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AIG CEO Takes on Government Over Pay

Source: WSJ

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Posted on 28 Dec 2009

At a reception shortly after he became chief executive officer of American International Group Inc. (AIG), Robert Benmosche told a group of AIG executives that a part of his anatomy was bigger than the government's.

His five-month tenure at the insurer is putting his swagger to the test.

Mr. Benmosche, more than any other leader of a bailed-out American company, has styled himself as a bulwark against government intrusion into the corner office. Although he sees his main mission as repaying roughly $87 billion in taxpayer money pumped into AIG, he doesn't want the government to tell him how to do his job.

The 65-year-old insurance-industry veteran has criticized regulators, threatened to quit over government pay constraints and used profanity in company meetings. "With me, what you see is what you get," Mr. Benmosche says he has told government officials, AIG board members and employees.

An examination of Mr. Benmosche's conflicts with his federal overseers reveals how the most explosive aspect of the government's intervention in the private sector -- its attempt to slash pay at the financial firms it bailed out -- is playing out inside one of the world's largest insurers.

AIG became a lightning rod for the issue well before Mr. Benmosche arrived. Federal officials rescued AIG in September 2008 to prevent what they feared would be a systemic meltdown. The mess was largely the doing of AIG's financial-products unit, which took huge risks in pursuit of big profits. Yet after the bailout, executives in that unit collected large payments to remain at AIG to clean up the wreckage. Moreover, some of the banks whose mortgage bets with AIG were paid off by the bailout are now expected to pay big bonuses of their own.

Amid public outrage, the Obama administration appointed a federal pay czar to oversee compensation at the companies that got the biggest bailouts. Other aid recipients, from Goldman Sachs Group Inc. to Bank of America Corp., scrambled to pay back bailout money, freeing them from pay constraints.

The government has spent about $121 billion thus far on the AIG rescue, and the company, now 80% government-owned, won't be paying back what it owes anytime soon. That has left Mr. Benmosche no option but to contend with pay czar Kenneth Feinberg.

Mr. Benmosche, who was born in Brooklyn, stands 6-feet, 4-inches tall and speaks with a gruff voice. He has championed the pay issue as core to his ability to lead his employees, arguing that federal dictates undercut his ability to boost morale and keep AIG competitive. "If we don't have a competitive pay structure going forward, we won't be successful," he says.

In addition to securing himself the largest pay deal of any CEO whose company is under the jurisdiction of the pay czar, he has successfully pushed back against some pay curbs on top employees.

"I didn't join this company to fail," he said in a recent interview with The Wall Street Journal. "While I may have created a perception that I have an issue with the government, I feel we have all partnered extremely well so far."

While AIG still has a long way to go, its insurance businesses are showing signs of stabilizing, and after last year's $99.3 billion loss, the company notched a profit in this year's second and third quarters.

For its first 11 months under government control, AIG was run by Edward Liddy, a former CEO of Allstate Corp. who agreed to work for a token $1 salary. Mr. Liddy sorted out the thorny issues of the bailout without visibly clashing with the government.

This past spring, with AIG appearing likely to survive, federal officials decided the company needed a new CEO to mend its reputation and strengthen its businesses, including those slated for sale, people familiar with the matter say.

In June, AIG directors approached Mr. Benmosche, who had retired three years earlier from the top job at MetLife Inc. Initially he was reluctant, he says, but he eventually looked at the invitation, in part, as a chance to help the insurance industry and stand up for AIG employees being vilified by lawmakers. From the outset, he spoke bluntly about what he thought were government missteps.

"Look, if you want me to come in here and just blow up the company, which is what you're doing, I'm not taking the job," Mr. Benmosche recalls telling government officials in New York and Washington when he was being screened.

Mr. Benmosche told government officials that he thought plans to quickly sell off assets to repay U.S. money were misguided. If you sell from weakness, you won't get good prices, he told them.

In late summer, before accepting the job, he met with Mr. Feinberg, a former prosecutor with a reputation as a tough negotiator with a keen political instinct. Mr. Benmosche sought assurances that he'd have the flexibility to pay AIG employees competitive salaries. Mr. Feinberg assured him he'd be able to.

Mr. Benmosche made it clear he was unwilling to work for a token salary. In August, Mr. Feinberg approved a pay package totaling $10.5 million a year, including $3 million in cash salary.

In wooing Mr. Benmosche, three board members had promised him that when he used AIG's corporate jet for business travel, he could make personal detours, so long as he reimbursed the company, people familiar with the matter say. But AIG couldn't get Treasury's nod to alter a company policy that prohibited personal use of corporate aircraft, these people say.

Commercial flight schedules later caused Mr. Benmosche to miss the first religious service that his daughter, a student rabbi, officiated in Florida. "It's really unfortunate that this happened," he told board members in frustration. "I retired to have my family life, and [use of the jet] was a deal we agreed on."

On his first day on the job, Mr. Benmosche met with senior managers at AIG's lower Manhattan headquarters. He exhorted them to come together to solve the company's problems, and said he didn't want to hear "whining and a lot of crying" about AIG's woes.

He used the F-word liberally, prompting some executives to quietly tally up the number of times he used it, according to a person familiar with the situation. "I was aggressive in my language, but I was trying to set a tone that life will be different and some things are not negotiable," Mr. Benmosche says.

