WASHINGTON — The chief of AIG defended his decision to dole out $165 million in bonuses to top employees in the division that helped cause the insurance giant's collapse, telling angry members of Congress Wednesday that reneging on the bonuses would have jeopardized the company's recovery and its ability to repay taxpayers.
Alternately contrite and forceful, but always conciliatory, Edward M. Liddy said he understood the outrage over the bonuses at a company propped up by $200 billion from the federal government, particularly at a time when millions are out of work.
But he said that he and other managers — after conferring with officials at the U.S. Federal Reserve Bank, AIG's primary lienholder — decided that failing to pay the retention bonuses might cause an exodus of people who are key to closing down AIG's stricken financial products division, known as AIG FP.
"I am trying desperately to prevent an uncontrolled collapse of that business," Liddy told a House Financial Services oversight subcommittee. "This is the only way to pay taxpayers back quickly … and the only way to avoid (more damage) to the U.S. economy."
He added that he knows "it does not sit well with the American taxpayers" and that on Wednesday morning he asked employees to return at least half the money. A few have, he said.
Members of Congress were hardly mollified. House Financial Services Chairman Barney Frank, D-Mass., demanded that Liddy provide the names of everyone who got a bonus. When Liddy cited concerns for the employees' safety — he read out loud a threat to kill AIG executives and their families with piano wire — Frank pledged to issue a subpoena for them.
Frank also said Congress may sue on behalf of taxpayers, who effectively own 80 percent of the company, to recover the $165 million paid out so far. He and others told Liddy that the bonuses may make it politically impossible for Congress to provide more bailout money for AIG or any other struggling company.
AIG has been public enemy No. 1 since lawmakers learned the company would distribute scores of bonuses, including 73 of at least $1 million.
Wednesday's hearing was scheduled for weeks, part of Congress' regular checkup on AIG's path to solvency, but outrage over the bonuses dominated a full day of testimony.
Liddy did not make for an easy target. The retired former chief executive of Allstate took over AIG in September, and he is doing the job for $1 per year. Liddy, 63, lacked any hint of the indignation that can turn a hearing into a feeding frenzy.
For nearly five hours under oath, he was upbeat about AIG's prospects for paying the government back. He made clear he had told the Federal Reserve about the bonuses, although Treasury Secretary Timothy Geithner learned about them only a couple of weeks ago.
He had good news, too, telling the panel that the financial products division, which nearly killed AIG by investing in mortgage-backed securities and other risky assets, had whittled its holdings from $2.7 trillion to $1.6 trillion.
Had he reneged on the bonuses, which were agreed upon more than a year ago, he said, some of those employees would likely have left. He needed their expertise to continue "winding down" the company's exposure to those toxic assets.
"I know $165 million is a very large number," he said. "In the context of $1.6 trillion … we thought that was a fair trade."
But lawmakers were skeptical of the AIG employees' value on the open market.
"I would think a big bonus for the people who put us in this position is they're not in jail for one, and that they still have jobs," said Rep. Bill Posey, a Melbourne-area Republican.
Lawmakers also were troubled that 11 of the 73 who got $1 million or more have already left. Liddy explained their jobs were cut once they finished their duties resolving the financial products holdings. The Washington Post reports that much of the work of defusing those deals was largely concluded by December,
AIG has set aside $450 million for retention bonuses for employees in that division, and about half of it is scheduled to be awarded in March 2010. But Liddy told lawmakers he doubts much of it will be distributed.
"I think the bulk of the people at AIG FP will return most of that (bonus) money, and it will come with their resignation," he told the panel. "We may not like the result of that, sir. I am worried about it."