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WSJ: AIG's Financial Unit On Track to Wind Down by Year-End, May Cost Taxpayers More


Posted on 13 Apr 2009

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Gerry Pasciucco, the head of American International Group Inc.'s (AIG) Financial Products said that the unit is on track to wind down by year end, but the controversy over bonuses that led to the loss of some key people may have made the process more costly for taxpayers.

Mr. Pasciucco, in his first extensive public interview since the bonus dust-up last month, said 20 of the unit's 370 employees quit amid the controversy, in which taxpayers and members of Congress decried retention payments to employees at the unit that helped topple the big insurer.

While the drama over the $450 million bonus program, which reached a fevered pitch last month in Washington during testimony of AIG Chief Executive Edward Liddy, has faded, the financial-products staff still needs "certainty" about compensation, Mr. Pasciucco says, but the situation "seems to have stabilized."

AIG Financial Products is the unit largely responsible for the parent company's collapse. It sold billions of dollars of guarantees on complicated securities tied to mortgages, and those guarantees pushed the company into the arms of the government. AIG told the Treasury in March that the unit's overall portfolio stood at $1.6 trillion and represented "significant risk."

"Failure to pay the required retention payments, therefore, could have very significant business ramifications" as AIG needed the employees to complete the job, the company said. AIG paid the bonuses, but Mr. Liddy asked some employees to give at least some of the money back voluntarily.

Mr. Pasciucco says the controversy "hurt morale" and "stunned people such that our wind-down has slowed down." He added, "Taxpayers probably have been damaged."

In addition to losing employees, he says the unit's trading partners were concerned about being drawn into the controversy and the unit's work was set back by weeks.

But despite the fears, Mr. Pasciucco says, the unit remains on schedule to have the "vast majority" of the $1.6 trillion "de-risked" by the end of the year.

AIG agreed to pay the retention bonuses in early 2008, before the bailout, at a time when the problems with the unit's housing-market bets were becoming more serious. The government has now committed as much as $173.3 billion to aid AIG.

Mr. Pasciucco took over the subsidiary after the government rescued the ailing insurer last year and has been overseeing the process of dismantling the unit's remaining business.

That includes tens of thousands of trades, mostly with other large financial institutions, that, among other things, promise to make payouts if, for example, interest rates rise or fall, or commodity prices spike or plunge.

Many of the trades are currently hedged, which is intended to limit losses, but Mr. Pasciucco said maintaining the hedges "is a task," which is one reason to pay bonuses to keep employees who are familiar with the portfolio.

Mr. Pasciucco said that as a result of the bonus controversy, some employees' children were harassed, and some had clubs ask them to resign.

"It doesn't surprise me that some senior people said, 'You know what, I've had enough,' " he said.

New York Attorney General Andrew Cuomo, a vocal critic of the bonuses, in March said employees had agreed to give back about $50 million. AIG declines to update that figure.

Overall, Mr. Pasciucco said, about a third of the resignations were from the financial-products office in London. He said that Jake DeSantis, an executive who announced his resignation in a New York Times op-ed piece amid the controversy, is still on the job short term as the commodity business he works on is resolved. AIG didn't make him available for comment.

Compensation is still an issue, Mr. Pasciucco indicated. AIG was due to pay out roughly $230 million of the bonuses for the current year, but Mr. Liddy told Treasury Secretary Timothy Geithner that he would try to reduce that amount "by at least 30%." He also said some employees would take a 10% pay cut, and the 25 highest-paid, active contract employees would cut their remaining 2009 salary to $1.

In the wake of the controversy, however, Mr. Pasciucco suggested that the unit's employees are wary that their pay could again come under political attack. He said within the coming weeks and months, AIG in concert with the government needs "to give them some certainty about how they're going to be compensated."

Among the employees who resigned were two top executives at Banque AIG, a French subsidiary of the financial-products unit. Before the resignations, AIG had described a scenario to the Treasury Department under which $234 billion in trades could default amid resignations.

A person familiar with the matter said French authorities were confident that AIG would succeed in hiring competent managers to replace the two departing executives at Banque AIG. Commission Bancaire, a French banking regulator, had no comment.


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