows no signs of ending. And last week's revelation that the unit's employees were being paid enormous bonuses was the straw that broke the taxpayers' back. The public outcry is clear and vocal but it's not exactly new. Americans have gotten righteously indignant at corporate behemoths when they've misbehaved many times before. But then what? Whether or not AIG has to return those bonuses, would you buy a policy from the company? Can these firms rebound from being public enemy No. 1? Usually, the answer is yes. In the 19th century, the railroads controlled by Commodore Vanderbilt and Jay Gould easily fit the bill as rogue companies. Using them as piggybanks, the owners almost bankrupted them more than once. The men's financial shenanigans became legendary, and investors were so badly hurt that one of the companies actually paid no dividend on its common stock until well into the 20th century. In the 1860s, New York state regulators required the railroads' annual reports to state how many fatal accidents they'd had during the previous year. Nevertheless, they continued to attract passengers. They had a stranglehold on their businesses and customers had little choice but to continue using them. In fact, that control of the market was part of the problem. When a company's franchise becomes so entrenched, misconduct almost invariably follows. These problems almost always occur during bull markets. When the background turns green, nearly everyone becomes temporarily colorblind. But, as we're seeing today, green quickly turns to red when markets go sour. Citibank's problems rankled the public and everyone on Wall Street when it became clear that the country's largest bank had dug itself an inescapable hole. The bank that was too big to fail became a ward of the government and had to scale down its activities to survive. But Citi has some experience bouncing back from low public opinion. In the early 1930s, the National City Bank was widely condemned by all, including Franklin D. Roosevelt and Congress, for having helped create the Crash of 1929 and the Depression that followed. Its president was fired and new banking laws were enacted to protect the financial system and the public. But the bank, today Citibank, survived and prospered. Its former president spent the rest of his working days overseeing a wellknown brokerage house. Similarly, the president of the Chase National Bank (today JP Morgan Chase) speculated in his own company's stock in the early 1930s. He actually sold the stock short, later explaining that he was helping stabilize it because the price was too high. These revelations occurred when the
unemployment rate was approaching 25 percent and the stock market was in serious trouble. And yet the bank survived to see many more prosperous years. Savers and investors either were uninformed about the problem or were indifferent to it. Not everyone comes back from the brink. The largest bank failure in the country in the early 1930s was the Bank of United States, located in New York City. It preyed on immigrants and used their savings to speculate in the stock market. Today, we would say that it behaved like a hedge fund, borrowing vast sums to invest in risky assets. After the smoke cleared, the bank was gone. The scandal prompted Congress to create the Federal Deposit Insurance Corp. Years later, when junk bonds captured public attention in the 1980s, the securities house that created them -- Drexel Burnham Lambert -- was the toast of Wall Street. But the savings and loan crisis of the late 1980s caused a record number of bond defaults, and within two years, regulators shuttered the firm. It survived in a much smaller form with a limited franchise. Its demise was a testament to the hubris of the 1980s bull market. For companies in these circumstances, it may turn out that any press is good press. The government bailouts of Chrysler and Lockheed more than 20 years ago did not deter customers from using their products. Both rebounded from those problems to survive, although Chrysler's fate is, of course, once again uncertain. The history of these fiascos suggests that AIG will survive the bad publicity, unless the current populist uproar continues for longer than expected. Of course, it might not be called AIG when the furor subsides. "I think the AIG name is so thoroughly wounded and disgraced that we're probably going to have to change it," AIG chief executive Edward M. Liddy said in congressional testimony last week. A cynical interpretation of the bonus mess at Merrill Lynch and AIG suggests that both companies already knew the history and precedents of the problem they were creating and proceeded to grant those bonuses anyway. Financial firms actually know more of their industry's history than their actions might suggest. Whether that history will repeat itself is the only remaining question. Charles R. Geisst is the author of "Wall Street: A History" and the forthcoming "Collateral Damaged: The Marketing of Consumer Debt to America."
Financial Policy Despair

By PAUL KRUGMAN Over the weekend The Times and other newspapers reported leaked details about the Obama administrations bank rescue plan, which is to be officially released this week. If the reports are correct, Tim Geithner, the Treasury secretary, has persuaded President Obama to recycle Bush administration policy specifically, the cash for trash plan proposed, then abandoned, six months ago by then-Treasury Secretary Henry Paulson. This is more than disappointing. In fact, it fills me with a sense of despair. After all, weve just been through the firestorm over the A.I.G. bonuses, during which administration officials claimed that they knew nothing, couldnt do anything, and anyway it was someone elses fault. Meanwhile, the administration has failed to quell the publics doubts about what banks are doing with taxpayer money. And now Mr. Obama has apparently settled on a financial plan that, in essence, assumes that banks are fundamentally sound and that bankers know what theyre doing. Its as if the president were determined to confirm the growing perception that he and his economic team are out of touch, that their economic vision is clouded by excessively close ties to Wall Street. And by the time Mr. Obama realizes that he needs to change course, his political capital may be gone. Lets talk for a moment about the economics of the situation. Right now, our economy is being dragged down by our dysfunctional financial system, which has been crippled by huge losses on mortgage-backed securities and other assets. As economic historians can tell you, this is an old story, not that different from dozens of similar crises over the centuries. And theres a time-honored procedure for dealing with the aftermath of widespread financial failure. It goes like this: the government secures confidence in the system by guaranteeing many (though not necessarily all) bank debts. At the same time, it takes temporary control of truly insolvent banks, in order to clean up their books. Thats what Sweden did in the early 1990s. Its also what we ourselves did after the savings and loan debacle of the Reagan years. And theres no reason we cant do the same thing now. But the Obama administration, like the Bush administration, apparently wants an easier way out. The common element to the Paulson and Geithner plans is the insistence that the bad assets on banks books are really worth much, much more than anyone is currently willing to pay for them. In fact, their true value is so high that if they were properly priced, banks wouldnt be in trouble. And so the plan is to use taxpayer funds to drive the prices of bad assets up to fair levels. Mr. Paulson proposed having the government buy the assets directly. Mr. Geithner instead proposes a complicated scheme in which the government lends money to private investors, who then use the
money to buy the stuff. The idea, says Mr. Obamas top economic adviser, is to use the expertise of the market to set the value of toxic assets. But the Geithner scheme would offer a one-way bet: if asset values go up, the investors profit, but if they go down, the investors can walk away from their debt. So this isnt really about letting markets work. Its just an indirect, disguised way to subsidize purchases of bad assets. The likely cost to taxpayers aside, theres something strange going on here. By my count, this is the third time Obama administration officials have floated a scheme that is essentially a rehash of the Paulson plan, each time adding a new set of bells and whistles and claiming that theyre doing something completely different. This is starting to look obsessive. But the real problem with this plan is that it wont work. Yes, troubled assets may be somewhat undervalued. But the fact is that financial executives literally bet their banks on the belief that there was no housing bubble, and the related belief that unprecedented levels of household debt were no problem. They lost that bet. And no amount of financial hocus-pocus for that is what the Geithner plan amounts to will change that fact. You might say, why not try the plan and see what happens? One answer is that time is wasting: every month that we fail to come to grips with the economic crisis another 600,000 jobs are lost. Even more important, however, is the way Mr. Obama is squandering his credibility. If this plan fails as it almost surely will its unlikely that hell be able to persuade Congress to come up with more funds to do what he should have done in the first place. All is not lost: the public wants Mr. Obama to succeed, which means that he can still rescue his bank rescue plan. But time is running out.
New York Times--March 23, 2009 Commentary Breakingviews.com
Tax on Bonuses Will Hurt Sector

Tax on Bonuses Will Hurt Sector President Obama has been vague about legislation that would retroactively levy huge taxes on bonuses paid by the largest recipients of government bailout money. Rather than just avoid associating himself with it, now is the time for him to stand up andoppose it. Paying out big bonuses at a time of national sacrifice is distasteful, particularly when it comes to the people who helped lead the American International Group into bankruptcy through their incompetence. But mutating the tax code is not an effective means for shaping good public policy. Here are six reasons to kill the legislation. 1. The bills would almost certainly be challenged as an affront to Article I, Section 9 of the United States Constitution, which states that, No bill of attainder or ex post facto law will be passed. Congress has the right to set tax policy. But legal experts are divided on whether the Supreme Court will uphold a blatant attempt to punish a subsection of society after the fact. At least one lawmaker has talked about retaliation. It would also be a field day for lawyers, incurring huge legal costs on both the government and banks money much better spent elsewhere. 2. Financial institutions that accepted government funds as part of an effort to shore up confidence but now say they didnt really need them would be unfairly punished. The $165 million in guaranteed bonuses paid out to the dunderheads in A.I.G.s derivatives group may have sparked the legislation, but it will snag profitable banks like JPMorgan Chase, Wells Fargo, Goldman Sachs and Morgan Stanley, along with others, like Citigroup, that are admittedly more deserving of a government crackdown. 3. A rush to pay back government funds a possible consequence of the legislation would remove capital from the banking system when it needs it most. Many of the banks that received money under the Troubled Asset Relief Program, known as TARP, dont technically need it. They could repay enough to exempt them from the strictures of the bills wending their way through Congress. But unless they replace the Treasury Departments money by raising equity, that will reduce their Tier 1 capital, and thereby their willingness to lend and investors confidence in their cushions to handle future bad loans on their balance sheets. 4. By rushing bills through the House and Senate, legislators have undermined government efforts, and especially the Treasurys. Castigating the effort of Timothy F. Geithner, the Treasury secretary, to persuade A.I.G. to withhold bonuses within the confines of the law has also damaged confidence in the administrations point man in finance and will make it even more difficult to recruit talent to the shockingly undermanned Treasury Department. The pragmatic Mr. Geithner was no doubt trying to give bigger issues the majority of his attention. The A.I.G.
debacle may have shown him to be a novice political operative or orator he was hired for.
but thats not what
5. The Congressional action also endangers other efforts to shore up the financial system and the economy. The government is urging the private sector to participate in programs intended to invigorate the securitization market (the Term Asset-Backed Securities Loan Facility) and remove dodgy assets from the banks (the Public-Private Investment Fund). Potential participants are now worried that Congress could use the taxpayer financing of these initiatives to impose greater regulation on the programs after the fact, as it has now done for TARP recipients. 6. Foreign banks and bankers will benefit at the expense of United States banks and bankers. Deutsche Bank, Credit Suisse, UBS, Barclays and Nomura have wanted for decades to grab market share on Wall Street. Because the tax rules will not affect them, they can now dangle huge retention bonuses and guarantees to the best bankers and traders in the business, from New York to San Francisco to Shanghai. Banking employees based in the United States and any United States taxpaying employees elsewhere would be sorely tempted by such offers. That could leave the American banks in even worse shape to pay back the government, create credit and generate tax revenue. There have to be better ways to address the bonus fiasco at A.I.G. In any event, its more important to think about how to improve the system for the future. Thats what Mr. Obama should put firmly at the top of the agenda. ROB COX For more independent financial commentary and analysis, visit www.breakingviews.com.
New York Times--March 21, 2009 Commentary--Talking Business
The Problem With Flogging A.I.G.

By JOE NOCERA Can we all just calm down a little? Yes, the $165 million in bonuses handed out to executives in the financial products division of American International Group was infuriating. Truly, it was. As many others have noted, this is the same unit whose shenanigans came perilously close to bringing the worlds financial system to its knees. When the Federal Reserve chairman, Ben Bernanke, said recently that A.I.G.s irresponsible bets had made him more angry than anything else about the financial crisis, he could have been speaking for most Americans. But death threats? All the executives and their families should be executed with piano wire my greatest hope, wrote one person in an e-mail message to the company. Another suggested publishing a list of the Yankee bankers so some good old southern boys can take care of them. Or how about those efforts to publicize names of individual executives who received bonuses efforts championed by Attorney General Andrew Cuomo of New York and Barney Frank, chairman of the House Financial Services Committee. To what end? How does outing these executives fix skewed compensation incentives, which have created that unjustified sense of entitlement that pervades Wall Street? No, its mostly about using subpoena power to satisfy the publics thirst for blood. (In light of the death threats, when Mr. Cuomo received the list of A.I.G. bonus recipients on Thursday, he promised to consider individual security and privacy rights in deciding whether to publicize the names.) Then there was that awful Congressional hearing on Wednesday, in which A.I.G.s newly installed chief executive, Edward Liddy, was forced to listen to one outraged member of Congress after another rail about bonuses and obsess about when Treasury Secretary Timothy Geithner learned about them while ignoring far more troubling problems surrounding the A.I.G. rescue. Oh, and lets not forget the bill that was passed on Thursday by the House of Representatives. It would tax at a 90 percent rate bonus payments made to anyone who earned over $250,000 at any financial institution receiving significant bailout funds. Should it become law, it will affect tens of thousands of employees who had absolutely nothing to do with creating the crisis, and who are trying to help fix their companies. Meanwhile, the real culprits like Joseph J. Cassano, the former head of A.I.G.s financial products division are counting their money in retirement. Nobody on Capitol Hill seems much interested in getting that money back. (And the bill does nothing about bonuses that were paid before 2009, meaning that most of those egregious Merrill Lynch bonuses, paid at the end of last year, will not be touched.) By weeks end, I was more depressed about the financial crisis than Ive been since last September. Back then, the issue was the disintegration of the financial system, as the Lehman
bankruptcy set off a terrible chain reaction. Now Im worried that the political response is making the crisis worse. The Obama administration appears to have lost its grip on Congress, while the Treasury Department always seems caught off guard by bad news. And Congress, with its howls of rage, its chaotic, episodic reaction to the crisis, and its shameless playing to the crowds, is out of control. This week, the body politic ran off the rails. There are times when anger is cathartic. There are other times when anger makes a bad situation worse. We need to stop committing economic arson, Bert Ely, a banking consultant, said to me this week. That is what Congress committed: economic arson. How is the political reaction to the crisis making it worse? Let us count the ways. IT IS DESTROYING VALUE During his testimony on Wednesday, Mr. Liddy pointed out that much of the money the government turned over to A.I.G. was a loan, not a gift. The companys goal, he kept saying, was to pay that money back. But how? Mr. Liddys plan is to sell off the healthy insurance units or, failing that, give them to the government to sell when they can muster a good price. In other words, it is in the taxpayers best interest to position A.I.G. as a company with many profitable units, worth potentially billions, and one bad unit that needs to be unwound. Which, by the way, is the truth. But as Mr. Ely puts it, the indiscriminate pounding that A.I.G. is taking is destroying the value of the company. Potential buyers are wary. Customers are going elsewhere. Employees are looking to leave. Treating all of A.I.G. like Public Enemy No. 1 is a pretty dumb way for a majority shareholder to act when he hopes to sell the company for top dollar. IT IS, UNFORTUNATELY, BESIDE THE POINT Even on Wall Street this week, I didnt hear anyone condoning the A.I.G. bonuses. They should never have been granted, and Mr. Liddy should have been tougher about renegotiating them. (A rich irony here is that any nonfinancial company in A.I.G.s straits would be in bankruptcy, and contracts would have to be renegotiated. The fact that the government is afraid to force A.I.G. into bankruptcy, despite its crippled state, is the main reason Mr. Liddy felt he couldnt try to redo the contracts.) But there is a much bigger issue that has barely been touched upon by Congress: the way tens of billions of dollars of taxpayers money has been funneled to A.I.G.s counterparties at 100 cents on the dollar. How can it possibly make sense that Goldman Sachs, Bank of America, Citigroup and every other company that bought credit-default swaps from A.I.G. should be made whole by the government? Why isnt it forcing them to take a haircut? Whats worse, some of those companies are foreign banks that used credit-default swaps to exploit a regulatory loophole. Should the United States taxpayer really be responsible for ensuring the safety of European banks that were taking advantage of European regulations? The person who has made this point most forcefully is Eliot Spitzer, of all people. In his column for Slate.com, he wrote: Why did Goldman have to get back 100 cents on the dollar? Didnt we already give Goldman a $25 billion cash infusion, and arent they sitting on more than $100 billion in cash? Mr. Spitzer told me that while there is a legitimate sense of outrage over the bonuses, the larger outrage should be the use of A.I.G. funding as a second bailout for the large investment houses. Precisely.
IT IS DESTABILIZING How can you run a company when the rules keep changing, when you have to worry about being second-guessed by Congress? Who can do business under those circumstances? Take, for instance, that new securitization program the government is trying to get off the ground, called the Term Asset-Backed Securities Loan Facility or TALF. Although it is backed by large government loans, it requires people in the marketplace Wall Street bankers! to participate. This program could help revive the consumer credit market. But at this point, most Wall Street bankers would rather be attacked by wild dogs than take part. They fear that theyll do something make money perhaps? that will arouse Congressional ire. Or that the rules will change. The constant flip-flopping is terrible, said Simon Johnson, a banking expert who teaches at the M.I.T. Sloan School of Business. A.I.G. offers another good example. Not all the employees who face the possibility of having their bonuses taxed out from under them work for the evil financial products division. Many of them work in insurance divisions. Very few of them pull down million-dollar bonuses, and none of them brought A.I.G. to its knees. (And employees who bought the companys stock are already hurting financially, having seen its value virtually wiped out.) They are the ones the company badly needs to keep if it hopes to sell those units at a healthy price. Taking away their bonuses after theyve already put the money in their bank accounts hardly seems like the right way to motivate them. And demonizing them in Congressional hearings doesnt help either. In previous columns, I have been an advocate of nationalizing big banks like Citigroup. But after watching Congress this week, Im having second thoughts. If this is how Congress treats A.I.G., what would it do if it had a bank in its paws? What the country really needs right now from Congress is facts instead of rhetoric. Instead of these raise your hand if you took a private jet to get here exercises of outraged populism, we need hearings that educate and illuminate. Hearings like the old Watergate hearings. Hearings in which knowledge is accumulated over time, and a record is established. Hearings that might actually help us get out of this crisis. Its happened before. In 1932, Congress established the Pecora committee, named for its chief counsel, Ferdinand Pecora. It was an intense, two-year inquiry, and its findings executives shorting their own companys stock, for instance shocked the country. It also led to the establishment of the Securities and Exchange Commission and other investor protections. One person who has been calling for a new Pecora committee is Senator Richard Shelby of Alabama, a Republican and key member of the Senate Banking Committee. As we restructure our regulatory system, we need to be thorough, he told me. We need to understand what caused it. We shouldnt rush it. Meanwhile, the House Financial Services Committee has scheduled a hearing on Tuesday featuring Mr. Bernanke and Mr. Geithner. The hearing has been called to find out only one thing: what did the two men know about the A.I.G. bonuses, and when did they know it? Is that Nero I hear fiddling?
Are We Home Alone?

By THOMAS L. FRIEDMAN I ran into an Indian businessman friend last week and he said something to me that really struck a chord: This is the first time Ive ever visited the United States when I feel like youre acting like an immature democracy. You know what he meant: Were in a once-a-century financial crisis, and yet weve actually descended into politics worse than usual. There dont seem to be any adults at the top nobody acting larger than the moment, nobody being impelled by anything deeper than the last news cycle. Instead, Congress is slapping together punitive tax laws overnight like some Banana Republic, our president is getting in trouble cracking jokes on Jay Leno comparing his bowling skills to a Special Olympian, and the opposition party is behaving as if its only priority is to deflate President Obamas popularity. I saw Eric Cantor, a Republican House leader, on CNBC the other day, and the entire interview consisted of him trying to exploit the A.I.G. situation for partisan gain without one constructive thought. I just kept staring at him and thinking: Do you not have kids? Do you not have a pension that youre worried about? Do you live in some gated community where all the banks will be O.K., even if our biggest banks go under? Do you think your party automatically wins if the country loses? What are you thinking? If you want to guarantee that America becomes a mediocre nation, then just keep vilifying every public figure struggling to find a way out of this crisis who stumbles once like Treasury Secretary Timothy Geithner or A.I.G.s $1-a-year fill-in C.E.O., Ed Liddy and youll ensure that no capable person enlists in government. You will ensure that every bank that has taken public money will try to get rid of it as fast it can, so as not to come under scrutiny, even though that would weaken their balance sheets and make them less able to lend money. And you will ensure that well never get out of this banking crisis, because the solution depends on getting private money funds to team up with the government to buy up toxic assets and fund managers are growing terrified of any collaboration with government. President Obama missed a huge teaching opportunity with A.I.G. Those bonuses were an outrage. The publics anger was justified. But rather than fanning those flames and letting Congress run riot, the president should have said: Ill handle this. He should have gone on national TV and had the fireside chat with the country that is long overdue. Thats a talk where he lays out exactly how deep the crisis we are in is, exactly how much sacrifice were all going to have to make to get out of it, and then calls on those A.I.G. brokers and everyone else who, in our rush to heal our banking system, may have gotten bonuses they did not deserve and tells them that their president is asking them to return their bonuses for the sake of the country. Had Mr. Obama given A.I.G.s American brokers a reputation to live up to, a great national mission to join, Id bet anything wed have gotten most of our money back voluntarily. Inspiring
conduct has so much more of an impact than coercing it. And it would have elevated the president to where he belongs above the angry gaggle in Congress. There is nothing more powerful than inspirational leadership that unleashes principled behavior for a great cause, said Dov Seidman, the C.E.O. of LRN, which helps companies build ethical cultures, and the author of the book How. What makes a company or a government sustainable, he added, is not when it adds more coercive rules and regulations to control behaviors. It is when its employees or citizens are propelled by values and principles to do the right things, no matter how difficult the situation, said Seidman. Laws tell you what you can do. Values inspire in you what you should do. Its a leaders job to inspire in us those values. Right now we have an absence of inspirational leadership. From business we hear about institutions too big to fail no matter how reckless. From bankers we hear about contracts too sacred to break no matter how inappropriate. And from our immature elected officials we hear about how it was all the other guys fault. Ive never talked to more people in one week who told me, You know, I listen to the news, and I get really depressed. Well, help may finally be on the way: one reason weve been sidetracked talking about bonuses is because the big issue the real issue the presidents comprehensive plan to remove the toxic assets from our ailing banks, which is the key to our economic recovery, has taken a long time to hammer out. So all kinds of lesser issues and clowns have ballooned in importance and only confused people in the vacuum. Hopefully, that plan will be out by Monday, and hopefully the president will pull the country together behind it, and hopefully the lawmakers who have to approve it will remember that this is not a time for politics as usual and that our country, alas, is not too big to fail. Hopefully ...
Has a Katrina Moment Arrived?

By FRANK RICH A CHARMING visit with Jay Leno wont fix it. A 90 percent tax on bankers bonuses wont fix it. Firing Timothy Geithner wont fix it. Unless and until Barack Obama addresses the full depth of Americans anger with his full arsenal of policy smarts and political gifts, his presidency and, worse, our economy will be paralyzed. It would be foolish to dismiss as hyperbole the stark warning delivered by Paulette Altmaier of Cupertino, Calif., in a letter to the editor published by The Times last week: President Obama may not realize it yet, but his Katrina moment has arrived. Six weeks ago I wrote in this space that the countrys surge of populist rage could devour the presidents best-laid plans, including the essential Act II of the bank rescue, if he didnt get in front of it. The occasion then was the Tom Daschle firestorm. The White House seemed utterly blindsided by the publics revulsion at the moneyed insiders culture illuminated by Daschles post-Senate career. Yet last weeks events suggest that the administration learned nothing from that brush with disaster. Otherwise it never would have used Lawrence Summers, the chief economic adviser, as a messenger just as the A.I.G. rage was reaching a full boil last weekend. Summers is so tone-deaf that he makes Geithner seem like Bobby Kennedy. Bob Schieffer of CBS asked Summers the simple question that has haunted the American public since the bailouts began last fall: Do you know, Dr. Summers, what the banks have done with all of this money that has been funneled to them through these bailouts? What followed was a monologue of evasion that, translated into English, amounted to: Not really, but you little folk neednt worry about it. Yet even as Summers spoke, A.I.G. was belatedly confirming what he would not. It has, in essence, been laundering its $170 billion in taxpayers money by paying off its reckless partners in gambling and greed, from Goldman Sachs and Citigroup on Wall Street to Socit Gnrale and Deutsche Bank abroad. Summers was even more highhanded in addressing the retention bonuses handed to the very employees who brokered all those bad bets. After reciting the requisite outrage talking point, he delivered a patronizing lecture to viewers of ABCs This Week on how our tradition of upholding law made it impossible to abrogate the bonus agreements. It never occurred to Summers that Americans might know that contracts are renegotiated all the time most conspicuously of late by the United Automobile Workers, which consented to givebacks as its contribution to the Detroit bailout plan. Nor did he note, for all his supposed reverence for the law, that the A.I.G. unit being rewarded with these bonuses is now under legal investigation by British and American authorities. Within 24 hours, Summerss stand was discarded by Obama, who tardily (and impotently) vowed to pursue every single legal avenue to block the bonuses. The question is not just why the White House was the last to learn about bonuses that Democratic congressmen had sought
hearings about back in December, but why it was so slow to realize that the publics anger couldnt be sated by Summerss legalese or by constant reiteration of the word outrage. By the time Obama acted, even the G.O.P. leader Mitch McConnell was ahead of him in full (if hypocritical) fulmination. David Axelrod tried to rationalize the lagging response when he told The Washington Post last week that people are not sitting around their kitchen tables thinking about A.I.G., but are instead thinking about their own jobs. While thats technically true, it misses the point. Of course most Americans dont know how A.I.G. brought the worlds financial system to near-ruin or what credit-default swaps are. They may not even know what A.I.G. stands for. But Americans do make the connection between their fears about their own jobs and their broad understanding of the A.I.G. debacle. They know that the corporate bosses who may yet lay them off have sometimes been as obscenely overcompensated for failure as Wall Streets bonus babies. As The Wall Street Journal reported last week, chief executives at businesses as diverse as Texas Instruments and the home builder Hovnanian Enterprises have received millions in bonuses even as their companies shares have lost more than half their value. Since Americans get the big picture of this inequitable system, that grotesque reality dwarfs any fine print. Thats why it doesnt matter that the disputed bonuses at A.I.G. amount to less than one-tenth of one percent of its bailout. Or that CNBC with 300,000 viewers on a typical day by Nielsens measure is a relatively minor player in the crash. Or that Edward Liddy had nothing to do with A.I.G.s collapse, or that John Thain, of the celebrated trash can, arrived after, not before, others wrecked Merrill Lynch. These prominent players are just the handiest camera-ready triggers for the larger rage. Passions are now so hot that even Bernie Madoffs crimes began to pale as we turned our attention to A.I.G.s misdeeds, just as A.I.G. will fade when the next malefactor surfaces. What made Jon Stewarts takedown of Jim Cramer resonate was less his specific brief against CNBCs cheerleading for bad stocks than his larger indictment of the gaping economic inequality that defined the bubble. As Stewart said, there were two markets the long-term market that Americans earnestly thought would sustain their 401(k)s, and the fast-moving, short-term real market in the back room where high-rolling insiders wagered giant piles of money and brought down everyone with them. No one is more commanding on this subject than our president. In his town-hall meeting in Costa Mesa, Calif., on Wednesday, he described the A.I.G. bonuses as merely a symptom of a culture where people made enormous sums of money taking irresponsible risks that have now put the entire economy at risk. But rhetoric wont tamp down the anger out there, and neither will calculated displays of presidential outrage. We must have governance to match the message. To get ahead of the anger, Obama must do what he has repeatedly promised but not always done: make everything about his economic policies transparent and hold every player accountable. His administration must start actually answering the questions that officials like Geithner and Summers routinely duck.
Inquiring Americans have the right to know why it took six months for us to learn (some of) what A.I.G. did with our money. We need to understand why some of that money was used to bail out foreign banks. And why Goldman, which declared that its potential losses with A.I.G. were immaterial, nonetheless got the largest-known A.I.G. handout of taxpayers cash ($12.9 billion) while also receiving a TARP bailout. We need to be told why retention bonuses went to some 50 bankers who not only were in the toxic A.I.G. unit but who left despite the retention jackpots. We must be told why taxpayers have so little control of the bailed-out financial institutions that we now own some or most of. And where are the M.R.I.s from those stress tests the Treasury Department is giving those banks? Thats just a short list. In general, its hard to imagine taxpayers shelling out billions for a second bank bailout unless theres a full accounting of every dime of the first, and true transparency for the new plan whose rollout is becoming the most attenuated striptease since the heyday of Gypsy Rose Lee. Another compelling question connects all of the above: why has there been so little transparency and so much evasiveness so far? The answer, I fear, is that too many of the administrations officials are too marinated in the insiders culture to police it, reform it or own up to their own past complicity with it. The dirty little secret, Obama told Leno on Thursday, is that most of the stuff that got us into trouble was perfectly legal. An even dirtier secret is that a prime mover in keeping that stuff legal was Summers, who helped torpedo the regulation of derivatives while in the Clinton administration. His mentor Robert Rubin, no less, wrote in his 2003 memoir that Summers underestimated how the risk of derivatives might multiply under extraordinary circumstances. Given that Summers worked for a secretive hedge fund, D. E. Shaw, after he was pushed out of Harvards presidency at the bubbles height, you have to wonder how he can now sell the administrations plan for buying up toxic assets with the help of hedge funds. It will look like another giveaway to his own insiders club. As for Geithner, people might take him more seriously if he gave a credible account of why, while at the New York Fed, he and the Goldman alumnus Hank Paulson let Lehman Brothers fail but saved the Goldman-trading ally A.I.G. As the nations anger rose last week, the president took responsibility for whats happening on his watch more than he needed to, given the disaster he inherited. But in the credit mess, action must match words. To fall short would be to deliver us into the catastrophic hands of a Republican opposition whose only known economic program is to reject job-creating stimulus spending and root for Obama and, by extension, the country to fail. With all due deference to Ponzi schemers from Madoff to A.I.G., this would be the biggest outrage of them all.
Anger Mismanagement
By CHARLES M. BLOW The recent unpleasantness of our economic unraveling has caused me headaches. Not so much because I was losing my shirt, but because I thought I was losing my mind. Credit-default swaps, derivative products, securitized mortgages. Say what? It feels as though Ive stumbled into a Mensa meeting. All the tumult is couched in a jumble of jargon that is confusing and infuriating. In laymens terms, the financial industry gambled and lost. This damaged the economy. And if we dont save Wall Street, the world will implode. Meanwhile, the worlds of many Americans are already imploding. People are being forced to seek modifications for their underwater mortgages, watch retirement savings wither and choose between medicine and meals. Its a mess. Still, we have to give multibillion-dollar bailouts in return for multitrillion-dollar deficits. Argh! Then came the opprobrium of the A.I.G. bonus imbroglio. Employees in the division of the American International Group that caused much of the problem were paid $165 million in bonuses. This I fully understand. And me no likey. The very idea of these bonuses has an acerbic affect on my American psyche. It is an insult to the basic rule of fairness. So my simmering anger finally has a target. Im unapologetically, deliriously, cathartically belligerent about it. I know that there are bigger, more pressing concerns. I know that these bonuses are a mere pittance relative to the bailouts that A.I.G. has received. In fact, if A.I.G.s bailouts totaled $100, these bonuses would amount to less than a dime. I know all this, yet I dont care. I want that dime back to restore my faith in fair play. Im not alone. According to a Gallup poll released on Wednesday, 59 percent of Americans said that they were outraged over the bonuses (26 percent more said that they were bothered), and 76 percent said that they believed that the government should try to block or recover the bonuses. And, could we please forgo the cacophonous symphony of political recriminations? Everyones complicit: Republicans have never liked limiting executive pay. The Obama administration stepped in to strip a provision from the stimulus bill that would have blocked these bonuses. And the Democratic Congress passed it. Just fix it. Congress is now seeking to claw back the bonuses by taxing them into oblivion. Nice try. I dont know if itll work or hold up in court, but anything involving clawing sounds good. Keep working on a solution, but stop trying to manage and manipulate our anger. Stop trying to squelch, mollify and exploit it. Just let it run its course. America needs this moment.
We dont expect you to understand Main Street anger, but we do need to register it. After all, we know that theres no Main Street in Washington. I invite you to visit my blog, By the Numbers. Please also join me on Facebook, and follow me on Twitter, or e-mail me at chblow@nytimes.com.
Toxic R Us
By MAUREEN DOWD WASHINGTON Its an image that could have come straight out of a McCain campaign ad: Barack Obama growing organic arugula at the White House. But there was Michelle on Friday, the first day of spring, with a bunch of fifth graders, digging a veggie garden on the South Lawn. She told The Times there would not be beets, because her husband doesnt like them, but there would be arugula. And she promised that the entire Obama family, including the president, would go out and pull weeds, whether they like it or not. The tableau of Michelle Obama hoisting a pitchfork on Friday with her sinewy arms and warning that the commander in chief would be commandeered into yard work left me wondering if the wrong Obama is in the Oval. Its a time in Americas history where we need less smooth jazz and more martial brass. Barack Obama prides himself on consensus, soothing warring sides into agreement. But the fury directed at the robber barons by the robbed blind in America has been getting hotter, not cooler. And thats because the president and his Treasury secretary have been coddling the Wall Street elite, fretting that if they curtail executives pay and perks too much, if they make the negotiations with those who siphoned our 401(k)s too tough, the spoiled Sherman McCoys will run away, the rescue plan will fail and the markets will wither. (Now that Mr. Obama has made $8,605,429 on his books including $500,000 for letting his memoir be condensed into a kids book maybe hes lost touch with his hole-in-the-shoe, hole-in-the-Datsun, have-not roots.) The shafters of the universe have been treated with such kid gloves that they remain obnoxiously oblivious. Vikram Pandit the Bandit at Citigroup, which received $50 billion in bailout money, is pulling a Thain, spending $10 million to renovate his Park Avenue offices, complete with a Sub-Zero refrigerator and premium millwork (whatever that is). Fannie Mae, the mortgage finance behemoth that had $59 billion in losses last year when the government was forced to take it over, and since has asked for $15 billion in taxpayer money, brazenly intends to give $1 million apiece in retention bonuses to four top executives, even though the word retention in a depression is pure Ionesco. Freddie Mac, which has sought $45 billion in aid, has yet to disclose its planned bonuses. Asked by Jay Leno why our loans to Wall Street havent trickled down to Main Street, President Obama conceded that the banks havent started lending it yet. Treasury Secretary Tim Geithner, who grew up as a Republican and was head of the New York Fed for five years, sees things from the point of view of that wellspring of masters of the universe, Goldman Sachs. (His Treasury chief of staff was a Goldman lobbyist, who fought then-
Senator Obamas attempt to curb executive compensation administration.)
just as Geithner has done within the
At the New York Fed, Geithner helped preside over the A.I.G. bailout in September. But in October, it was Andrew Cuomo, the New York attorney general, who had to threaten to sue unless A.I.G. canceled $160 million in planned expenses for conferences and a $600 million bonus pool. Virtually unnoticed amid the bonus imbroglio was A.I.G.s grudging disclosure that it had funneled $93 billion more than half its federal money to date to its high-flying insurees, including Goldman Sachs, Merrill Lynch and a group of European banks. Goldman Sachs separately got $10 billion in bailout money last year, but recently asserted snootily that its doing well enough and doesnt want our money because of the restrictions attached. Yet as Goldman sneers at the federal money at the front door, its taking delivery of billions in no-strings federal money through the back door. Can we taxpayers deduct the difference? Our gift to Goldman demonstrates why the governments headless and heedless bailout of A.I.G. is so wrong. And why are we bailing out foreign banks, including a couple of French ones and UBS, a Swiss bank currently tussling with the I.R.S. because it refuses to hand over the names of thousands of U.S. tax-dodgers? The issue is how much we must pay to preserve financial stability over all, not how much one company promised to pay. At this point, A.I.G. seems to be the only party paying face value on toxic derivatives. Ed Liddy was put in charge of an essentially bankrupt company, but he never drove a hard bargain on bonuses or counterparty debts. He honored contracts made by an organization that had become a fraudulent scheme. He could have told the leeches inside the company and out that the world had utterly changed, so the contracts would too as Michelle would say, whether they like it or not.
When the Economy Really Did Fall Off a Cliff

