What Does AIG's Future Hold?

As AIG's chief faces Congress, some of the thorny problems facing the insurer include its troubled asset sales and the billions paid to counterparties

By Ben Levisohn

American International Group's executive team shouldn't expect a warm welcome when it goes before Congress on Mar. 18. Americans are up in arms about the $165 million in bonuses paid to AIG (AIG) executives, and Congress has noticed. Rather than an information-gathering session, the executives should be ready to face a grilling worthy of Torquemada. "It's going to be a witch hunt," says Dory Wiley, chief executive of boutique investment banking firm Commerce Street Capital.

American taxpayers own 80% of AIG at a cost of $173 billion in loans and guarantees. But the value of that investment is shrinking by the day. "They're holding a deteriorating asset," says Adam Lerrick, a scholar at the American Enterprise Institute and a former investment banker. "They're losing clients, businesses, and good people, and the assets [soon] won't be worth much." There are important questions that should be asked, but probably won't be, about how taxpayers are going to recoup even a small portion of their investment. The focus should be on resolving the issues at AIG, not on righteous anger and revenge. In the current rage, Lerrick says, elected officials would be wise to start thinking like investors.

To do that, they need to dig below the headlines. Start with the bonuses. It seems inconceivable that anyone working for a company that has cost taxpayers billions should get million-dollar payouts. But there are arguments for the pay. For starters, the skills these managers possess are still in demand. UBS (UBS) and Deutsche Bank (DB), among others, have been raiding U.S. financial firms for brokers and other financial professionals. Nor are there many incentives for employees to stay put. AIG Financial Products employees are being paid to clean up the unit and wind it down. When they complete their task, they will be out of a job. "You don't punish the cleanup crew," says Rob Sloan, head of U.S. financial services at Egon Zehnder International.

Asset Sales a Mess

Congress may wonder why it was important to retain everyone who was rewarded with a bonus for staying on the job. After all, some of these same workers undoubtedly helped get AIG into the financial mess. And according to New York Attorney General Andrew Cuomo, 11 of the 73 AIG employees who received retention bonuses of more than $1 million no longer even work at AIG. They also need to ensure that the incentives are designed correctly to balance performance and retention. Lean too far to the retention side, and employees will be rewarded for keeping the unit going as long as possible, rather than liquidating it for the best value. But if any payments are based on past agreements, rather than the new order, anger would be justified. "That would be troubling," says Sloan. AIG Chief Executive Officer Edward Liddy himself has been critical of the bonuses. "I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them," he wrote in a Mar. 14 letter to Treasury Secretary Timothy Geithner.