Challenges Remain For AIG, Employees

The public furor over $165 million in retention payments at American International Group has faded in recent weeks. But in its wake, other problems have arisen that conceivably could cost the company -- and U.S. taxpayers -- more than the payments themselves.

Employees at AIG's Financial Products division -- the unit whose faulty derivatives contracts nearly wrecked the giant insurer -- have agreed to return more than $50 million, according to company and government officials. But before AIG can recover the money, it must navigate a maze of tax issues and legal uncertainties, made more complicated because the payments were disbursed to employees across the globe.

"The political headline is over and done," said Gerry Pasciucco, the current chief operating officer at Financial Products. But "there's a whole host of issues that have to be parsed through."

Financial Products, based in Connecticut but with offices in London, Paris, Tokyo and Hong Kong, faces a host of troublesome scenarios. One example: It could end up trying to reclaim money from an Italian who works in London for an American company.

Several tax experts agreed that the endeavor is complicated by variations in international laws and the fact that AIG already made the payments. But as long as employees stand by their pledge to return the money, experts said, it shouldn't pose major hurdles.

"Once the money is out the door, it's a lot harder to get back in," said Martin Lobel, a Washington tax lawyer. But "assuming they haven't spent it, there's absolutely no reason they couldn't send the money back."

Company officials acknowledge that the money is retrievable, particularly the portions being returned voluntarily, but they say the process will take time.

Meanwhile, Financial Products employees say that the episode has plunged the firm into uncertainty. They say the bad publicity has further wounded the firm in the eyes of its trading partners. In addition, about 20 people have resigned in recent weeks, most of them senior managers in the United States, London and Paris. Others, beset by frustration, have been sending out résumés.

The potential exodus, employees say, threatens to unravel the firm's $1.6 trillion of outstanding trades.

"The thing was going fine. We were winding down fine," said one Financial Products executive, who spoke on the condition of anonymity. "Since two weeks ago, we're basically back to square zero. What we're doing right now is triage. The ability to focus on getting deals done is virtually impossible."

Even AIG Chairman Edward M. Liddy, in testimony last month to Congress, warned of the potential consequences if the deals at Financial Products were not handled delicately. The firm still could "cause irreparable damage," he said.

But it's unclear just how much risk remains.