Correction to This Article
Earlier versions of this story, including in the print edition of The Washington Post, misstated the quarter in 2008 when AIG posted the largest loss in U.S. history. The $62 billion loss came in the fourth quarter.

Officials Knew of AIG Bonuses Months Before Firestorm

By David Cho and Brady Dennis
Washington Post Staff Writers
Wednesday, May 13, 2009

As American International Group chief executive Edward M. Liddy returns to Washington to face Congress today, new details are emerging about how long federal officials were aware of the company's recent bonus payments to its executives and of how inflammatory the payments could be.

Documents show that senior officials at the Federal Reserve Bank of New York received details about the bonuses more than five months before the firestorm erupted and were deeply engaged with AIG as well as outside lawyers, auditors and public relations firms about the potential controversy. But the New York Fed did not raise the alarm with the Obama administration until the end of February.

Timothy F. Geithner, who became Treasury secretary early this year, was the head of the New York Fed when it became aware of the bonus details. But his name is not among those of senior New York Fed officials mentioned in the summaries of phone calls, correspondence and other documents obtained by The Washington Post.

Those documents also illuminate who in the government, beyond the New York Fed, knew what about the bonuses at AIG's most troubled unit, and when.

Key members of Congress began investigating the payments as long ago as October and, beginning in January, repeatedly warned the Treasury about the matter.

In early February, Fed officials in New York sent details about the bonus program to their counterparts at the Federal Reserve in Washington, to prepare Chairman Ben S. Bernanke in case he was asked about the payments at a congressional hearing.

By the time the Obama administration was fully engaged in early March, the New York Fed had determined that AIG was legally bound to pay the bonuses to its Financial Products division, the documents show. Top New York Fed officials also huddled with AIG about developing a strategy to mollify angry lawmakers -- but that did little to quell the firestorm that ensued.

The furor over the bonus payments at AIG -- the crippled insurance giant that is benefiting from a government bailout of more than $180 billion -- disappeared from public view as quickly as it erupted in mid-March.

At the height of the controversy, the House passed a resolution that would tax the bonuses at 90 percent and the Senate introduced an even harsher bill, which it abandoned as AIG employees began promising to return the money.

But even after the storm, the fallout remains. As the financial crisis demands their attention, senior Treasury officials have met several times a week since March to review, one by one, the bonuses of even lower-ranking AIG executives, sources familiar with the discussions said. Geithner attended some of the initial meetings.

Ongoing Legal, Tax Issues

AIG is still grappling with the legal and tax issues surrounding the bonuses while trying to stay afloat. And while employees of AIG's Financial Products division have said they intend to repay nearly a third of their $165 million in bonuses in response to the public outcry, it is unclear when or how much will be returned.

After the initial $85 billion federal bailout of AIG in September, the New York Fed, which is accustomed to dealing with banks, struggled to understand a complex global insurance company.

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