By JEAN STROUSE IN what may come to be the definitive line about our current economic crisis, Warren Buffett said on the CNBC program Squawk Box this month that the United States economy has fallen off a cliff. The most trusted investor in history went on the air to talk, with characteristic candor and humor, about the horrendous truth we pretty much know, possibly in an effort to calm things down and point toward some answers we dont yet know. He proceeded to give his views on what went wrong (everybody thought house prices could go nothing but up ... so you had $11 trillion of residential mortgage debt built on this theory ), on peoples paralyzing fear and confusion (We are in a very, very vicious negative feedback cycle .... I dont want this to be the last line of the movie), and on the absolute necessity of fixing the banks and taking clear, decisive action. A look back at the handling of another financial crisis a full century ago underlines the point about decisive action. You just dont want to take the wrong decisive action. Markets today are immeasurably more complex, global, fast-moving and regulated (a lot of good that did) than they were a hundred years ago, but the need for strong leadership has not changed. In early 1906, the banker Jacob Schiff told a group of colleagues that if the United States did not modernize its banking and currency systems, its economy would, in effect, fall off a cliff that the country would have such a panic ... as will make all previous panics look like childs play. Yet the country failed to reform its financial institutions, and conditions deteriorated steadily over the next 20 months. There was a worldwide credit shortage. The American stock market crashed twice. The young Dow Jones industrial average lost half of its value. In October 1907, when a panic started among trust companies in New York and terrified depositors lined up to get their money out, Schiffs dire prediction seemed about to come true. The United States had no Federal Reserve, the Treasury secretary did not have much political authority, and the president, Theodore Roosevelt, was off shooting game in Louisiana. J. Pierpont Morgan, a 70-year-old private banker, quietly took charge of the situation. In the absence of a central bank, Morgan had for decades been acting as the countrys unofficial lender of last resort, gathering reserves and supplying capital to the markets in periods of crisis. For two harrowing weeks in 1907, with the whole world watching, he operated like a general, deploying three young lieutenants to do leg work and supply him with information, and bringing two other leading bankers, James Stillman of National City Bank and George Baker of the First National Bank, into a senior trio to make executive decisions. (First National and National City eventually combined to form what is now Citigroup are the shades of Baker and Stillman writhing over what has become of their descendant institution?) The Morgan teams ran stress tests on the unregulated trust companies, figuring out which were impossibly overleveraged and should be allowed to fail, and which were basically sound but
crippled by the panic. Once they had determined that a trust was essentially healthy, the bankers supplied it with cash, matching their loans dollar-for-dollar with the trusts collateral assets. When the New York Stock Exchange nearly closed early one day in October 1907 because financial institutions calling in loans were choking off the markets money supply, Morgan summoned the presidents of New Yorks major commercial banks to his office and came up with $24 million to lend to the exchange. Next, New York City ran out of cash to meet its payroll and interest obligations; Morgan and company conjured up a $30 million loan and prevented default. At the end of Week 1, President Roosevelt sent a letter to the press congratulating the substantial businessmen who in this crisis have acted with such wisdom and public spirit. Shipments of gold were on the way from London to New York, and confidence had returned to the French Bourse, owing, reported one paper, to the belief that the strong men in American finance would succeed in their efforts to check the spirit of the panic. During a panic, confidence is almost as good as gold. At the end of Week 2, Morgan called 50 presidents of trust companies to his private library on East 36th Street, locked the doors, and did not let them out until they had signed on to a final $25 million loan. The scholar of Renaissance art Bernard Berenson told his patron Isabella Stewart Gardner that Morgan should be represented as buttressing up the tottering fabric of finance the way Giotto painted St. Francis holding up the falling church with his shoulder. Though Morgan had a large sense of public duty, he had not shouldered the falling church out of pure altruism. His self-interest operated on a national scale. His clients many of them Europeans who had invested for decades in the emerging American economy through the House of Morgan had billions of dollars committed in the United States. In watching over their longterm interests, trying to control the excesses of the business cycle and maintain the value of the dollar, Morgan had come to serve as guardian of American credit in international markets. His power in 1907 derived not from the size of his own fortune but from the trust placed in him by investors, other bankers and international statesman. After Morgan died in 1913, the newspapers reported his net worth as about $80 million roughly $1.7 billion in todays dollars. John D. Rockefeller, already worth a billion in 1913 dollars, is said to have read the figure, shaken his head, and remarked, And to think he wasnt even a rich man. Trust in Morgan was by no means universal. In 1907, some of his critics charged that he had started the panic in order to scoop up assets at fire-sale prices and line his own pockets. In fact, the Morgan banks lost $21 million that year. The difficulty today of assigning dollar values to toxic assets makes Morgans job look easy. Yet though the amount of money required for the 1907 bailouts is pocket change compared to the current trillions, at the time, the troubles and the numbers seemed enormous. No single figure, much less a private banker, could wield the kind of power in todays gargantuan collapsing markets that Morgan had a hundred years ago. And so far, not even the combined official powers of the Fed and Treasury have been able to stop the cascading disasters. Paul Volcker, the former Federal Reserve chairman, said recently that he couldnt remember a time maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world.
Perhaps new economic leadership will emerge during this crisis, under our gifted, charismatic president. It seems likely to consist of people who have the kind of experience, judgment and authority Morgan had possibly a new trio made up of the current Fed chairman, Ben Bernanke; Paul Volcker; and Warren Buffett. Only Mr. Bernanke is formally in a position to exercise that high authority now, which he is doing he announced last week that the Fed would inject an extra $1 trillion into the financial system. Mr. Volcker, chairman of the White House Economic Recovery Advisory Board, could easily be promoted to a more dominant role. Mr. Buffett has already stepped up in public, praising the steps the Fed took last fall to insure money markets and commercial paper as vital in keeping the place going (if the Fed hadnt acted, Mr. Buffett told his CNBC interviewer, wed be meeting at McDonalds this morning). Moreover, Mr. Buffett said he could guarantee that in five years or so our great economic machine will be running a lot faster than it is now, with the government playing an enormous role in how quickly it recovers. Last fall he declared that we had just been through an economic Pearl Harbor. Last week he said that in order to fight this economic war the country has to unite behind President Obama, the government has to deliver very, very clear messages and we all have to focus on three jobs: Job 1: win the economic war. Job 2: win the economic war. Job 3: win the economic war. Just what Morgan would have said. Jean Strouse is the author of Morgan: American Financier and the director of the Cullman Center for Scholars and Writers at The New York Public Library.
BNA3/23/09 Congress Senate to Consider Volunteerism Bill; House Vote on Omnibus Lands Bill Planned The Senate will begin the March 23 week considering a volunteerism bill and may consider a Troubled Assets Relief Program (TARP) reform bill, while the House will take up debate on a pair of lands bills. After adjourning March 19 for a three-day weekend, the Senate is scheduled to reconvene March 23 at 2 p.m. Following a period of morning business, senators will resume consideration of the motion to proceed to The Generations Invigorating Volunteerism and Education (GIVE) Act (H.R. 1388). The legislation, sponsored by Rep. Carolyn McCarthy (D-N.Y.), would reauthorize and reform the nation's national service laws, expanding several volunteer programs. The House March 19 passed the bill by a vote of 321-105 after adopting several amendments to the original legislation. A roll call vote on the motion to invoke cloture on the motion to proceed to the GIVE Act is expected to occur March 23 at approximately 6 p.m. TARP Tax, Nominations Also Expected Although the Senate has yet to announce its agenda for the rest of the week, senators are likely to consider a recently passed bill (H.R. 1586), that would impose an additional tax on bonuses received by employees of financial institutions that received TARP assistance. The House March 19 overwhelmingly passed the legislation, introduced by House Ways and Means Committee Chairman Charles Rangel (D-N.Y.), as a response to the public outrage of bonuses given to executives of American International Group (AIG), which received over $170 billion in taxpayer funds as part of a government bailout. The legislation would impose a 90 percent tax rate on bonuses given to individuals with family incomes of over $250,000 a year by institutions that opted to take government assistance funds. A bipartisan group of senators March 19 introduced an alternative bill (S. 651) that would enforce a lower tax rate on bonuses handed out by companies that received TARP funds. The Senate also could consider more of President Obama's nominations, including that of Gary Locke, of Washington, to be secretary of commerce. The Senate Commerce Committee approved the Locke nomination on March 19. The Senate, as it usually does on Tuesdays, is scheduled to recess from 12:30 p.m. until 2:15 p.m. for the weekly party conferences to meet. House to Debate Lands Bills
The House is scheduled to reconvene March 23 at 12:30 p.m. to consider bills under suspension of the rules. All roll call votes will be postponed until 6:30 p.m. The House will meet March 24 at 10:30 a.m., with legislative business being taken up at noon. Representatives also are scheduled to meet March 25 and 26 for legislative business at 10 a.m. each day. No votes are expected to be taken on March 27. The major piece of legislation the House will consider during the March 23 week is the Senate amendment to a bill (H.R. 146) which has been used as a vehicle for the omnibus public lands legislation. The omnibus lands package is made up of approximately 150 bills aimed at federal lands preservation. The House March 11 rejected a previous version of the omnibus public lands bill (S. 22) under suspension of the rules, falling two votes shy of passage. The Revolutionary War and War of 1812 Protection Act, a battlefield acquisition measure that passed the House by a vote of 394-13, was then chosen as the vehicle for the lands bill. The House Rules Committee plans to meet March 24 at 2:30 p.m. in Room 313 of the Capitol building to formulate the procedure for floor debate of the omnibus lands bill. During that meeting, the Rules Committee will also work on a rule for floor debate of the Federal Land Assistance, Management, and Enhancement (FLAME) Act, which also will be taken up by the House during the week of March 23. If passed, the legislation would authorize the creation of a supplemental funding source for catastrophic emergency wildlife fire suppression activities on land controlled by the Department of the Interior and the National Forest System. The bill would also require the secretary of the interior and the secretary of agriculture to work together to form a response plan to wildfires. House to Also Tackle TARP Reform In addition to the lands bills, the House also plans to consider a bill (S. 383) that would establish a special inspector general for the Department of the Treasury's Troubled Asset Relief Program. That bill is expected to be considered under suspension of the rules as early as March 24. The Senate Feb. 4 passed the legislation by unanimous consent. The House will consider the legislation under suspension of the rules, meaning that two-thirds of its members will have to vote in favor of the bill for it to pass. Budget Resolutions to Be Marked Up The House and Senate Budget committees are expected to mark up their respective fiscal 2010 budget blueprints during the March 23 week. The House Budget Committee has scheduled to consider its budget blueprint during a mark up session slated for March 25. The committee has not been set for the meeting.
Meanwhile, the Senate Budget Committee was not expected to announce the date of its markup session before March 23. The committee could meet March 25 and 26 on its version of the congressional budget resolution. House and Senate leaders have said that wanted both budget writing committees to complete their work so that they can have a resolution passed before Congress leaves April 3 for a twoweek spring recess. Panels Continue on TARP Bonuses Secretary of the Treasury Timothy Geithner and Federal Reserve Chairman Ben Bernanke are scheduled to testify at a March 24 hearing on the American International Group, or AIG. The House Financial Services Committee will hold an oversight hearing of the federal government's intervention at AIG. The hearing begins at 10 a.m. in Room 2128 of the Rayburn House Office Building. The full Financial Services Committee is scheduled to meet March 25 to mark up legislation that would eliminate bonuses to government firms receiving funds from the Troubled Asset Relief Program. This would included bonuses to officials at Fannie Mae and Freddie Mac. The markup session begins at 2:15 p.m. in the committee main meeting room, 2128 Rayburn. Other Issues Involving Financial Institutions The Senate Banking Committee has planned the second in its series of hearings on modernizing bank supervision and regulation. The hearing will be held March 24 at 10 a.m. in Room 538 of the Dirksen Senate Office Building. A Senate Judiciary panel has set a March 24 hearing on abusive credit card practices and bankruptcy. The Subcommittee on Administrative Oversight and the Courts will meet at 10 a.m. in Room 226 Dirksen. Rosemary Gambradella, a judge in the Bankruptcy Court for New Jersey, will be among the witnesses. The Subcommittee on Commerce, Trade, and Consumer Protection of the House Energy and Commerce Committee on consumer credit and debt. The subcommittee will focus on the role of the Federal Trade Commission in protecting the public. The hearing begins at 10 a.m. in Room 2123 of the Rayburn House Office Building. The House Financial Services Committee has planned a March 25 hearing on exploring the balance between increased credit availability and prudent lending standards. The 10 a.m. hearing will be held in Room 2128 Rayburn. Treasury Secretary Geithner returns to Capitol Hill March 26 to discuss addressing the need for comprehensive regulatory reform. The House Financial Services hearing starts at 10 a.m. in 2128 Rayburn. Tax, Economic Policy Meetings
Whether to extend, modify, or expire middle class income tax relief will be examined at a March 26 hearing before the Senate Finance Committee. Witnesses from the private sector are scheduled to testify at the 10 a.m. hearing in Room 215 Dirksen. Lawrence Lindsey, former director of the National Economic Counsel, and George Soros, chairman of the Soros Fund Management and Open Society, are among the witness at a Senate Foreign Relations hearing on foreign policy and the global economic crisis. The hearing commences at 2:30 p.m. in Room 419 Dirksen. Health Care Reform Examination Continues On March 25, a Senate Finance subcommittee will hold a hearing on the role of long-term care in health reform, focusing on coverage. The Subcommittee on Health Care convenes at 2:30 p.m. in Dirksen 215. The Senate Health, Education, Labor, and Pensions Committee has scheduled a March 24 hearing on addressing insurance market reform in national health reform. The hearing begins at 10 a.m. in 430 Dirksen. The Subcommittee on Health of the House Energy and Commerce Committee will discuss making health care work for American families during a March 24 hearing at 10 a.m. The panel will focus on improving access to care. The subcommittee will meet in 2322 of the Rayburn building. A March 26 hearing has been planned by the Senate Commerce Committee on health insurance industry practices. The hearing begins at 10:30 a.m. in 253 Russell. Energy, Environmental Concerns Energy development in the Outer Continental Shelf and the future of our oceans will be the subject of a March 24 hearing before two House Natural Resources subcommittees. The Subcommittee on Energy and Mineral Resources and the Subcommittee on Insular Affairs, Oceans, and Wildlife will meet at 10 a.m. in 1324 of the Longworth House Office Building. Trade aspects of climate change legislation will be examined during a March 24 hearing by the House Ways and Means Subcommittee on Trade. Subcommittee members will meet at 10:30 a.m. in the committee's main meeting room, 1100 Longworth HOB. House Ways and Means members return March 26 for a hearing on addressing price volatility in climate change legislation. The hearing begins at 10 a.m. in Room 1100 Longworth. The Senate Environment Committee has planned a March 26 meeting to examine the nomination of Jonathan Cannon to be deputy administrator of the Environmental Protection Agency. The committee also will consider the nomination of Thomas Strickland to be assistant secretary for fish and wildlife and parks at the Department of the Interior. The meeting begins at 10 a.m. in 406 Dirksen.
The Subcommittee on Energy of the Senate Energy Committee will examine draft legislation to improve energy market transparency and regulation. The hearing starts at 2 p.m. in Room 366 of the Dirksen building. The House Energy and Commerce's Subcommittee on Energy and Environment will hold a March 25 hearing on adaptation policies in climate legislation. The hearing is set to begin at 9:30 a.m. in 2123 Rayburn. Transportation Investments The Senate Environment Committee has scheduled a March 25 hearing on the need for transportation investments. The hearing starts at 10 a.m. in 406 Dirksen. Reauthorization of the Federal Aviation Administration and the NextGen air traffic modernization program will be discussed at a March 25 Senate Commerce subcommittee hearing. The Subcommittee on Aviation Operations, Safety, and Security will examine the costs and benefits to modernizing the nation's aviation system. The hearing begins at 2:30 p.m. in Room 253 of the Russell Senate Office Building. Pensions and Employment Topics Retirement security will be the topic of a House Education and Labor subcommittee hearing on March 24. Specifically, the Subcommittee on Health, Employment, Labor, and Pensions will be examining the importance of an independent investment adviser. The hearing begins at 10:30 a.m. in Room 2175 of Rayburn. A House Appropriations subcommittee will meet on raising wages and living standards for families and workers. The March 25 hearing is set to begin at 10 a.m. in 2359 Rayburn. Meanwhile, the House Education and Labor Committee has planned a March 25 hearing on a Government Accountability Office undercover investigation involving wage theft of America's vulnerable workers. The hearing begins at 10 a.m. in 2175 Rayburn. Government Oversight An overview of Coast Guard acquisition policies and programs will be addressed at a House Transportation subcommittee hearing March 24. The Subcommittee on the Coast Guard and Maritime Transportation will meet at 10 a.m. in 2167 Rayburn. Combat aircraft acquisition will be the topic of a March 25 House Appropriations Subcommittee on Defense hearing. Officials from the Air Force and Navy are scheduled to testify at the 10 a.m. hearing in Room H-140 of the Capitol. The Senate Judiciary Committee again will try to mark up patent reform legislation (S. 515) during a March 26 meeting. The committee also will consider pending nominations at the 10 a.m. meeting in Room 226 of the Dirksen building.
Oversight of the digital television transition will be discussed a House Energy and Commerce subcommittee hearing March 26. The Subcommittee on Communications, Technology, and the Internet is scheduled to meet at 10 a.m. in Room 2322 Rayburn. A list of committee meetings tentatively scheduled for the week of March 23 are in the legislative calendar in this section. By Patrick Ambrosio and Mack A. Paschal
CQ TODAY PRINT EDITION BANKING & FINANCIAL SERVICES March 20, 2009 8:07 p.m. Senate Prepares to Punish Givers and Recipients of Bailout Bonuses By Richard Rubin and Phil Mattingly, CQ Staff After last weeks cathartic release of anger in the House, senators are eager to train their wrath on bailed-out financial firms and their executives who received bonuses. The exact timing for debate and votes remains uncertain, but a public outcry, a strong bipartisan House vote and support from at least two Senate Republicans seem likely to propel an effort to use the tax code to reclaim or prevent the bonuses. By cosponsoring a Senate bill (S 651) that would impose 35 percent excise taxes on both companies and bonus recipients, Republicans Charles E. Grassley of Iowa and Olympia J. Snowe of Maine made it easier for Democrats to overcome other GOP attempts to slow the measure and call for hearings as long as the majority can hold its own members in line. So far, the legislative barrage against American International Group Inc. (AIG) and similar companies shows no signs of slowing, even as financial institutions warn about the potential effect of punitive legislation on their workforce and on their future willingness to cooperate with the government in efforts like the Troubled Asset Relief Program (PL 110-343). Its very hard for the Congress to distinguish between an AIG, which needed the money, versus a community bank who the government hoped would use the money in the community, said Steve Verdier, a senior vice president for the Independent Community Bankers of America. You get this atmosphere of attacking bonuses and pay and activities like sales meetings. The atmosphere is so negative that any community bank that might have considered applying for TARP money is going to be discouraged from doing that. Maybe the TARP-type process is not the best way to help community banks help communities. President Obama, while applauding the House for reflecting public outrage by passing its bill (HR 1586) with 90 percent taxes on bonuses, has not explicitly endorsed using the tax code to recoup the money. Instead, in a statement, he said he looks forward to getting a bill that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated. The House bill would create a new 90 percent income tax rate on bonuses received in 2009 and beyond, replacing the income tax that would otherwise apply to those earnings. Combined with state and local income taxes, the bill would recover almost all of the bonuses. If employees return the money to their employers or waive their rights to receive it, they would not pay the tax. The Senate bill, sponsored by Senate Finance Chairman Max Baucus, D-Mont., approaches the issue differently. Employees would still pay normal income taxes on their bonuses, but the company and the employee would each pay an additional 35 percent. And to address the concern that some employees are foreign citizens who are not subject to U.S. tax law, the bill doubles the tax on the company for such payouts.
Differences in House and Senate Bills Even before possible amendments on the Senate floor, there are other significant differences between the two measures. The Senate bill applies much more broadly. It would affect companies that received as little as $100 million, while the House bill is limited to about a dozen firms that have received more than $5 billion. The House bill attempts to protect lower-level employees by applying the tax only to people who make more than $250,000 a year ($125,000 for married people filing separate tax returns). The Senate bill approaches the same issue by exempting from the special tax the first $50,000 in bonuses. All bonuses intended to retain an employee, however, would face the new tax, with no such exemption. The Baucus bill also includes limits on deferred compensation; the House bill is silent on this issue. AIG Under Fire The furor over executive compensation started just last week, after news reports about AIG awarding $165 million in retention bonuses to employees in its Financial Products division. The company, which has received more than $180 billion in federal money to prevent it from collapse, has asked employees to return half of the money. Treasury Secretary Timothy F. Geithner, who said he could not stop the bonuses because that would have required violating valid contracts, plans to deduct $165 million from the next $30 billion the government is sending to AIG. That wasnt enough for lawmakers, who pounced on Geithner, Federal Reserve officials and AIG with a flurry of bills, culminating in the March 19 vote on the tax bill. The bill passed, 32893, with support from nearly half of House Republicans, including conservatives such as Minority Whip Eric Cantor of Virginia, Paul D. Ryan of Wisconsin and Wally Herger of California. That strong margin provides a springboard for Senate Democrats. Still, some Senate Republicans, such as Judd Gregg of New Hampshire and Jon Kyl of Arizona, say they want hearings and more careful consideration of the constitutional questions before rushing a bill to the floor. Beyond the tax bills, House Speaker Nancy Pelosi, D-Calif., also asked the Financial Services and Judiciary committees to write legislation on the issue. The Financial Services panel will mark up its measure March 25. The bill would bar companies that received bailout money from paying bonuses until the company has paid the government back. The measure will prohibit any compensation deals that are excessive, as well as all nonperformance-based bonuses at those companies.
Franks measure goes well beyond the tax bill, because it would affect any company that has received bailout funds but has not yet paid them back in full. For those companies, the bill would: bar the payment of any bonus to any employee, regardless of when any agreement to pay a bonus was entered into; prohibit paying any compensation that is unreasonable or excessive, as defined in standards set by the Treasury secretary; and ban the payment, or the arrangement to pay, of any retention payment, bonus or other supplemental payment that is not directly based on performance-based standards set by the Treasury secretary. Additionally, the House may consider a bill (HR 1575) approved by the Judiciary Committee that would use the bankruptcy code to go after the bonuses. Its prospects are particularly uncertain, because some senior Democrats, such as Melvin Watt, D-N.C., questioned whether it is constitutional. Benton Ives contributed to this story. Source: CQ Today Print Edition Round-the-clock coverage of news from Capitol Hill. 2009 Congressional Quarterly Inc. All Rights Reserved.
Senators push for bonus clawback

By Tom Braithwaite and Andrew Ward in Washington Published: March 21 2009 02:00 | Last updated: March 21 2009 02:00 Senators are preparing a final push next week to impose a punitive tax on bonuses at bailed-out financial institutions such as AIG, the troubled insurance group. But as Wall Street braces itself for a draconian clampdown on its pay culture, the legislation could yet stall amid criticism that it might undermine the government's financial rescue programme and even violate the -constitution. On Thursday the House of Representatives overwhelmingly passed a bill to impose a 90 per cent tax on the bonuses of employees earning more than $250,000 (184,000, 173,000) at companies that received more than $5bn in bail-out money. Originally aimed at AIG, which has taken $170bn in taxpayer money and paid $165m in bonuses, the measure would also affect other institutions including Citigroup, JPMorgan and Goldman Sachs. The Senate is working on similar legislation involving a 70 per cent tax on bonuses at a broader range of institutions - half to be paid by employees and half by companies - but it remains uncertain whether it has enough support to force its way through a crowded legislative agenda. A Democratic aide to the Senate leadership said senators were divided between those wishing to push through fast-track legislation and others backing a slower process, including committee hearings, which could see momentum fade as the initial wave of anger over the AIG bonuses subsidies. President Barack Obama has voiced broad support for congressional efforts to reign in Wall Street pay but stopped short of endorsing legislation to impose retro-active bonus taxes. "I understand Congress's frustrations," he told Jay Leno, the chat-show host. "But I think that the best way to handle this is to make sure that you've closed the door before the horse gets out of the barn." Recriminations intensified yesterday over the AIG bonuses as Democrats traded blame for an affair that threatens serious damage to the Obama administration. The White House was again forced to defend Tim Geithner, the beleaguered Treasury secretary, as fresh doubts emerged over when he first learned of the AIG bonuses and why he did not try to stop them. Maxine Waters, a Democratic congresswoman, expressed exasperation at the administration's handling of the controversy, saying: "Maybe the president is not up to speed on what is going on." The Treasury department acknowledged that Mr Geithner had been questioned on the bonuses in a congressional hearing a week before the White House had previously said he first learned of
them. There was also mounting scrutiny of the administration's role in watering down a provision in the stimulus bill last month that could have blocked the payouts. Republicans tried to keep the focus on Democratic infighting to mask their own party's turmoil over the bonus saga, as they struggled to reach consensus over the tax proposals. The mooted legislation offends the anti-tax principles of many conservatives but Republicans are reluctant to be seen blocking measures to recoup bonuses that have caused a wave of populist anger. "At least some Republicans made clear that they are not going to allow this to go ripping through the Senate," said Tom Mann, a senior fellow in governance issues at Brookings Institution, the think-tank. "At the very least they will use their procedural [tools] to hold off any votes for a period of time and use that as a medium for blaming the Democrats for what they did or failed to do earlier." Critics say a retroactive tax on bonuses is unfair and potentially counter-productive if it discourages other institutions from participating in government attempts to rebuild the financial system. Supporters of the committee route argue that such a controversial piece of law should be considered with a cool head after the political passion has died down. The Democratic leadership in the Senate has a very short window to push through a vote before the Easter recess. Bankers will be hoping that the Senate has not, by then, imposed on them an involuntary Lenten fast by taking away their bonuses. Editorial Comment, Page 10 Man in the News, Page 11 Copyright The Financial Times Limited 2009
CongressDaily3/20/09 FINANCE
Frank Unveils Broader Legislation Tackling Bonus Payouts

Friday, March 20, 2009 by Bill Swindell As it works to recoup the $165 million in bonuses to executives at American International Group, Congress is taking other steps so all firms receiving government aid will have to give back bonus payments. The House Financial Services Committee will vote Wednesday on legislation that would ban bonus payments by firms receiving loans under the Troubled Asset Relief Program. The bill could be on the House floor the following week. House Financial Services Chairman Barney Frank's bill is a comprehensive approach to stem the public uproar over the bonus payouts. Instead of addressing bonuses on an ad-hoc basis, as in the AIG case, the bill would ban any bonus regardless of when the agreement was entered into. It would also prohibit any compensation deemed "unreasonable or excessive," as deemed by the Treasury Department, and bar any other bonus payment that is not tied to performance-based standards set by Treasury. Firms covered by the bill include those that benefited from the 2008 housing bill, which would include Fannie Mae, Freddie Mac and the Federal Home Loan Banks. Congressional Democrats want to get ahead of the bonus controversy so it does not diminish the Obama administration's political capital, which they think could be better spent on their agenda to revive the economy. The groundswell is expected to pick up next week, when Senate Democrats hope to consider legislation that would tax the AIG bonuses. The Senate tax bill is likely to encounter opposition. "The implications of pursuing this [tax] course of action are not that we will recover the bonuses distributed to AIG executives, but that we will undermine the credibility of our tax system, create an atmosphere where any group that offends the sensibilities of the majority may be at risk for punitive tax treatment, and step into a world more akin to the government of Venezuela than that of America," said Sen. Judd Gregg, R-N.H. The congressional action also may encourage healthy firms that took the TARP money to quickly return it, according to lobbyists, and stifle other lending programs initiated by the Federal Reserve to bolster credit markets. Frank wrote today to Federal Housing Finance Agency Director James Lockhart asking him to cancel planned bonuses to executives at Fannie and Freddie. "The public, having provided significant support for the purpose of restoring trust and confidence in our country's financial system, rightfully insists that large bonuses such as these awarded by institutions receiving public funds at a time of a serious economic downturn cannot continue," Frank wrote. Meanwhile, pressure continues to mount on identifying the 13 companies receiving TARP money that are delinquent in paying income or payroll taxes.
For Rangel, a Complicated Relationship With A.I.G.

