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.
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Officials Knew of AIG Bonuses Months Before Firestorm

Bernanke has said in congressional testimony that he was not made aware of the issue until around March 10. After his staff informed him about it, he tried to stop the payments but was counseled by Fed attorneys that there may be no legal way to do so.

In Plain Language

As the outcry on Capitol Hill grew louder, Hennessy of the New York Fed sent an e-mail to Stephen Albrecht, a Treasury attorney, on Feb. 28, documents show. The correspondence was intended to set off alarm bells: More than $160 million in bonuses would be paid in March to AIG's Financial Products unit, the e-mail stated plainly.

"This was triage, Treasury triage," said the AIG executive, noting the department had been largely absent from the discussions to that point. "When they finally realized it was a heart attack and not the measles, it was too late."

By that time, senior officials at the New York Fed and AIG were resigned that nothing could be done to stop the bonuses. On March 2, Hennessy received an opinion from an outside legal counsel concluding that AIG could be sued if it failed to make the payments as originally crafted.

That same day, the company posted a $62 billion loss for the fourth quarter of 2008, the largest corporate loss in U.S. history. The government announced its fourth bailout for the firm, raising the total rescue package to more than $180 billion.

After growing convinced they could not restructure the payments, Hennessy, Dahlgren and top AIG officials focused on devising a strategy for presenting the matter to Capitol Hill.

Senior Treasury officials have said they had been aware of the bonuses, but not their specifics, since early February. But the e-mails from Hennessy alerted the department that big trouble was on its way.

Geithner said in interviews that he had been preoccupied with the financial crisis and was taken aback when he was told about the extent of the bonuses. But he said he took responsibility for not knowing about the details of the bonuses earlier.

Geithner called Liddy on March 11, demanding that the company restructure the bonuses. Liddy began drafting a letter that bowed to some of Geithner's concerns. Because the letter was to be released publicly, Treasury officials reviewed drafts and suggested changes.

The letter was released March 14. But it was too late. The bonuses to executives at Financial Products were already heading out the door.

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