Insurer AIG must pay back bonuses, government says

WASHINGTON -- The government will deduct $165 million in proposed aid to bailed-out American International Group Inc. to recoup the cost of bonuses paid to employees of the giant insurer last week, Treasury Secretary Timothy F. Geithner said Tuesday.

In a letter sent to congressional leaders, Geithner said he persuaded AIG Chief Executive Edward M. Liddy last week to scrap hundreds of millions of dollars in future payments after determining that the bonuses already granted would be "legally difficult to prevent."

Geithner said the company would be required to pay the $165 million from corporate operating funds as part of the final terms for a previously announced $30-billion line of credit from the government. In addition, the credit line will be reduced by the same amount.

The action came amid growing public outrage over the bonus payments made last week to employees who created and sold the risky financial instruments that were largely responsible for bringing the New York conglomerate to its knees and helping to wreak havoc in world financial markets.

"There is ire that almost verges ... on hate," said Sen. Dianne Feinstein, D-Calif.

The employees still would keep their bonuses. Seeking to change that, Congress is stepping in with proposals to rip the funds from them by taxing the extra income so much that they would be left with little or nothing.

At least three bills have been introduced in the House this week seeking to place an excise tax of 95 percent to 100 percent on the $165 million in bonuses paid to about 400 employees of AIG's Financial Products division. Senate Finance Committee Chairman Max Baucus, D-Mont., and Sen. Charles E. Grassley, R-Iowa, were drafting similar legislation slapping large excise taxes on companies and employees when bonuses are paid by any company receiving government bailout funds.

"When a child breaks his curfew, he should get grounded. When someone commits a crime, he should be punished," Senate Majority Leader Harry Reid, D-Nev., said. "And when an employee brings his company and our economy to the brink, he's not rewarded with multimillion-dollar bonuses paid by the taxpayers."

Grassley, the senior Republican on the Senate Finance Committee, asked Treasury Inspector General Eric Thorson to open a probe into the AIG bonus payments and to determine whether top Treasury officials had some role in approving the payments, according to Grassley's office.

The inquiry could turn the heat back on the Obama administration, which has expressed outrage over the payments and wants to block them.

In a letter to Thorson obtained by the Los Angeles Times, Grassley asked whether Treasury officials made any previous efforts to block the bonus payments or demanded that the payments be waived before releasing taxpayer bailout funds.

Thorson also would examine whether there are contracts that compel the payments and, if so, when those legal obligations were created.

Reid joined Feinstein and 11 other Senate Democrats in writing to Liddy demanding that the bonus money be repaid. "Mr. Liddy, I urge you to fix this mess because ... if you don't fix it, we will," said Sen. Charles E. Schumer, D-N.Y., who organized the letter.

Schumer also had a message for the people who received the bonuses: "If you don't return it on your own, we will do it for you."

The outrage was fueled as additional details of the bonuses emerged. The top seven bonus recipients were awarded more than $4 million each, with the largest totaling more than $6.4 million, New York Attorney General Andrew Cuomo said. Twenty-two people received more than $2 million, and 73 received more than $1 million. And although the bonuses were aimed at retaining key employees, at least 11 quit after getting their share.

There was broad agreement in Congress that the issue had to be addressed. Democrats tended to blame corporate greed. Republicans harshly criticized Geithner, although they stopped short of calling for his resignation.

In a contentious briefing dominated by the AIG issue, White House press secretary Robert Gibbs said that President Barack Obama retained confidence in Geithner.

Some lawmakers said they were concerned about the legality of a tax that would wipe out the bonuses in their entirety. Mark Scarberry, a law professor at Pepperdine University, said the legislation would have to be designed carefully to assure it would not be challenged as an illegal taking under the Constitution.

Staff writer Ralph Vartabedian contributed to this report.