By DAVID KOCIENIEWSKI As Congress moved this week to levy a 90 percent tax on the $165 million in bonuses paid to executives of the American International Group, one of the more conspicuous expressions of outrage came from Representative Charles B. Rangel. As public anger over the bonuses surged, Mr. Rangel on Wednesday introduced a bill that would seize most of the bonuses paid to A.I.G., which received billions in taxpayer bailout funds. Dreams have been shattered and homes have been lost because a small group of executives were motivated by greed rather than preserving a system that America and the world depend upon, said Mr. Rangel, a Harlem Democrat and chairman of the powerful House Ways and Means Committee. After the measure passed the House overwhelmingly the next day, Mr. Rangel congratulated his colleagues on their bold action, saying that A.I.G. executives have gotten away with murder in what theyve done to our communities. But Mr. Rangels indignation was a reversal of his position earlier in the week, when he opposed heavily taxing the bonuses and warned his colleagues to restrain themselves from allowing the public outcry to warp their judgment. What is more, the congressmans relationship with A.I.G. is a complicated one; as recently as last year, he was trying to woo the company to donate $10 million to a school to be named in his honor. And while A.I.G. officials mulled the request, Mr. Rangel supported a provision in a tax bill that saved the company millions of dollars. For decades, Mr. Rangel has been a close friend of Maurice R. Greenberg, the chief executive of A.I.G. until 2005, and until recently one of the companys biggest shareholders. Mr. Greenberg has sponsored fund-raisers on Mr. Rangels behalf, and in 2007, a foundation controlled by Mr. Greenberg gave $5 million to the school, the Charles B. Rangel Center for Public Service at the City College of New York. City College records show that the effort by Mr. Rangel and college officials to persuade A.I.G. to donate to the school went on for two years. In a 2007 e-mail message obtained by The New York Times, City Colleges director of development, Rachelle Butler, wrote that Mr. Rangel suggested in early 2006 that fund-raisers concentrate on A.I.G. for a contribution. Two years later on April 21, 2008 Mr. Rangel attended a meeting at A.I.G. to ask the company to support the school, without specifically discussing a donation. A month later, as A.I.G. was still considering a financial contribution, the top executive who had attended the fund-raising meeting wrote a letter to Mr. Rangel, urging him to support a provision of a tax bill that would save A.I.G. millions of dollars a year.
Mr. Rangel dropped his opposition to the tax measure, which eventually became law. But he has said that City Colleges request for the $10 million, and the letter from A.I.G., played no part in his decision. A colleague in the New York delegation, Representative Joseph Crowley, said that he was responsible for persuading Mr. Rangel to support the tax change. A.I.G. has never donated to the Rangel Center. But with Mr. Rangels personal finances and fund-raising for City College now the subject of an ethics investigation, some Republicans questioned whether Mr. Rangels public protestations about the bonuses were designed to eclipse his connections to the company over the years. Representative John Carter, a Republican of Texas, described Mr. Rangel, who had received $110,000 in campaign donations from A.I.G, as one of several Democrats who had exchanged legislative favors with the company. Mr. Rangels spokesman, Matthew Beck, has said that the chairman has never given A.I.G. any preferential treatment. Mr. Rangel declined to be interviewed for this article, but in a written statement, he said that he decided to support the heavy tax on A.I.G. bonuses because the companys financial missteps had caused such expensive and widespread damage to American consumers and taxpayers. When you weigh the harm that A.I.G. and other bad actors have done to the system, our economy and American families, with the concerns regarding the precedent of using the tax code, there is no question this legislation is the best decision we can make, he said. It is not enough to say, You cant do anything about it. We have to do something about it.
Furor Over AIG Bonuses May Affect Dodd

Conn. Democratic Stalwart Tarred by Ties to His State's Financial Industry
By Keith B. Richburg Washington Post Staff Writer Sunday, March 22, 2009; A06
WILTON, Conn., March 21 -- For his nearly three decades in the Senate, Christopher J. Dodd has been a towering figure in tiny Connecticut, untouchable by political opponents in his four reelection races and a prodigious fundraiser thanks to his strong ties to the state's huge financial services sector. But with banks, insurance companies and investment firms now held in widespread contempt, Dodd's political fortunes have also taken a hit. For the first time since he was elected to the Senate in 1980, he could face a serious challenge. And some of Dodd's longtime supporters are saying they will not vote for him again. "I think his days are numbered," said Linda Walker, a retired nurse from Ridgefield. "He doesn't have the character I thought he had. That's where term limits come in." Speaking of all long-serving politicians, Walker said, "They become so disconnected from where they're from." "I'd rather he not run and save himself the embarrassment of losing," said Andrea Beebe, a teacher who also lives in Ridgefield. "You know, he was up to his eyeballs. He's had his hands in the mud pile for four or five years." And these are Dodd's onetime supporters. The most immediate issue for Dodd is the $165 million -- possibly more -- in bonus payments to employees of insurance giant American International Group. Many top AIG executives live in Connecticut, specifically in prosperous Fairfield County, one of the wealthiest in the nation. And the AIG Financial Products division, which is largely blamed for the country's financial meltdown because of its dealings in toxic mortgage-backed securities, is based here in the town of Wilton and was the target of a small but noisy protest rally Saturday. Dodd, 64, is chairman of the Senate Banking, Housing and Urban Affairs Committee, and Wednesday night, he said his staff removed a provision from the recently enacted economic stimulus bill that would have blocked AIG from paying those bonuses. Dodd said he was acting at the request of Treasury Department officials, who feared the provision would prompt legal challenges. But earlier in the week, Dodd had said he did not know how the provision got removed from the bill. That shift in position has only underscored for many Dodd's close relationship with AIG. The company's employees and political funds have contributed $300,000 to Dodd over the past decade, according to the nonpartisan Center for Responsive Politics. Dodd, who was traveling in the state this weekend after a tumultuous week in Washington, has remained defiant and tried to limit the damage. He was quoted in an Associated Press story from
an event in Enfield, Conn., on Friday saying, "I'm going to do my job. Politics will take care of itself, one way or the other, in the final analysis. And I'll either once again earn the respect and confidence of the people of this state, or I won't." Dodd is also under a Senate ethics investigation involving two mortgages he received from Countrywide Financial for his homes in the District and Connecticut. Dodd in 2003 was enrolled in a Countrywide VIP program that gave him preferential treatment for those loans. Countrywide, once the country's largest mortgage lender, was sold last year to Bank of America as its subprime mortgage portfolio began to collapse. On top of all that, this state's pride and sensibilities were hurt when Dodd last year made his quixotic run for president, dramatically uprooting his family and moving to Iowa before that state's Democratic caucuses. "This is kind of like a perfect storm going for Chris Dodd at the moment," said Edward Anderson, who described himself as "an activist" from New Haven. "Is he with the people, or is he working for the corporate interests?" "Dodd's in trouble," Anderson said. "Everybody wants to give Dodd six or eight months," Then, pointing to his well-behaved golden retriever, Bo Diddley, Anderson said, "He's vulnerable to my dog if he's not careful. "I voted for Dodd. I'm a strong Chris Dodd supporter," said Bruce Miller, a middle school guidance counselor from Winstead. But he added: "He oversaw the committee. I'm very disappointed in Chris Dodd." The national Republican Party has tried to make Dodd, along with Rep. Barney Frank (D-Mass.), the public face of Democratic culpability for the nation's financial collapse. At the protest Saturday outside AIG Financial Products, about two dozen people -- from the Connecticut Working Families Party and the community activist group ACORN -- chanted and held aloft signs with slogans such as "Damn You, AIG," and "Dude, Where's My Life Savings?" The protesters arrived in Wilton after a bus tour that took them to the posh homes of two AIG executives, or what the organizers called a "Lifestyles of the Rich and Infamous" tour. Joining the protesters, but not on the bus, was Scott Kimmich, a 79-year-old retiree, who said he lost a third of his life savings in the economic collapse, and "that's all I have -- I don't have a pension." He, like many others interviewed, mentioned Dodd's shifting explanation for the removal of the provision that would have blocked the AIG bonuses. "I like Chris Dodd," he said. "I think he made a bad error in what I call a sort of a coverup." But like others, Kimmich said he was hoping a contender would challenge Dodd in the Democratic primary, because few in this overwhelmingly blue state said they were ready to vote for a Republican to unseat him. Some mentioned the state's popular attorney general, Richard Blumenthal, who lives in Greenwich, as a better choice, and others said they hoped Ned Lamont, who won the Democratic primary in 2006 but lost to Sen. Joseph I. Lieberman (I), would run against Dodd. (Lamont has indicated he would run for governor next year).
"If Ned Lamont were running for Senate and Chris Dodd would stand down, that would be a great thing," Kimmich said. Lucille Miller, a 78-year-old retiree from Thomaston, said, "Dodd -- right now I'm not very happy with him. Democrats -- and I'm a Democrat -- should rethink his running again." Dodd's only announced challenger is Rob Simmons, a moderate former Republican congressman and CIA officer who narrowly lost his reelection bid in 2006. He has since been working as an appointee of the governor, in the position of business advocate. A March 10 Quinnipiac University poll showed Simmons and Dodd in a virtual tie in a hypothetical matchup, with Dodd at 42 percent and Simmons at 43 percent -- the margin of error was plus or minus 2.8 percentage points. That poll showed Dodd with a 49 percent job approval rating and sagging support among independents. But Simmons's problem is the growing Democratic party identification in the state. As Miller, the guidance counselor, said: "I would never vote for a Republican." A longtime Democratic activist in Fairfield County, who spoke on the condition of anonymity in order to be more candid, said he saw the situation as similar to the year before the 2006 election, when Lieberman, then a Democrat, faced a groundswell of popular anger over his support for the Iraq war and eventually lost the primary despite the backing of the powerful Democratic State Central Committee. "Everything in the Democratic party is exactly the same as the run-up to 2006," he said, noting that Lieberman was a national figure who made a quixotic run for president in 2004. "People know the Chris Dodd name now, but they don't know the man himself," the Democratic activist said. "He's like a celebrity in Washington. . . . Voters in Connecticut are very parochial about the state." Staff writer Shailagh Murray in Washington contributed to this report.

MARCH 23, 2009
Obama Says Constitutionality of House Bonus Bill in Doubt

By LAURA MECKLER
WASHINGTON -- President Barack Obama expressed doubt about the constitutionality of a House bill that would impose heavy new taxes on certain Wall Street bonuses, clouding the measure's future. His comments came in a wide-ranging interview on the CBS program "60 Minutes." The president also advised people on Wall Street who are upset about limits on executive compensation to "spend a little time outside New York" where people "would be thrilled to be making $75,000 a year -- without a bonus." Responding to growing voter anger over bonuses paid out at American International Group Inc., the House overwhelmingly passed legislation last week that would impose a bonus surtax of 90% on workers earning more than $250,000 annually at large firms receiving federal bailout money. The Senate is expected to consider a similar measure that would impose a 35% excise tax on a broader group of workers. Neither the president nor his aides have said whether Mr. Obama would sign either bill. Asked about the constitutionality of the House bill, Mr. Obama, a former constitutional-law professor, said on "60 Minutes" that he has concerns. "As a general proposition, you don't want to be passing laws that are just targeting a handful of individuals. You want to pass laws that have some broad applicability," he said in an interview broadcast Sunday. "And as a general proposition, I think you certainly don't want to use the tax code...to punish people." He said he hoped to find a way to address the AIG situation, which he called "pretty egregious," in a way that is constitutional and that upholds basic principles of fairness but that doesn't hamper the government from "getting the banking system back on track." AIG's financial-products unit has acknowledged paying out $165 million in bonuses in March; the firm has received $182 billion in federal bailout money. In the interview, as he has on the stump, the president said he believes in the private market but said the financial sector is "out of balance." "You look at how finance used to operate just 20 years ago, or 25 years ago," he said. "If you went into investment banking, you were making 20 times what a teacher made. You weren't making 200 times what a teacher made."
He also said that he is starting to see "flickers of hope" that the economy is getting better, with refinancings significantly increasing and the interest rates at historic lows. In other topics, President Obama said: The administration has offered top Treasury jobs, which remain vacant, to people who have turned them down because of the scrutiny surrounding the confirmation process. These people don't want to go through "some of the scrutiny, embarrassment, in addition to taking huge cuts in pay." Iraq is in many ways simpler to deal with than Afghanistan, with easier terrain, a better educated population and better infrastructure. He fundamentally disagrees with former Vice President Dick Cheney, who said last week that Mr. Obama was making the country more vulnerable to attack with his plan to shut down the military prison at Guantanamo Bay, Cuba, and other policy shifts. The Bush administration policies were breeding contempt for the U.S. in the Arab world and helping terrorist groups recruit new followers, Mr. Obama said. "Are we going to just keep on going until -- you know, the entire Muslim world and Arab world despises us?" Write to Laura Meckler at laura.meckler@wsj.com
Advisers To Obama Wary of Bonus Tax

Asset Plan Readied; President Reiterates Support for Geithner
By Michael A. Fletcher and Anthony Faiola Washington Post Staff Writers Monday, March 23, 2009; A01
As the Obama administration prepared to unveil major elements of its plan to address the global financial crisis, some of its leading economic officials reacted coolly to congressional actions to recoup bonuses from financial firms through targeted taxes, with one adviser saying the approach may be a "dangerous way to go." While acknowledging the legitimacy of the public outcry over at least $165 million in bonuses paid to executives at American International Group, administration officials stopped far short of endorsing legislation passed last week by the House that would levy a 90 percent tax on the payments. The Senate is scheduled to take up a modified version of the measure this week. "I think the president would be concerned that this bill may have some problems in going too far -- the House bill may go too far in terms of some -- some legal issues, constitutional validity, using the tax code to surgically punish a small group," Jared Bernstein, the top economic adviser to Vice President Biden, said on ABC's "This Week." "That may be a dangerous way to go." Another top Obama economic official, Austan Goolsbee, echoed that view. "The president's also been clear we don't want to govern out of anger. He's going to look at what comes out of the House, what comes out of the Senate, see what ideas we have," Goolsbee, a member of the president's Council of Economic Advisers, said on CBS's "Face the Nation." The public outrage over the AIG bonuses has undermined support for Treasury Secretary Timothy F. Geithner at a pivotal moment. In an interview broadcast last night on "60 Minutes," Obama expressed strong support for Geithner, who has been criticized in Congress and elsewhere for what some call his halting response to the financial crisis and for not doing more to block the AIG bonuses. AIG paid the bonuses to members in its troubled Financial Services division after receiving more than $170 billion in federal bailout aid. Still, Geithner is central to the Obama administration's plans for dealing with the global economic crisis, key portions of which are to be rolled out this week. Today, the Treasury Department is expected to introduce plans to create a government body to finance the purchase of as much as $1 trillion in toxic assets from ailing financial institutions. The new entity would combine assets with private investors, as well as the Federal Deposit Insurance Corp. and the Federal Reserve, to buy those assets, a step seen as crucial to unclogging the balance sheets of banks and allowing credit to flow more freely. Administration officials were putting the finishing touches on the plan yesterday and were reaching out to some of the private investors whose participation is key to the plan's success. Also, the Obama administration this week is expected to announce new proposals for financial regulation, executive pay, accounting standards, the structure of the International Monetary Fund and other issues ahead of a summit of 20 major nations in London on April 2.
At the summit, leaders will seek to reach a consensus on those and other coordinated steps meant to combat the global economic crisis and prevent a repeat. In particular, France and Germany are seeking to win assurances at the summit that Washington is committed to tighter financial regulations. Diplomatic sources say the Europeans have largely backed the 24 recommendations contained in a report of an advisory group to the Group of 20 industrialized and developing nations calling for broad reforms, including tighter regulations of hedge funds and rating agencies as well as higher capital requirements for banks. The details of how to enact such changes are likely to be left to each nation, though the Europeans are pressing for countries including the United States to agree to a rough outline of principles. For instance, they are requesting that the G-20 adopt language that would call for hedge funds to register and report regularly on their size, investment style, borrowing levels and performance. Currently, hedge funds are not subject to rigorous reporting requirements. The report calls for G-20 nations to take new steps to monitor and prevent excessive levels of executive compensation, although administration officials said that was not a central thrust of the proposals. That would be done partly by having regulators take executive compensation packages into consideration when assessing the overall risk levels at major financial institutions. A European official who spoke on the condition of anonymity said that while there are still "some differences" on the specifics of a final agreement, those differences were relatively narrow and were being worked out. Some of the bigger differences instead center more on the U.S. position that governments must be more aggressive on fiscal stimulus to combat the crisis -- a position that Germany and France reject. In an interview with the Wall Street Journal, European Central Bank President Jean-Claude Trichet said that a new stimulus plan was not needed. Critics have also expressed concern that the measures agreed upon at the summit may ultimately be so vaguely worded to win broad support that they may prove to have little real effect. On Thursday, Geithner is scheduled to testify before the House Financial Services Committee about overhauling financial regulation. He is likely to call for giving the Federal Reserve new powers to regulate the financial system as a whole, including power to oversee any institution that is big enough or intertwined enough to pose risks to the financial system. Congress was moving toward such steps just two months ago, and Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee, endorsed the idea. But the push has faded lately as members of Congress have become more skeptical of the Fed's perceived lack of accountability and its role in the takeover of AIG and bonuses paid to executives there. The new economic proposals come as Congress is to begin debating the administration's $3.6 trillion budget proposal for next year. The spending plan, which Obama calls central to his vision to lay a foundation for the nation's economic future through its investments in expanding and reducing the cost of health care, education and renewable energy, has come under intense fire because of its huge price tag. Also, some of the key revenue-raising mechanisms in the proposal -- including a tax on carbon emissions and a limit on tax deductions that can be taken by highincome families -- face an uphill battle in Congress.
Opposition to the ambitious spending plan only increased Friday after the Congressional Budget Office released an analysis projecting that the plan would require the national deficit to swell by $2.3 trillion more than the president predicted in his budget request a month ago. On CNN's "State of the Union," Sen. Judd Gregg (R-N.H.), who was on track to serve as Obama's commerce secretary before backing out last month, said the proposal was a non-starter because of its impact on the long-term deficit. "The practical implications of this is bankruptcy for the United States. There's no other way around it," Gregg said. "If we maintain the proposals which are in this budget over the 10-year period that this budget covers, this country will go bankrupt. People will not buy our debt; our dollar will become devalued." Sen. Susan Collins (R-Maine), also expressed concern about the deficit spending contemplated in the budget. "It brings our debt levels to an unprecedented level," she said on ABC. "That is not sustainable," she added. "It poses a threat to the basic health of our economy." On the same program, Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, expressed similar concerns. "Look, $2.3 trillion over 10 years is a stunning amount of money," he said. "In fairness to this administration, they locked down their forecasts three months ago. There's been a lot of bad news since. So we've got a worsening situation. That requires adjustments, and it's going to have to be across a broad front." Christina Romer, chairman of Obama's Council of Economic Advisers, did not back down from the budget proposals, saying that the estimates in the CBO report are not necessarily accurate. "There is a question whether CBO is right," she said on CNN. "So we know that forecasts -- both of what the economy is going to do and of what the budget deficit are going to do -- are highly uncertain." Staff writers Neil Irwin and Michael D. Shear contributed to this report.
Obama Looks for Calm in a Firestorm

President Must Balance Anger at Wall Street With Need for Its Big Players to Help Revive the Economy
By Michael D. Shear and Paul Kane Washington Post Staff Writers Sunday, March 22, 2009; A10
It was the kind of statement that Barack Obama is famous for -- at once empathetic, stern and measured. In remarks to a group of small-business owners, the president lashed out at American International Group, said he felt the outrage of average workers and pledged to turn his anger into action. "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. "I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?" But the president's comments Monday did little to contain a political wildfire that presents his White House with an early test of the crisis management strategy used with success during the 2008 campaign -- confront, accept responsibility and move on. For an administration still in its infancy, the stakes are high, because the compensation controversy, at a minimum, is a diversion from its broader efforts to fix the economy and re-order budget priorities, and it could undermine them. When Congress returns tomorrow, it will continue work on legislation to stop bonuses at the insurance giant and other financial institutions receiving federal bailout assistance. The House vote Thursday to impose a 90 percent tax on bonuses was an opening ante in Congress's battle with Treasury Department officials over executive compensation limits. In a sign of the anger moving beyond AIG, Rep. Barney Frank (D-Mass.) sent a letter Friday to the overseer of government-run mortgage giants Fannie Mae and Freddie Mac, demanding an end to bonuses there. "The public . . . rightfully insists that large bonuses such as these awarded by institutions receiving public funds at a time of a serious economic downturn cannot continue," wrote Frank, chairman of the Financial Services Committee. At the same time, bankers and other financial leaders are warning that the legislation pending in Congress could doom Obama's efforts to resuscitate lending by causing banks to reject government help. In a letter to his employees, Citigroup chief executive Vikram Pandit wrote that the bailout would be "significantly set back" by the congressional move to heavily tax bonuses. Pandit said he takes "exception" to a "tide of negative sentiment rising in Washington D.C." In an effort to contain that anger, the White House indicated this weekend that it wants to see more measured attempts to curb bonuses that will not threaten the efforts to revive the banking system. White House Chief of Staff Rahm Emanuel said he expects the president will not be asked to sign a bill exactly like the one that passed the House last week.
Emanuel said that although the anger of the public and Congress is understandable, "everybody woke up the next day, took a deep breath and realized, let's not govern out of frustration." Emanuel added that a solution will be found that changes the banks' compensation system without harming the goal of achieving financial stability. Senior White House aides concede that the AIG scandal made it difficult for them to communicate their message last week. They said the media failed to take note of the 30 percent increase in home refinancing and paid relatively little attention to the president's small-business proposal, his diplomatic opening with Iran and his legislative agenda. Instead, they said with more than a hint of frustration, the cable news programs and major newspapers returned day after day to the bonus story. "It got in the way for Wall Street," Emanuel said in an interview yesterday. "It got in the way for Washington. It got in the way for the media. It got in the way for everybody." In his weekly radio and Internet address yesterday, Obama made no mention of the AIG bonus scandal, choosing instead to use the forum to urge lawmakers to pass his budget. He plans to do the same at his second prime-time news conference Tuesday night. His call on Congress to take up "the important work of debating this budget" is unlikely to do much to shift the political conversation away from where it has been for seven days. Even as the president left Washington mid-week for town hall meetings on the budget and an appearance on "The Tonight Show With Jay Leno," his Treasury secretary became the whipping boy for congressional anger as lawmakers proceeded to draft legislation aimed at punishing AIG executives for the bonuses. "Quite simply, the Timothy Geithner experience has been a disaster," Rep. Connie Mack (R-Fla.) said Tuesday in calling for the secretary's resignation. The AIG controversy has prompted Republicans to more directly attack Obama than at any time since he took office. At a Thursday session with reporters, Senate GOP leaders personally mocked him as a dilettante president, busy making lighthearted appearances on television, even talking about college basketball on ABC's "Good Morning America." "He's even found time to fill out his NCAA bracket," Sen. Lamar Alexander (R-Tenn.) said. The mounting anger last week on both sides of the issue served as a blunt reminder that Obama's efforts to fix the economy will require a delicate balance of several constituencies: the public, the Congress and the financial industry. Press secretary Robert Gibbs admitted as much Friday, telling reporters that the president has "two objectives" as he confronts demands that he do something about the AIG bonuses. "The first is understanding that taxpayer anger and frustration," Gibbs said. But also, he added, Obama must ensure "our ability to stabilize the financial system and ensure that credit flows from banks and lending institutions."
The political dangers inherent in navigating between those two objectives became clearer last week as Gibbs and other White House officials were peppered with questions about Geithner's knowledge of the bonuses given to executives at AIG. Geithner's Treasury Department position was shaky even before it started. His confirmation was held up by revelations that he had failed to pay thousands of dollars in taxes. His early rollout of a bank bailout plan was savaged as flimsy by Wall Street, and the stock market plunged. Now, as the president said last week, Geithner is "on the hot seat" once again, in part because of his role as head of the New York Federal Reserve at the time the AIG bailout was initiated. In particular, Geithner and the White House have been under fire for conflicting answers about when the Treasury secretary found out that AIG executives would receive bonuses on March 15. A White House timeline initially said that he found out on March 10, but he later admitted that he had known a week earlier. Obama has repeatedly defended Geithner, calling him indispensable to the task of reviving the economy. But the damage to his reputation, especially on Capitol Hill, was hard to miss. By Thursday, Geithner was on television, trying to repair his image. "I completely share the basic frustration across America about what's gotten us to this place," he said on CNN Thursday evening. Republicans have seized on the AIG issue in the belief that it has the potential to link Obama more closely to the widely unpopular $700 billion bailout legislation for the financial sector -legislation that was crafted in the Bush administration. "They're in charge," Sen. John Cornyn (Tex.), chairman of the National Republican Senatorial Committee, said of the Obama administration. "This could be a game changer in one sense. It's tapped into the populist outrage." Rep. Charles B. Rangel (D-N.Y.), chairman of the tax-writing Ways and Means Committee, was initially reluctant to use the tax code in a punitive way, but he changed his mind as the political pressure mounted and as he drew up an even broader group of individuals dragged into the bonus tax than just AIG executives. "They have caused irreparable harm," Rangel told reporters Wednesday, hours before releasing his plan. Perhaps no reaction better summed up the attitude on Capitol Hill than that of Sen. Olympia J. Snowe (R-Maine), a co-sponsor of the Senate legislation. Told by reporters that her plan could eliminate the entire salary-bonus structure of the financial sector, Snowe held her hand to her mouth and posed, making a mock gesture of shock at the suggestion. "That's about the size of it," she said, declaring that her preference was to wipe out bonuses for every company receiving government rescue. "This isn't the time for the status quo mentality." Despite the aggressive rhetoric on Capitol Hill, final resolution could be weeks away.
Senate leaders, who have several key GOP votes of endorsement, hope to pass their bill this week, but it would have to be reconciled with the House legislation to iron out their critical differences. The goal is to send final legislation to Obama by April 3, when Congress is slated to go on a two-week legislative break. Senate Majority Whip Richard J. Durbin (D-Ill.), for one, predicted that the anger and outrage that fuel the bonus controversy will soon fade. "We'll come back down to earth," he said. "And we'll realize there's a lot of other work to be done."
Administration Seeks Increase in Oversight of Executive Pay

By STEPHEN LABATON WASHINGTON The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said. The outlines of the plan are expected to be unveiled this week in preparation for President Obamas first foreign summit meeting in early April. Officials said the proposal would seek a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire financial system. It will propose that many kinds of derivatives and other exotic financial instruments that contributed to the crisis be traded on exchanges or through clearinghouses so they are more transparent and can be more tightly regulated. And to protect consumers, it will call for federal standards for mortgage lenders beyond what the Federal Reserve adopted last year, as well as more aggressive enforcement of the mortgage rules. The administration has been considering increased oversight of executive pay for some time, but the issue was heightened in recent days as public fury over bonuses spilled into the regulatory effort. The officials said that the administration was still debating the details of its plan, including how broadly it should be applied and how far it could go beyond simple reporting requirements. Depending on the outcome of the discussions, the administration could seek to put the changes into effect through regulations rather than through legislation. One proposal could impose greater requirements on company boards to tie executive compensation more closely to corporate performance and to take other steps to ensure that compensation was aligned with the financial interest of the company. The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving federal bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission. During the presidential campaign, Mr. Obama repeatedly urged regulators to adopt new rules to give shareholders a greater voice in setting executive pay for all public companies. And last month, as part of the stimulus package, Congress barred top executives at large banks getting rescue money from receiving bonuses that exceeded one-third of their annual pay. The regulatory plan is being put together ahead of the meeting of the Group of 20 industrialized and developing nations in London. The meeting, which begins April 2, is expected to be
dominated by the global financial crisis and discussions about better oversight of large financial companies, whose problems could threaten to undermine international markets. An important part of the plan still under debate is how to regulate the shadow banking system that Wall Street firms use to package and trade mortgage-backed securities, the so-called toxic assets held by many banks and blamed for the credit crisis. Officials said the plan would also call for increasing the levels of capital that financial institutions need to hold to absorb possible losses. In a sign of the economic systems fragility, officials said the administration would emphasize that those heightened standards should not be imposed now because they could discourage more lending. Rather, they would be put in place after the economy began to rebound. The argument some are making is that they dont want to be stepping on the gas pedal and the brake at the same time, said Morris Goldstein, a senior fellow at the Peterson Institute for International Economics and a former top official at the International Monetary Fund. Administration officials are also debating how tightly to supervise hedge funds. A broad consensus has emerged among regulators and administration officials that hedge funds must be registered and more closely monitored, probably by the Securities and Exchange Commission. But officials have not decided how much the funds will have to disclose about their investments and trading practices. The officials spoke on condition of anonymity because the regulatory plan was still being formulated and they did not want to upstage Mr. Obama or Treasury Secretary Timothy F. Geithner, who will describe the plan when he appears before Congress on Thursday. A central aspect of the plan, which has already been announced by the administration, would give the government greater authority to take over and resolve problems at large troubled companies not now regulated by Washington, like insurance companies and hedge funds. That proposal would, for instance, make it easier for the government to cancel bonus contracts like those given to executives at the American International Group, which have stoked a political furor. Under the proposal, the Treasury secretary would have the authority to seize and wind down a struggling institution after consulting with the president and upon the recommendation of two-thirds of the Federal Reserve board. Long before he became Treasury secretary, Mr. Geithner sought broader authority for the government to resolve problems at financial institutions not under bank regulators supervision. The government now has the power to take over only the banking unit that controls federally insured deposits of large troubled institutions, not the parent company a limit that could pose problems if large financial conglomerates like Citigroup or Bank of America continued to spiral downward. In unveiling the regulatory plan, Mr. Obama would signal to Europe that he intended to crack down on the risk-taking and other free-wheeling practices by the financial industry that resulted in the global economic meltdown.
France and Germany especially have suggested that the better response is not more government spending but tighter regulation. The Obama administration has urged European nations to do more to restart their economies through financial stimulus. Mr. Obama is hoping that by showing a serious commitment to tighter regulation he can more easily persuade other countries to increase government spending and stimulate demand by consumers and businesses that would help pull the global economy out of a serious decline. But the administrations efforts, especially on tighter regulation of hedge funds, are not expected to assuage some European countries. Moreover, the hedge fund industry has significant influence on Capitol Hill and has shown that it can defeat proposals it finds onerous. While a growing number of hedge fund advisers have voluntarily agreed to register with the S.E.C., many of the most prominent ones are expected to oppose efforts to require them to provide what they consider proprietary information about their holdings and trading practices, even on a confidential basis. From the outset of the Obama administration, officials and European leaders have disagreed over how much to limit pay. And Mr. Geithner has discouraged the administration from imposing across-the-board limits on compensation of all employees at troubled companies receiving federal assistance and more burdensome pay restrictions at healthy institutions that the administration is trying to encourage to take government money so they can increase lending. Last week, Ben S. Bernanke, the Fed chairman, also called on regulators to supervise executive pay at banks more closely to avoid compensation practices that can create mismatches between the rewards and risks borne by institutions or their managers. Much of the plan would require the approval of Congress, where divisions are forming over how best to overhaul financial industry oversight. Representative Barney Frank, the Massachusetts Democrat who heads the Financial Services Committee, said he believed giving the government new authority to take over troubled companies could be adopted by the House relatively quickly, particularly after the furor over the A.I.G. bonuses. This would give the government the same powers that you would get as if the company were in bankruptcy, Mr. Frank said in an interview shortly after meeting with Mr. Geithner on the plan. But Mr. Frank and other lawmakers said other elements of the plan could take more time, like expanding the authority of the Federal Reserve to become a systemic regulator. In a hearing Thursday, Senator Christopher J. Dodd, a Connecticut Democrat who is chairman of the banking committee, expressed skepticism about that proposal. Whether or not those vast powers will reside at the Fed remains an open question, said Mr. Dodd, pointing out that the Federal Reserve had failed to apply tough oversight of the companies it now regulates. Landon Thomas Jr. contributed reporting from London.

