The American people were justifiably outraged when they learned earlier this year that American International Group (AIG) would pay $165 million in bonuses to executives at AIG's Financial Products Division (AIGFP), the very division that brought the company to its knees. The news came just months after taxpayer dollars funded an $85 billion bailout of AIG last September, followed by more money in October, more again in November and still more in March of this year. In total, the federal government committed $180 billion to save the insurance giant.
Not long after the last transfer of $85 million in TARP funds to this company, Federal Reserve officials learned that AIG planned to distribute a total of $1.75 billion in bonuses and other extraordinary compensation throughout the company.
Since that time, the American people have been eager to understand how the government failed to prevent these bonus payments from going out the door -- payments that were paid out with their taxpayer dollars. The public also wants to know what their government is doing to prevent an episode like this from happening in the future.
Recently, I held a House Oversight and Government Reform Committee hearing to better understand why there was not diligent oversight of pay practices at AIG after the company received a multi-billion dollar government funded bailout. Our sole witness for the hearing was the government's TARP watchdog, Neil Barofsky, the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). The SIGTARP completed an audit this month that examined compensation practices at companies that received bailout money, including AIG, and his testimony provided us with an explanation of the findings of his report.
We first learned from the SIGTARP that AIG was not always a company that awarded its executives lavish bonuses. The SIGTARP's audit found that AIG's compensation used to be weighted toward long-term incentives that were payable only at retirement. In other words, they used the classic "golden handcuffs." But in 2007, when losses began to mount, AIG's new management decided to "update" their compensation plans. The golden handcuffs were replaced by golden envelopes. The era of instant gratification had arrived at AIG. In essence, long-term incentives were rejected in favor of risky, short-term gains.
We also learned from Mr. Barofsky's report that the Treasury Department, under former Treasury Secretary Henry Paulson, abdicated its responsibility to oversee the executive compensation plans at AIG. In fact, Treasury made no independent effort to evaluate the breadth of AIG's compensation obligations before funneling taxpayer dollars to the company. Not until March 19, 2009, when Secretary Geithner announced a plan to deal with future payments of executive compensation at AIG, did Treasury finally begin to oversee the company's compensation practices. Therefore, much of the public outcry this spring could have been avoided had Treasury evaluated the compensation packages at AIG from the moment former Secretary Paulson began allocating TARP funds.
Widespread outrage at this situation among taxpayers and policymakers has resulted in a number of actions designed by the Obama administration to rein in executive compensation, particularly at firms receiving TARP funds. On June 10, 2009, the Treasury Department issued its Interim Final Rule on TARP Standards for Compensation and Corporate Governance. The most important part of the rule was the creation of the Office of the Special Master for TARP Executive Compensation. Treasury appointed Kenneth Feinberg as Special Master, who is serving pro bono.
Mr. Feinberg already has his hands full. According to the SIGTARP, AIG executives still believe that $200 million dollars in bonuses -- or so-called retention payments -- should be paid to them without regard to the company's performance and without repaying the government in full. News reports indicate that Mr. Feinberg is having trouble convincing AIG to reduce those payments. This does not surprise me.
I look forward to hearing directly from Mr. Feinberg Wednesday, when he will testify before our Committee about his review of executive compensation at TARP recipient companies, including his decision last week to slash compensation for the top 25 executives at the seven largest bailout companies (AIG, Bank of America, Citigroup, Chrysler, Chrysler Financial, General Motors and GMAC) that have not repaid the taxpayers.