AIG Firestorm Raises Alarm For Other Firms
Wednesday, March 18, 2009
The firestorm over bonuses paid by insurance giant American International Group has triggered alarm at other financial firms, threatening federal efforts to draw private investors into economic recovery programs.
It is a critical juncture for the Obama administration. Officials at the Federal Reserve and the Treasury Department are increasingly worried that the controversy could discourage investors from joining a new government effort to revive consumer lending as well as a separate plan that relies on private money to buy toxic assets from banks, sources familiar with the matter said. Treasury officials planned to outline that second program as early as this week.
The attack by lawmakers on AIG pay has provoked renewed complaints from some financial company executives that federal involvement in business decisions is making it difficult for struggling firms to return to profitability. In particular, executives say they need to offer bonuses to keep and motivate their most valuable employees and are already seeing an exodus of talent.
But lawmakers are outraged that many financiers continue to be rewarded despite their role in fueling the current crisis. Some on Capitol Hill say the financial industry should be smaller and its jobs less lucrative.
AIG, which received more than $170 billion in emergency federal aid, has become the chief exhibit for both sides of the debate. Executives say they must pay retention bonuses to keep employees who are unwinding its Financial Products division, which nearly brought down the insurance giant with trading in exotic derivatives.
But a former senior Financial Products executive who spent eight years at the firm disagreed. Because the division is shrinking and no longer seeking new business, many workers have lost their relevance. The only key positions are employees who are working to extricate AIG from $2 trillion worth of outstanding contracts, the executive said.
"The guys who are getting paid all the big money are not really the ones who are important to the company," he said.
The government's rescue of AIG, which began a federal takeover of the firm in September, has been a mixed blessing. The company is being pressed to pay back the federal money in the next few years, forcing executives to try selling company assets for what some say are fire-sale prices. AIG customers have also been bolting the company, increasing doubts about the firm can survive.
AIG, once the world's largest insurer, now is in decline. Some administration officials say they would like new authority from Congress to wind down the company.
Several industry executives, observing the pressure being exerted on AIG and other big banks, say they are worried about joining in government efforts to rescue the financial system in the newly charged political environment.
"Am I afraid of the populist outrage? Yes," said Lynn Tilton, chief executive of Patriarch Capital, a private-equity firm that has weighed making such an investment.
A senior executive at one of the nation's largest banks said he had heard from several hedge funds that they would not partner with the government for fear that lawmakers would impose retroactive conditions on their participation, such as limits on compensation or disclosure requirements.