MARCH 23, 2009
Geithner Aides Worked With AIG for Months on Bonuses

By MICHAEL M. PHILLIPS and SUDEEP REDDY
WASHINGTON -- Since the fall, senior aides to Timothy Geithner have closely dealt with American International Group Inc. on compensation issues including bonuses, both from his time as president of the Federal Reserve Bank of New York and as Treasury secretary. The extent of their involvement, which wasn't widely known, raises fresh questions about whether Mr. Geithner could have known earlier about AIG's $165 million in bonus payments. When the bonuses sparked a political firestorm last week, Mr. Geithner said he learned about their full scope in early March, just days before they were paid. Mr. Geithner and Federal Reserve Chairman Ben Bernanke will be grilled by Congress on Tuesday in a hearing that is likely to focus heavily on AIG. The flap has prompted lawmakers to seek curbs on an array of bonuses, tested the Obama administration and undermined Mr. Geithner's standing as he attempts to implement measures to stabilize the financial system. Treasury officials say the department's staff kept Mr. Geithner in the dark until March 10. "Secretary Geithner, who has been actively engaged in shaping and executing the president's broad economic agenda, takes full responsibility for not being aware of these programs" before that date, Treasury spokesman Isaac Baker said Sunday in a written response to questions. This account of how Mr. Geithner and his aides were apprised of the AIG bonuses was based on interviews with government officials, lawmakers and congressional testimony. As New York Fed president, Mr. Geithner was central to AIG's initial $85 billion bailout in September, which was carried out in a tumultuous four-day period. After Edward Liddy took over as AIG chief executive, the company hired consultants to look at its payment plans around the world. One of Mr. Geithner's top bank supervisors at the New York Fed, Sarah Dahlgren, became the government's lead overseer of AIG. She sat in on AIG board meetings, joined at times by other top Fed staffers, and also participated in compensationcommittee meetings. It isn't clear whether the issue rose to the board level until this month. AIG received an expanded government rescue in October and another in November, bringing the total to about $150 billion, including $40 billion in Treasury funds. In early November, the Fed, outside auditor Ernst & Young and AIG officials began examining through a committee the bonuses set to be paid to AIG's financial-products division, including those that sparked last week's furor. The committee concluded that the bonuses, which were in contracts signed before the government takeover, couldn't be legally blocked, according to a
person familiar with the matter. The Obama administration has since agreed with that legal interpretation. AIG cited the retention plan in a public filing in early November, and Fed officials were aware AIG planned to pay $55 million in bonuses to financial-products employees the next month. Mr. Geithner remained involved in major AIG matters, seeking updates from Ms. Dahlgren and other top Fed staffers. He recused himself from dealing with aid to specific companies around the time of his Nov. 24 nomination as Treasury secretary. Fed officials declined to make Ms. Dahlgren available to comment on the bonus issue. Lawmakers were also scrutinizing AIG's operations. Some raised the matter of the AIG bonuses at a hearing in December where they grilled Neel Kashkari, a Bush Treasury official who remains at the department. In late January, news outlets reported that AIG planned a total of $450 million in bonuses to help retain employees winding down the complex trades in the unit at the heart of the company's collapse. In the weeks that followed, Mr. Liddy and other AIG officials briefed some lawmakers about the retention payments and other aspects of the AIG rescue. On Feb. 28, as government officials worked on a fourth AIG bailout, the New York Federal Reserve Bank emailed Stephen Albrecht, a Treasury lawyer, laying out the AIG bonus issues and promising further detail, according to two people familiar with the email. Mr. Albrecht did not return a call seeking comment. It was an intense weekend, as Treasury and Fed officials frantically prepared to close the AIG deal. "When we heard there was this executive compensation thing floating out there, we thought, 'We'll deal with this later,'" said one Treasury official. On March 2, AIG announced both record losses and $30 billion in fresh Treasury aid. The following day, Mr. Geithner appeared at a hearing of the House Ways and Means Committee. Rep. Joseph Crowley, a New York Democrat, asked the secretary about more than $160 million in bonuses that AIG would be paying to financial-products employees "in the coming weeks." Treasury officials say the AIG problem didn't register with Mr. Geithner at the hearing amid the other issues he faced. Mr. Baker, the Treasury spokesman, acknowledged that information about the financial-products bonuses was "in the public arena...for many months." But, he said, it wasn't until March 10 -- five days before the big batch of retention payments were due -- that department staff spelled out the situation for the secretary. The following day, March 11, Mr. Geithner, alert to the potential political fallout, called Mr. Liddy to protest the bonus payouts. At a congressional hearing last week, Mr. Liddy described the call as "open and frank." According to Mr. Liddy's sworn testimony from that hearing, Mr. Geithner indicated on the call that he had learned about the bonus "situation about a week" earlier.
A Treasury spokeswoman said Mr. Liddy was "wrong." An AIG spokeswoman said the CEO was passing on his impression from the conversation. "If that impression was incorrect, he certainly defers to the Treasury secretary," she said. Over the weekend, administration officials contended the uproar wouldn't derail their efforts. President Barack Obama and a pair of Republican senators -- Judd Gregg of New Hampshire and Charles Grassley of Iowa, the top Republican on the Finance Committee -- disagreed with those calling for Mr. Geithner's resignation. "I think Geithner is going to survive this -- I think he has the trust of the president," Rep. Elijah Cummings (D., Md.), an Obama ally and early critic of AIG's bonuses, said in an interview. But "he has to put a very high-powered microscope on AIG," he added. Liam Pleven, Matthew Karnitschnig and Laura Meckler contributed to this article. Write to Michael M. Phillips at michael.phillips@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com
Labours mount up for Geithner

By Daniel Dombey Published: March 23 2009 02:00 | Last updated: March 23 2009 02:00 As President Barack Obama acknowledges, Tim Geithner, the US's Treasury secretary, is battling against a multitude of foes. Not only is Mr Geithner seeking to rid banks of hundreds of billions of dollars in toxic assets while contending against Republican calls for his resignation; he is also seeking to get to grips with financial sector regulation in the midst of popular outrage over $165m (120m, 114m) in bonuses paid to AIG executives. Last night, in the latest in a series of presidential statements defending the Treasury chief, Mr Obama joked that even were Mr Geithner to resign, he would say "Sorry, Buddy, you've still got the job". For the moment at least, Mr Geithner's labours seem never to end. Later this week, after he has outlined his plans for dealing with toxic assets, the Treasury secretary is expected to set out principles to cut down on financial sector systemic risk, which would open the door to regulation of hedge funds. "We want to reform the financial framework; where the framework is creating systemic risk that lingers there, we have got to take it out," said a Treasury official. "We have to define who needs to be regulated by what they actually do and the risk they pose." The ideas under discussion would include establishing principles for systemically important financial groups, including greater transparency and internal company oversight to align executives' pay with institutions' long-term health rather than short-term performance. But Mr Geithner's plans rely on co-operation with the financial sector - much of which is furious about a bill that passed the House of Representatives last week to claw back 90 per cent of the bonuses paid to employees of AIG and other companies benefiting from federal funds. Although the Senate is working on a similar bill, which would impose a lower level of retrospective tax on bonuses, Mr Obama is only committed to "looking at" the resulting legislation. "This kind of claw-back legislation has to balance between the need to address the absolutely reasonable and well-justified anger of the Congress and the American people about how this money is being spent in these undeserved bonuses and the need to pursue financial stability," Jared Bernstein, chief economic adviser to Joe Biden, the vice-president, told ABC yesterday. He added that Mr Obama would be concerned that the House bill in particular would have "problems in going too far", and cited concerns about the legality and constitutional validity of "using the tax code to surgically punish a small group". He added: "That may be a dangerous way to go." A further complicating factor is mounting concern about the US's fiscal position in the wake of a Congressional Budget Office report that estimated that Mr Obama's budget plans would result in
$9,300bn of deficits over the next decade. Yesterday, Judd Gregg, a New Hampshire senator Mr Obama had sought to make commerce secretary, said the administration's budget plans would bankrupt the country. In his interview last night, Mr Obama highlighted the scale of the challenges facing his administration. "It's going to take a little bit more time than we would like to make sure that we get this plan just right," he said, arguing that his administration had only been in office for 40 days and faced "the greatest financial crisis since the Great Depression". Copyright The Financial Times Limited 2009
Give Geithner a chance, says McCain

Published: March 21 2009 02:00 | Last updated: March 21 2009 02:00 Tim Geithner, embattled US Treasury secretary, should be given a chance to succeed, says former presidential candidate John McCain. He is the first prominent Republican to speak up in Mr Geithner's defence amid growing calls for his resignation. Mr McCain said that the 'perfect storm' over AIG 'has been as explosive in a short period of time as anything I have seen'. Mr McCain, who was one of the few Republican senators to vote in favour of Mr Geithner's nomination after revelations of tax arrears, was speaking at the end of a week in which the Republican party has targeted Mr Geithner amid mounting public anger over Wall Street bonuses. 'Everyone acknowledges he needs help,' said Mr McCain, in reference to the Obama administration's difficulty in recruiting nominees to the Treasury department, where Mr Geithner remains the only official to have been confirmed. 'The guy deserves a chance. So what are we going to do? Throw the guy out, nominate someone new and then go through the whole process again?' Mr McCain also distanced himself from Republican 'righteous indignation' over Mr Obama's budget tactics. Copyright The Financial Times Limited 2009
For Cuomo, Financial Crisis Is His Political Moment

By MICHAEL POWELL, DANNY HAKIM and LOUISE STORY This article is by Michael Powell, Danny Hakim and Louise Story. Andrew M. Cuomo, whose love of analogies is great, often likens his investigations to a fine opera. The opening act, he instructs his lieutenants at the New York State attorney generals office, is taken up with his investigation and rivets the audiences attention. The middle acts are sung by tenors from executive suites, who agree to change their misbegotten ways. The final act, in his rendition, is played by Congress or the State Legislature, which enacts new laws and systemic reform. Mr. Cuomo, a double-espresso of a politician and an oh-so-careful guardian of his own media image, now has found his moment like few politicians in the United States. For months he has given voice to disgust with the abuses and self-regard within the nations financial industry. He has forced the three largest rating agencies to the bargaining table, persuaded mortgage lenders to agree to rework their appraisals and sought to force down the cost of student loans by shaming universities and lenders. Mr. Cuomos use of his office, its powers and its bully pulpit, is muscular. He has sent his subpoenas to those in plush offices, and dragged out the names of bonus recipients from American International Group and Merrill Lynch, to loud applause from many voters. But with names in hand, the attorney general is experiencing a very Cuomo-esque moment of agonizing about the propriety of exposure. As he watched Edward M. Liddy, chief executive of the American International Group, describe death threats that his employees had received, including a note suggesting hangings with piano wire, Mr. Cuomo began this week to wonder whether the public baying had grown too loud, an aide who was with him said. Theres a risk it gets so loud it becomes counterproductive, he said, the aide recalled. Its important to take a deep breath. For now, Mr. Cuomo will not publicize the names. Instead, he will give A.I.G. a few days to persuade the top earners to give back their bonuses. Then Mr. Cuomos staff will contact the holdouts. And then? Perhaps Mr. Cuomo releases a few names. (He still intends to release the names of Merrill Lynch bonus recipients, aides said.) All of that would fit Mr. Cuomos profile as attorney general and his practice of relying more on his acute political antenna than on lawyerly concern with setting legal precedent. His enthusiasm for the subpoena worries some in the legal community, not least a few prosecutors. Evincing outrage is not a legal strategy, so it remains to be seen what hes going to do with his information, said Daniel C. Richman, a Columbia law professor and former prosecutor.
Eliot Spitzer, his congenitally combative and competitive predecessor, not too subtly mocked Mr. Cuomos subpoena penchant this week. Everybody is jumping up and down, serving subpoenas and beating their chest trying to be tougher than the next person, Mr. Spitzer said on WNYC radio. At 51, Mr. Cuomo has spent more than three decades around politics he managed the gubernatorial campaigns of his temperamental father, Mario, while still in his 20s and his ambition tends to vibrate about him. As Gov. David A. Patersons administration lists perilously close to the waterline, many politicians expect Mr. Cuomo to try for that office in 2010. Mr. Cuomo and his staff dart away from such talk; Mr. Cuomo is aware that many accuse him of wearing the cloth of ambition too publicly in the past. The attorney general has been known to work more than one reporter on a given day, but, after much staff negotiation, he declined an interview for this article. His allies are less shy. How do I answer this? Andrew Cuomo will be the governor of the state of New York, said Assemblyman Sam Hoyt, a Democrat from Buffalo. Im not prepared to say 2010 or 2014. Mr. Cuomo walked through the political wilderness after serving as secretary of housing and urban development under President Bill Clinton. He wound up suspending his run for governor in 2002 just before the Democratic primary. Then he endured a nasty dynastic divorce with Kerry Kennedy. He ran for state attorney general in 2006, embracing the mantle of Eliot Spitzer. But once elected, he quickly fashioned a different image. Mr. Spitzer had focused, to devastating effect, on the cozy dealings and poor regulation of Wall Street, but Mr. Cuomo retailed himself as tribune of the little man. His cases ran from a headline-grabbing student loan case to forcing operators of coal-fired plants to disclose financial risks related to global warming. He attacked heating contractors in Buffalo, and collaborated with the Securities and Exchange Commission on a two-year investigation of the state comptrollers office run by Alan G. Hevesi that resulted in a 123-count indictment of two former Hevesi advisers this week. It was not until 2008 that he turned his gaze on Wall Street. In June, he reached an agreement with the nations largest rating agencies, Fitch, Moodys and Standard & Poors. Previously, the agencies had produced preview ratings before investment banks decided whether to pay for the service. Mr. Cuomo forced the agencies to toss out that arrangement and to demand payments before giving ratings. Then he sued UBS, the Swiss banking giant, whose managers had hawked auction rate securities investments that banks portrayed as being as safe as cash even as they sent e-mail messages to each other about their risks. He accused UBS of securities fraud. Many financiers assumed that Mr. Cuomos interest was fleeting. It was not. He began talks with Wall Street, and soon enough a banking armada Citigroup, JPMorgan, Wachovia, Merrill
Lynch, Deutsche Bank and Goldman Sachs among others than $60 billion to reimburse investors.
collectively agreed to pay more
Mr. Cuomo kept marching deeper into Wall Street. His decision, in part, owed to common sense, as collapse had exposed decayed underpinnings. But he also found a vacuum. Much of New Yorks political class stood nearly mute. So when the federal government bailed out A.I.G. in September, Mr. Cuomo negotiated with Mr. Liddy, the companys new chief, to cut $160 million in expense and freeze $600 million in deferred bonuses for the unit responsible for the credit default swaps. Mr. Cuomos office took after Merrill Lynch. In early December, when it became public that Merrills former chief, John A. Thain, sought a bonus of $10 million, Mr. Cuomo decried it as nothing less than shocking. Then, his staff discovered that more than 700 employees at Merrill had made a buck last year, a minimum bonus of $1 million. Hes dug in and come up with important information that wasnt known, and hes exposed failures, said Michael Garland, a director at CTW Investment Group, which works with union pension funds. But Mr. Cuomo missed a beat or two. He did not realize that at A.I.G., the financial unit had another $165 million set aside for another species of bonus, known as retention bonuses. Some, too, complain that he is too quick to settle. In the case of the rating agencies, the Connecticut attorney general, Richard Blumenthal, pushed on, suing the agencies. At this point, Mr. Cuomo stands astride an unusual crossroad. A man of the political world, he has preferred negotiation to legal challenges. Peter B. Pope, who was the chief of the criminal division in the attorney generals office under Mr. Spitzer, noted, By throwing sunlight on things, he has the ability to attract all kinds of other regulators, and that is in the end probably something that he is anticipating. Long known as his fathers dark prince, as a man with sharp political incisors and many enemies, Mr. Cuomo has crafted a less carnivorous image. No fund-raiser is too parochial, from Buffalo to the Bronx. He purrs into phones with legislative leaders and chest bumps with assemblymen. And his staff members are everywhere. When Assemblyman Hoyt traveled to a block association meeting in Buffalo, he found one of Mr. Cuomos lawyers there, instructing homeowners about consumer fraud. Raise the question of his gubernatorial prospects, and Mr. Cuomo changes the subject. Nor does he take the opportunity to rule out a primary challenge to Mr. Paterson. He has more cash on hand than the governor, and he has hired the governors former fund-raiser, Cindy Darrison.
It would not be easy for him to challenge a black governor, particularly after Mr. Cuomo angered many black voters by challenging the former comptroller, Carl McCall, in 2002. I have no doubt he wants to be governor, but my advice now? Mr. Hoyt said. The best politics is to keep on doing what hes doing.
Bankers Press Case Against Punitive Tax

Executives Cite Health of Industry, Economy
By Binyamin Appelbaum Washington Post Staff Writer Saturday, March 21, 2009; A01
An alarmed banking industry looked for friends in Washington yesterday as it tried to head off severe congressional restrictions on compensation, fearful that a wave of popular anger about vast paydays will result in permanent damage to the industry. After a week of unexpected setbacks for an industry accustomed to deference, bank executives said they were now racing to convince Congress and the Obama administration that imposing punitive taxes on bonuses would unfairly punish thousands of people for the sins of a few. Executives also argued that hitting banks would hurt the broader economy. "We are working in every appropriate way with policymakers in Washington, and with other financial institutions and industry associations, to come to agreement on a constructive industry compensation system that is good for the company, the financial system and the country," Citigroup chief executive Vikram Pandit said in a memo sent to employees. The stakes are especially high because the Treasury Department is moving ahead with a critical initiative that involves persuading private investors to buy troubled assets from banks. The administration, which could unveil more details of this plan as early as Monday, is deeply worried that investors will be afraid to participate, Treasury officials say. The Treasury plan would include three primary components, drawing on resources from the Federal Deposit Insurance Corp., the Federal Reserve and private investors, officials say. Congress remained at a fever pitch, with several members issuing new demands that various companies rescind various bonuses. Long-simmering anger about lavish paydays on Wall Street has erupted since the disclosure last weekend that American International Group, bailed out by the government, still had paid $165 million in new bonuses to the company's most troubled division. But there were signs that others in official Washington were more sympathetic to industry concerns. Two of the nation's senior banking regulators indicated in speeches that compensation should be tied to performance, the point of bonuses. Fed Chairman Ben S. Bernanke said banks should structure compensation to reflect contributions to a company's health and profitability. He said problems arose when employees were rewarded for short-term results that created long-term risks. "Poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization," Bernanke said in a speech to the Independent Community Bankers of America. FDIC Chairman Sheila C. Bair, speaking yesterday to the same group, said that some bankers deserved to be paid more depending on performance.
The Obama administration continued to offer measured comments. An official said that the White House will seek to recover the bonus payments from AIG, but in a manner that does not threaten the financial system. "The president has said repeatedly that he will do everything possible to recoup these bonuses -- it is not a matter of if he is in favor of it, but how and what the best vehicle is," the official said. Many bank employees, particularly those who work in the capital markets and investment banking, get the majority of their annual compensation in the form of a lump-sum payment at year's end, a practice that is designed to tie pay to performance. The bill passed by the House on Thursday would eliminate those bonuses for thousands of workers at eight of the largest U.S. banks, in addition to employees of AIG, Fannie Mae and Freddie Mac. It would slap a 90 percent tax on bonuses to employees with incomes above $125,000, or household incomes above $250,000. A broader Senate bill, which could reach the floor next week, would also tax thousands of bonus recipients at regional banks. The rapid progress of the legislation surprised many in the financial industry, triggering widespread panic. The measures are retroactive, and many employees have spent some of the money, which they might now be required to repay. There was also alarm at the Treasury, where some officials fear that the ferment on Capitol Hill will damage the government's ability to partner with financial firms on economic recovery. The program to buy toxic assets would involve three components, sources said. The plan would establish an entity, backed by the Federal Deposit Insurance Corp., to buy loans from banks, a source familiar with the matter said. The idea is rooted in what some market analysts and regulators call a "bad" bank. Treasury and Federal Reserve officials are also preparing to partner with private investors to create funds that could buy toxic assets, which provided the financing for troubled loans such as mortgages and have been at the heart of the banking system's troubles. The funds would borrow money at favorable rates from the Fed -- without having to pay back the loans for at least five years and possibly as long as seven years -- to buy the assets, freeing banks to lend once again, a source said. Finally, the Treasury and Federal Reserve would expand a recently-launched program that provides financing to private investors to buy assets that back new consumer loans, such as credit card debt, student loans and auto loans. That initiative would be broadened to address toxic assets that have been sitting on the books of banks for months, not just new ones. Several of the nation's leading bankers yesterday tried to comfort their employees. Jamie Dimon, chief executive of J.P. Morgan Chase, held a conference call with senior executives to emphasize their value, and to tell them that the company was working to convey its concerns to the government. Bank of America chief executive Kenneth D. Lewis told employees in a memo that they deserved to keep their pay.
Pandit of Citigroup raised another common theme, arguing that most of those responsible for the bank's mistakes in recent years had left the company, and that the remaining employees were playing a key role in helping the nation to recover. "You have been invaluable in our collective efforts to put the company on solid footing," Pandit wrote. "The work we have all done to try to stabilize the financial system and to get this economy moving again would be significantly set back if we lose our talented people because Congress imposes a special tax on financial services employees." Staff writers Michael Shear, David Cho and Neil Irwin contributed to this report.
Warning over bonus crackdown

By Aline van Duyn and Julie MacIntosh in New York Published: March 23 2009 02:00 | Last updated: March 23 2009 02:00 Plans by US lawmakers to curtail big Wall Street bonuses may have adverse effects on government rescue plans aimed at restarting consumer lending and resolving the toxic asset overhang. In particular, private investors such as hedge funds and private equity groups may be less likely to take part amid concerns of government scrutiny and fears that profits may be clawed back in the future. Fed officials believe there is already evidence of this in the lacklustre initial take-up of loans offered for the term asset-backed securities loan facility (Talf). The first $200bn leg of the Talf, aimed at restarting the securitised debt markets, began last week and details are expected today on a "public/private partnership" aimed at getting billions of dollars of toxic assets off banks' books. "I just hope this divide between Washington and the investment community doesn't actually injure the initiatives we need to succeed," said Roger Altman, the head of Evercore Partners and a former deputy US Treasury secretary. "We need the investment community to participate in the Talf and the public/private partnership, and it would be a shame if they were not willing to step in." Already some investors have been concerned that borrowing money from the Federal Reserve to buy securities backed by car loans and credit cards might open them up to scrutiny from regulators. If nothing else, this could result in time-consuming disclosure requirements. "What we hear time and time again from the investors' standpoint, and even the issuers' standpoint, is a reluctance to get involved with a government programme, for fear of retribution . . . and that there's some sort of clawback [on profits]," said Greg Peters, head of fixed income and economics research at Morgan Stanley. "There's such concern about over-reaching government involvement that it's actually hurting these programmes, ultimately," he said. The Fed said it had lent $4.7bn to investors to buy securities. By borrowing money to buy triple A rated securities backed by car loans, the returns available can reach 20 per cent. Tim Geithner, Treasury secretary, has said that the Talf programme could be expanded to $1,000bn, making it a vital part of an effort to make credit available to consumers and businesses after the collapse of the securitisation markets which for years have been a key source of financing. Mr Geithner is also working on a plan for private investors to buy toxic assets that are clogging up banks' balance sheets and that could include elements used in the Talf, such as lending investors money to pump up potential returns. There has been public outrage over plans to pay AIG derivatives traders $165m in bonuses after the company received $160bn of taxpayer funds to stay afloat. To recoup the funds, the House of
Representatives approved a bill last week that would impose a 90 per cent tax on bonuses to employees of bailed-out institutions. Michael Widner, banking analyst at Stifel Nicolaus, said the bonus bills defeated the object of many of the government programmes to rebuild the banking sector - such as capital injections from the troubled asset relief programme (Tarp). "In our view the government has just given all of those banks strong incentives to get out from under Tarp as soon as possible. That means the banks will likely do what they wanted to do before Tarp came along." This would mean less lending, fewer modifications to mortgage loans, more cost cutting, more capital building and more job cuts, he said. Additional reporting by Saskia Scholtes in New York and Krishna Guha in Washington Clive Crook, Page 7 Lex, Page 12 www.ft.com/vftm
Bonus Flap May Keep Investors on Sidelines

Expansion of Talf bears risks for Fed American Banker | Monday, March 23, 2009 By Steven Sloan and Stacy Kaper WASHINGTON The congressional response to the bonuses at American International Group Inc. is threatening the Treasury Department's ability to leverage private capital to take bad assets off banks' books. Lawmakers rushed to pass a slew of bills last week that would retroactively apply conditions to some or all recipients of Troubled Asset Relief Program funds. Now many investors fear the same could happen if they participate in the Treasury's as-yetundetailed public-private partnership fund or the Federal Reserve Board's Term Asset-Backed Securities Loan Facility. If they do not participate, both efforts are likely to fail, observers said. "It is impossible for me to fathom that when Congress talks about taxing bonuses at this level that it could be even remotely perceived as an encouraging indicator for why private capital would want to invest in anything when they might remotely be subject to congressional scrutiny before, during or after," said Doug Rediker, the director of global strategic finance initiatives at the New America Foundation. Mark Zandi, the founder of Moody's Investor Services' economy.com, said investors are worried that any rules the Treasury adopts for its public-private partnerships, the details of which may be released this week, could later change. "How do they know the rules aren't going to be different six months down the road, and they get creamed?" he said. "If you can go back and change preexisting contracts, what does it mean that I'm entering into a contract right now with you? It makes the whole thing a lot more difficult." After news about the AIG bonuses last weekend, lawmakers moved at unprecedented speed. The House passed a bill taxing bonuses at 90% for all companies that received $5 billion or more of government aid a day after the House Judiciary Committee had targeted bonuses at any company that got more than $10 billion. House Financial Services Committee Chairman Barney Frank, meanwhile, is pushing his own bill that would cover executive bonuses at any Tarp recipient. The result was twofold, giving more impetus to bankers to return Tarp funds on the one hand and simultaneously undermining the credibility of the Treasury Department on the other. The Treasury, which orchestrated the four bailouts of AIG, was viewed by lawmakers and critics as complicit in letting AIG pay the bonuses. Treasury Secretary Tim Geithner will get a chance to turn things around at a hearing Tuesday of Frank's House panel. He is expected to testify alongside Fed Chairman Ben Bernanke on the government's handling of AIG. The public-private partnership and the Fed's liquidity programs are both likely to be hot topics.
"The Treasury is just literally paralyzed by the politics right now," said Joseph Mason, a professor at Louisiana State University. "It's almost impossible for the Treasury to produce any credible policy that would make a change." Observers said the Treasury would also probably need more money from Congress to create a workable public-private partnership fund funds unlikely to be appropriated in the current political environment. The Obama budget calls for an additional $750 billion in funding, in addition to the $700 billion given to the Treasury last fall. "This AIG fiasco has crystallized in their minds that it's not being used appropriately," Zandi said. This leaves the Fed as the probable best bet to take illiquid assets off bank balance sheets, according to Gil Schwartz, a former lawyer at the central bank who now works in private practice. "That's the only thing that hasn't been tried," he said, "and they've tried just about everything." But whether the Fed's taking on the responsibility of buying bad assets would make for good policy is an open question. So far, its Talf program has been limited to newly originated auto, credit card, student and small-business loans. Expanding it or creating a new program to finance the purchase of legacy assets on banks' books could dramatically increase the Fed's risk. In addition to holding government securities, most of the assets on the Fed's balance sheet are highly rated and observers said the situation should stay that way. "The Fed has a fiduciary responsibility to keep their balance sheet clean," said Sung Won Sohn, a lecturer in business and economics at California State University Channel Islands. "The Fed must have a squeaky clean balance sheet because their reputation is very important. No one is concerned about the Fed going bankrupt, but it's very important for the Fed to have a clean balance sheet so we know it's an institution we can trust." Like the Treasury, however, the Fed's Talf plan is not immune from concerns that the government could later impose more conditions on companies that participate. "Do they want to get in bed with the Fed managing assets?" said Bert Ely, an independent consultant in Alexandria, Va. "You're going to have to figure out how to enter into a contractual relationship with the Fed to make sure Congress isn't going to be picking your pockets the next week." The financial industry's reluctance to work with the government may already be on display. The Fed has promised to lend up to $1 trillion against securities backed by consumer loans. But in the first round of lending, the Federal Reserve Bank of New York said last week that investors requested just $4.7 billion of funds.
If the Fed bought bad assets, its balance sheet could also lose luster quickly. Fed Chairman Bernanke and New York Fed President William Dudley have noted in recent weeks that the time will come when the central bank must slim down its balance sheet. It could accomplish that by selling assets, but the Fed could face a conundrum if few buyers were willing to buy the toxic holdings. "It can't shrink down its balance sheet if it's got the bad assets," Ely said. "It would have to hold less in the way of Treasuries." Further complicating the Fed's prospects as an asset buyer are concerns that such activities could compromise its independence. "This gives Congress yet another way to question what the Fed has done and whether they've done their job well," said Kevin Jacques, a former Bush Treasury official who is now the chairman in finance at Baldwin-Wallace College. "It ratchets up the pressure on the Fed." But observers agreed the government must find a way to remove bad assets from banks' books. "There's still a definite need to get those assets off the balance sheets of the banks," Jacques said. "We've all seen already that the idea of injecting capital without getting bad assets obviously didn't work. If I've got these toxic assets, and I don't know how much they're worth, then I don't know how much capital I should be holding."
Fed Chief Calls for Scrutiny of Executive Pay Policies

By JACK HEALY Amid public outrage over employee bonuses at troubled firms like Merrill Lynch and the American International Group, the Federal Reserve chairman, Ben S. Bernanke, called on Friday for executive pay policies created with a companys long-term health in mind. Poorly designed compensation policies can create perverse incentives that can ultimately jeopardize the health of the banking organization, Mr. Bernanke said during a speech in Phoenix to the Independent Community Bankers of America. Management compensation policies should be aligned with the long-term prudential interests of the institution. His speech came as lawmakers in Washington tried to claw back some $165 million in bonuses paid to employees at A.I.G., which has received $170 billion in government aid. The furor over bonus payments at the government-controlled insurance giant prompted the House to pass a bill on Thursday that would tax at a 90 percent rate bonuses paid this year by firms that have received bailout funds. In his speech, Mr. Bernanke also called for smarter regulation of the financial system that would address the problem of companies deemed too big to fail. Huge and interconnected institutions like Citigroup and A.I.G. have received billions in government aid to keep their troubles from pulling down other companies. Mr. Bernanke said that regulators needed to better monitor the financial stability and compensation policies of such companies, and that the government should develop procedures for safely winding down a systemically important firm rather than keeping it operating. He also said regulators might need to modify accounting rules and regulations that set standards for how much capital banks must keep on hand, to ensure those rules did not amplify the natural rise and fall of financial markets. In a speech 10 days ago to the Council on Foreign Relations, Mr. Bernanke flicked at the idea of reviewing accounting standards that regulate how companies value their assets, known as markto-market rules. But he said he did not support suspending those rules, a move that some investors support. Mr. Bernanke also said he had seen some signs that the Feds response to the credit crisis had begun to bear fruit. The Feds Open Market Committee has chopped target interest rates to a record low, near zero percent, and it has set up a range of programs to buy securities backed by mortgages, student loans, commercial loans and other assets. This week, the Fed said it would buy some $750 billion in mortgage-backed securities and $300 billion in longer-term Treasury debt, a move aimed at lowering mortgage rates and easing the constricted credit markets.
So far, we have generally been encouraged by the market responses, including the decline in mortgage interest rates, Mr. Bernanke said. In addition, our commercial paper facility has helped American businesses finance their payrolls and other operational obligations by significantly lowering rates on the paper and opening access to financing at terms longer than a few days.
Senate Will Delay Action on Punitive Tax on Bonuses

