Bad year or good, AIG employees got big bonuses

By STEVENSON JACOBS

NEW YORK (AP) — A Wall Street firm loses billions of dollars, nearly destroying its business and crippling the nation's economy. But top executives still receive huge bonuses?

As crazy as that sounds to most Americans, paying such bonuses even after a company suffers big losses is common practice on Wall Street, and it's at the heart of the outrage surrounding insurer AIG.

Employees of the insurer's financial-products unit received $165 million in so-called "retention" bonuses — payments designed to keep valued employees from quitting. They are paid out no matter whether the employee had a great year or a horrible one.

In Wall Street's high-stakes competitive culture, paying top people to stay in their jobs has been the norm for years.

"It's basically a bribe, so your employees don't bolt and take their clients with them," said Chuck Collins, a senior scholar at the Washingon-based Institute for Policy Studies and an executive compensation expert.

Even though most bonuses paid to Wall Street employees are tied to performance, retention bonuses have ignited anger since the government began pouring billions of dollars into the financial system to keep banking and insurance firms from collapsing.

Despite the uproar, the payments have continued at several firms, most recently at investment bank Merrill Lynch.

"It's part of this Marie Antoinette syndrome of Wall Street," Collins added. "They're completely in a bubble, and they don't understand how these payments are perceived."

They do now.

The bonuses at American International Group, which is now nearly 80 percent owned by taxpayers, have drawn howls of outrage from Congress and President Barack Obama. Lambasting the insurance giant for "recklessness and greed," Obama pledged to try to rescind payment of the bonuses.

AIG has argued that retention bonuses are crucial to pulling the company out of its crisis. Without the bonuses, the company says, top employees who best understand AIG's business would quit — an assertion that critics of the payments quickly rejected.

"I'm very skeptical that retaining the people who made the mistakes is a good idea," said Rep. Barney Frank, chairman of the House Committee on Financial Services. "I think we have a strong case to get some of those bonuses back."

Experts say it won't be easy.

For starters, AIG's retention payments were guaranteed in the executives' contracts. By breaking them, AIG says it would risk triggering a wave of employee lawsuits. And the cost of those lawsuits would likely dwarf the size of the retention bonuses.

One way around the contracts would be to prove fraud. A 2002 law adopted after the accounting scandals at Enron and other companies allows publicly traded corporations to take back ill-gotten compensation.

On Capitol Hill late Tuesday, House Democrats were considering proposing new legislation to authorize Attorney General Eric Holder to recover bonus payments like the ones paid by AIG.

A day earlier in New York, state Attorney General Andrew Cuomo subpoenaed information from AIG to determine whether the payments made over the past weekend constitute fraud under state law.

In a letter Tuesday, Cuomo said 73 AIG employees received retention bonuses of $1 million or more — including 11 who have since left the company. Cuomo said the bonus checks were mailed Friday.

"These payments were all made to individuals in the subsidiary whose performance led to crushing losses and the near-failure of AIG," Cuomo wrote in the letter to Frank.

"Thus, last week, AIG made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing a taxpayer bailout. Something is deeply wrong with this outcome."

Critics say the government could have done more to prevent the AIG bonuses.

Peter Morici, a business professor at the University of Maryland, said the government could have forced AIG to re-negotiate the bonus contracts so employees would be paid less. He noted that the government demanded similar concessions from unionized autoworkers before agreeing to bail out General Motors and Chrysler.

"It seems like no effort was made to negotiate with the AIG people and that the government gave them whatever they want," Morici said. "If we forced autoworkers to take less, we could have done it with AIG employees."

As for AIG's argument that failure to pay the bonuses would send employees running for the exits, some experts say that would be just fine.

"There's a lot of unemployed Wall Street workers that could be brought in as fresh blood," said Stephen Davis, a senior fellow and expert on corporate governance at Yale University.

Otherwise, Davis said, paying bonuses to executives of faltering companies risks creating a "a grab-and-go culture."

"The danger is that this kind of culture could spread to other companies," he said. "People could see this as their moment to get what they can before the gate closes."

AIG's troubles stem from its business insuring mortgage-backed securities and other debt against default. As the credit crisis took hold, that business imploded.

Since September, the government has shoveled more than $170 billion into AIG, which has operations in more than 130 countries.

AIG's financial products unit had been led by Joseph Cassano, who stepped down a year ago after the division reported a loss of more than $11 billion on a book of contracts in the last quarter of 2007.

AIG representatives did not return calls seeking comment Tuesday. Spokeswoman Christina Pretto had said Monday that the company was in ongoing contact with Cuomo's office and would respond to his requests for information.

Retention bonuses on Wall Street and in other industries are hardly new. Last month, the Wall Street Journal reported that Morgan Stanley plans to pay up to $3 billion in retention bonuses to 6,500 brokers in its joint venture with Smith Barney. Morgan Stanley has received $10 billion in bailout funds.

