By David Cho and Binyamin Appelbaum
Washington Post Staff Writers
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.
Other firms want to bide their time to see how early participants in the rescue programs are treated before they decide whether to sign up, said the executive, who spoke on condition of anonymity.
"Why do you think Hong Kong is a better place to do business than Shanghai? Because of the certainty of the contracts," said another executive at one of the nation's largest private-equity firms. "Once the uncertainty factor goes up, the less interested you are in doing business because it becomes a more risky proposition."
The government's effort to revive consumer lending launched last night with a $1.3 billion package of auto loans issued by Nissan's finance arm. Bidding by private investors was heavy, a positive sign for the program.
Morgan Stanley is also feeling heat for some of its bonus payments.
Sen. Robert Menendez (D-N.J.) sent a letter to Treasury Secretary Timothy F. Geithner yesterday charging that a compensation plan announced by Morgan Stanley in January raised the same concerns as in the case of AIG and deserved the same response.
"I urge you to use every legal means available to stop these retention awards at Morgan Stanley, so long as those firms are in receipt of taxpayer dollars," Menendez wrote.
Morgan Stanley fashioned a joint venture with Citigroup's Smith Barney unit and offered up to $3 billion to about 6,500 high-performing brokers if they stayed with the company. Anyone who leaves the firm within nine years must repay a portion of the money. Morgan Stanley said it will not use bailout funds to make the payments.
"The retention program is not a bonus," Morgan Stanley said in a statement yesterday. "The program is necessary because our financial advisers are being poached by competitors."
New York Attorney General Andrew M. Cuomo yesterday questioned the value of bonus payments in retaining employees at AIG. He noted that of 73 people who received bonuses of $1 million or more, 11 no longer work at the company.
The top bonus recipient at Financial Products got more than $6.4 million, while the top seven earners received payouts of more than $4 million each, he added. Cuomo had also requested the names of the recipients and expressed indignation that AIG had not disclosed them.
AIG declined to comment. But a person familiar with the situation said the company did not want to release the names because of privacy issues and also out of concern for the safety of the individuals. The company has been flooded with irate phone calls and death threats in the past few days.
Officials added yesterday that their ability to restrict compensation at AIG was limited by holes in existing financial regulations.
There is a well-established process for liquidating troubled banks through the Federal Deposit Insurance Corp. -- a process that parallels bankruptcy and provides the necessary power to restructure compensation -- but there is no such process for dealing with the collapse of other kinds of financial firms, such as AIG.
As a result, the government was forced to prop up the company by injecting huge amounts of money, while continuing to honor AIG's commitments and contracts.
"There is in existing law no remedy with which to unwind and resolve the problems that exist, in order to protect taxpayers," Obama's press secretary Robert Gibbs said yesterday. He said the president wants Congress to write such a law as part of a broader reform of financial regulations.
Staff writers Neil Irwin, Brady Dennis and Tomoeh Murakami Tse in New York contributed to this report.