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Bernanke Wanted to Block AIG Bonuses, Was Advised Against It

Posted on 24 Mar 2009

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Federal Reserve boss Ben Bernanke says he wanted to take legal action to stop insurer AIG paying millions of dollars of bonuses but was advised against it. He also said that had AIG collapsed, it would have caused a 1930's-style global financial and economic meltdown.

Bernanke was testifying before US Congress along with Treasury Secretary Timothy Geithner on the need to reform the US financial system. Geithner asked for new powers to take control of failing institutions.

Bernanke said it was "highly inappropriate" to pay substantial bonuses to employees at the AIG division that was the primary source of AIG's collapse.

He said lawyers advised against legal action to prevent the payments, on the grounds that state law provided for substantial damages if the lawsuit failed.

"Legal action could have thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees," he said.

AIG's decision to pay bonuses despite being bailed out by the government had sparked widespread outrage in the US.

New York's attorney general Andrew Cuomo said he hoped to recoup $80 million of bonus payments - which amounts to about half of the $165m paid by AIG on 15 March. So far they have recouped about $50 million.