By Shailagh Murray and Paul Kane Washington Post Staff Writers Tuesday, March 24, 2009; A07
Jarred by a cool reception from the White House and fears of unintended consequences across the financial world, Senate leaders are likely to delay until late next month legislation to punitively tax bonuses at banks and investment firms that receive federal aid. Senate Majority Leader Harry M. Reid (D-Nev.) announced last week that the Senate would move ahead with the legislation as soon as possible, and he attempted to bring the bill to the floor Thursday night. But he revised that timetable yesterday, saying that the chamber will spend this week debating a national-service bill before turning to a long-scheduled showdown over the budget for fiscal 2010. With just two weeks to go until Congress departs for a spring recess, action on the tax measure would be unlikely before late April. Reid's shift came as senators in both parties voiced increasing skepticism about the tax approach taken by the House, echoing President Obama's admonition Sunday night on CBS News's "60 Minutes" against using the tax code "to punish people." Finance Committee Chairman Max Baucus (D-Mont.), who introduced a Senate version of the bill Thursday, said yesterday that it is "unclear at this point" when the measure will be considered. He initially hoped to pass his legislation in a matter of days but said White House officials and other senators were offering "a lot of ideas" for modifying his proposal. But he added that no consensus has emerged on the specifics of the bill, as opposed to the unified outrage over the bonuses. "Everybody knows you've got to address the outrage -- that's a no-brainer," Baucus told reporters. Slow-walking the legislation would allow more time for leaders of American International Group, the troubled insurance giant at the center of the controversy, to attempt to recoup the targeted bonuses voluntarily. New York Attorney General Andrew M. Cuomo said yesterday that 18 of the 25 AIG Financial Products employees who received the biggest retention payments had agreed to return them, amounting to more than $50 million. [Story, D1.] The delay also would give lawmakers room to consider more measured restraints on executive pay. The AIG bonuses stirred an unusually potent bipartisan furor on Capitol Hill from lawmakers still troubled by the scope of the $700 billion Troubled Assets Relief Program approved in October, and Treasury Secretary Timothy F. Geithner and Federal Reserve Chairman Ben S. Bernanke are slated to testify on the matter today before the House Financial Services Committee. On Thursday, five days after the AIG payments were disclosed, the House voted 328 to 93 to impose a 90 percent tax on the $165 million in bonuses distributed this month to employees of the firm's derivatives division, where high-risk trades led AIG to the verge of collapse and helped trigger the global financial crisis.
But the House bill would also apply to thousands of workers at major institutions such as Citigroup and Bank of America that have received more than $5 billion in TARP funding. The Senate version of the legislation, released shortly after the House vote, is even more broad, applying to firms that received less aid. As the scope of the bills sank in over the weekend, industry leaders warned that some firms might reject government funding in an effort to free themselves from federally imposed compensation restraints, potentially jeopardizing economic recovery plans. Obama's response to the House vote was decidedly neutral. Yesterday, on the eve of the president's prime-time news conference focusing on his administration's attempts to stabilize the economy in partnership with the nation's top financial firms, White House press secretary Robert Gibbs expressed the administration's concerns about the bill's potentially damaging downsides. "We cannot and should not reward failure with bonuses and the message that would send," he said. But he added that administration officials "also want to make sure you don't do harm to the financial system." Obama expressed similar reservations in a portion of the "60 Minutes" interview that was not broadcast. "We're going to take a look at this legislation, and I'm going to do so with two principles in mind. Number one, we've got to make sure that people aren't rewarded for failure with taxpayer money," he said. "Number two, we've got to keep our eye on the big picture and the fact that we've got to get our banking system lending again." Obama's statement contrasted with the outrage he expressed early last week when he vowed to "pursue every legal avenue to block these bonuses." White House officials said the president is waiting to see what emerges from Congress before deciding whether to sign the measure into law. While the Senate pauses, House Financial Services Committee Chairman Barney Frank (DMass.) is pushing ahead with a different proposal that his panel could approve as soon as tomorrow. The measure would forbid all retention bonuses at any bank or firm receiving TARP funding until the recipient has paid back the Treasury in full. Existing contracts that call for executives to receive six- and seven-figure retention bonuses would not be broken, but the payments would be delayed until the bank or financial firm had fully refunded the government. In an interview Sunday on CBS's "Face the Nation," Frank expressed reservations about the tax approach. "I voted for the bill. I was not a major advocate," he said. "People are worried about taxation being used in this way. People are worried about interfering with contracts." In the House, nearly half of Republicans, including Rep. Eric Cantor (Va.), the No. 2 GOP leader, voted in favor of the tax. But in the Senate, after a week of saying little, Republicans came out in force yesterday against the legislation. "My view is that this bill ought to slow down and we ought to think about the ramifications of what we're doing," Senate Minority Leader Mitch McConnell (Ky.) told reporters. Sen. Judd Gregg (R-N.H.) said the bonus tax could sabotage the administration's plan, which Geithner announced yesterday, to court private-sector investors to buy up the toxic bank assets that have paralyzed the economy.
"I would think a lot of the private-sector folks who might invest with the government are going to have second thoughts about that, unfortunately," Gregg said, noting that firms not included in the current proposals fear that they will be targeted in later bills. One key Democratic defection was Senate Budget Committee Chairman Kent Conrad (N.D.), who said the bonus tax raised serious constitutional questions because of its narrow focus. "Do you really want to use the tax code to go after just a handful of people?" he said in an interview with MSNBC. But Sen. Olympia J. Snowe (R-Maine), a co-sponsor of the legislation, urged her colleagues to push forward with it. "It would be a huge mistake for Congress to retreat," she said. Staff writer Michael A. Fletcher contributed to this report.
Democrats push on with bonus tax plans

By Andrew Ward and Tom Braithwaite in Washington Published: March 24 2009 02:00 | Last updated: March 24 2009 02:00 The Democratic leadership in the Senate plans to push ahead with legislation to slap tax penalties on bonuses at bailed-out financial institutions even after President Barack Obama expressed reservations. Harry Reid, the Senate majority leader, said yesterday that lawmakers would be given extra time to examine proposals, but the legislation would not be derailed. "We will continue to work to right this egregious misuse of taxpayer dollars," he said, urging Republican support to "quickly and responsibly return these funds to the American people". The Senate is working on a watered-down version of measures passed by the House of Representatives last week to impose a 90 per cent retroactive tax on bonuses paid by groups receiving taxpayer support. Congress launched the bonus clampdown last week after revelations that AIG, the insurer, had used some of its $170bn in government aid to award $165m in top-up pay to employees of the financial products business that caused the group's nearcollapse. But resistance to the legislation appeared to be growing after Mr Obama suggested the proposals could violate the constitution and urged Congress not to "govern out of anger". Several senators said they too had concerns about the measures, signalling that the Senate was likely to take a more deliberative approach than the swift passage of the House bill on Thursday. With the Senate's time occupied with a national service bill yesterday and the budget set to dominate next week, lawmakers have a short window before the Easter break to pass a bill, which would affect banks such as Citigroup as well as AIG and Freddie Mac, the mortgage financier. Sceptics in both parties have argued that the legislation should be sent to a committee to be examined in more depth. But Democratic leaders are still hoping to bring the bill to a vote. The Obama administration will face fresh scrutiny of its role in the controversy today when Tim Geithner, Treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, are grilled by the House financial services committee. Mr Geithner is sure to face tough questioning over why he did not try to stop the bonuses before approving $30bn more aid to AIG this month. Mr Bernanke is likely to face pressure over the Fed's role in the saga. In a television interview at the weekend, Mr Obama voiced broad support for measures to clamp down on excessive pay but warned against measures that could undermine efforts to stabilise the financial sector.
"You've got a pretty egregious situation here that people are understandably upset about," he said, referring to the AIG bonuses. "So let's see if there are ways of doing this that are both legal, that are constitutional, that uphold our basic principles of fairness, but don't hamper us from getting the banking system back on track." Mr Obama appeared to side with critics who have questioned the constitutionality of a retroactive tax on bonuses. "As a general proposition, you don't want to be passing laws that are just targeting a handful of individuals," he said. "And as a general proposition, I think you certainly don't want to use the tax code . . . to punish people." White House officials are worried the proposed legislation could discourage banks from participating in government-led rescue efforts. The House legislation would impose a 90 per cent tax on bonuses received by those earning more than $250,000 annually at large groups receiving federal funds. An alternative being considered in the Senate is a 70 per cent tax on bonuses at a broader range of companies, but with half the tax paid by the employer. Copyright The Financial Times Limited 2009
CQ TODAY PRINT EDITION March 23, 2009 8:51 p.m. Momentum Wanes for Bonus Tax By Phil Mattingly and Richard Rubin, CQ Staff A reluctant White House, an uncertain Senate and voluntary givebacks have doused some of the populist rage that was propelling legislation to impose stiff taxes on bonuses handed out by firms receiving federal bailout money. The Senate will not take up the legislation before the next recess begins on April 3 without a unanimous consent to do so, according to Jim Manley, a spokesman for Majority Leader Harry Reid. With several Republicans leery of the legislation, such an agreement appears highly unlikely, despite the public furor ignited by the millions of dollars in retention bonuses handed out by battered insurance giant American International Group Inc. Meanwhile, New York Attorney General Andrew M. Cuomo announced late Monday that many of the top bonus recipients at AIG had returned the money and that he hopes to recover about half of the $165 million paid out. The developments, combined with President Obamas tepid comments, appear to have stalled congressional action less than a week after the House voted to hit the executive bonuses with hefty taxes. Were looking very carefully at changes in the legislation, Senate Finance Chairman Max Baucus, D-Mont., told reporters Monday. Weve got a lot of ideas. Baucus said he is in discussions with the White House but, thus far, those discussions have led to nothing specific. Everybody knows we have to address the outrage, Baucus said. But everybody knows weve got to come up with a solution that helps get our country back on track. Charles E. Grassley of Iowa, the top Republican on the committee and Baucus partner in crafting the Senate version of the legislation, complained bitterly about Obamas weekend retreat from the congressional proposals. We wouldnt be using the tax code if he had been on top of things and kept the bonuses from going out in the first instance, Grassley said. All the special interests that the president said hes fighting are raising their ugly head, and hes submissive to them. Reid, D-Nev., said that he planned on moving forward to recoup the AIG bonuses, but he did not endorse a specific plan for using the tax code to get the money back. We will continue to work to right this egregious misuse of taxpayer funds, he said. Republicans have asked for more time to study the legislation. With Republican cooperation, we can quickly and responsibly return these funds to the American people. In theory, with two Republicans signed on as cosponsors, the legislation written by Baucus and Grassley should have a clear path through a Senate with 58 Democrats sitting in the majority.
But with a chunk of the Democratic Caucus uncommitted and some top Republicans vowing to slow it down, Democratic leaders would have a significant problem if they tried to push it forward. Moreover, after several of Obamas top economic advisers raised legal and practical concerns about the congressional moves on the political talk show circuit March 22, Obama himself took some of the steam out of the effort during an interview on CBSs 60 Minutes that aired that night. I think that as a general proposition, you dont want to be passing laws that are just targeting a handful of individuals, Obama said. You want to pass laws that have some broad applicability. And as a general proposition, I think you certainly dont want to use the tax code to punish people. Lets see if there are ways of doing this that are both legal, that are constitutional, that uphold our basic principles of fairness, but dont hamper us from getting the banking system back on track, Obama said. Congress Acted in Haste The presidents comments came after a week in which congressional rage quickly turned into legislative action. On the heels of revelations that AIG had paid $165 million in retention bonuses to employees in its maligned financial products division, the chairmen of the tax-writing panels in both chambers produced legislation to recoup the bonus money. The House passed its bill (HR 1586), 328-93, on March 19. It would impose a 90 percent tax on the bonuses, targeting a narrow group of individuals at about a dozen firms that have received more than $5 billion in federal aid, including AIG. Obama applauded the House for reflecting public outrage, but did not explicitly endorse using the tax code to recoup the money. The Senate bill (S 651) would apply much more broadly, affecting companies that received as little as $100 million. It would impose a 35 percent excise tax on companies that paid bonuses, as well as a 35 percent tax on employees who received them. Senate Minority Whip Jon Kyl, R-Ariz., said Monday that he agreed with Obamas televised comments and that the issue deserves to be aired in hearings. There are a lot of concerns that have been raised over the weekend about both of these approaches, Kyl said of the House and Senate legislation. I have urged a little bit of caution here so that we dont do the wrong thing again. One of the reasons that were in the position were in is because Congress acted in haste. Still, despite thin support from the White House and possible constitutional problems with targeting a specific group of people with punitive taxes, the anger at AIG and the congressional impetus to do something remains strong. I think we have to respond to where the people are, said Sen. Barbara A. Mikulski, D-Md. And theres a general feeling that these guys dont pay taxes anyway, so thats the direction. Timing Considerations
Meanwhile, the Treasury Department rolled out Monday its latest plan to clear toxic assets from the balance sheets of battered banks. That program would rely largely on private investors, a group that could be scared away should congressional action on the bonuses continue, Kyl said. One of the things that Id like to do is make sure that, in expressing our outrage and every one of us are outraged about this that we do it in a way thats constructive and not destructive to the very program the president has created to try and help these struggling companies get back on their feet, said Kyl, adding that calls to his office have been 6-to-1 against the legislation. To this point, AIG has received more than $180 billion in federal bailout funds. Of that amount, $40 billion came from the $700 billion Troubled Asset Relief Program (TARP, PL 110-343) enacted last fall. The Federal Reserve has taken on much of the remaining financial burden to keep the insurance giant afloat. Treasury has committed to injecting another $30 billion of TARP funds into the company, as needed. The administration has not cut the check and has said it will take $165 million out of that payment in punishment for the retention bonuses. Fed Chairman Ben S. Bernanke and Treasury Secretary Timothy F. Geithner will testify Tuesday in front of the House Financial Services Committee on AIG. Bernanke and Geithner will be questioned about the roles they played in the AIG interventions, the powers and authorities afforded to them as part of the interventions, and their monitoring efforts. Geithners successor as New York Fed president, William Dudley, will join the duo at the hearing. Source: CQ Today Print Edition Round-the-clock coverage of news from Capitol Hill. 2009 Congressional Quarterly Inc. All Rights Reserved.
Some Bonuses Returned, But Members Still Eye Legislation

Tuesday, March 24, 2009 by Peter Cohn Efforts to slap a punitive tax on employees receiving bonuses from financial firms, including embattled American International Group Inc., appeared to cool off in the Senate Monday. President Obama and his economic advisers, as well as top Senate Democrats, are increasingly expressing caution about moving forward with such an unprecedented levy on one group of taxpayers. That was not welcome news to Senate Finance ranking member Charles Grassley, who accused the White House of going soft on "those money-grubbers at AIG." The pressure and maneuvering appears to be having some impact, however, as New York State Attorney General Andrew Cuomo announced Monday that 15 of the top 20 beneficiaries of $165 million in retention bonuses have agreed to return the money. That amounts to about $30 million, Cuomo said, adding that efforts are under way to recoup more. Grassley is a lead sponsor of the Senate bill that would tax AIG and other financial firms' bonuses if they are not returned. Instead of forcing a vote on the measure, Senate Majority Leader Reid Monday brought up a bill to reauthorize AmeriCorps and other volunteer service programs that may take a few days to complete. With the FY10 budget debate expected to dominate next week, that leaves a small window for legislation to reach Obama's desk before the spring recess. "It does surprise me because Reid was very hot about [the bonus tax bill] Tuesday and Wednesday of last week and then he schedules [the service bill]. If he really wanted to move, it would seem to me he would have had that bill up instead of this one," Grassley told CongressDaily. "And then I heard over the weekend that the White House was giving it some reconsideration, which is very sad because at the grassroots of Iowa ... the public's outraged about these bonuses. I think if the White House is backing away to give some leeway to those money-grubbers at AIG, I think they're misreading the public." Reid tried to bring up the House bill, which passed 328-93 in that chamber, by unanimous consent last Thursday and he said he would try to do so again this week. "Despite last week's Republican objection to passing the AIG bonus bill, we will continue to work to right this egregious misuse of taxpayer funds. Republicans have asked for more time to study the legislation, and they are entitled to that," Reid said. "With Republican cooperation, we can quickly and responsibly return these funds to the American people." A spokesman for Reid said, "We have to do the National Service bill and the budget is right around the corner. It depends how much opposition Republicans put up." Republicans argued the measure was unconstitutional and that Treasury Secretary Geithner could quickly come up with a plan on his own to recoup the bonuses. "I just happen to believe that if the Secretary of the Treasury called these folks down to his office and said, 'You know, for the good of the country, you ought to give half or two-thirds or
whatever it is of the bonus back," Minority Whip Kyl said. "He could also talk to the executives at AIG and ask them to sit down with the same people and renegotiate the contracts. There are other ways, in other words, in order to accomplish the same result without doing violence to our tax code, to the concept of contracts and to the questions in the Constitution." Sen. Olympia Snowe, R-Maine, another sponsor of the Senate bill, Monday said she was still pushing to bring the bill up and did not know why Republicans objected to its consideration. Lead sponsor Senate Finance Chairman Max Baucus said he was negotiating with the White House and other senators on a solution that would muster the required 60 votes for passage. "We don't have one yet," he said. On Monday, at least two senior Senate Democrats, Budget Chairman Kent Conrad and Appropriations Chairman Daniel Inouye, advocated a go-slow approach. "I think it may take legislation, but let's cool it," Inouye told the Greater Miami Chamber of Commerce, adding that his staff has questioned the constitutionality of a tax on AIG and other firms' bonuses. "What they did was absolutely stupid," Inouye said of AIG, as quoted by the South Florida Business Journal. Individual banks and trade groups such as the Securities Industry and Financial Markets Association have been working to try and water down or kill the tax measure. On Monday, critics circulated comments by former Obama adviser and Harvard professor Laurence Tribe that the House bill may be seen as "punitive" and thus unconstitutional, representing a reversal from an opinion he issued last week. The Senate bill has a broader reach but a lighter touch. It would apply to all but the smallest banks that received government aid, limited to financial institutions and other firms that took more than $100 million in funding. It divides the impact with a 35 percent excise tax on the company and a 35 percent tax on the employee receiving a bonus, with retention bonuses taxed at the first dollar but up to $50,000 in other performance incentives exempt. George Clarke, an attorney with Miller & Chevalier's tax and white collar practice called the House bill "clearly a bad idea from a tax policy perspective and probably unconstitutional," adding that it's "almost like a penalty for not doing something Congress wants you to do." The Senate version, he said, is "a lot less confiscatory" and might actually hold up in court. In general though, Clarke asked: "Should you be doing any of this through the taxing system? And why do we keep changing the rules? If you keep changing the rules, no one's going to want to take the money ... if anybody needs anything right now, its certainty."
AIG Employees to Repay $50 Million in Bonuses

Executives at Troubled Unit Vow to Give Up Payments, Staving Off Cuomo Threat to Release Names
By Brady Dennis Washington Post Staff Writer Tuesday, March 24, 2009; D01
The e-mail went out at 6:46 p.m. on Friday. It had been a brutal week inside AIG Financial Products. News that the firm had doled out more than $165 million in retention payments over the past week had angered the country and sent lawmakers into fits of rage. American International Group's president, Edward M. Liddy, had asked that the unit's employees consider returning some, if not all, of the money. New York Attorney General Andrew M. Cuomo had subpoenaed AIG for a list of Financial Products employees and how much money each had received. Now, the firm's chief operating officer, Gerry Pasciucco, had set a 5 p.m. Monday deadline for staffers to indicate whether they planned to return their retention payments, and if so, what percentage. His e-mail included what appeared to be a tacit ultimatum from Cuomo. "We have received assurances from Attorney General Cuomo that no names will be released by his office before he completes a security review which is expected to take at least a week," Pasciucco wrote."To the extent that we meet certain participation targets, it is not expected that the names would be released at all." Yesterday afternoon, 18 of the 25 most senior Financial Products executives had agreed to return their retention payments, amounting to more than $50 million thus far. Company officials expect more employees to follow suit. "They are doing the right thing," Cuomo said on a conference call with reporters, adding that he now saw no need to reveal the names. In addition, AIG issued a news release that said, "We are deeply gratified that a vast majority of FP's senior leadership have expressed a willingness to forsake their recent retention payments." AIG's efforts to retrieve the payments after last week's outpouring of public indignation marked a dramatic reversal to months of assurances to Financial Products employees that the insurance giant would honor those contracts, according to numerous internal AIG e-mails and memos obtained by The Washington Post. The retention program at Financial Products was created in March 2008. The unit's longtime president, Joe Cassano, had announced his resignation as it became clear that the housing bubble was collapsing and the firm's now-famous credit-default swaps were going to cost AIG billions of dollars. Company executives planned to keep Financial Products afloat, but they worried that its employees would flee without the promise of financial stability. "AIG is committed to the future of AIG-FP and is confident about the long term prospects for the business," Bill Dooley, an AIG senior vice president, wrote to Financial Products employees on
March 18, 2008. "AIG recognizes that it is important to combine our statements of support for the business with a retention plan that reassures employees regarding their current and future financial prospects with the company. We hope that this plan will encourage all of you to make the same continuing long-term commitment to AIG-FP that AIG is making." Those promises kept coming -- even as the federal government rescued AIG in September, even as the company decided that Financial Products must be closed down, and even as it hired consulting firms such as McKinsey and BlackRock to work alongside the Federal Reserve to help chart the path ahead. "The unwinding of FP's complex portfolio will take time to complete and will require the specialized skills and unique knowledge that you have," Dooley wrote to the Financial Products staff on Oct. 3. "I ask that you continue to operate with the same professionalism and grace that you have shown to date. . . . Although many issues remain to be resolved, I can tell you that AIG will live up to its commitment in honoring your retention guarantees." Several AIG executives said that Cuomo was aware of the retention payments last fall. "They showed it to Cuomo," said one executive, who was not authorized to speak on the record. "Cuomo was aware this thing was signed up." Cuomo's office did not respond to a request to comment yesterday on when he became aware of the payments. Cuomo had met with Liddy in October to express displeasure over executive compensation and lavish spending at AIG. In a news release that AIG and Cuomo's office jointly issued after the meeting, Cuomo was quoted as saying, "These actions are not intended to jeopardize the hardearned compensation of the vast majority of AIG's employees, including retention and severance arrangements, who are essential to rebuilding AIG and the economy of New York." In November, AIG hired Pasciucco, a Morgan Stanley veteran, to help Financial Products carefully dismantle the unit's more than $2 trillion in exposures. "This is a tremendous undertaking and it will require the effort of the entire company," he wrote to the staff that week. "There is great urgency around this task." Months later, on March 2, AIG posted a $62 billion loss for the fourth quarter of 2008 and announced an expanded bailout that included access to another $30 billion of taxpayer money. That day, Pasciucco sent another e-mail to his staff. "Our mission at FP remains unchanged," he wrote. "Today is not a day to pause and be distracted by the news flow. Fortunately, today can be a day like any other. The restructuring allows us to continue to have the tools we need to stay focused and continue to professionally execute our plan." Soon, however, the tide began to change. On March 13, the day the retention payments began to go out and two days after Treasury Secretary Timothy F. Geithner had chided Liddy about them, another e-mail arrived from Pasciucco.
"Although today we honored our legal obligation to make this payment," he wrote, "it would be irresponsible for us not to recognize the extraordinary circumstances we find ourselves in, and to do as much as we are able to reduce other, non-contractually obligated payments." Pasciucco noted that each of the firm's employees had "been severely tested in the past year and will continue to be challenged in the weeks and months ahead." Little did he know how much they would be tested in the coming days, receiving the scorn of the public and the Congress and even facing death threats as word of the retention payments spread. As the hysteria began to swell early last week, Pasciucco e-mailed his colleagues once again. "Barring a new meltdown by Britney Spears, we are likely to occupy the front page for some time to come," he wrote. "Ignore it. Focus on what we each do control. Focus on the future. Focus on the professional completion of the work at hand so that, when viewed fairly and away from the heat of easy populist sophistry, we will all be proud."
BNA3/24/09 Executive Compensation President Obama, Senate GOP Seeking Further Examination of Punitive Bonus Tax Senate Majority Leader Harry Reid (D-Nev.) said March 23 he has not been able to forge an agreement for consideration of legislation to claw back certain executive bonuses, as opposition to the pending bills became more pronounced in the Senate and Obama administration. Reid said the Senate will spend the week working on a national service bill (H.R. 1388) to ensure that the week of March 30 is spent in its entirety working on the fiscal year 2010 budget resolution. Republicans objected to Reid's March 19 effort to call up the bonus legislation, citing a need for more time to read the bills (H.R. 1586, S. 651) (52 DTR G-7, 3/20/09). Despite last week's Republican objection we will continue to work to right this egregious misuse of taxpayer funds, Reid said on the Senate floor March 23. With Republican cooperation, we can quickly and responsibly return these funds to the American people. But Senate Republicans asked congressional Democrats to slow down, saying they believe the administration has the authority to reclaim the money without amending the Internal Revenue Code and without passing a bill that might not withstand constitutional muster. The House passed H.R. 1586, which would impose a 90 percent tax on executive bonuses, while the Senate is seeking a 70 percent tax, with the individual recipient and his or her firm each paying half. Obama Talks of Alternate Route For his part, President Obama said March 22 that rather than modifying the tax code, he would prefer taking a different avenue to reclaim the money, although he did not specify what that route would be. Reid's announcement of the schedule for the two weeks leading up to the spring recess, which begins April 6, cast doubt on previously stated goals of Senate Democrats to move the legislation immediately. With nearly an entire week spent on the service bill, and another on the budget resolution, it will be difficult to find time to pass a bonus-related bill and conference it with the House. In light of the concerns being raised by the White House and Senate Republicans, we are still discussing timing and next steps, a Reid spokesman said. Senate Finance Committee Chairman Max Baucus (D-Mont.) said March 23 discussions are ongoing for how to reclaim the bonus money, but he also said many senators are offering ideas different from the legislation. We are trying to talk to other senators to find a solution, Baucus said. We don't have one yet. Obama, Officials Question Constitutionality
One of the main questions facing the clawback bills is whether the legislation constitutes a bill of attainder, a characterization that would make the legislation unconstitutional under Article 1, Section 9, clause 3. That measure prohibits punishing a specific class of people without a trial. Asked on CBS's 60 Minutes about the constitutionality of the House measure, Obama said he is seeking options that are both legal, that are constitutional, that uphold our basic principles of fairness, but don't hamper us from getting the banking system back on track. He added, You certainly don't want to use the tax code to punish people. The House bill, argued George Clarke, a tax litigator with Miller & Chevalier, is very specific, He said it targets about 12 firms. We already know the targets from the bill, floor statements, and rhetoric, Clarke told BNA. If the targets can be determined from the specificity, it's unconstitutional. Certainly it is a very dubious question of constitutionality, he said. Clarke said the broader the legislation, the greater chance it has to withstand constitutional scrutiny. But the Senate bill also could cause a problem because while broader, it still targets a relatively small group of recipients of federal bailout money. The list of recipients and how much money they took in federal aid is available through the Treasury Department. I don't think it's out of the woods, but it's not as targeted, Clarke said. Administration advisers appeared on the Sunday television talk shows to temper Democratic hopes that Obama would definitely sign their legislation. I think the president would be concerned that the House bill may go too far in terms of some legal issues, constitutional validity, using the tax code to surgically punish a small group, said Jared Bernstein, chief economist to Vice President Biden on ABC's This Week. That said, let's see what comes out of the Senate. He has not said he won't sign this bill. Quick Bill Facts The House bill would levy a 90 percent income tax on retention bonuses at firms receiving $5 billion in federal bailout funds. Firms covered under this plan include insurance giant American International Group Inc., Fannie Mae, Freddie Mac, and Citigroup. Under the Senate plan, for retention bonuses, corporations and individual recipients each would have to pay a 35 percent excise tax on excessive compensation. For nonretention bonuses, the same tax rates would apply, but the proposal would apply to all amounts over $50,000. The Senate bill also would cap nonqualified deferred compensation. All of the Senate's restrictions apply to financial firms receiving at least $100 million in federal bailout aid. Both bills would impose taxes on bonuses received dating back to Jan. 1, 2009. Speaking on CBS's Face the Nation March 22, Senate Finance Committee ranking member Charles Grassley (R-Iowa) said Congress's best leverage for reclaiming the money is through taxes. He expressed hope that the measure would hit the Senate floor but labeled himself cynical, noting the unrelated measure Reid scheduled for floor action.
Kyl Again Urges Hearings Sen. Jon Kyl (R-Ariz.), a member of the Senate Finance Committee, has called on Congress to hold a hearing on issues related to the AIG bonuses that have caused such a furor among lawmakers. A lot of times when Congress acts in haste, it makes mistakes, Kyl said on the Senate floor March 23. And one of the concerns I have is the question of whether we've adequately thought through the exact remedy that we want to impose here in order to get the bonus money back. Additionally, Kyl said, he wants Congress to explore whether or not the bonuses need to be paid to protect the interests of the government now that it owns a substantial part of the insurance company. Other questions he would like answered include how much bonus money has been returned and whether more will be returned, the fairness of retroactive taxes, and the bills' constitutionality. He also said he would like lawmakers to look into whether Treasury Secretary Timothy Geithner has the authority under the stimulus law (Pub. L. No. 111-5) to reclaim the bonus money without further statutory changes. Kyl said he believes Geithner does have the authority, while others have said the administration needs Congress to expand its so-called resolution authority. Kyl also expressed concern that firms receiving the Troubled Asset Relief Program (TARP) money or other bailout funds would choose to bail from the program rather than face retroactive punitive changes to their bonuses. Repaying the funds, Kyl said, would reduce their ability to loan money and be detrimental to efforts at restoring the economy. Addressing the same argument on CBS, Obama said that on Wall Street, employees need to remember that they enjoyed substantial benefits prior to the crisis, while on Main Street, workers must understand that the economy will not recover until the larger banks are moving again. Calling the House bill a punitive and targeted attack on a group of citizens who obviously acted inappropriately, Senate Budget Committee ranking member Judd Gregg (R-N.H.) March 23 called the tax code the biggest weapon we have as a country and said it should not be used in this fashion. And I would think a lot of the private-sector folks who might invest with the government are going to have second thoughts about that, unfortunately, because of the House action in that area. According to Kyl, however, There are other ways to accomplish the same result without doing violence to our tax code, to the concept of contracts, and to the questions in the Constitution that raises questions about the constitutionality of this act. By Heather M. Rothman Text of the House-engrossed version of H.R. 1586 is in TaxCore.

