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AIG Bonuses Were a Treasury 'Failure,' Barofsky Says

Source: WSJ

Posted on 15 Oct 2009

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Neil Barofsky, the special inspector general for the government's financial bailout said Wednesday that the $168 million in retention payments to American International Group Inc. (AIG) represented a "failure" that occurred when the Treasury Department "outsourced its oversight" to other agencies.

Mr. Barofsky said while legally binding last year, AIG compensation contracts may be renegotiated before this year's payments, scheduled for March 2010.

AIG has argued that it had no choice but to pay the bonuses, regardless of employee performance. Mr. Barofsky said while his audit concluded the contracts were binding, both AIG and Congress lost opportunities to demand renegotiation of the contracts, particularly when the company received additional bailout funds from the government.

"Just because it was a legally binding contract didn't mean there weren't other alternatives," Mr. Barofsky said. Currently the government is pursuing other options before AIG's next round of scheduled payments in March 2010, he said.

In his testimony before the House Committee on Oversight and Government Reform, Mr. Barofsky highlighted the Treasury's inadequate oversight of AIG's compensation plans, whose complexity bogs down even AIG's human resources officers, he said.

"This was a failure of communications, a failure of management," Mr. Barofsky said. He highlighted the fact that the Treasury didn't find out from better-informed officials at the Federal Reserve Bank of New York about the $168 million of retention payments for employees in the insurance company's troubled financial services division until two weeks before they were issued last March. And even when Treasury officials found out about the imminent payments, they didn't alert Treasury Secretary Timothy Geithner for an additional 10 days, he said.

Committee Chairman Edolphus Towns (D., N.Y.), asked Mr. Barofsky if he would characterize the lack of cooperation as a break-down in communications between the Treasury and the New York Federal Reserve.

"I think that would be kind, to have it as a breakdown," Mr. Barofsky said. "Communications were virtually nonexistent."

As guardians of the taxpayer-funded bailout, the Treasury had specific responsibilities to oversee executive compensation that the New York Fed did not, Mr. Barofsky said. To the New York Fed, the $168 million in retention payments was not significant compared to the size of the government's $180 billion bailout of the insurance company and did not identify it as a politically explosive issue.

"They didn't think it was that big a deal -- $168 million was a drop in the bucket," Mr. Barofsky said. "Their concern was paying back the debt. The Federal Reserve was looking at this as a creditor."

Mr. Barofsky agreed with lawmakers' comments that "retention payments" paid to AIG administrative employees, including to a file administrator and kitchen assistant, weren't necessary to keep irreplaceable employees from resigning.

"Somebody who made the decision to give these bonuses made the decision to make everyone happy and not to act in the interest of American taxpayers," said ranking member Rep. Darrell Issa (R-CA).

Mr. Barofsky said in any future government bailouts of this magnitude, the Treasury Department should either take on the primary oversight role or establish specific procedures to maintain communications.

There needs to be policies in place to ensure a "comprehensive and not ad-hoc review of executive compensation and other politically sensitive issues," Mr. Barofsky said. He also said he planned to work with "pay czar" Kenneth Feinberg to review compensation packages for the highest-paid executives at seven companies that have received special government assistance.

"That's clearly within our jurisdiction," Mr. Barofsky said.