In a December survey of 264 companies across a variety of industries, business consultant Watson Wyatt Worldwide found that 9 percent of companies had added, or expected to add, a special retention bonus. An additional 21 percent were considering doing so.

Associated Press Writer Michael Virtanen contributed to this report from Albany, N.Y.

I find Obama's outrage over this to be horribly false, didn't he have a chance to voice his dissent to AIG's ability to give these bonus's before this?

This be one dumb political decision.

Well the UBS payed 1000 mio CHF of bonus based on no contract after getting 50b CHF help from staate. 165 mio is peanuts!

again, WTF!!!!!!

just heard Obama speak in Cal... and he did bring up AIG only! As you mentioned, there seems to be lots of companies doing this: Citi, FannyMae, Bank of America, etc...... so it really amazes me that they aren't talking about these other companies....but these guys just are very smart or in touch with things....??????

***** Also, I heard that Congress is talking about a 90 % TAX on anyone making 250 + whose company got more than 5 Million.... > SHOULD BE INTERESTING HOW/EVERYONE VOTES ON THIS!!!!

Pointless. Who cares about 100+ million. I want to know where the 50 BILLION that Madoff and Co stole went or the 5 Billion that Stanford leeched or where/who/how it was spent the 9 TRILLION the private reserve has spent.

and the media and politicians make a big deal over 100 m i l l i o n .... oh please

What's interesting about this other than Congress trying to selectively steal people's earned income after they've already earned it.

They ought to put a 90% tax on Madoff if they are gonna bother with this bogus devious legislation/action.

He's in real trouble for re-election

Senate Republicans brake rush to tax AIG bonuses

By LAURIE KELLMAN and STEPHEN OHLEMACHER, Associated Press Writers Laurie Kellman And Stephen Ohlemacher, Associated Press Writers


WASHINGTON – Senate Republicans are drawing out a flap that has made the Obama administration squirm, applying the brakes to Democratic attempts to quickly tax away most of the bonuses at troubled insurance giant AIG and other bailed-out companies.

Sen. Jon Kyl, the Republicans' vote counter, blocked Democratic efforts Thursday evening to bring up the Senate version of the tax bill to recoup most of the $165 million paid out by AIG last weekend and other bonuses in 2009. The House had swiftly approved its version of the bill earlier in the day.

By rushing, Kyl said, Democrats were letting populist outrage trump informed decision-making in the Senate, which is supposed to be insulated from the pressures of public passion.

"I don't believe that Congress should rush to pass yet another piece of hastily crafted legislation in this very toxic atmosphere, at least without understanding the facts and the potential unintended consequences," Kyl said on the Senate floor. "Frankly, I think that's how we got into the current mess."

Senate Democrats said they will try again next week to take up the tax bill and hope to complete it before April 4, when Congress leaves for a two-week spring break. Combining the disparate House and Senate versions of the bill might have to wait until after the recess.

The Senate voted last month to block the bonuses at AIG and other companies as part of the $787 billion stimulus bill, but Democrats then watered down the measure allowing them after Treasury Department officials warned that the move could trigger lawsuits against the government.

Last week, when Treasury Secretary Tim Geithner couldn't talk AIG out of paying the bonuses, Republicans were quick to blame Democrats, pointing out that they were in charge of Congress and the department when the decision was made about bonuses and the stimulus bill. Democrats sought to regain the offensive — and stem the political damage — with promises to tax the bonuses away.

How to impose those taxes without running afoul of the Constitution or the law is a dispute that has Republicans urging a go-slow approach. Doing so, of course, would drag out the Democratic discomfort over administration missteps and provide plenty of time for the GOP and others to question Geithner's performance.

Republican reluctance also appeals largely to a key constituency that traditionally finds regulation anathema: Wall Street.

Robert Willens, a corporate tax lawyer in New York, said the Senate bonus tax bill would still allow bailout beneficiaries to negotiate higher salaries with employees to compensate for lost bonuses. The Senate bill authorizes the Treasury to issue regulations preventing firms from masking bonus payments as salaries, but it does not prevent firms from handing out raises.

"If the vast majority of bonuses become fixed salaries that would harm the institutions because they would have higher fixed costs," Willens said. "What happens if the bank suffers through a poor year? It has all these fixed obligations they have to meet. That's the beauty of the bonuses."

The House bill, which passed 328-93 and split Republicans almost evenly, would impose a 90 percent tax on bonuses paid after Dec. 31, 2008, by companies that have received more than $5 billion in government bailout money. The tax would not affect workers with adjusted gross incomes below $250,000.

The Senate bill is much broader, affecting bonuses paid after Jan. 1, 2009, by firms receiving more than $100 million in government bailout money. The Senate bill would impose a 35 percent excise tax on the companies that pay the bonuses, and a 35 percent excise tax on the employees who receive them. Those taxes would be in addition to the 25 percent now withheld by the IRS on bonuses up to $1 million, and 35 percent withholding on bonuses above that.

