The contracts that AIG executives have cited as justification for bonus payments insured that they would receive the money regardless of massive losses.
Rep. Barney Frank (D-Mass.), who read from the contracts in question at a hearing of a subcommittee of the House Financial Services Committee Wednesday, suggested AIG executives structured the contracts in such a way in anticipation of dramatic losses.
Frank, chairman of the committee, also said that if AIG CEO Edward Liddy did not provide the names of the recipients of the bonuses, he would subpoena them. He suggested the federal government file suit to reclaim the bonuses, arguing that they are illegitimate since the company performed so poorly.
"I looked at the contract that's being invoked as unassailable," said Frank, "and here's what it says:
And section 3.07 says,
The bonus pool for any compensation year, beginning with the 2008 compensation year, will be effected by the incurrence of any realized losses arising from any source subject to the limitations set forth in section 3.07.
Notwithstanding any other provision of the plan for any compensation year beginning with 2008, there shall be a 67.5 million dollar limit per year on the extent to which the pool can be reduced.
Frank went on to read a passage that insured that even if AIG lost tens of billions of dollars, those responsible would still be rewarded. "What it says is," said Frank, "if the losses in the year exceed 225 million dollars, then that loss above 225 million is irrelevant to reducing the bonus pool. Two hundred and twenty-five million turned out to be a rounding error in their losses."
[UPDATE: Read the contracts.]
Frank translated the language. "It means that if in fact they have a net loss for the year, they still get the bonuses. This is the problem. This is the problem with the contracts," he said. "So they give themselves contracts that effectively insulate them from losses."
The structure of the contracts, Frank said, suggests that AIG executives anticipated major losses, yet sought to protect their compensation.
Such contracts could be susceptible to a court challenge brought by the federal government as the owner of the company. "I do believe that it is time for us to assert our ownership rights under this arrangement," he said. "That may be a controversial lawsuit, but it's a better one than trying to interfere under our regulatory authority."