- The Washington Times - Wednesday, March 18, 2009

CHARLOTTE, N.C. (AP) - In the six months since American International Group Inc. received its first massive cash bailout from the U.S. government, the company has frequently been in the news and a target of criticism because of payments made to its trading partners and employees, and because of expensive company-sponsored employee trips.

Here are some questions and answers about AIG, how it got into financial trouble and why it remains in the news:

Q: Why is there so much controversy building around AIG?

AIG came close to collapsing last September because it had gotten heavily into the business of insuring mortgage-backed securities, the risky investments that are at the root of the hundreds of billions of dollars in losses suffered by banks and other financial institutions around the world.

Since September, the government has given AIG $180 billion, maintaining that without help, AIG would fail, further disrupt already stricken markets and cause more damage to the economy. In return for the aid, the government took a nearly 80 percent stake in AIG.

The government’s move has many lawmakers questioning whether taxpayers should be on the hook for billions of dollars in bailout money. And AIG has come under severe criticism after some of its employees went on expensive company-paid resort trips and because it paid millions of dollars in bonuses to the traders and executives whose risky financial behavior caused the company’s near-collapse.

Those payments contributed to further questions about the government’s rescue of banks in general.

“AIG has managed to put itself at the center of a lot of uncertainty, doubt, fear and anger over the relationship between the continuing bailout of various financial institutions and a very serious recession,” said Donald Light, a senior analyst at Celent, a Boston-based financial research and consulting firm.

Q: Why are companies like Goldman Sachs Group Inc. and hedge funds getting AIG’s bailout money?

When the government seized control of AIG back in September, it agreed to uphold the insurer’s contracts with U.S. and foreign companies; the contracts guaranteed that the companies would reimbursed for their investment losses. The government argued that failing to repay those debts would cause catastrophic losses at big international banks, potentially toppling the global financial system.

For months, government and company officials refused to say who was benefiting from AIG’s billion dollar bailout. They reversed that stand last weekend, and revealed that the insurer has paid more than $90 billion in taxpayer money to keep some of the biggest names in finance from losing money, including Goldman, Citigroup Inc., Merrill Lynch & Co., Switzerland’s UBS AG and French bank Societe General.

The U.S. banks have already received bailout money of their own from the government.

Q: Why is there so much controversy about the bonuses now when AIG disclosed them back in November?

Bonuses given to financial company employees, long a standard part of their compensation and that can run into the millions of dollars per employee, have become an issue since the government began bailing out the firms.

AIG’s plans to pay hundreds of millions of dollars in bonuses were publicized last fall, when Congress started asking questions about the expensive employee trips the company had sponsored. A November regulatory filing by the company details more than $469 million in “retention payments” to keep prized employees.

For months, the Obama administration and members of Congress have known that AIG was getting ready to pay such bonuses to employees in its troubled financial products division, the unit at the root of AIG’s downfall. It wasn’t until some of the money _ $165 million _ was doled out over last weekend that officials in Washington expressed their outrage and vowed to yank the money back.

“Sometimes a hot political issue may be hiding in plain sight,” Light said, adding its anybody’s guess on why things didn’t “explode” back in November.

Q: What has been AIG Chief Executive Edward Liddy’s role with the bonus payments?

Two days after AIG received its first injection from the government, AIG named Liddy, former chairman of Allstate Corp., as chairman and chief executive succeeding Robert Willumstad, who stepped down after three months on the job.

The retention payments _ ranging from $1,000 to nearly $6.5 million _ were not his idea. Liddy himself is not getting a bonus and is only drawing $1 a year in salary. The bonuses were promised in contracts with employees that AIG signed early last year, long before then-Treasury Secretary Henry Paulson asked Liddy to take over the company.

On Wednesday, Liddy testified before Congress that he had asked employees whose bonuses came to more than $100,000 to return some of the money, and that some have volunteered to do so.

Q: How are the AIG bonuses like the ones that Merrill Lynch & Co. gave its workers? Or is that situation different?

Employees of the insurer’s financial products unit received what are called retention bonuses _ payments designed to keep valued employees from quitting. They are paid out no matter whether the employee had a great year or a terrible one.

Merrill Lynch, which was acquired by Bank of America Corp. on Jan. 1, also is undergoing similar federal scrutiny of its bonus plans. In the weeks before it was acquired, and while Bank of America was seeking more federal bailout funds, the investment bank paid out $3.6 billion in bonuses to Merrill employees for various reasons, but it’s unclear if they were for performance and/or retention.

Q: What kind of recourse does the government have if it wants to get any of the money back?

AIG’s retention payments were guaranteed in employee contracts. By breaking them, AIG says it would risk paying millions more in lawsuits brought by the workers.

One way around the contracts would be to prove fraud. A 2002 law adopted after the accounting scandals at Enron and other companies allows publicly traded companies to take back ill-gotten compensation.

Another way, which Liddy is trying, is persuasion.

“With all of this attention, some of (the bonus recipients) may be responsive and want to make right,” Light said.

Q: What other government officials are getting involved?

Earlier this week on Capital Hill, House Democrats were considering proposing new legislation to authorize Attorney General Eric Holder to recover bonuses payments like the ones paid by AIG.

New York Attorney General Andrew Cuomo has also subpoenaed information from AIG to determine whether the payments made over the past weekend constitute fraud under state law because they were promised when the company knew it wouldn’t have the money to cover them.

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