Retention bonuses, like the ones paid to AIG employees, would be fully taxable. The first $50,000 of other bonuses, such as performance bonuses, would be exempt. The Senate bill would also cap deferred compensation for top executives at $1 million a year. Deferred compensation above that amount would come with steep penalties.

More bills are on the way.

House Financial Services Committee Chairman Barney Frank, D-Mass., is holding a hearing next week on legislation that would apply to bailout recipients such as Fannie Mae and Freddie Mac and prohibit them from paying "any bonus to any employee, regardless of when any agreement to pay a bonus was entered into."

Republicans say there are enough problems or unknowns about the bonus-limiting bills to merit a closer look. Imposing too high a tax rate, doing it retroactively and targeting a narrow group of people could violate several of the Constitution's prohibitions against government takings without due process, Republicans say.

Even House Ways and Means Committee Chairman Charles Rangel, D-N.Y., warned against using the tax code as a political weapon, but later backed off and supported the bill because, he said, that was the consensus and he saw no other way.

In practical terms, too, Senate Republican leaders do not yet know where members of their caucus stand on the measures, particularly the Senate bonus limits bill co-sponsored by Republican Sen. Charles Grassley of Iowa, GOP officials said Friday.

"I think the outrage is so obvious that we need to pass the legislation to send a clear message to corporate America that when your sucking the taxpayers, you don't do these outrageous things," Grassley said. "When you're under water, you don't suck in more water because then you die."

Then there's the question of the sanctity of contracts.

If the government goes around canceling contracts like those calling for AIG bonuses, people might stop entering into contracts that call for using government bailout money designed to get credit flowing again to help spend the nation out of recession.

Some firms could be scared away from the bailout program, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable.

"Ultimately it will undermine the recovery efforts," Talbott said. "It will have a chilling effect on ability to attract and retain employees," Talbott said.

___

The House bill is HR 1586, the Senate bill is S 651.

Citigroup, Bank of America, JPMorgan Oppose Limits on Bonuses

By Elizabeth Hester
March 20 (Bloomberg) -- Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., recipients of more than $100 billion in U.S. rescue funds, criticized congressional proposals to tax Wall Street bonuses.

Bank of America Chief Executive Officer Kenneth Lewis called the tax “unfair” in a memo to employees today, while Citigroup’s Vikram Pandit said his bank is “working in every appropriate way with policymakers.” JPMorgan’s Jamie Dimon held a conference call with about 200 executives, saying the firm is concerned about retention and is working with lawmakers.

The banks are responding to an outcry in Congress over $165 million in bonuses paid by American International Group Inc. after the insurer received $173 billion in federal bailout funds. The Senate will vote next week on levies on bonuses after the House of Representatives approved a 90 percent tax on bonuses at companies that received bailout funds.

“People are very anxious about this getting too widespread, this notion that no one on Wall Street or in banking deserves any money,” said Seamus McMahon, a consultant with Booz & Co. in New York, who works with financial firms.

Banks, worried that the proposals are distracting employees, are trying to reassure staff and keep them focused on clients. Lewis said the taxes could cause “unintended harm” and delay the recovery of the financial system. Dimon urged workers to call politicians and voice their opinions, a spokesman said.

‘Talented People’

“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,” Pandit said in the memo, whose contents were confirmed by a Citigroup spokesman.

Citigroup removed the people who caused its financial distress and acted quickly to strengthen the business, Pandit wrote. “You have been invaluable in our collective efforts to put the company on solid footing,” he wrote, saying the legislation would affect people who would find it “difficult, if not impossible,” to repay bonuses.

The House bill would affect employees whose household income is more than $250,000 at companies that received more than $5 billion. JPMorgan took $25 billion as part of the first round of infusions. Citigroup got $45 billion and agreed to allow the government to become its biggest shareholder. Bank of America, including Merrill Lynch, has received $45 billion in cash and a backstop on $118 billion in assets.

Paying Back

Firms that repay enough bailout funds to reduce the government’s investment below $5 billion will be exempt, said Laurence Tribe, a constitutional law professor at Harvard Law School.

“I am very concerned about our ability to retain some of our most valuable associates,” Lewis wrote in his memo to employees obtained by Bloomberg. “The very best performers on our team will always have offers from competitors.”

In a separate e-mail to his own employees, Jes Staley, head of JPMorgan’s asset-management unit, said that the bank is “working hard on all of the challenges we are currently facing.”

JPMorgan’s e-mail, whose contents were confirmed by spokeswoman Mary Sedarat, didn’t offer any detail about the New York-based firm’s position on pending legislation.

“While it is necessary and appropriate to keep my comments brief, given the evolving issues, please know that the Operating Committee and Government Relations are working hard on all of the challenges we are currently facing,” the e-mail from Staley said. “Thank you sincerely for staying focused on our clients and our business.”

Last Updated: March 20, 2009 19:25 EDT