MARCH 24, 2009
Obama Dials Down Wall Street Criticism

By MONICA LANGLEY
WASHINGTON -- The Obama administration, after months of criticizing Wall Street, has been scrambling to woo top bankers and financiers to back its latest bailout plan. In recent days, in spite of public furor over huge bonuses paid at American International Group Inc., the administration has concluded that it needs the private sector to play a central role in fixing the economy. So over the weekend, the White House worked to tone down its Wall Street bashing and to win support from top bankers for the bailout plan announced Monday, which will rely on public-private investments to soak up toxic assets. But weeks of searing criticism by politicians and the public had left bankers leery of working with the government. After brainstorming about what to do about that problem, the White House resolved to try to take control of the debate, according to several administration officials. In weekend television appearances, President Barack Obama and other administration officials tempered their criticisms of the financial sector. Treasury Secretary Timothy Geithner will be asking for the authority to modify executive pay agreements, while the President explains his budget priorities and the latest effort to stabilize banks. Video courtesy of Fox News. Meanwhile, Treasury Secretary Timothy Geithner and his colleagues worked the phones to try to line up support on Wall Street for the plan announced Monday. They told executives they don't favor using the tax code to retroactively penalize specific individuals who had received bonuses, according to people familiar with the calls. They asked officials to sign on "in pencil, not ink," and to "validate" or "express support" for the plan, these people say. Some bankers say they turned the conversations into complaints about the antibonus crusade consuming Capitol Hill. Some have begun "slow-walking" the information previously sought by Treasury for stress-testing financial institutions, three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions. "Our great challenge is to make clear that we can't have an economic recovery without Wall Street, but these AIG bonuses make it that much harder," said David Axelrod, President Obama's top political aide, in a recent interview. The administration "is adjusting to find the right balance" between politics and policy, says Thomas Nides, chief administrative officer at Morgan Stanley. "The White House understands that to have a healthy Main Street, you need a healthy Wall Street." Early in the Obama presidency, top banking executives were frozen out of internal discussions about how to fix the economy. In its first few weeks in office, the administration closely hewed
to the anticorporate sentiment that was a campaign hallmark. As the White House began filling top economic posts, it largely avoided market veterans, or applied strings to their employment. When Michael Froman, a Citigroup Inc. executive and Harvard Law friend of Mr. Obama, joined as a senior official in the White House, he gave to charity his year-end bonus. The White House says it didn't require any Wall Streeters coming to Washington to forgo their bonuses. But, given the political explosion over large payouts to executives from companies receiving federal funds, a White House spokeswoman explains, officials "encouraged executives who come to work here to review their executive compensation." In late January, as Treasury Secretary Geithner prepared his proposal for handling the banking crisis, administration officials avoiding seeking input from Wall Street. "Those people are tainted," said one aide at the time. "Why would we consult the very executives who got us into this mess?" Our history should give us confidence that we don't have to choose between an oppressive government run economy and a chaotic, unforgiving capitalism. It tells us we can emerge from great economic upheavals stronger, not weaker. Obama, March 27, 2008 Mr. Geithner's speech unveiling the first bailout plan was widely panned for lacking specifics, and stocks dropped after the rollout. White House officials professed not to worry about the market decline and continued their attacks on corporate greed. In one television appearance, Mr. Axelrod said Wall Street was upset because it didn't get "wheelbarrows of cash" in the Geithner proposal. Mr. Obama and his aides regularly and publicly criticized financial firms for buying private planes and redecorating offices and hosting lavish parties. The talk was fueled in part by the results of surveys by New York pollster Joel Benensen, commissioned by the Democratic Party, which Mr. Axelrod regularly reviews. The polls consistently showed that the public blames big financial firms for the current mess, and is hesitant to offer aid. "There's a rebellion out there," says Mr. Axelrod. "Everyone but Wall Street knows the days of Gordon Gekko are over." The administration's initial approach contrasted with those of the last two White Houses. Robert Rubin left Goldman Sachs Group to become one of Bill Clinton's top economic advisers, and convinced the new president that what was good for Wall Street was good for America. Under President George W. Bush, the administration "looked up to and admired Wall Street," says one banker. "The Obama folks don't even like us." Goldman Sachs President Gary Cohn saw the contrast in person when he visited Chief of Staff Rahm Emanuel in early March. Goldman executives wanted to be part of the dialogue reshaping their industry, according to one Goldman executive. Instead, Mr. Emanuel lectured about how Wall Street "mispriced risk" and then expected Uncle Sam to pay the price for it. "My shareholders are called taxpayers," said Mr. Emanuel, who had previously worked for about two years as an investment banker. When chief speechwriter Jon Favreau began working on the president's late-February joint address to Congress, he included draft language criticizing Wall Street for helping trigger the
economic downturn and stating that "Americans are justifiably angry" at the banks -- sentiments the president had expressed many times before. Yet when Messrs. Favreau and Axelrod presented the draft in the Oval Office, Mr. Obama surprised them by saying he wanted to interject some balance to help encourage the financial industry to lend again, one official said. So I know how unpopular it is to be seen as helping banks right now, especially when everyone is suffering in part from their bad decisions. I promise you, I get it. But I also know that in a time of crisis, we cannot afford to govern out of anger or yield to the politics of the moment. Obama, Feb. 24, 2009 The president cited a letter he had read a few days earlier -- one that his office had selected from the mail that pours into the White House. The owner of a pontoon and fishing-boat manufacturing business in Missouri wrote that he had cut his payroll to 33 part-time employees, from 120 full-time. "During the past year, we have been turned down three times for loans necessary to secure operating capital," he wrote. "We are desperate." Mr. Obama dictated to his aides new language for the speech. He tried not just to respond to the public fury, but to tamp it down, an adviser said. "I know how unpopular it is to be seen as helping the banks right now, especially when everyone is suffering in part from their bad decisions....I get it," he ultimately said in his speech. But he added: "In a time of crisis, we cannot govern out of anger." The stock market continued to drop, causing some unease inside the White House. At one morning meeting of the senior staff in the Roosevelt Room, an official turned over in dismay a newspaper with a headline that blared: "Obama Bear Market." In late February, the administration developed a new housing policy to help consumers stay in their houses. This time, it worked hard to get support from banks. Treasury officials invited executives from Wells Fargo & Co., Bank of America Corp. and J.P. Morgan Chase & Co., among others. Around the Treasury's biggest conference table, they hashed out how the mortgage plan would work in practice for eight hours, ordering in pizza. White House aides returned to some key Wall Street fund-raisers who had helped give credibility to Mr. Obama's presidential campaign. Some had complained about lack of access in the early days of his White House, according to several of them. Among those called were Robert Wolf, president of UBS AG's investment bank, and Mark Gallogly, co-founder of Centerbridge Partners, a New York private-investment firm. Both of them are plugged into the financial world and could support the policy on Wall Street. Orin Kramer, an early Obama supporter who heads New Jersey's state pension system, praised the administration's effort on CNBC. On March 10, Lawrence Summers, the chief White House economic adviser, met privately with financial executives for dinner at the U.S. Chamber of Commerce. A few days later in a speech, he said that the past decade contained "too much greed and too little fear....Today, however, our problem is exactly the opposite."
Early on, Obama aides had had little to do with Wall Street heavyweights such as J.P. Morgan Chase Chief Executive Jamie Dimon. On March 11, Mr. Dimon was ushered into the White House and Treasury Department, where advisers brain-stormed with him about how banks and markets would react to their emerging policies. The following day, at a White House meeting, business executives implored Mr. Obama to get credit flowing again. "All right," the president said, according to a transcript of the meeting. He'd have his people "talk to Jamie." In recent weeks, the administration has been developing a consumer-lending facility aimed at increasing the availability of auto loans, student loans and credit cards. Its idea is to provide $1 trillion in financing to private investors who buy securities backing those consumer loans. "Outreach is operating on all cylinders," says an administration official. Treasury officials have held conference calls with Ford Motor Co., General Motors Corp., Chrysler LLC, Sallie Mae Inc., BlackRock Inc. and other financial firms. In a call to one Wall Street firm, Treasury counselor Lee Sachs sought input on ways to "improve or enhance" Treasury programs in the works. Other Treasury officials also placed calls to senior executives at Morgan Stanley, Goldman Sachs and other firms. The news that AIG had paid millions of dollars in bonuses to employees complicated White House efforts to improve relations with Wall Street. At first, the administration gave a tempered response. On a Sunday television show, Mr. Summers called the bonuses "outrageous," but added that "the government cannot just abrogate contracts." As a general proposition, you don't want to be passing laws that are just targeting a handful of individuals. You want to pass laws that have some broad applicability. And as a general proposition, I think you certainly don't want to use the tax code to punish people. Obama, March 22, 2009 But as the furor intensified, Mr. Obama's words to Congress -- "we cannot govern out of anger" - seemed to take on less importance. Last week, he was asked by reporters on the White House South Lawn whether anger was getting in the way of pushing through banking reforms. "I don't want to quell anger," he replied. "I think people are right to be angry. I'm angry." Bankers were shell-shocked, especially when Congress moved to heavily tax bonuses. When administration officials began calling them to talk about the next phase of the bailout, the bankers turned the tables. They used the calls to lobby against the antibonus legislation, Wall Street executives say. Several big firms called Treasury and White House officials to urge a more reasonable approach, both sides say. The banks' message: If you want our help to get credit flowing again to consumers and businesses, stop the rush to penalize our bonuses. Write to Monica Langley at monica.langley@wsj.com
On March 3, Mr. Geithner himself was quizzed during a congressional hearing in detail about the AIGFP retention plan by Democratic Rep. Joe Crowley -- a week before Mr. Geithner now says he heard of the plan. It may be that the full picture was kicked up to him only when a political decision was needed, but by then his one decent choice was to insist on the bonuses' legality. However politically inopportune the bonuses may be, the president only dirtied himself by authorizing a feel-good, bipartisan hate storm aimed at innocent AIG employees. And it's hard to believe Mr. Obama would have done so, or the subsequent spectacle would have unfolded as it did, without Mr. Geithner's seminal prevarications (and we say this fully acknowledging that he's had a rough ride in an inhumanly difficult job). Barney Frank, who doesn't have the excuse of being stupid, was last seen bullying Mr. Liddy to do what on any other day Mr. Frank would flay Mr. Liddy for doing -- violating the privacy rights of his employees. Charles Grassley? His early bloviating about the duty of AIG executives to kill themselves almost begins to look like a grace note, since it alerted the public to the hyperbolic playacting about to come. Paul Kanjorski, before running off to host a hearing, proclaimed on CNBC that AIG's Mr. Liddy would be responsible if Congress now failed to summon the political courage to take necessary steps to address the financial crisis. Pause to let it sink in. Mr. Liddy, who is doing his job with grit and personal sacrifice, is blamed in advance if Congress proves too cowardly to do its own job. But the biggest lesson here is the old one that the price of freedom is eternal vigilance -beginning with insistence on the rule of law. Americans clearly cannot trust their elected officials to defend their rights and interests, or care whether justice is served, when the slightest political risk might attach to doing so. Which brings us back to Mr. Cuomo, whose office has been implicitly threatening to publish names of AIG employees who don't relinquish pay they were contractually entitled to. Mr. Cuomo is a thug, but at least he reminds us: It can happen here.
Successful bank rescue still far away

By Martin Wolf Published: March 24 2009 19:24 | Last updated: March 24 2009 19:24 I am becoming ever more worried. I never expected much from the Europeans or the Japanese. But I did expect the US, under a popular new president, to be more decisive than it has been. Instead, the Congress is indulging in a populist frenzy; and the administration is hoping for the best. If anybody doubts the dangers, they need only read the latest analysis from the International Monetary Fund.* It expects world output to shrink by between 0.5 per cent and 1 per cent this year and the economies of the advanced countries to shrink by between 3 and 3.5 per cent. This is unquestionably the worst global economic crisis since the 1930s. One must judge plans for stimulating demand and rescuing banking systems against this grim background. Inevitably, the focus is on the US, epicentre of the crisis and the worlds largest economy. But here explosive hostility to the financial sector has emerged. Congress is discussing penal retrospective taxation of bonuses not just for the sinking insurance giant, AIG, but for all recipients of government money under the troubled assets relief programme (Tarp) and Andrew Cuomo, New York State attorney-general, seeks to name recipients of bonuses at assisted companies. This, of course, is an invitation to a lynching. Yet it is clear why this is happening: the crisis has broken the American social contract: people were free to succeed and to fail, unassisted. Now, in the name of systemic risk, bail-outs have poured staggering sums into the failed institutions that brought the economy down. The congressional response is a disaster. If enacted these ideas would lead to an exodus of qualified employees from US banks, undermine willingness to expand credit, destroy confidence in deals struck with the government and threaten the rule of law. I presume legislators expect the president to save them from their folly. That such ideas can even be entertained is a clear sign of the rage that exists. This is also the background for the public/private partnership investment programme announced on Monday by the US Treasury secretary, Tim Geithner. In the Treasurys words, using $75bn to $100bn in Tarp capital and capital from private investors, the public/private investment programme will generate $500bn in purchasing power to buy legacy assets with the potential to expand to $1 trillion over time. Under the scheme, the government provides virtually all the finance and bears almost all the risk, but it uses the private sector to price the assets. In return, private investors obtain rewards perhaps generous rewards based on their performance, via equity participation, alongside the Treasury. I think of this as the vulture fund relief scheme. But will it work? That depends on what one means by work. This is not a true market mechanism, because the government is subsidising the risk-bearing. Prices may not prove low enough to entice buyers or high enough to satisfy sellers. Yet the scheme may improve the dire state of banks trading books. This cannot be a bad thing, can it? Well, yes, it can, if it gets in the way of more fundamental solutions, because
almost nobody certainly not the Treasury thinks this scheme will end the chronic undercapitalisation of US finance. Indeed, it might make clearer how much further the assets held on longer-term banking books need to be written down.
Why might this scheme get in the way of the necessary recapitalisation? There are two reasons: first, Congress may decide this scheme makes recapitalisation less important; second and more important, this scheme is likely to make recapitalisation by government even more unpopular. If this scheme works, a number of the fund managers are going to make vast returns. I fear this is going to convince ordinary Americans that their government is a racket run for the benefit of Wall Street. Now imagine what happens if, after stress tests of the countrys biggest banks are completed, the government concludes surprise, surprise! that it needs to provide more capital. How will it persuade Congress to pay up? The danger is that this scheme will, at best, achieve something not particularly important making past loans more liquid at the cost of making harder something that is essential recapitalising banks. This matters because the government has ruled out the only way of restructuring the banks finances that would not cost any extra government money: debt for equity swaps, or a true bankruptcy. Economists I respect Willem Buiter, for example condemn this reluctance out of hand. There is no doubt that the decision to make whole the creditors of all systemically significant financial institutions creates concerns for the future: something will have to be done
about the too important to fail problem this creates. Against this, the Treasury insists that a wave of bankruptcies now would undermine trust in past government promises and generate huge new uncertainties. Alas, this view is not crazy. I fear, however, that the alternative adequate public sector recapitalisation is also going to prove impossible. Provision of public money to banks is unacceptable to an increasingly enraged public, while government ownership of recapitalised banks is unacceptable to the still influential bankers. This seems to be an impasse. The one way out, on which the success of Mondays plan might be judged, is if the greater transparency offered by the new funds allowed the big banks to raise enough capital from private markets. If that were achieved on the requisite scale and we are talking many hundreds of billions of dollars, if not trillions the new scheme would be a huge success. But I do not believe that pricing legacy assets and loans, even if achieved, is going to be enough to secure this aim. In the context of a global slump, will investors be willing to put up the vast sums required by huge and complex financial institutions, with a proven record of mismanagement? Trust, once destroyed, cannot so swiftly return. The conclusion, alas, is depressing. Nobody can be confident that the US yet has a workable solution to its banking disaster. On the contrary, with the public enraged, Congress on the warpath, the president timid and a policy that depends on the governments ability to pour public money into undercapitalised institutions, the US is at an impasse. It is up to Barack Obama to find a way through. When he meets his group of 20 counterparts in London next week, he will be unable to state he has already done so. If this is not frightening, I do not know what is. * Global Economic Policies and Prospects, March 13-14 2009, www.imf.org martin.wolf@ft.com More columns at www.ft.com/wolf
Dear A.I.G., I Quit!

The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Groups financial products unit, to Edward M. Liddy, the chief executive of A.I.G. DEAR Mr. Liddy, It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context: 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. You and I have never met or spoken to each other, so Id like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institutes generous financial aid enabled me to attend. I had fulfilled my American dream. I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.s effort to repay the American taxpayer. The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my
life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity directly as well as indirectly with the rest of the taxpayers. 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 countrys 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 didnt defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut. My guess is that in October, when you learned of these retention contracts, you realized that the employees of the financial products unit needed some incentive to stay and that the contracts, being both ethical and useful, should be left to stand. Thats probably why A.I.G. management assured us on three occasions during that month that the company would live up to its commitment to honor the contract guarantees. That may be why you decided to accelerate by three months more than a quarter of the amounts due under the contracts. That action signified to us your support, and was hardly something that one would do if he truly found the contracts distasteful. That may also be why you authorized the balance of the payments on March 13. 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. I think your initial decision to honor the contracts was both ethical and financially astute, but it seems to have been politically unwise. Its now apparent that you either misunderstood the agreements that you had made tacit or otherwise with the Federal Reserve, the Treasury, various members of Congress and Attorney General Andrew Cuomo of New York, or were not strong enough to withstand the shifting political winds. Youve now asked the current employees of A.I.G.-F.P. to repay these earnings. As you can imagine, there has been a tremendous amount of serious thought and heated discussion about how we should respond to this breach of trust. As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised. None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house. Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.s promises and are not inclined to return the money as a favor to you.
The only real motivation that anyone at A.I.G.-F.P. now has is fear. Mr. Cuomo has threatened to name and shame, and his counterpart in Connecticut, Richard Blumenthal, has made similar threats even though attorneys general are supposed to stand for due process, to conduct trials in courts and not the press. So what am I to do? Theres no easy answer. I know that because of hard work I have benefited more than most during the economic boom and have saved enough that my family is unlikely to suffer devastating losses during the current bust. Some might argue that members of my profession have been overpaid, and I wouldnt disagree. That is why I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.s or the federal governments budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need. On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients. This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear. Mr. Liddy, I wish you success in your commitment to return the money extended by the American government, and luck with the continued unwinding of the companys diverse businesses especially those remaining credit default swaps. Ill continue over the short term to help make sure no balls are dropped, but after whats happened this past week I cant remain much longer there is too much bad blood. Im not sure how you will greet my resignation, but at least Attorney General Blumenthal should be relieved that Ill leave under my own power and will not need to be shoved out the door. Sincerely, Jake DeSantis
BNA3/25/09 Executive Compensation Punitive Bonus Tax Bill on Back Burner As Some Money Returned, Lawmakers Say Further action on legislation that would impose a punitive tax on executive compensation at firms that accepted federal bailout aid might not be necessary, lawmakers said March 24. Reacting to national outrage after employees from the American International Group Inc. accepted more than $165 million in bonuses, the House March 19 overwhelmingly passed a bill that would levy a 90 percent income tax on retention bonuses at firms receiving $5 billion in federal bailout funds (52 DTR G-7, 3/20/09). But with employees returning a portion of those bonuses, House Majority Leader Steny Hoyer (D-Md.) said the House bill already might have had the effect lawmakers desired. I think apparently the House bill had its effect, Hoyer told reporters. They're giving it back. It was insensitive at best, shameless at worst, and extraordinarily bad policy for these bonuses to have been paid and for these bonuses to have been accepted. Hoyer's announcement came just two days after President Obama questioned the constitutionality of the House bill (54 DTR G-1, 3/24/09). Asked if the legislation had its intended effect, House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) said, Do you think they would have done this voluntarily? Come on. Emerging from the weekly Senate Democratic Caucus, Majority Leader Harry Reid (D-Nev.) said the legislative effort to claw back the bonuses is on hold in the Senate, but not over. Baucus Says Senators Still Holding Talks Reid said he wants AIG and the federal government to renegotiate the bonuses and continue trying to reclaim the money, while he continues to work on an agreement to allow a bill (S. 651) imposing a 70 percent tax to come to the Senate floor. I have no problem waiting for a few days to see what's going to happen in the Finance Committee, Reid said. Finance Committee Chairman Max Baucus (D-Mont.), he said, told Senate Democrats that senators have offered a number of ideas since he introduced his bill with Finance Committee ranking member Charles Grassley (R-Iowa). It's going through a major re-evaluation by a lot of different senators with a lot of different ideas, Baucus told reporters, noting that one major concern is that the current cut-off levels in the Senate proposal are arbitrary. Steve Bartlett, chairman and chief executive officer of the Financial Services Roundtable, sent senators a letter March 23 urging them to be calm and fair and to look at the bigger picture.
The tax bills will undermine the recovery effort, Bartlett wrote, noting that 10 companies that took money from the Troubled Asset Relief Program provided about $680 billion in loan commitments and renewals in the final quarter of 2008. If the tax bills force them out of TARP, or forces them to curtail lending through the loss of experienced employees, the total lending will be reduced and the economic recovery that could have begun will be further delayed. Bernanke Tried to Stop Bonuses Federal Reserve Chairman Ben Bernanke told lawmakers March 24 that he tried to stop the bonuses which he called highly inappropriate from being paid out to executives at AIGFinancial Products, but was told litigation could result in even more money being paid out. Testifying before the House Financial Services Committee, Bernanke said his legal staff advised against suing to prevent the payments, noting that, under Connecticut law, substantial punitive damages were likely if the lawsuit were to fail. Legal action does have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees, he said. Ways and Means Committee member Artur Davis (D-Ala.) praised the House legislation, calling it one of the major reasons why the bonus money is being returned and that the public pressure generated by the legislation and its bipartisan vote of 328-93 was too much for the executives to ignore. But before lawmakers decide to shelve further action on the legislation, Davis said he would like to see how much of the bonus money ultimately is returned. However, Davis made it clear that the outrage over the AIG bonuses is not solely about money. This has been a debate about a very important principle that you don't get to profit from misconduct or from enormous errors on your own part, he told BNA. In fact, these executives were profiting from getting their company run into the ground so bad the government had to take it over. That's the definition of ill-gotten gains. By Heather M. Rothman and Brett Ferguson

MARCH 25, 2009, 6:56 A.M. ET
Drive to Tax AIG Bonuses Slows

Return of Some Awards Undercuts Bill in Senate; Obama to Meet With Bank Chiefs
By GREG HITT
WASHINGTON -- Congress's drive to recoup bonuses at American International Group Inc. is slowing significantly as passions on the issue cool, potentially removing a wedge that has threatened to derail the Obama administration's broader agenda. The bonuses sparked an outpouring last week in the House, which voted overwhelmingly to impose a 90% tax on many bonuses, not just at AIG but at all institutions receiving significant financial-bailout support. But the legislation now appears certain not to come up in the Senate until after a two-week recess that begins April 3. It could be put off altogether if the administration demonstrates a commitment to reining in such payments in the future. The diminishing ardor follows comments from President Barack Obama pouring cold water on the House bill. Senate Republican leaders have also urged caution, and a number of AIG executives recently returned the controversial payments. Other moves by the administration -including a revamp of financial-markets oversight, which will include some executivecompensation rules -- could provide cover to drop the matter. In a further sign of how the White House is trying to tamp down the AIG brouhaha, President Obama plans to meet Friday with about a dozen top bank executives to discuss administration plans to shore up the financial sector. The meeting is unusual because such meetings are typically held by Federal Reserve or Treasury officials. Relations between Washington and Wall Street remain tense following the AIG bonus furor, but the administration is relying heavily on private investors and Wall Street banks to implement its various rescue programs. House Majority Leader Steny Hoyer (D., Md.), stepping back from the House's dramatic moves last week, suggested the bonus-tax legislation "may not be necessary" now that some AIG bonuses are being returned. Mr. Hoyer defended the House vote as a legitimate reflection of lawmaker concerns, saying no one receiving taxpayer help "ought to miss the anger that was reflected in the passage of that bill, or the possibility of policies being adopted in reaction to the continued insensitivity to the concerns of taxpayers." But, he added: "I think our bill apparently had the effect of focusing their attention on that issue.... Whether or not it becomes law is another question." Senate Majority Leader Harry Reid (D., Nev.) said Tuesday that "the issue is not over" and stressed his intention to keep pressure on AIG. He signaled that the issue isn't an immediate priority, saying he would look at it when "we feel we have a window to do something" and has "no problem waiting for a few days." Reid spokesman Jim Manley said separately: "In light of
the significant concerns raised by President Obama and Senate Republicans, we've decided to take a step back and discuss any possible next steps." The legislation's course in the Senate will depend on the administration's moves on executive pay and whether anything further emerges that could rile lawmakers and the public, such as bonuses or other spending by banks perceived as unwarranted. Democratic Sen. Ron Wyden of Oregon, for one, said he still wants the Senate to act. He said he welcomed AIG officials' decision to return the bonuses, but "I am just as concerned about preventing the next round of bonuses." On Tuesday, Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke largely blunted congressional anger at a House hearing that was expected to be replete with fireworks. Several lawmakers expressed their displeasure with the government's AIG rescue, but most moved on to broader policy questions. AIG had ignited an uproar on Capitol Hill when the big insurance company paid $165 million in bonuses to top employees and executives, even after receiving a $173 billion bailout. Many of the bonuses were paid to people in the division responsible for the firm's collapse. Last week, the House, voting 328-93, approved a bill that would impose a 90% surtax on bonuses given to employees with household incomes of $250,000 or more at companies that have received at least $5 billion from the government's financial rescue program. The tax would be retroactive to Dec. 31, 2008. The strong vote, in which about half of House Republicans joined, was a rebuke of the Obama administration and a signal that lawmakers intend to be more assertive on economic issues. Since then, 15 of the top 20 recipients of bonuses have agreed to give them back, New York Attorney General Andrew Cuomo said Monday. In all, he said, employees of AIG's financialproducts unit, which produced heavy losses for the firm, have agreed to return about $50 million. The bipartisan leadership of the Senate Finance Committee unveiled its own version of the legislation, which would impose a less-punitive tax but hit a larger number of employees and financial firms. Among other things, the measure would impose a 70% surtax on most bonuses, half paid by employees and half by firms. The White House and the Treasury worried that the tax legislation would deter investors from participating in an array of financial rescue plans, including the newly announced one to remove toxic assets from bank balance sheets. The furor that gripped Congress also threatened to upset the passage of other Obama priorities, including the budget, which is up for debate this week and next. One potential alternative to the AIG tax bill could be House legislation giving the Treasury and the U.S. attorney general enhanced authority to recoup excessive bonuses. In addition, Mr. Geithner's proposal to change regulation of financial markets is expected to give the Fed powers to ensure that compensation and bonus structures at systemically important companies aren't totally divorced from the long-term performance of the companies. -- Deborah Solomon contributed to this article. Write to Greg Hitt at greg.hitt@wsj.com
CQ TODAY PRINT EDITION BANKING & FINANCIAL SERVICES March 24, 2009 7:26 p.m. House Prepares More-Moderate Tax Measures to Regulate Bonus Payments By Richard Rubin, Edward Epstein and Kathleen Hunter, CQ Staff Democratic leaders found victory Tuesday in the Senates stalling of legislation to tax executive bonuses, and a House panel prepared to consider a bill that would take a less punitive approach to the controversial compensation issue. House Majority Leader Steny H. Hoyer and Senate Majority Leader Harry Reid suggested that even the mere threat of legislation had been enough to convince numerous executives at American International Group Inc. to give up their bonuses, though neither lawmaker was willing to pull the plug completely on further congressional action. I think apparently the House bill had its intended effect. Theyre giving it back, Hoyer, D-Md., said, referring to New York Attorney General Andrew M. Cuomos announcement that about half of the money from the giant insurance companys bonus program will be returned. No executive or company who is receiving help from taxpayers ought to miss the anger that was reflected by passage of that bill last week, he added. Reid, D-Nev., called the voluntary paybacks a start, adding, AIG should continue working to renegotiate these bonuses or return them. Still, just a few days after the House quickly and angrily voted to slap a 90 percent tax on the bonuses (HR 1586), the legislative effort has stalled, and little action seems likely before the spring recess starts at the end of next week. President Obama and some senators have criticized the use of the tax code to punish those who received the bonuses as potentially unconstitutional and as a dangerous policy precedent. Hoyer said he still hopes the Senate takes up legislation aimed at recovering the AIG bonuses, because not all the money that stirred such a furor has been returned. If the House bill had accomplished its goal perfectly, he said, legislation would not be needed. For his part, Reid said: The issues not over, and thats an understatement. I have no problem waiting for a few days to see whats gong to happen. In addition to the House-passed bill, Senate Finance Chairman Max Baucus, D-Mont., has introduced a separate version (S 651) that would impose a 35 percent excise tax on companies that paid bonuses, as well as a 35 percent tax on employees who received them. Baucus said Tuesday, though, that his effort was on the shelf, at least for the time being. Another Plan Even as the effort to tax the bonus money seems to be losing steam, the House Financial Services Committee is going ahead Wednesday with another approach. The panel will mark up legislation by Chairman Barney Frank, D-Mass., designed to prohibit the payment of bonuses at all firms that receive funds from the $700 billion Troubled Asset Relief Program enacted last fall (PL 110-343). The committees bill (HR 1664) would also apply to mortgage giants Fannie Mae and Freddie Mac, which are under federal control.
It would retroactively insert the language into the bailout law and into the law that established the $300 billion Hope for Homeowners mortgage refinancing program (PL 110-289). But it is unclear how far the bill will get. House Speaker Nancy Pelosi, a California Democrat, last week deployed three committees Ways and Means, Financial Services and Judiciary to write legislation that could help recoup the bonus money. The legislation the House passed last week was sponsored by Ways and Means Chairman Charles B. Rangel, D-N.Y. The Judiciary Committee marked up a bill (HR 1575) last week that would use the bankruptcy code to go after the bonuses. But no further action has been pursued, amid questions about the measures constitutionality raised by several senior panel Democrats. The Financial Services bill would prohibit institutions receiving federal bailout money from: paying any bonus to any employee, regardless of when an agreement to pay a bonus was entered into; paying any compensation that is unreasonable or excessive, as defined in standards set by the Treasury secretary; or paying or arranging to pay any retention payment, bonus or other supplemental payment that is not directly tied to performance-based standards set by the Treasury secretary. The institutions would be free of the bonus conditions once they repaid the government funds. The Financial Services markup is scheduled for 2:15 p.m. Wednesday in 2128 Rayburn. Source: CQ Today Print Edition Round-the-clock coverage of news from Capitol Hill. 2009 Congressional Quarterly Inc. All Rights Reserved.
CongressDaily3/25/09
House Panel Set To Approve Bonus Clawback Bill Today

Wednesday, March 25, 2009 by Bill Swindell, with Dan Friedman and George E. Condon Jr. contributing Looking to put the controversy over bonuses to American International Group employees to rest, the House Financial Services Committee is slated to approve legislation today that would curtail bonuses for certain firms that participate in the Troubled Asset Relief Program. The panel will mark up legislation prohibiting any bonus to any employee regardless of when it was entered into, allowing Treasury to go back and get bonuses. It also would ban any compensation Treasury deems "unreasonable or excessive," and stop any retention payment, bonus, or other supplemental payment not directly based on performance-based standards set by Treasury. It also would apply to Fannie Mae, Freddie Mac and the Federal Home Loan Banks. The restrictions would only apply to firms that received money through the Capital Purchase Program established by Treasury to inject money directly into banks. Financial Services Chairman Barney Frank said the bill, sponsored by Reps. Alan Grayson, D-Fla., and Jim Himes, D-Conn., would not apply to firms -- whether investors or asset managers -- that want to apply to the recently announced program by Treasury Secretary Geithner to purchase up to $1 trillion in toxic assets. Potential investors in that plan have expressed concern the bonus restrictions could be later applied to them. Geithner has said such restrictions should not apply to investors under the new plan. "We need to restrain the perverse incentive effect of compensation that has one-way bonuses," Frank said. "I think we can be tougher and should be tougher where companies have received federal funds." The effort comes as legislation to impose a punitive tax on employees that have received bonuses from firms such as AIG has stalled in the Senate. Some AIG employees have returned their bonuses under the political pressure. Some banks have publicly said they intend to send their TARP money back instead of adhering to the new restrictions. "It [the bill] might have legs, although the issue is dying in the Senate," noted one lobbyist. But senior Senate Democrats said the effort is not dead. "The issue is not over," Senate Majority Leader Reid said. The House last week passed legislation slapping a 90 percent tax on bonuses for executives at certain firms that received federal bailout funds. Senate Democrats initially said a similar measure would move quickly. But faced with objections by the White House and key senators to a punitive tax on one group, Reid did not try to force a vote on the Senate bill this week. Instead he has tried to move to the bill by unanimous consent, a step sure to fail due to GOP objections. Reid acknowledged plans to take up the budget next week mean the AIG bill will likely not come up before the spring recess but said Democrats will look for "a window to do something."
Senate Finance Chairman Max Baucus said the bill has been shelved "for the time being" but "I'm not sure how long 'the time being' is." A senior White House official added: "President Obama will meet with the CEOs of several of the largest banks in the country to reiterate his belief that getting the economy back on track will require an understanding that each of us must look beyond our own short-term interests to the wider set of obligations we have to each other in order for America to succeed."
Fortune3/24/09
Geithner's new friends on Capitol Hill

The Treasury Secretary is earning some key political support, but the real test comes when he asks for more bailout money.
By Nina Easton, Washington editor March 24, 2009: 11:09 AM ET WASHINGTON (Fortune) -- As Treasury Secretary Timothy Geithner's reputation rose from the ash heap on Wall Street yesterday, he also made headway with harsh critics in his other important audience - Congress. "This could be the beginning of a very constructive improvement in capital flows," Georgia Senator Johnny Isakson told Fortune. Just last week, Isakson, a member of the Senate Commerce Committee, became the first Republican senator to call for Geithner's resignation. Isakson was shocked that the former New York Federal Reserve president - who essentially "wrote the check" to AIG last September - was completely unaware of the bonuses that caused a national uproar six months later. Over in the House, GOP Florida congressman Connie Mack yesterday kept up his campaign on the airwaves calling for Geithner's resignation. But GOP Whip Eric Cantor of Virginia was more measured, saying that while he worries the new plan may have "fundamental flaws," he hoped it would address the sticky problem of how to price the assets that banks need to unload. "The markets seem to be reacting positively," Cantor noted in an interview. President Obama likes to compare his Treasury Secretary to Alexander Hamilton - a public servant facing problems of historic magnitude. But in the past month, Geithner has been likened to Tiny Tim. After the markets voted thumbs down on his first attempt at a bank rescue plan in February, the treasury secretary became the butt of late-night comic jokes. The mocking turned into calls for his resignation when he revealed that he learned of the taxpayer-funded bonuses going to AIG (AIG, Fortune 500) executives just days before they went out - and then was unable to stop them, or effectually explain them to Congress and the public. Alabama's Richard Shelby, the Senate Banking Committee's ranking Republican, told Fox News on Sunday that his confidence in Geithner is "waning every day," and conservative critic Senator Jim Bunning of Kentucky said he didn't think Geithner was qualified for the job. (Neither senator had commented on the bank plan by Tuesday morning.) While Republicans have been vocal in their condemnations, waves of worry about Geithner's performance have quietly rippled through lawmakers in his own party. President Obama felt compelled to defend his Treasury Secretary on CBS' 60 Minutes last weekend, saying he would refuse to accept Geithner's resignation even if it were offered. And yesterday, senior White House economic adviser Larry Summers appeared in the White House press room for a Bloomberg TV interview in which he insisted that Geithner had "provided extraordinary leadership."
This won't be the end of Geithner-bashing on Capitol Hill. His critics will be out again in full force today with a House hearing on AIG, which has ignited a populist fire that lawmakers from both parties have found politically expedient to stoke. But the true measure of Geithner's performance should be the success or failure of his bank rescue plan, and that won't be evident for many weeks. "The next quarter, the next three months will be the sweet spot," says Scott Talbott, senior vice president for government affairs at the Washington-based Financial Services Roundtable, which applauded the plan. The political good news for Geithner is that he can now count on some vocal defenders from across the aisle - which will serve as a helpful ballast against loud critics in the coming months. "I like what he's laid out," says Tennessee Senator Bob Corker, who was briefed in detail last night by FDIC chairman Sheila Bair. Noting that the plan builds on the original proposal by former Treasury Secretary Hank Paulson to have the government purchase "toxic assets," Corker added: "But it is enhanced by using the private sector for price discovery and by leveraging government funds. It allows what's left of the TARP money to go further, and it doesn't add to inflationary pressures." If the plan succeeds in reviving the banking sector, Corker predicts that Geithner's rocky start "will be a blip on the screen." That's a sentiment that Isakson seconds: "If the secretary of the Treasury will execute this plan judiciously and markets develop [for the assets] and credit begins to flow, you'll see a remarkable change in attitude toward the Treasury Secretary." But the real test of whether Timothy Geithner has restored his reputation is whether he can persuade Congress to release the additional $250 billion in TARP funds that President Obama tucked inside his new budget. And on that - with bailout fatigue infecting both parties - he still has a long way to go. "If he went up there now, hat in hand, he wouldn't get the money," notes Talbott