In the ensuing weeks, Mr. Benmosche traveled around the nation meeting hundreds of AIG employees. In August, at a reception prior to a dinner with 20 or so executives at an AIG life-insurance unit in Houston, Mr. Benmosche said "my b -- are bigger than the government's," apparently to make the point that he wasn't easily intimidated, say two people familiar with the matter.

Mr. Benmosche says he doesn't recall saying such a thing. "If I said it, I would apologize, as it was not appropriate," he says, adding that sometimes "you have to be a little bit provocative if you're going to get people to believe in you and know you're not afraid."

In late August, Mr. Benmosche made a previously scheduled trip to his vacation home and vineyard in Croatia. He showed off the sprawling property to several journalists, complaining at the same time about the demonization of AIG employees on Capitol Hill.

Around that time, some of the comments he made at employee meetings trickled out. Bloomberg News reported that he had said regulators were to blame for AIG's problems and that New York Attorney General Andrew Cuomo, who had demanded the names of AIG employees who received retention bonuses, should not be in office.

James Millstein, the Treasury's point person on the AIG bailout, worried that the comments would undermine the company by reigniting populist anger. He called Mr. Benmosche in Croatia. "Bob, what are you doing?" Mr. Millstein asked.

"I got a bit into it and said a bunch of stupid things," Mr. Benmosche replied, saying he didn't realize the comments would become public. AIG issued a statement saying Mr. Benmosche regretted his remarks about Mr. Cuomo, who didn't end up releasing the names.

When he got back to the U.S., Mr. Benmosche was summoned to the Treasury. He arrived with AIG Chairman Harvey Golub, meeting department officials in the Treasury's diplomatic reception room. "Welcome back to America," said Neal Wolin, Treasury's deputy secretary.

Mr. Benmosche began talking about Croatia's history, but the Treasury official cut him off. "I think we've all heard enough about Croatia," Mr. Wolin said. He told Mr. Benmosche he needed to stay focused on AIG, which was big and complicated, and not to waste time making inflammatory statements.

Mr. Benmosche says he agreed, but told Mr. Wolin he needed to let employees know he would defend them. Mr. Wolin told him not to do so by criticizing the government.

In September, senior AIG executives continued negotiations with Mr. Feinberg over 2009 compensation packages for AIG's dozen highest-paid employees, after Mr. Benmosche. Several were due millions of dollars in cash that AIG had agreed to pay if they stayed. Mr. Feinberg wanted the company to shift a portion of those payouts into stock or other long-term instruments.

Mr. Benmosche resisted, fearing some key executives would leave. He says he thought it was important to pay people as promised.

Top officials at Treasury and the New York Fed urged Mr. Feinberg not to force the issue. "You've got to be careful," Sarah Dahlgren, the New York Fed's point person for AIG, told Mr. Feinberg.

In late October, Mr. Feinberg decided to slash total pay to the dozen executives by 58% from 2008 levels, and to reduce the cash portion by 91%. He made the deep cuts to compensate for cash retention payments that some executives refused to renegotiate, government officials say.

"I was surprised at the dramatic cuts," recalls Mr. Benmosche. He and his board pushed back. Last month, they met Mr. Feinberg at the insurer's headquarters. Some board members said the pay cuts would hamstring the company.

Mr. Feinberg told the board that AIG would suffer if he signed off on exorbitant pay packages. "You're looking to me to protect you," Mr. Feinberg said. "If I just give you whatever you want...they'll kill you up there," he said, referring to Capitol Hill, where anger over AIG pay had persisted.

Afterwards, Mr. Benmosche expressed his frustration to fellow AIG board members. "If we're going to restrict pay to the point where it's no longer acceptable to some of our key people, then I can't see how we're going to make it," Mr. Benmosche recalls telling the board. "You might want to start thinking about my succession, as I may go back to retirement in the spring."

After The Wall Street Journal reported Mr. Benmosche's resignation threat, he told employees in a companywide memo he was "totally committed" to leading the company and would continue to fight on their behalf.

He took charge of the pay negotiations from AIG's general counsel, Anastasia Kelly, government officials say. Mr. Benmosche's suggestions were creative and flexible, says one of the officials, and "negotiations took a 180-degree turn for the better." Ms. Kelly declined to comment.

On Dec. 1, five senior AIG executives informed the company they were prepared to resign and collect severance benefits if their pay was cut significantly. The five included Ms. Kelly and William Dooley, who oversees the group that contains AIG's ill-fated financial-products division.

Mr. Benmosche told Mr. Feinberg he would try to resolve the problem. Shortly thereafter, everyone but Ms. Kelly rescinded their notices.

Early this month, Mr. Feinberg announced 2009 pay decisions for another 75 top employees. He limited annual cash salaries to $500,000 for most individuals and said cash should make up no more than 45% of total pay.

But this time, he made a concession -- he let AIG make substantial cash retention payments to employees and didn't impose much tougher cash-salary curbs on those receiving them. In a letter to Mr. Benmosche, he acknowledged that AIG faced "unique financial circumstances" and needed to keep certain individuals to improve its chances for repaying taxpayers.

Mr. Benmosche is now gearing up for the next pay hurdle. In February, Mr. Feinberg is expected to determine 2010 pay for top executives. Mr. Benmosche says he needs to figure out how to persuade key executives to stay after they collect the last of their retention payments in the spring.

He is aware that his record at AIG ultimately will be judged not by his battles over pay but by whether AIG succeeds in paying back taxpayers. Over the long run, he says, "the government can't be propping up sick businesses."

"We need to get back on our own," he says, "and if we can't make it, shame on us."


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