Washington struggles to contain AIG firestorm

March 18, 2009 10:31:55 AM

• A⁺ 
• A^-
• |
• 
• |
• 
• |
• 

New revelations about staggering bonuses awarded to employees who brought giant insurer AIG to its knees fueled a political firestorm as Washington struggled to contain the fallout.

The controversy engulfing bailed-out American International Group threatened to turn nasty amid reports of death threats against AIG workers, as US networks and newspapers were inundated with expressions of rage from the public.

Lawmakers said they were looking at punitive tax measures to reclaim the bonuses paid largely to the same London-based financial products traders who brought ruin to AIG and helped to ignite the global financial crisis.

In the latest disclosures of what has become a critical test for President Barack Obama, New York Attorney General Andrew Cuomo said AIG paid out more than 160 million dollars in bonuses to staff at its financial products unit.

Cuomo, who slapped subpoenas on AIG Monday as part of a probe into Wall Street excess, said 73 AIG employees each received bonuses of one million dollars or more.

The top 10 recipients were paid a total of 42 million dollars, with one executive getting 6.4 million alone. And 11 executives quit AIG despite being paid "retention" bonuses of at least a million dollars each to stay.

"These payments were all made to individuals ... whose performance led to crushing losses and the near failure of AIG," Cuomo wrote in a letter to Congress.

"Something is deeply wrong with this outcome."

News of the departure of the 11 employees from the insurance giant made a mockery of government-appointed AIG boss Edward Liddy's argument that the bonuses were necessary to retain "the best and brightest talent."

"Given the trillion-dollar portfolio at AIG Financial Products, retaining key traders and risk managers is critical to our goal of repayment," he wrote in a letter Saturday to Treasury Secretary Timothy Geithner.

With Geithner accused of bungling the controversy, White House spokesman Robert Gibbs said Obama had "complete confidence" in the Treasury chief and said "everybody is offended by every aspect" of the bonuses.

Despite Obama's vow Monday to "pursue every single legal avenue to block these bonuses," the administration has struggled to explain how it can do that without tearing up iron-clad contracts awarded last April to the AIG staff.

Republicans turned up the political heat on Obama, who must tread a fine line between riding the public fury against Wall Street without eroding congressional support for forthcoming measures to prop up tottering banks.

John Boehner, the minority leader in the House of Representatives, noted that Gibbs had two weeks ago expressed confidence that taxpayer money given to AIG was being well spent after its brush with death last September.

"I think this is outrageous, and I think the American people are rightly outraged that their tax money is going to pay bonuses to the very people that got this company in trouble," he said.

Gibbs has said that Geithner is looking at recouping the bonus money out of his latest 30-billion-dollar infusion for AIG, which has taken the insurer's total bailout to 180 billion.

Barney Frank, the powerful Democratic chairman of the House Financial Services Committee, noted that the US taxpayer now controls 80 percent of AIG's equity.

"I think the time has come to exercise our ownership rights," he said, calling on the Obama administration to exercise much tougher control over AIG.

Charles Grassley, the top Republican on the Senate Finance Committee, demanded that top AIG executives show "contrition" but said his suggestion Monday that they "resign or go commit suicide" was just political talk.

Hired guards have been posted outside the offices of AIG Financial Products in suburban Connecticut and inside, employees have been flooded with emailed death threats, the Washington Post reported.

As Geithner readies a plan to clean out US banks' bad debts, a new poll Tuesday by CNN and Opinion Research Corp. said that 41 percent of the public believes the US government should pull the plug on distressed lenders.

A total of 39 percent backed a temporary nationalization, and just 18 percent supported the idea of the government extending more bailout money without taking over the banks.

* Get the latest weather on your phone. Txt VLWH to 333 now