MARCH 25, 2009
Tapping AIG Furor, Regulators Seek Power to Seize Nonbanks

By SUDEEP REDDY
Treasury Secretary Timothy Geithner, left, talks with Fed Chairman Ben Bernanke before the start of a House hearing on AIG. The government's top financial regulators are channeling widespread outrage over retention bonuses at American International Group Inc. to quickly win authority they have sought for much of the past year to seize nonbank companies and freeze their contracts. The House Financial Services Committee plans to vote as early as next week on legislation that would give the government that authority. Federal officials already have such power over banks. The Obama administration is pushing for fast action on the issue, even before Congress tackles a broader overhaul of financial regulation. Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke, in congressional testimony Tuesday, said the lack of authority to seize AIG -- the way the Federal Deposit Insurance Corp. places failing banks into so-called receivership -- forced the government into the position of owning almost 80% of the insurance giant, and serving as its major lender, while lacking the power to stop multimillion-dollar bonus contracts signed before the government intervention. "If a federal agency had had such tools on Sept. 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate," Mr. Bernanke said. While the power seems likely to be granted by Congress, it's unclear which wing of the government would be given the authority. Mr. Geithner proposed that any emergency action be based on a determination by the Treasury secretary along with the Federal Reserve and the federal regulator overseeing the company. He said that in addition to the power to seize a company, the proposed authority would give the government rights to sell or transfer assets or liabilities of the firm and renegotiate contracts, including those with employees. Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, declined to say whether the power would be provided to the FDIC, the Treasury or some combination of the two. Speaking to reporters after Tuesday's hearing, Mr. Frank said that he had discussed the issue with President Barack Obama and that the committee would vote on a bill either next week or the following week. But the legislation would still be at least a few weeks away from enactment, because it must go through the Senate as well.
Several lawmakers expressed their displeasure with the AIG intervention during Tuesday's hearing. But the outrage that consumed Capitol Hill -- and much of America -- for the past week appeared to have softened. Mr. Geithner and Mr. Bernanke have faced a storm of criticism since the disclosure 10 days ago that AIG had paid $165 million in bonuses to employees in the same unit that triggered many of its problems. But they blunted much of the anger by focusing their testimony on the limits to their authority and the regulatory holes that created the problems around AIG. The two officials, joined by Federal Reserve Bank of New York President William Dudley, explained that they sought to block the bonuses but were advised of the limitations to breaking the contracts. Mr. Bernanke said that upon learning of the payments, he asked that they be stopped. Informed that they were mandated by contracts, Mr. Bernanke said he "then asked that suit be filed to prevent the payments." But legal staff counseled against that because laws in Connecticut, where the AIG unit is based, could result in the "perverse effect" of doubling or tripling the payouts to those employees through damages. Still, Messrs. Bernanke and Geithner on Tuesday faced continued criticism over other decisions on AIG and the wider government financial-rescue efforts. Mr. Bernanke was asked repeatedly about the tens of billions of dollars AIG has paid out to major banks, including foreign institutions, using government money. He maintained that AIG needed to meet its obligations to prevent a default that he said would cause "chaos in financial markets." He also noted that European governments have bailed out their banks without distinguishing between European and American creditors. Write to Sudeep Reddy at sudeep.reddy@wsj.com
"I am not at all surprised to see AIG backtracking on another multibillion-dollar figure that was announced to the media," said Rep. Elijah Cummings, D-Md. "For months, this company -- and [CEO] Edward Liddy himself -- has consistently changed the numbers when discussing compensation policies with me. I can't decide if AIG needs a new accounting department, a new PR department, or both." Other estimates were unchanged. The total funds devoted to support of the company's troubled financial products division was $52 billion. Tabulations of the funds that ended up in the hands of banks that traded with AIG didn't change either. Questions about AIG's bookkeeping aren't new. In 2005, the company restated its earnings for five years, wiping out $4 billion in profits that had been reported while its longtime leader, Hank Greenberg, was still CEO. Last February, the company admitted it had a "material weakness" in how it valued its credit default swap portfolio - the derivatives holdings whose unraveling left the company teetering at the edge of bankruptcy last September before the government stepped in to save AIG. The company provided the first breakdown of how bailout funds were used after Congress demanded to know which Wall Street firms were benefiting from the company's taxpayer-funded rescue. In response, AIG produced a document on March 15 that outlined how direct taxpayer support was used at its AIG Financial Products unit and in the unwinding of its securities lending business. The financial products operation got the company into trouble last fall, when a downgrade of AIG forced it to come up with more cash to cover the financial products group's promises to cover banks' possible losses on certain debt pools. It was that cash squeeze that led policymakers led by the Federal Reserve Bank of New York to make an $85 billion emergency loan to AIG. Problems at the securities lending business led to an additional $38 billion loan from the New York Fed later that fall. AIG has since received two additional rounds of taxpayer support, raising the total federal funding of the AIG rescue to $182 billion. Though members of Congress expressed some exasperation earlier this month over the slow pace of AIG's disclosure of its trading partners, the issue has since been dwarfed by the outrage over the payment of $165 million of retention bonuses to staffers at the financial products group -some of whom had already left the company when the checks went out. In the past week, legislators have passed measures slapping taxes as high as 90% on the bonuses, and New York Attorney General Andrew Cuomo has said he hopes to recoup half the money. Three-quarters of the top bonus recipients have agreed to return the money, Cuomo said.
A Growing Chorus on the Hill Questions the Fed's Decisions

Lawmakers Could Delay Expansion of Bank's Powers
By Neil Irwin Washington Post Staff Writer Thursday, March 26, 2009; D01
The Federal Reserve, which for the past year has drawn mostly praise from Congress for its aggressive response to the financial crisis, is increasingly on the hot seat. In recent weeks, members of Congress have criticized the central bank -- publicly and vociferously -- for failing to stop the payment of bonuses at American International Group, for not disclosing the names of companies that benefit from its massive lending programs and for acting without lawmakers' explicit approval in deploying vast sums of taxpayer dollars. While the attacks are loudest from junior members of Congress, even some senior legislators are expressing growing wariness over how much power the Fed has amassed in its bid to contain the financial crisis. That has put an institution whose leaders traditionally keep their distance from politics on the defensive. This change in tone comes as the Obama administration seeks to create a powerful new authority to oversee the stability of the financial system. Sources familiar with the matter said the Obama administration has the Fed in mind for that role. But given recent events, there is growing wariness in Congress about giving such powers to the Fed. The central bank has vastly expanded its role since the onset of the financial crisis, acting to bail out Bear Stearns and AIG and launching new lending programs to support everything from home mortgages to business loans. It has repeatedly used special emergency authorities that increasingly make some in Congress uncomfortable. Just this week, Federal Reserve Chairman Ben S. Bernanke faced frequently hostile questioning from the House Financial Services Committee, including a demand from Rep. Michele Bachmann (R-Minn.) that he point to where in the Constitution the Fed gets its authority. After Rep. Donald Manzullo (R-Ill.) pressed Bernanke for a "yes" or "no" in response to a question about the AIG bailout, the mild-mannered chairman replied testily, arguing that it was a "poorly posed question." "The kind of decisions that are being made unilaterally by the Fed are decisions that King Louis XIV would have been hesitant to make," said Rep. Alan Grayson (D-Fla.), a first-term congressman who assailed Fed Vice Chairman Donald L. Kohn at a January hearing for not disclosing the names of recipients of about $1.2 trillion in loans. The Fed has a long history of keeping private the identities of banks and other institutions that it makes emergency loans to, for fear that naming them would prompt a run on the institutions and cause a deeper crisis. Still, video footage of Grayson laying into Kohn over the issue has recently made him a mini-sensation on YouTube. "These are decisions that involve trillions of dollars," Grayson said, "and they're being made by a group that feels itself beholden to no one."
Indeed, although the Treasury Department had to seek congressional approval for its $700 billion financial rescue package, the Fed, as an independent agency, has been able to inject more than $1 trillion into the financial system without explicit permission from Congress. Moreover, the Treasury has launched programs in coordination with the Fed, stretching its $700 billion further and avoiding the need to seek approval from lawmakers. Rep. Barney Frank (D-Mass.), who has spearheaded the effort to give the Fed formal authority over the largest banks, investment firms, insurance companies and other entities that pose a systemic risk by this spring, now intends to move on that action in summer. His counterparts in the Senate, however, appear more reluctant. "Whether or not those vast powers will reside at the Fed remains an open question," Senate Banking Committee Chairman Christopher J. Dodd (D-Conn.) said at a hearing last week, particularly given the Fed's "increasing number of responsibilities and the obvious mistakes the Fed made in the run-up to the current crisis." This week, Dodd seemed open to giving that authority to some sort of council of financial regulators, rather than entrusting it entirely with the Fed. He has been particularly critical of what he views as the Fed's failure to protect consumers in the years before the crisis. Sen. Richard C. Shelby (R-Ala.), ranking Republican member of the Banking Committee, is even more critical. "They are economists, basically," Shelby said this week. "It is troubling to me and others to give the Fed powers maybe by default. I see the Fed, as a bank regulator, big-time failing the American people." A Fed spokeswoman declined to comment on the recent criticism from Capitol Hill. Despite misgivings in the Senate, officials in the financial industry say the Fed will ultimately end up with the new role of systemic risk regulator. "There are criticisms coming out on this proposal, but what you're not seeing is many other proposals," said Scott Talbott, senior vice president at the Financial Services Roundtable, an industry group. "Some say we'll create a separate entity, but that seems like a very heavy lift to create a whole new regulator out of nothing." Meanwhile, discontent over the Fed could flare up on a more obscure issue: whether the central bank should have the authority to issue its own debt. That power would give the Fed the flexibility to rein in the money supply in the future despite the massive expansion of its balance sheet because it would be able to suck money out of the financial system without selling assets. The central bank released a set of principles on Monday indicating that it will pursue that power. Fed watchers aren't sure it will fly. "Coming out of this, Congress is going to be much more circumspect about giving the Fed free rein," said Vincent Reinhart, a former senior Fed official who is now a scholar at the American Enterprise Institute.

MARCH 26, 2009
Some at AIG Buck Efforts to Give Back Bonus Pay

By RANDALL SMITH, JONATHAN WEISMAN and LIAM PLEVEN
Some American International Group Inc. employees, vilified for receiving bonuses amid the $173 billion bailout of their company, are fighting back. Wednesday, employees at the insurer gave a standing ovation for Jake DeSantis, an executive in AIG's financial-products division, who was the first to publicly refuse to return his retention bonus despite an outcry over the payments. Joining in the ovation was Gerry Pasciucco, attendees said. Mr. Pasciucco heads the division that had $40 billion in losses last year that nearly sank AIG and triggered the government rescue. About five employees of the unit quit Wednesday, said a person familiar with the matter. Mr. Pasciucco, who was recruited last autumn from Morgan Stanley to manage the AIG unit, declined to comment. Mr. DeSantis resigned Tuesday, arguing in a New York Times op-ed piece Wednesday that AIG employees are being "unfairly persecuted." A firestorm of protests has erupted over $165 million in retention payments to employees of the unit. Fifteen of the top 20 recipients of the retention bonuses have agreed to give back a total of more than $30 million in payments. The departures and refusals to return bonuses have compounded the turmoil within a division that still had an estimated $1.6 trillion in its portfolio of derivatives instruments as of March 14, according to the company. Mr. DeSantis said he would donate his after-tax proceeds of $742,000 to charity. In recent days, employees have huddled in small groups in conference rooms off the division's main trading floor in Wilton, Conn., debating what to do. Some have expressed worries about retaliation. One employee said he had instructed his wife to call the police in the event his identity became known and a news truck appeared at his home. Others commiserated that their children have been verbally abused in school. Employees have passed around emails from colleagues who opposed returning the payments. Mr. DeSantis and some other employees have argued that they didn't work in the part of the business that produced the problem. The losses stemmed from credit-default swaps, insurancelike contracts that protected banks and others holding mortgage-related assets. In the op-ed piece, Mr. DeSantis criticized AIG executives led by Chief Executive Edward Liddy for having "misled" employees by repeatedly promising last fall that the bonus payments would be made to allow an orderly unwinding of the division's trading positions. Yet before Congress last week, Mr. Liddy acknowledged that "the payment of large bonuses to people in the very unit that caused so much of AIG's financial troubles does not sit well with the
American taxpayer in any way, shape or form" in light of the government support required since AIG sought a bailout in September. Mr. Liddy said he had asked employees to return at least half of their bonuses. In doing so, Mr. DeSantis wrote, Mr. Liddy had proved himself "not strong enough to withstand the shifting political winds." Messrs. Liddy and DeSantis declined to comment. In a statement, AIG said Mr. Liddy "deeply appreciates the frustration expressed in this letter and believes that the recent vilification and harassment of AIG employees is grossly unfair and unwarranted." The statement said that employees have reduced risk in the business by cutting outstanding trading positions by 36%. Meantime, some AIG employees have criticized an opponent of the bonus payments, New York Attorney General Andrew Cuomo, arguing that he had appeared to support the bonuses in October by backing the need for retention plans at the parent company. Mr. Cuomo, who subpoenaed AIG to get the names of the bonus recipients, disputes any suggestion he specifically approved the bonuses, said a person familiar with Mr. Cuomo's investigation. Mr. Cuomo wasn't informed last fall of any plans by AIG to make payouts under a retention plan for its financial-products unit, said this person. The bonuses were approved in early 2008 by the board of AIG's financial-products unit, which included Harvard economist Martin Feldstein, according to a person familiar with AIG's governance. At that time, the unit's losses were beginning to surface. Mr. Feldstein didn't return calls seeking comment. Mr. Pasciucco said last week that the top bonus recipient, Douglas Poling, had successfully sold off several holdings in his area of responsibility, infrastructure and energy investments. "He's done an excellent job at the task of unwinding his book, of realizing value," Mr. Pasciucco said. Mr. Poling has made known his intent to return his bonus, according to a person close to the company. Elizabeth Rappaport contributed to this article. Write to Randall Smith at randall.smith@wsj.com, Jonathan Weisman at jonathan.weisman@wsj.com and Liam Pleven at liam.pleven@wsj.com
AIG paid bonuses early, says executive

By Francesco Guerrera in New York and Tom Braithwaite in,Washington Published: March 26 2009 02:00 | Last updated: March 26 2009 02:00 AIG paid more than $40m in controversial retention bonuses to staff at its troubled financial unit in December, three months ahead of schedule, according to the resignation letter of an executive at the insurance group. News of the decision to pay bonuses of $165m to staff at AIG sparked outrage in Congress, after the insurer was bailed out with $173bn of public money starting last year. Before the publication of the letter, momentum on draconian legislation to claw back bonuses had begun to slow. Jake DeSantis, a manager in AIG's Financial Products unit, said AIG "accelerated by three months [the payment of] more than a quarter" of the $165m of retention bonuses due to the division's employees. "That action signified to us your support and was hardly something that one would do if he truly found the contracts 'distasteful'," Mr DeSantis wrote to Edward Liddy, AIG's governmentappointed chief executive, in a letter first published in The New York Times. Mr Liddy had earlier called the bonuses "distasteful" in an appearance in the House of Representatives. The House voted for a 90 per cent tax on bonuses at AIG and other financial institutions that have taken government funds. Leading members of the Senate finance committee have drawn up proposals for a 70 per cent tax. AIG, which is 80 per cent controlled by the government, confirmed yesterday that a payment of about $50m was made in December to AIG-FP's employees but declined to say whether that was ahead of schedule. Merrill Lynch sparked protests earlier this year when the Financial Times revealed it had brought forward the payment of about $4bn in bonuses by a month to December, days before its takeover by Bank of America. ILFC warns, Page 16 Copyright The Financial Times Limited 2009
Paid Handsomely to Stay

By ERIC DASH and JONATHAN D. GLATER Before the furor over pay at A.I.G., most Americans probably had never heard of a retention bonus. But like C.D.O. and credit-default swap, the term, a bit of sugar-coated corporate-speak, is quickly entering the popular lexicon. Retention bonuses, it turns out, are not uncommon in corporate America companies that have been bailed out by taxpayer dollars. or indeed among
Despite the furor over the bonuses paid by the American International Group, executives at more than a dozen other financial firms that received government money stand to collect many millions in similar bonuses. At least 19 of these companies, ranging from giants like Citigroup to regional players like SunTrust Banks of Atlanta, have promised to pay certain executives bonuses just for staying in their jobs, according to an analysis conducted for The New York Times by Equilar, a compensation research firm. The payments, in the form of cash, stock or both, are expected to be made over the next few years, in some cases regardless of how the executives or their companies perform. In some cases, these could rival A.I.G.-style paydays. The bonuses are worth as much as $50.3 million, based on current share prices, and are to be spread among roughly 75 executives. That compares with the $165 million paid to several hundred employees at A.I.G. But the coming round of retention bonuses, details of which were gleaned from regulatory filings, could be far bigger if the stock prices of the companies rise, as they have lately. When the bonuses were first awarded, and stock prices were much higher, the payments were valued at nearly $159 million. Many rank-and-file employees are also in line for similar payments or have been guaranteed bonuses upon joining the companies though these are not recorded in company filings, which typically cover only the highest-paid executives. Companies routinely defend retention bonuses as a way to coax employees to stay on through rough patches. But the idea of giving employees, even valuable ones, a bonus for showing up at work might strike many ordinary Americans as absurd, particularly at a time when so many jobs are disappearing. Even some compensation consultants, who generally support such bonuses, concede that the fracas over A.I.G. has given these payouts a bad name. Some suggest a bit of rebranding is in order, and that the term retention bonus could disappear, even if the payments do not. The notion of paying someone extra money to stay put and get something done in difficult times is not something thats going to go away, said Brian Foley, an executive compensation consultant based in White Plains, who says many companies are better off paying the bonuses than losing good employees.
Most of the bonuses tallied by Equilar, like those at A.I.G., were promised before the firms received taxpayer money. In some cases, the bonuses are to be paid to executives who were in place as the companies were brought to their knees by the financial crisis. In others, they are to go to executives who were hired to turn around the companies. A.I.G. employees have agreed to give back about half of their controversial bonuses. But with Congress threatening to impose a heavy tax on bonuses paid this year by the insurance company and other firms that accepted large bailouts, the financial industry is moving rapidly to find new ways to reward its employees, including increasing cash salaries. Of the 75 biggest bailout beneficiaries, Citigroup appears to have been the most generous with its top executives, according to Equilar. Over the last 15 months the company showered at least nine top executives with stock and cash, payable in the future. Equilar estimates that the combined awards, together worth about $80 million when they were made, are now worth about $27 million, given declines in the companys stock price; the value could of course change again in the future. The awards vest over either two or four years, so it is unclear precisely how much remains to be paid out. Vikram S. Pandit, Citigroups chief executive, received a supplemental stock grant initially worth $2.5 million. He took no bonus in 2008, and is collecting an annual salary of $1. But Mr. Pandit made about $165 million when he sold his hedge fund to Citigroup when he joined the company just two years ago. Three senior leaders Stephen R. Volk, Lewis B. Kaden and Michael S. Klein were awarded $38 million in early 2008, with at least a portion of the payments linked to performance. Mr. Kaden, who supervised Citigroups chief risk officer as the company pushed into risky mortgage investments, was awarded a retention bonus then worth more than $8 million in cash and stock. Mr. Klein, who headed Citigroups investment banking operations, was given a retention package in cash and stock worth $19.3 million. Even though he announced his departure a few months later, the board nonetheless paid him his full $5.5 million cash bonus in connection with that award. That was on top of nearly $28.8 million in two other cash payouts one due on March 31, the other in October for agreeing not to work for several Citigroup rivals. In a proxy statement filed this month, Citigroup said: The awards were made to balance the need to retain key executives, who received significantly reduced cash and total awards, at market levels while linking their compensation to Citis future performance. A Citigroup spokeswoman declined to comment. At least four top executives at Fannie Mae, now operating under government conservatorship, stand to receive a total of as much as $1 million each over the next two years. The awards to four executive vice presidents are one-third performance-based, with the balance of the money to be paid out in April and November of this year. Freddie Mac has adopted a similarly staggered cash bonus structure for at least three top executives, paying them 65 percent of the bonus amount for staying at the company through
December of this year and the remaining 35 percent, based on meeting performance targets, in March 2010. Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, demanded last week that regulators rescind bonuses paid to executives at Fannie Mae and Freddie Mac, which have received more than $59 billion from taxpayers since they were taken over. But their regulator, James B. Lockhart III, rebuffed that suggestion. And Fannies chief executive, Herbert M. Allison Jr., quickly struck back in a note to employees, decrying the injustice of letting the firestorm surrounding A.I.G.s bonuses spread to Fannie Mae. It is simply inaccurate to say, as some have, that in this difficult job market our highly skilled, professional employees have no place else to go, wrote Mr. Allison, who did not receive any salary or bonus last year. It is not just financial giants that have embraced these types of bonuses. In January 2008, SunTrust Banks jettisoned its broad-based performance bonus program for a one-time grant of restricted stock after it fell short of its financial goals the last two years. In its recent proxy, SunTrusts compensation committee called the award very important to retaining talent. While some smaller banks are rethinking such bonuses because of tough times, First Horizon of Tennessee said it had no plans to do so. Although the lender is sensitive to the public outcry, John Daniel, First Horizons head of human resources, said that retention awards for several top executives were crucial to the banks recovery plan. Still, if bonuses do not keep people in their seats, the grim job market might. Right now, there just arent many places for people to go, said Timothy L. Holt, an executive recruiter at Heidrick & Struggles. Charles Duhigg contributed reporting.

MARCH 26, 2009
AIG Fights a Fire at Its Paris Unit

Executives' Resignations Put Billions in Contracts at Risk of Default
By LIZ RAPPAPORT, LIAM PLEVEN and CARRICK MOLLENKAMP
Amid the flap over bonuses at American International Group Inc. two of the company's top managers in Paris have resigned. Their moves have left the giant insurer and officials scrambling to replace them to avoid an unlikely but expensive situation in which billions in AIG trading contracts could default. Representatives of the Federal Reserve, AIG's lead U.S. overseer, are talking with French regulators and AIG officials to deal with the consequences of a complicated legal scenario in which the departures of the managers in Banque AIG, a subsidiary of AIG's Financial Products unit, could trigger defaults in $234 billion of derivative transactions, according to people familiar with the situation and a document AIG provided to the U.S. Treasury. Defaults, by no means inevitable, could not only hurt AIG but also could force European banks involved in the trades to raise billions in capital to cushion potential losses, according to AIG documents. That is because the banks used Banque AIG to hedge the risk in some of the assets they own, allowing them to hold less capital against those assets, which could include securities such as mortgages and corporate debt. The executives at Paris-based Banque AIG, Mauro Gabriele and James Shephard, have resigned in recent days but have agreed to stay on for a transition, according to people familiar with the matter. In the wake of their resignations, AIG must replace them to the satisfaction of French banking regulators. If they don't, French regulators may appoint their own designee to manage the bank -- an outcome that could trigger defaults under the bank's derivative contracts. The private contracts say that a regulator's appointment of a manager constitutes a change in control, according to a person familiar with the matter; the provision is often included in derivative contracts where parties want to preserve a way out if something about their counterparties changes. Messrs. Gabriele and Shephard didn't respond to requests for comment. AIG said in a statement that the departing managers "have agreed to stay on to help ensure an orderly transition. They, AIG, and our stakeholders have been in communication with the regulatory authorities in France to discuss our plan to replace them." France's Commission Bancaire, the banking regulator, declined to comment.
Regulators and the company are motivated to find a solution in Paris. AIG described the issues in a five-page white paper submitted to the U.S. Treasury Department earlier this month along with a letter about $165 million in retention payments the company made to employees in the financial-products unit, the unit responsible for the worst of AIG's woes. The company was rescued by the federal government in September. After a public outcry this month about the bonuses, employees were urged to return them, and now several have quit, according to AIG. The two departing managers at Banque AIG have offered to return their bonus payments, AIG says. In the white paper, AIG said it had legal obligations to make the retention payments, but it also discussed the "significant business ramifications" of failing to pay. AIG said that employees at the financial-products unit are needed to wind down and sell pieces of that business, which has $1.6 trillion in outstanding trades. Referring to the circumstances at Banque AIG, the company said that at a minimum, the "disruption associated with significant departures related to a failure to honor contractual obligations would require intensive interactions with regulators and other constituents (rating agencies, counterparties, etc.) to assure them of the ongoing viability of AIGFP as well as its commitment to honoring counterparty contracts and claims." The risk that the Banque AIG transactions would default if managers departed would represent an unexpected problem for what had been one of the AIG Financial Products businesses that hadn't run seriously aground in recent months, according to AIG securities filings. Banque AIG enabled AIG to generate revenue by helping European banks lower the amount of capital they are required to hold to protect against losses on assets such as mortgage and corporate loans. The bank was set up in the early 1990s, and was licensed by French banking regulators in early 1991. More recently, a Banque AIG branch has been located in London's Mayfair district along with the financial-products unit. In the event of a default, European banks that have done these trades with AIG could be forced to take back responsibility for billions of dollars in assets. That could require them to raise billions of dollars in capital, AIG has said. The deals worked like this, according to a Banc of America Securities-Merrill Lynch report and a person familiar with AIG's contracts: A European bank with a hypothetical $1 billion portfolio of assets could unload some of the risk by having AIG protect the top and largest layer, or tranche, against losses with insurance-like derivative contracts. The move greatly reduced the regulatory capital charge for AIG clients. In May 2007, a British executive in the financial-products office in London told investors: "For the European banks and the Asian banks, this is very much a regulatory capital arbitrage business. By structuring their businesses, whether it's their mortgage lending or their corporate loans into these sorts of trades and tranching the risk up, they're able to significantly reduce the capital they have to hold against their portfolios." Write to Liz Rappaport at liz.rappaport@wsj.com, Liam Pleven at liam.pleven@wsj.com and Carrick Mollenkamp at carrick.mollenkamp@wsj.com
Look who's getting the goodies

Angry about the AIG bonuses? Here's what should really disturb you.
By Allan Sloan, senior editor at large Last Updated: March 26, 2009: 9:58 AM ET NEW YORK (Fortune) -- To understand what Washington is actually up to, you have to watch what it does, not what it says. That's especially true when it comes to Washington's role in the ongoing bailout of Wall Street, part of its "let's hope this works" plan to revive the U.S. economy. While Washington is setting the populist mob on the individual American International Group (AIG, Fortune 500) employees who got a total of $165 million in bonuses this year, far larger amounts of money are being quietly handed to Wall Street through programs that generate barely a peep of protest. Let me count the ways - or at least some of them. We'll start with the proposed public-private investment program for toxic assets. It depends heavily on a massive subsidy from the Federal Deposit Insurance Corp., which would insure the borrowings of the program's investors. The borrowings would be up to six-sevenths of the total invested; the Treasury and Wall Street (which I define as the nation's big financial institutions and money managers) would each put up half of the initial seventh. I'm glad that taxpayers stand to get half the profits and fees because the Treasury's in the game. But the Treasury and the FDIC (whose guarantees for such huge sums are credible only because they're backed by the Treasury) run much more risk than the private investors, whose loss is limited to their investment. The subsidy, by my back-of-the-envelope math, could be worth $18 billion a year to the Wall Street investors. That assumes that the program raises $75 billion from Wall Street and that the guarantees lower interest costs by 4% on the Street's $450 billion share of the borrowings. That's more than 100 times the AIG bonuses. We also have the Federal Reserve Board's programs to revive the economy by offering cheap money under a dozen plans invented since the credit crunch began in earnest in the summer of 2007. They total around $1.1 trillion by my count, so a three-point saving - a very conservative number - is more than $30 billion a year. Meanwhile, the Fed's decision to buy Treasury paper and assorted U.S. mortgage-backed securities isn't helping troubled home-owners. Rather, these purchases, designed to lower mortgage rates, benefit well-off homeowners, who can refinance at new, cheaper rates. It also boosts the market value of the tons of Treasuries and mortgage-backed securities held by Wall Street. Marginal or distressed homeowners don't qualify for cheap mortgages because lenders have toughened their credit standards.
I'm not saying, by the way, that any of these programs are necessarily bad. We have to get out of this horrible financial mess somehow, and the feds are throwing everything they have against the wall to see what sticks. But if you want to yell about taxpayer money subsidizing Wall Street, you should look at those programs, not waste time with AIG bonuses, which are symbolically important but economically meaningless. Yes, AIG has received vast amounts of bailout money from the government. But that doesn't mean that every bonus-receiving employee is some sort of troll or incompetent who deserves to be threatened with a 90% tax or with having his address made public so that people can picket his house. I won't even mention that this uproar in the name of preserving taxpayer money has cost taxpayers bigtime. We own 79.9% of AIG's stock and have committed $180 billion in loans and investments to it. This uproar has eviscerated our investment by destroying AIG's reputation and shredding the value of its businesses. Good luck on getting anything like our $180 billion back. Finally, if you want a real bonus outrage, consider this: The operation getting the biggest taxpayer subsidy of all - the federal government - pays bonuses to its employees too. This year it plans to hand out about $1.6 billion of bonuses, despite running more than $1 trillion in the red. So there you have it. While the public is focused on AIG small fry, Wall Street's big fish are getting the bulk of Washington's goodies. As always, follow the money. Not the noise. Allan Sloan invites you to post your questions to him about Wall Street, dealmaking and the state of the financial crisis in a Fortune Talkback forum. He'll choose several questions to answer in a future online installment of his column, The Deal. First Published: March 26, 2009: 4:03 AM ET
AIG's wind-down has $1.6 trillion left

Retention payments cloud the real issue: Ed Liddy has a long way to go in 'de-risking' the company.
By Carol J. Loomis, senior editor at large March 26, 2009: 9:17 AM ET NEW YORK (Fortune) -- The public uproar over the retention payments that American International Group made to the employees of its Financial Products (FP) division has drowned out all other revelations about the huge, government-controlled insurer. But certain new facts and assertions that have emerged in the company's 10-K and recent hearings seem worth more attention than national outrage has permitted. One such fact concerns FP's derivatives, the hotbed of trouble at AIG (AIG, Fortune 500). In 2008 their notional value fell from $2.7 trillion to $1.6 trillion. And why? Some contracts matured, more than $60 billion of credit default swaps were terminated by government action, and a great many contracts were closed out by negotiations between AIG and its counterparties. That much progress is obviously a major step toward CEO Edward Liddy's goals of both "derisking" AIG (that's one of Wall Street's latest vogue words) and getting it back to home base, insurance. But the remaining $1.6 trillion of derivatives are inevitably going to be a more difficult problem. FP is loaded with contracts that are complex, long in duration, and likely to be extinguished only after intense negotiations between AIG and its counterparties. At the hostility-ridden House hearings about AIG held in mid-March, Liddy himself cited an energy-related contract not due to mature for another half-century: "How," he asked, "do you know what oil prices are going to be in 50 years?" Pressed to say when FP might be completely wound down, he estimated four years. In his financial plan, he said, was $2 billion to help FP extricate itself from troublesome contracts. That figure, of course, has nothing to do with the $165 million in retention payments - the "bonuses," as they are somewhat loosely called - that AIG paid to keep FP's employees on the job and that so infuriated the public. Liddy arrived at AIG months after the retention plan was created. But he made it clear in his House testimony that FP has a burning need for skilled people and that his wish to keep them onboard (as opposed to a wish to avoid legal problems) was what mainly drove him to make the payments. Just how many FP employees will in fact be staying on at their newly politicized workplace seems totally uncertain. The whole problem of unwinding FP is so complex, and AIG itself is so weakened today by controversy, that it is impossible to say that the company - fortified so far with $180 billion in government commitments - won't come asking for more funds in the future. If it does, public anger will be a force not easily swept aside.

MARCH 26, 2009
Is the Bonus Tax Unconstitutional?

