By David Cho and Michael D. Shear
Washington Post Staff Writers
Thursday, March 19, 2009
Federal Reserve officials knew for months about bonuses at American International Group but failed to tell the Obama administration, according to government and company officials, exposing problems in a relationship that is vital to addressing the financial crisis.
As pressure mounted on AIG employees to return the bonuses, new details emerged yesterday about what the Fed, the Treasury Department and the White House knew regarding the payments and when. AIG executives said the Fed was informed three months ago by the company that it would pay $165 million by March 15 to employees working at its most troubled division. The Treasury and White House said they learned of the payments from Fed officials only days before they were due.
Close coordination between the Fed and the administration is now more important than ever as they near the launch of two signature programs to rescue the financial system, which together could reach $2 trillion and are aimed at reviving consumer lending and purchasing soured assets and loans from ailing banks.
Treasury Secretary Timothy F. Geithner, a central figure in the decision to bail out AIG last fall as president of the Federal Reserve Bank of New York, said in an interview yesterday that he had not been aware of the size of the bonuses and the timing of the payments.
"I was stunned when I learned how bad this was on Tuesday [March 10]," Geithner said. "I shouldn't have been in that position, but it's my responsibility and I accept that."
Two days later, Geithner told the White House. The last-minute disclosure irked some of the president's senior advisers, but they refuse to point fingers now, saying the timing had little impact on the outcome or the president's public statements this week.
"Would I have liked an earlier warning system on this? Yeah," said David Axelrod, a senior White House adviser. "Would it have markedly changed things? Probably not. The legal constraints are the legal constraints."
One source familiar with the discussions said the company had provided details about the bonuses to senior Treasury officials at least a month ago. A Treasury spokesman said last night that was not true.
Democrats and Republicans in Congress are increasingly questioning how Geithner could not have known about the bonuses, given his past role in AIG's bailout, which has totaled more than $170 billion.
"I'm sick and tired of hearing the administration and the Secretary of the Treasury say, 'I just found out about it,' " Rep. Paul E. Kanjorski (D-Pa.) said yesterday.
The dispute over AIG's payouts represents the most pressing controversy confronting the administration as it addresses the financial crisis. Some private firms say the furor has made them wary of joining the federal initiatives to help save the economy. Government officials add that the newly charged political environment will make it difficult to ask Congress for more rescue funds.
When the government rescued AIG in mid-September, no one was more central to the decision than Geithner.
AIG officials met with Geithner and then Treasury Secretary Henry M. Paulson Jr. in New York on Sept. 14 to warn them of the dire threat posed by the derivative business developed by AIG's Financial Products unit. Executives told the two men the firm needed help but had at least a week before it faced collapse, sources said.
Paulson left for Washington. But Geithner stayed up all night with officials at the New York Fed to examine AIG's situation. He discovered not only an enormous number of complicated trades, estimated at $2 trillion, but that AIG had backed retirements funds across the nation. He also realized that a collapse of AIG was imminent, and that the fallout would ripple across the banking system, sources familiar with the episode said.
Geithner, with Paulson and Fed Chairman Ben S. Bernanke, decided to lend the company $80 billion in exchange for an 80 percent ownership equity stake.
About a month later, Geithner redesigned the bailout package for AIG, which raised the total to about $123 billion.
During this period, Geithner's primary concern was keeping the financial system from collapsing, not what firms were paying their employees, a source said. Other staff members at the Fed and Treasury were in charge of the compensation issues and only briefed Geithner, two sources said. Once nominated for the Treasury post in December, Geithner recused himself from affairs related to specific firms.
AIG executives said they disclosed in a quarterly filing late last year to federal regulators that employees at Financial Products would receive retention bonuses but the filings, with the Securities and Exchange Commission, did not detail how much individuals would be paid or the dates of the payments. The company revealed those details in meetings with New York Fed officials in January, AIG chief executive Edward M. Liddy said at a congressional hearing yesterday.
"What we've assumed is that, in our discussions with the Federal Reserve, that they were properly communicating with others," Liddy said. "It appears that we need to improve upon that process."
While declining to answer questions about the AIG bonuses, Fed spokeswoman Michelle Smith said in a statement: "The Fed and Treasury officials have coordinated closely on all aspects of the U.S. government's support for AIG during this extraordinary period."
The Fed officials did not anticipate the political firestorm that would erupt over the bonuses, a senior government official said. "They clearly underestimated the matter," the source said.
AIG executives say the Fed had been intimately involved in reviewing the contracts before the first dime was paid. The payments, which were due by March 15, were ready to be distributed last Tuesday, a senior AIG executive said. But the firm didn't get the go-ahead from government officials to make the payments until late last week.
"We weren't authorized until Thursday night," the AIG executive said. "We were negotiating with the Treasury and the Federal Reserve. Treasury indicated that they needed it cleared by the White House, as well. We hit the go button for the payments on Friday."
Geithner said the Fed did not tell him about the bonuses until March 10. He immediately huddled with his senior staff, examining options, but ultimately concluded that the government could not change contracts for work that had already been done.
He confronted Liddy over the phone March 11, demanding that he renegotiate the bonus contracts. Some minor changes were made, but the bulk of the bonuses were paid. Company and Treasury officials say they will seek changes to bonuses promised for work done this year.
Obama learned of the bonuses March 12, the day before they were paid out, from Axelrod, whom Geithner had briefed on the situation. The president was "aggravated" and "a little bit disbelieving," Axelrod said in an interview yesterday.
For the new administration, the bonuses were a distraction from what senior aides called the main focus: getting the economy working and people back to work. "People are not sitting around their kitchen tables thinking about AIG," Axelrod said. "They are thinking about their own jobs."
Obama's top economic aides -- including Geithner -- sought to identify any recourse. The task was made more difficult Friday, when millions of dollars were disbursed. Their message to the president when the group assembled for their first extended conversation about AIG in the Roosevelt Room on Sunday was not optimistic: They told him they had "done and will do what we legally can," Axelrod said.
But Obama made clear at that meeting that he was unwilling to throw up his hands. He instructed Geithner and the others to seek legal ways that the government might recover the bonuses. And he made plans to tell the public what he thought the next day.
That decision ran counter to the belief among some in his inner circle that the bonus issue while an outrage was a small problem compared with the economic issues confronting his young presidency. "The first and most important job we have is to get this economy moving again," Axelrod said. "As galling as this is, it doesn't go to the main issue."
Over the following days, Obama came out swinging, denouncing the bonuses while expressing "complete confidence" in Geithner. Yesterday, he continued the effort, saying that "I don't want to quell anger. I think people are right to be angry. I'm angry."