As AIG Bonus Fury Grows, Lawmakers Target Pay & Geithner Explains

Posted by: Jane Sasseen on March 17

By Jane Sasseen and Theo Francis

Up and down Pennsylvania Avenue, the fast-burning fury over the $165 million in bonuses paid out at AIG continued to consume much of Washington. The Administration scrambled through much of the day to defend its less than consistent position on whether it has any legal power to block the bonuses, which the company negotiated back in April 2008. Spokesman Robert Gibbs was hammered with questions about why the payments weren’t cancelled when AIG was bailed out last fall—and what role Treasury Secretary Timothy Geithner, then the head of the New York Fed, played in the decision to leave them in place. By day’s end, commentators on CNBC and elsewhere were beginning to question whether the Treasury Secretary would survive the debacle.

Geithner’s response came in a two-plus page letter sent Tuesday night to congressional leaders—and quickly released to the press. In the letter, Geithner sought to explain how the snafu came about and why his hands were tied in trying to prevent it. For starters, he says, he only learned of the AIG bonuses last week, when it was essentially too late to do anything about them. He argues that lawyers at both AIG and the Treasury concluded that it would be difficult or impossible to legally prevent the payments from being made. Moreover, he points out that even the stringent executive-pay rules included in the recent stimulus bill didn’t try to stop bonuses promised before February 2009.

But whatever constraints Treasury officials saw last week, the political firestorm over the payouts has sent Geithner back to the law books. Geithner says he is now working with the Justice Dept. to determine whether any of the bonuses can be recouped. Much of Congress appears to be doing the same. Throughout the day, outraged Congressmen hit the airwaves to compete with one another to propose ways of clawing back the bonuses. Both Sen Chuck Schumer (D-NY) and Rep Barney Frank (D-Mass.)announced they would do everything in their power to get the money back; indeed, one suggestion was more draconian than the next. Sen Chuck Grassley (R-Iowa) at one point even suggested that the bonuses recipients should commit suicide after giving the money back -- comments he later said were not meant to be taken literally.

But if that suggestion wasn't serious, the legislative proposal offered up with Sen. Max Baucus (D-Mont) late in the day clearly was. The pair released a proposal for stiff executive comp restrictions that seemed to go well beyond the rules adopted in the stimulus bill.

The Baucus Grassley proposal, which would apply to companies receiving taxpayer bailout funds, seeks to nip AIG-style bonuses in the bud with punitive excise taxes. Companies handing out retention bonuses or bonuses over $50,000 would have to pay a 35% tax, while the individuals receiving the bonus would also have to fork over 35%. Companies would have to front money for at least some foreign employees, and the senators promised to prevent companies from simply reclassifying pay as salary to shirk the taxes.

Moreover, the proposal would seek to prevent executives from postponing more than $1 million a year in pay under deferred-compensation programs -- a sort of super-size 401(k) for executives -- by slapping a 20% excise tax not just on deferrals over that amount, but on all previous deferrals by the same person.

Companies would be limited to paying "reasonable" returns on deferred compensation as well -- either reflecting actual market returns or tied to "book value and a reasonable fixed rate of return." (Contributions to run-of-the-mill retirement plans, like a 401(k), wouldn't be affected.)

Will that be enough to calm the storm? Not likely, says one sympathetic lobbyist in close touch with the Treasury: "It's a political hot potato." It may well be the case, as National Economic Council head Larry Summers told CNBC this afternoon, that the government can't go around abrogating contracts. Whatever the legal logic, that argument won't make the outrage go away.

The Administration's best hope may be to turn the fury into support for the financial reforms they are about to propose. To that end, Geithner made one last point in his letter to Congress. He turns the controversy into an argument for one of the key items from the administration's financial-regulation wish-list: authority for the executive branch to wind down or dismantle shaky financial giants in extremis, much as the Federal Deposit Insurance Corp. can wind down troubled banks (but not bank holding companies). That expanded authority, he argues, would enable "the government to better deal with situations like this." Though Geithner is undoubtedly hoping he'll never again be in a situation like this.