The Supreme Court defers too much to Congress.
By RICHARD A. EPSTEIN
Bills now winding their way through Congress would tax between 70% and 90% of bonuses paid to any executive earning in excess of $250,000, if he or she is employed by a business that received more than $5 billion from U.S. bailout funds. With popular outcry at a fever pitch, too few Democrats and only some Republicans are prepared to stand up to this juggernaut. But would the courts uphold this legislation? The AIG bonuses were made pursuant to valid contracts entered into before the receipt of the bailout money. They were ratified in the legislation that provided for the bailout, and efforts to find loopholes in these contracts have proved unavailing. Thus any sensible system of limited government should consider the proposed bills unconstitutional. Special taxes on some forms of income (but not others) and retroactive taxes put in place after business transactions are complete both merit strong condemnation. The bills in Congress are rife with both elements. Nevertheless, a constitutional attack against any such law that might emerge faces an uphill battle. Since the New Deal, if not earlier, the courts have allowed Congress and the states to decide which economic activities to tax, and how. Two basic principles that animated our Constitution appear to have no traction today. One holds that property is the guardian of every other right. The second asserts that voluntary exchange is the source of general peace and prosperity. Today's Supreme Court looks to neither principle for guidance. What about the suggestion that the current tax is either a bill of attainder -- legislation directed at punishing particular individuals -- or an ex post facto law, both of which are forbidden? No luck. A bill of attainder has to name a small group of individuals, and the class of financial executives affected by the legislation under consideration is too large to fit comfortably into that category. The prohibition against ex post facto laws has been held to cover only criminal laws, not taxes. And as for the constitutional provision against the impairment of contracts, that only limits state, not federal, power. Today the last, best hope of a constitutional counteroffensive relies on substantive due process and the takings clause. But the courts have resisted both arguments on numerous grounds. First, it's not clear whether contract rights would be held as a species of property, or whether taxes count as a taking of private property. Deny both these propositions, and the constitutional inquiry reaches a dead-end.
Yet even if these knockout blows are averted, the Supreme Court is quick to accept justifications for presumptive constitutional lapses. It may seem laughable after the recent Congressional hearings, but our Court supinely defers to Congress's supposed "expertise" on complex matters of taxation and regulation. Worse, the Supreme Court has eagerly embraced the toxic theory that parties are deemed to assume the risk of regulation and taxation when they are given sufficient notice of Congress's extensive legislative activities in these areas. Hence the more Congress broadcasts its intentions, the fewer rights ordinary individuals have against it. In the 1980s, for example, the federal Pension Benefit Guaranty Corporation (PBGC) lured in multiemployer plans with the express promise they could withdraw without penalty if they did not like its fund management. But when the funds went south, the Court used the sufficientnotice theory to bless Congress's decision to tax these companies on the withdrawal of their funds. Double crosses are now fair game. In good times they won't happen, because sensible legislators know that capital and labor will flee our shores if we engage in senseless acts of plunder. But these are not ordinary times, nor is this an ordinary Congress. The $165 million in bonus payments may be small potatoes compared to the $700 billion at stake in the AIG bailout, no less to the damage caused when investors, foreign and domestic, lose confidence in our institutions. But populist fury and Congressional fecklessness continue. People are right to ask when this cycle will end. Can Congress pass retroactive tax increases on all high-income earners? Can it give tax breaks to TARP-friendly banks as it hammers those who stay out of its bailout clutches? Who knows? But if Congress doesn't stop its descent into the abyss, the Court should confess its past sin of constitutional passivity and stop it for them. Mr. Epstein is a professor of law at the University of Chicago and a senior fellow at the Hoover Institution.

MARCH 26, 2009
Democrats Bid Business Adieu

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By DANIEL HENNINGER
Barack Obama meets with a flock of nervous bankers at the White House tomorrow to reassure them he understands their interests. Good luck. There has always been tension between the Democratic Party and the private sector. That tension is over. With its vote in the House of Representatives to punish corporate bonus payments, the national Democratic Party has disconnected itself entirely from the private sector. The public bear-baiting of AIG's Ed Liddy, and then passage of the bonus bill, gave the nation a good look at the modern Democratic Party freed of constraints. The current version of the party has largely broken free of any understanding whatsoever of the private sector -- how it works or what it needs to function. True socialists at least think about markets so they can criticize them. The Democratic Party's leadership doesn't stir to even that level of engagement. In the House, Senate and some corners of the Obama White House, the party is acting as if the marketplace was the world of an alien tribe, which it has to control through intimidation or demands for protective tribute (read: campaign contributions). This is not true of the entire 90% of self-identified Democrats who voted for Barack Obama. But Democrats who work in real jobs rather than work for the mothership in Washington must recognize that the party's obsessions are becoming ever less hospitable to a functioning economy, or Mr. Geithner's labors to that goal. This decoupling has occurred mainly in the Northeast (New England lost its last House Republican in 2008) and in California. Invulnerable seats have allowed politicians from these regions to control key committee chairs affecting the economy: Barney Frank (finance), Henry Waxman (regulation) Pete Stark (the health subcommittee of Ways and Means), Chris Dodd (Senate banking), Ted Kennedy (health), Barbara Boxer (environment). Put it this way: Imagine any of this generation's Democratic establishment taking a job at Procter & Gamble in Cincinnati as a middle-manager responsible for a division of employees and its annual profit and loss. It is wholly inconceivable. Or helping an owner of an auto-parts company manage through a real crisis. They wouldn't have a clue. That anti-bonus bill was not unique. It is routine. With the passing of the anti-bonus bill, the national Democratic Party completes its decoupling from the private sector, says Wonder Land columnist Daniel Henninger. Spending in the president's budget, skyrocketing to 28.5% of GDP this fiscal year, is a harbinger. No matter. This week two of the party's "progressive" (the left) Web-based activist groups -- the
force that kept the Obama candidacy afloat -- announced an effort to harass some 50 moderateto-conservative Blue Dog Democrats in the House for expressing doubts about Mr. Obama's reforms, such as "health care for all." They name 20 "conservative" senators, including such notable right-wingers as Evan Bayh, Mary Landrieu, Ben Nelson, Robert Byrd and Blanche Lincoln. This is not your father's Democratic Party. Wall Street's collapsed businesses and layoffs have devastated New York's tax revenues. So what? Attorney General Andrew Cuomo flogged Bank of America into giving up the names of Merrill Lynch bonus recipients. Imagine the coincidence this week when two of Merrill's most respected hands, analyst David Rosenberg and strategist Richard Bernstein, quit. Connecticut Attorney General Richard Blumenthal and the legislature are also mau-mauing AIG over bonuses. Nor can it be said that these Democrats are merely scapegoating the private sector to deflect blame for the politicians' share of the mortgage debacle. Using the private sector as the party's punching bag is also now routine. Al Gore and John Kerry ran at Big Oil, Big Pharma and Big Insurance. With mercurial suppleness, so did the current president. These "big" industries are proxies for the whole world of owners and managers, who somehow now always find themselves beyond acceptable politics as enemies of the people's interests. A Democratic Party that was always anti-Wall Street is becoming anti- Main Street. Meanwhile, plaintiffs lawyers assault the private sector, dig cash out of it, and transfer a percentage back to Democratic re-election campaigns. Democrats in Congress then try to legislate provisions to make the private sector vulnerable to more such lawsuits. Congress has passed the Lilly Ledbetter Fair Pay Act, with the Paycheck Fairness Act on tap. If the private sector is now largely an abstraction to Democrats in Congress, they will continue to make mistakes, explicit like the bonus bill or just thoughtless errors that constantly disrupt operations for private companies. This will have a dampening effect on the U.S. growth rate and its ability to create jobs, especially for new, younger entrants. Some of Mr. Obama's supporters need to reboot their vision. They did not sign on just to him, but to him and his party. That party is creating a world of its own, a world being drained of oxygen for the kind of people who build the nation's economy. Write to henninger@wsj.com

MARCH 26, 2009
Obama Points Back to the GOP's Future

The president has made taxes and spending the big issues again.
By KARL ROVE
Something powerful is stirring in the land, and it may not be good news for President Barack Obama, his agenda or the Democratic Party. Mr. Obama said Tuesday night his budget moves America "from an era of borrow and spend" to "save and invest." But people are realizing he would add $9.3 trillion to the national debt, doubling it in six years and nearly tripling it in 10 years, according to the Congressional Budget Office (CBO). How can that be "save and invest"? In his inaugural address, Mr. Obama told us, "The stale political arguments that have consumed us for so long no longer apply." He wants to turn to new issues of education, health care and green jobs, which he plugged at every opportunity in Tuesday's press conference. Suddenly, though, it doesn't seem like a time of new politics and new concerns. Many Americans are anxious -- and in some cases angry -- about a set of old issues: deficits, taxes and the national debt. Mr. Obama's radical budget, his administration's slapdash operating manner, and events such as the AIG bonuses have revived animosity over government's size and cost. In response, tea parties are sprouting up, and opposition is growing to more bailouts, more spending, higher taxes and larger deficits, even among Congressional Democrats. Last fiscal year, the deficit was $459 billion. For this fiscal year, it was $569 billion when Mr. Obama took office. Under his proposals, another $1.276 trillion will be added to the deficit this year, for a total of $1.845 trillion. The CBO says deficits will fall for three years to $658 billion, still nearly 50% larger than any past deficit. After that, deficits go back up every year, reaching the trillion-dollar a year mark again in nine years. By 2019, the debt would reach 82.4% of GDP, a level not seen since 1947. With astonishing candor, even Peter Orszag, the president's budget director conceded these levels of deficits and debt are "unsustainable." Federal spending will under Mr. Obama top $4 trillion this year. This translates into 28.5% of GDP -- a level exceeded only at the height of World War II. According to the president's plans, spending will thereafter slow for three years, but then grow faster than the economy for the next seven years and beyond. Spending rises by $3.1 trillion from 2009-19, including $911 billion for legislation signed during his first two months in office, including the stimulus bill and the expansion of the State Children's Health Insurance Program (and not including interest on the mushrooming debt). Mr. Obama is violating every tenet of his promise "to spend wisely, reform bad habits, and do our business in the light of day."
Americans are also worried about Mr. Obama's plans for $1.9 trillion more in taxes. These tax hikes won't just affect the "rich," as he claims. His cap-and-trade carbon tax will hit everyone who consumes energy -- that is, every American. Taxes on the top 5% of filers will result in lost jobs and wages for small businesses and less charitable giving. The administration claims higher taxes are required for deficit reduction. But its spending increases are half again as large as its tax hikes. Nothing has deterred the administration from pursuing its staggeringly expensive agenda. Mr. Obama brushed off any concerns Tuesday night. He is quite openly using the economic crisis to launch a massive, permanent expansion of government financed by ever-more borrowing and ever-higher taxes. This may mean that his goal is to cause taxes to rise to European levels, transforming America into a European-style social democracy. The dynamic he has set in motion could spur the emergence of strong competitors to Mr. Obama in 2012 who take a strong, principled stand against record-setting deficits, debt and taxes. It may also strengthen Republican chances in next year's midterm elections. Democrats should, for example, be troubled by a new National Public Radio poll showing Republicans tied or ahead in generic matchups for Congress. And while the midterms are 20 months off, Republican gubernatorial hopefuls in Virginia (Attorney General Bob McDonnell) and New Jersey (former U.S. Attorney Chris Christie) are ahead in two states Barack Obama carried last year that vote this fall. Tuesday night's news conference showed a fluid, self-assured president -- but one who seems to think that repeating a false argument will make it true. The man who promised to end "fingerpointing" has developed the habit of blaming everyone who came before him. Invoking the language of fiscal responsibility, he is engineering prosperity-killing deficits and bankrupting spending. Mr. Obama has put front and center a set of issues -- spending and taxation -- that brought Republicans to power in the past and may bring them back again. It looks as if we may be heading back to the future. Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush.
We need to share the bill for bail-outs

By John Gapper Published: March 25 2009 21:16 | Last updated: March 25 2009 21:16 One thing we have learnt in the past year is that some banks are definitely too big to fail. We may yet discover something even more disturbing: that some are too big to save. Tim Geithner, the US Treasury secretary, who has staged something of a reputational recovery this week helped by the fickle stock market will this morning testify to Congress on his plans for reforming regulation and gaining more power to wind up insolvent financial institutions. Mr Geithner has intelligent things to say about how the Treasury and the Federal Reserve could have done a better job of letting Lehman Brothers go down gracefully, and saving American International Group without having to stick to bonus contracts. He wants the US government to be able to seize control of such institutions when spending public money. The fact that it could not that it had to lend $85bn to AIG to keep it afloat last September rather than take over the insurance group, and was unable to deal properly with Lehman Brothers is one reason why he has been in trouble with Congress. But here is a disconcerting thought. What if the US government, with its balance sheet and its reserve-currency dollar, gained the powers that Mr Geithner and Ben Bernanke, chairman of the Federal Reserve, seek? Would that be enough to guarantee that it could resolve the next AIGstyle crisis? Unfortunately not. This crisis, with its discoveries that the UK arm of Lehman Brothers was beyond the reach of the Fed, and that AIG booked many credit derivatives trades through a London-based French banking subsidiary, showed that such institutions have outgrown the US. They not only have many foreign subsidiaries; they have woven a global web of financial contracts. That makes it very hard to take control of them, even if American taxpayers were sanguine about their money being used to pay off foreign counterparties, which their politicians are not. Nationalisation may not be enough to corral them; it would require internationalisation. The fact that there is, in this sense, no such notion as internationalisation is the problem. No cross-border body exists with the authority or resources to take over a global financial institution, wind it down safely and divide the bill fairly among taxpayers of many countries. The resolution authority Mr Geithner and Mr Bernanke have teamed up to obtain is modelled on the Federal Deposit Insurance Corporation, the agency that winds up insolvent banks in the US. The FDIC has extensive powers to seize banks, turf out their managers, hand over the assets and liabilities to other banks and absorb any losses. It did that last week, for example, with Colorado National Bank of Colorado Springs, whose $83m (61m, 57m) in deposits and four branches were forcibly handed over to Herring Bank of
Amarillo, Texas. The FDIC will cover 80 per cent of losses fund, to which US banks all pay levies.
some $9m
out of its insurance
This kind of approach would be a great deal better than the desperate improvisation we witnessed last autumn. Investment banks could be helped to avoid going into Chapter 11 bankruptcy protection without having to cover all their liabilities. As Mr Bernanke pointed out to a House committee on Tuesday, it would allow the government to rip up obnoxious contracts, such as AIGs guaranteed retention bonuses, and impose some losses on creditors and counterparties, such as holders of AIGs credit default swaps. But resolution authority may not be sufficient. The Colorado National Banks of the world are conveniently small and self-contained, with a ready buyer to hand once losses are covered . Lehman and AIG, however, were not tiny domestic outfits. Take Lehman. On September 15, when its holding company went into Chapter 11 bankruptcy, the New York Fed, under Mr Geithner, tried to keep its investment banking arm going so that it could be wound down in an orderly way. The Fed failed, for reasons that are instructive. Although the Fed propped up the US broker-dealer operations, it found that it could not effectively fund the UK arm, which had depended on the bankrupt holding company for cash. It also faced obstacles in dealing with the German banking subsidiary, Lehman Bankhaus. Resolution authority would have helped, since the government could have and presumably would in any future case of a Wall Street collapse stood behind the holding company and backed the foreign subsidiaries through it. That would not, however, guarantee that it could catch all of the overseas entities through which such institutions trade. Even if it could, there is a political problem. Congressional unrest is growing over the fact that the US government paid off AIGs CDS counterparties, including foreign banks led by Socit Gnrale and Deutsche Bank, at par. It was being a good global citizen, but that does not earn you points on Capitol Hill. If you seek to limit global financial risk, it is sensible not to make any distinction between counterparties on the grounds of nationality. Try telling that, however, to taxpayers who must contribute billions of dollars. A theoretical solution would be to have a global financial authority, with powers akin to the International Monetary Fund, that could salvage a global institution and apportion the costs appropriately. That, however, is not politically achievable, even if it would work in practice. Perhaps another way can be found to split the bill when one country pays to prop up anothers banks. I am not holding my breath but without it no government can be sure, however enormous its domestic powers, of solving the next AIG. john.gapper@ft.com More columns at www.ft.com/gapper Read and post comments at John Gappers blog
BNA3/27/09 Executive Compensation House Financial Services Committee Passes Bill to Limit Compensation at TARP Firms The House Financial Services Committee approved legislation March 26 that would authorize federal financial regulators to set standards for compensation and executive bonuses at companies that have received taxpayer money under the Treasury Department's Troubled Assets Relief Program (TARP) and the Housing and Economic Recovery Act of 2008 (Pub. L. No. 110289). The measure (H.R. 1644), approved by a 38-22 recorded vote, will move to the full House for consideration. The bill to prohibit excessive compensation and unreasonable executive bonuses passed with two substantive amendments, including one offered by Rep. Brad Miller (D-N.C.). The Miller amendment would require the Treasury secretary to consult with the leader of the Congressional Oversight Panel established under Title I Section 125 of the Emergency Economic Stabilization Act of 2008 (Pub. L. No. 110-343) before establishing the compensation standards. A manager's amendment offered by Financial Services Committee Chairman Barney Frank (DMass.) also was adopted. The Frank amendment would require that the standards developed by the Treasury secretary be approved by the financial regulatory agencies that make up the Federal Financial Institutions Examination Council, which includes the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and several other federal regulatory agencies. Bill Would Fix Bonus Mistake.' The measure would also nullify a provision in the American Recovery and Reinvestment Act of 2009 (Pub. L. No. 111-5) that provoked public outrage by allowing the American International Group (AIG) to award $165 million in bonuses, despite a $186 billion government bailout. If this bill passes the House and Senate, then the mistake will have no effect, Frank said (55 DTR G-1, 3/25/09). In a separate vote, the Financial Services Committee approved H. Res. 251, sponsored by Rep. Steven LaTourette (R-Ohio), directing the Treasury secretary to provide a full accounting of communications involving Treasury and the AIG bonuses. The resolution was ordered reported to the House by a record vote of 64-0. Fiduciary Duty During a March 25 markup session, Rep. Jim Himes (D-Conn.), a co-sponsor of H.R. 1664, said the measure acknowledges the government's fiduciary role on behalf of taxpayers that have capitalized companies under the TARP program. We are trying to correct the clear failure of government to exercise its fiduciary duty to protect shareholder interests, he said.
By Florence Olsen More information is at http://www.house.gov/apps/list/press/financialsvcs_dem/hr_1664.pdf.
CQ TODAY PRINT EDITION BANKING & FINANCIAL SERVICES March 26, 2009 Updated 1:31 p.m. Leaders Suggest Slow Track for Bailout Bonus Measures By Kate Davidson and Benton Ives, CQ Staff An effort to impose new rules on compensation for executives at companies receiving federal bailout money made its way though a House panel Thursday, but leaders in both chambers suggested they were in no hurry to see it become law just yet. The House Financial Services Committee approved, 38-22, a measure (HR 1664) that would bar any recipient of bailout funds from paying any compensation that is unreasonable or excessive, as defined by standards that would be set by federal banking regulators. It also would prohibit any retention payment, bonus or other supplemental payment not directly tied to performance standards set by regulators. The restrictions would be lifted once a company had repaid the government. The vote to approve the bill was mostly along party lines. Two Republicans, Ed Royce of California and Walter B. Jones of North Carolina, supported the bill along with the panel Democrats. With this bill, House Democrats are taking a less punitive approach than they did last week, when the House passed legislation (HR 1586) that would impose a 90 percent excise tax on bonus payments made by companies receiving more than $5 billion in government aid. The vote was 328-93, but the push to clear the measure quickly ran out of steam in the Senate as the bills constitutionality was called into question. That bill and the one approved Thursday were written in response to revelations that insurance giant American International Group Inc. (AIG) paid millions in retention bonuses after receiving more than $180 billion in government money. The Financial Services bill now goes to the full House for passage, although Speaker Nancy Pelosi, D-Calif., sounded a cautionary note Thursday about the reach of such legislation. We want to make sure that what we are doing makes the distinctions between the abuses and the insult to the taxpayer of an AIG employee executive who drove his company into the ground, costing hundreds of billions of dollars of taxpayer dollars and then taking taxpayer dollars as his reward for failure, Pelosi said. That is something quite different than the normal compensation practices that have bonuses and performance as part of it. Pelosi said she is confident that Congress will come up with a bill that meets her specifications. Im certain that once this bill comes to the floor and goes to conference that those distinctions will be made. On the Senate side, Majority Leader Harry Reid, D-Nev., said any legislation on the bonus matter would wait until after lawmakers return from the spring recess that begins April 4. As to what were going to do about AIG compensation, were not through with that yet. . . . Were willing to go along with this timeout, Reid said, adding that work on the fiscal 2010 budget resolution would take up next weeks time anyway.
Were going to have two weeks where we go home for the recess. If this is still an issue we still need to proceed on when we come back, we will do it, he said. Amendments in Committee The committee adopted, 36-24, an amendment by Brad Miller, D-N.C., that would require the Treasury secretary to consult with the chairman of the Congressional Oversight Panel when defining standards for unreasonable and excessive compensation. The committee began its work on the measure March 25, when it adopted by voice vote a managers amendment that would require federal banking regulators to approve of compensation standards set by the Treasury Department. The bank regulators will decide whats excessive and unreasonable, said the sponsor of the amendment, Financial Services Chairman Barney Frank, D-Mass. The committee also adopted by voice vote an amendment by Brad Sherman, D-Calif., that would require any recipient of funds under last years Troubled Asset Relief Program (PL 110-343) to report to the Treasury secretary within 90 days of enactment the number of employees who received high compensation during fiscal 2009. The report must distinguish how many people received more than $500,000, $1 million, $2 million, $3 million and $5 million. The report would not name employees, Sherman said. The committee rejected by voice vote a second Sherman amendment that would have defined unreasonable or excessive payments as more than $1 million in compensation, excluding restricted stock, restricted options or sales commissions. The amendment would not have prevented the Treasury secretary from lowering that standard. Edward Epstein and Kathleen Hunter contributed to this story. First posted March 26, 2009 10:58 a.m. Source: CQ Today Print Edition Round-the-clock coverage of news from Capitol Hill. 2009 Congressional Quarterly Inc. All Rights Reserved.
House Committee on Financial Services Press Release3/27/09 For Immediate Release: March 26, 2009
Financial Services Committee Passes Reps. Grayson and Himes Legislation to Prohibit Bonus Payments by TARP Recipients
Washington, DC - The Financial Services Committee today passed H.R. 1664, the GraysonHimes Pay for Performance Act of 2009, that would prohibit certain compensation payments by companies that have received direct capital investments under the TARP program and the Housing and Economic Recovery Act until these investments are repaid. Specifically, the bill prohibits any compensation payments that are unreasonable or excessive, restricts all nonperformance based bonuses, and effectively repeals a controversial provision in the American Recovery and Reinvestment Act. The Committee passed the legislation by a vote of 38-22. This bill is based on two simple concepts. One, no one has the right to get rich off taxpayer money. And two, no one should get rich off abject failure," said Congressman Alan Grayson (DFL). "An economy in which a bank executive can line his own pocket by destroying his company with risky bets is an economy that will spiral downwards. And a government that hands out money to such executives is a government that fails to protect the taxpayers." Given the legislative process and the Administrations desire to get this bill done before the recess to speed funds into the economy, Congress made a mistake. We have, fortunately, a process for correcting mistakes which is subsequent legislation. We have now acted very promptly and if this bill passes the House and the Senate then the mistake will have had no effect, said Chairman Frank. We need regulation that aligns the publics interest with the health of financial institutions, said Congressman Jim Himes (D-CT). This responsible legislation will help ensure accountability for taxpayers and shareholders and encourage good performance while keeping employee pay a matter of measurable job performance rather than public opinion. The bill adds new compensation/bonus restrictions to the Emergency Economic Stabilization Act for financial institutions that receive or have received a direct capital investment by the Treasury Department under the Troubled Asset Relief Program or the Housing and Economic Recovery Act (which covers Fannie Mae, Freddie Mac and the Federal Home Loan Banks). While such a capital investment is outstanding, and regardless of when a compensation payment arrangement was entered into, recipients of a direct capital investment from the Treasury would be prohibited from:
Paying any executive or employee any compensation that is unreasonable or excessive, as defined in standards established by the Treasury Secretary.
Paying any bonus or other supplemental payment that is not directly based on performance-based standards set by the Treasury Secretary. x The bill would require the Treasury Secretary to consult with the Chairperson of the Congressional Oversight Panel and obtain approval of the agencies that are members of the Federal Financial Institutions Examination Council before defining unreasonable or excessive compensation and establishing performance-based measures.
The bill also would provide that the restrictions on bonuses of highly-compensated employees, adopted in the American Recovery and Reinvestment Act, would apply while a direct capital investment under TARP remains outstanding, regardless of when the arrangement to pay such bonus was entered into. This provision is intended to effectively repeal a provision that currently exempts from the prohibitions coverage bonuses that are due under employment contracts entered on or before February 11, 2009. Finally, the bill would require a financial institution that is subject to the new compensation requirements to submit an annual report to the Treasury Secretary stating how many executives and employees received or will receive total compensation above specified dollar amounts during the fiscal year. The legislation is now being forwarded to the full House for consideration, which could come as early as next week.

MARCH 27, 2009
Cuomo Widens His Probe to a Unit's Swaps Deals

By LIZ RAPPAPORT
New York Attorney General Andrew Cuomo is expanding his investigation into American International Group Inc. to include questions about how its financial-products unit is unwinding deals as well as examining bonus payments at the division. Mr. Cuomo subpoenaed AIG on Thursday for information largely to assess AIG's statements that it needs the expertise of the unit's employees to unwind or ready for sale its $1.6 billion in trades. "In an investigation, sometimes one thing leads to another, and here our review of bonus payments has led to questions about underlying credit-default-swap contracts," Mr. Cuomo said in an interview Thursday. AIG declined to comment on the subpoena. The Federal Reserve, which has overseen AIG since a government rescue in September, also declined to comment. Credit-default swaps are private contracts that investors buy to insure themselves against losses on debt securities or against the default of a counterparty. Losses tied to credit-default swaps sold by AIG's financial-products unit nearly toppled the company last year, leading to the rescue. Bonuses paid to staff at the financial-products unit raised a stir this month. AIG had warned officials of "significant business ramifications" of failing to pay the bonuses, saying employees were needed to wind down the business. Mr. Cuomo has urged workers to return bonuses and has said commitments of about $50 million have been made. One question Mr. Cuomo has raised is whether the tasks for staffers is complicated given that, at least for one line of business, AIG and the Fed effectively paid some investors 100 cents on the dollar to unwind certain trades. Still, that payout applies only to the particular type of trade tied to mortgage securities. The unit also has other types of credit-default swaps, including $234 billion of swaps tied to European banks' regulatory capital. Those could be at risk of default in light of the recent resignations of two senior managers at a subsidiary in Paris under legal terms surrounding the deals. AIG said Thursday that given the managers' commitment to see through an orderly transition, it expects the book of derivatives "will remain unchanged and in good standing." Susanne Craig contributed to this article. Write to Liz Rappaport at liz.rappaport@wsj.com
Mcnulty, Amy
From: Sent: To: Subject: Sundberg, Linda Thursday, March 19, 2009 10:36 AM Schaffer, Laurie AIG Fallout Accelerates as Obama, Hill Respond (from American Banker) -- note highlighted resolution language
AIG Fallout Accelerates as Obama, Hill Respond

American Banker | Thursday, March 19, 2009
By Cheyenne Hopkins WASHINGTON The political fallout from the American International Group rescue widened Wednesday as policymakers, including the president, pointed to excesses at the insurance giant as the basis for sweeping legislation that would have far-reaching effects. For instance, the House Judiciary Committee passed a bill Wednesday aimed at recovering bonuses paid by AIG to its executives, but it would apply to executives at all companies that have received more than $10 billion in rescue aid, including Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., and Wells Fargo & Co. President Obama, citing the AIG mess, pledged Wednesday to speed through Congress a bill to give the government resolution power over systemically important financial firms. "We're going to be moving that on a fast track," Obama said. "What we are working on is resolution authority that would be similar not identical but similar to the powers that the FDIC currently has over banks." The president provided no further details but said he had discussed the issue Wednesday with House Financial Services Committee Chairman Barney Frank. It was unclear, for instance, which firms would fall under the new resolution authority, including if bank holding companies which are currently not subject to receivership by the Federal Deposit Insurance Corp. could be included. Obama said resolution authority would "allow us proactively to get out in front, make sure that we are separating out bad assets from good, dealing with contracts that may have been inappropriate, and preventing the kinds of systemic risk that we've seen taking place with AIG." Steve Adamske, a spokesman for Frank, said that both the White House and the Massachusetts Democrat's staff are drafting resolution authority legislation. He said that the Financial Services Committee would hold a hearing as soon as drafting was complete, probably next week, and that if the "planets align" there could be a committee vote on the bill before the Easter recess in April. Adamske said that the Federal Reserve Board is the regulator most likely to receive resolution powers for nonbanks but that the details are still to be worked out. "We have to wait to get these details," he said. The flurry of congressional activity came in response to growing public outrage over $165 million paid in bonuses to AIG, which has received four government bailouts so far.
House Judiciary Committee Chairman John Conyers, D-Mich., said he conceived of his bill on Monday and drafted language on Tuesday. He said the panel was moving the bill quickly so that it could be voted on by the House next week. "The legislation before us represents an effort to safeguard taxpayer funds and rein in out-of-control compensation and bonus abuses by companies that have received federal financial assistance to avoid bankruptcy," Conyers said. The legislation would allow state attorneys general to sue to recover "previously excessive payments of compensation" and to limit compensation payments if they are more than 10 times the average amount of annual compensation paid to the company's nonmanagement employees. The speed of the legislation clearly caught other lawmakers and the banking industry off guard. Lawmakers on both sides of the aisle questioned the legality of the bill and the speed with which it was being considered. "In responding to the economic crisis, Congress has let emotion overrun reason," said Lamar Smith, the lead Republican on the Judiciary Committee. "We have had no debate, no hearing, no witnesses, and no real evaluation of this bill. Congress already has learned the hard way about the unintended consequences of rushing to legislate without adequate expert testimony and debate. But that's exactly what we're doing now." Rep. Mel Watt, D-N.C., agreed. "I just don't think we have the authority to do this given the record we have built," he said. The bill appears slated for easy passage despite the objections. It is being pushed by House Speaker Nancy Pelosi and has the support of House Minority Leader John Boehner. Observers said the language was so vague it was unclear what impact the bill would have on the four banking holding companies that would be subject to it and was a possible sign of more requirements for banks that took part in the Troubled Asset Relief Program. "It illustrates that the potential rules continue to change for recipients of government assistance," said Phil Corwin, a partner at Butera & Andrews. "In the ongoing financial crisis, there is no telling what further conditions may be put on those recipients." Stacy Kaper contributed to this story.

Responsive Documents - CREW: Department of The Treasury: Regarding AIG Bonuses: 5/18/2012 - 2009 03 124 - Final Redacted Documents

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Aiken, Justin (Contractor)

Aiken, Justin (Contractor)

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Regards, RonFerlazzo RonFerlazzo AttorneyAdvisor OfficeofFinancialStability DepartmentoftheTreasury (202)9272800 Ronald.Ferlazzo@do.treas.gov

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Shaw, Karen (Contractor)

Shaw, Karen (Contractor)

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ERP PAYMENTS AUTHORIZED AND UNDERWAY, SALARY REDUCTIONS ANNOUNCED

Shaw, Karen (Contractor)

Itwouldbebesttohaveaquickmeetingorcalltodiscussthisandreachresolution. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,20091:48PM

To:Wolin,Neal;Albrecht,Stephen;Baker,Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:RE:HeadsupandrequestforcommentonAIGstory

Shaw, Karen (Contractor)

Shaw, Karen (Contractor)

Shaw, Karen (Contractor)

OriginalMessage From:Wolin,Neal Sent:Friday,March13,20092:37PM To:Albrecht,Stephen;Cutter,Stephanie;Baker,Isaac;Lambright,James;Hsu,Michael; Sperling,Gene

Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim;Aviel,Sara;Knight,BernardJr. Subject:Re:HeadsupandrequestforcommentonAIGstory

Itwouldbebesttohaveaquickmeetingorcalltodiscussthisandreachresolution. OriginalMessage From:Cutter,Stephanie Sent:Friday,March13,20091:48PM

To:Wolin,Neal;Albrecht,Stephen;Baker,Isaac;Lambright,James;Hsu,Michael Cc:Williams,Andrew;Engebretsen,Jenni;Patterson,Mark(DO);Jaconi,Kristen;Greene, Michelle;Sachs,Lee;Wallace,Kim Subject:RE:HeadsupandrequestforcommentonAIGstory (b) (5)

Shaw, Karen (Contractor)

Shaw, Karen (Contractor)

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Shaw, Karen (Contractor)

Aiken, Justin (Contractor)

Shaw, Karen (Contractor)

Aiken, Justin (Contractor)

Zarco, Juan (Contractor)

SECTION 2 PARTICIPATION 2.01. Participation.

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Aiken, Justin (Contractor)

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Shaw, Karen (Contractor)

Shaw, Karen (Contractor)

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BN-NJ-01-08-2009 1441 ET # 122591 Document AMBEST0020090108e51800105

Shaw, Karen (Contractor)

Shaw, Karen (Contractor)

Code: (b) (6)

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