03/18/2010 05:12 am ET Updated May 25, 2011

Treasury, NY Fed Backed AIG In Feud With Pay Czar: New York Times Magazine

During the height of the tense negotiations over executive compensation led by pay czar Kenneth Feinberg in recent months, Wall Street had an unexpected ally: the Treasury Department and the New York Federal Reserve, according to Steven Brill's new cover story in the upcoming New York Times Magazine.

After top executives at AIG refused to give back their controversial "retention payments" (read: bonuses) and insisted on all-cash pay packages, Feinberg dug in, insisting that they needed to share risk with the company's shareholders. Among the execs was CFO David Herzog, who threatened to leave the firm if he didn't get to keep his $1.5 million bonus.

"No one at A.I.G. seemed to be embarrassed to argue that the chief financial officer of Wall Street's Titanic was irreplaceable," writes Brill.

(One tantalizing tidbit that serves as the best example of AIG's tone-deafness, the firm spent $3 million -- most of which ultimately came from taxpayers -- on two compensation consultants and two Wall Street firms to file their compensation proposal to Feinberg. Among the expenditures: paying a consulting firm $500,000 to prepare a 167-page PowerPoint presentation.)

Riding to AIG's rescue were Treasury officials, including assistant secretary for financial stability Herb Allison, who met daily with Feinberg and pressed him to not require pay packages in stock.

And the New York Fed, where Treasury Secretary Tim Geithner previously was president, was even more supportive of AIG and other Wall Street giants, reports the Times. As an example of their close ties, Brill notes that the law firm advising Citigroup and General Motors in the compensation negotiations -- Davis Polk and Wardwell -- also worked for the NY Fed on TARP matters, charging from $305 to $1,055 per hour.

As reported by HuffPost earlier this month, AIG employees still haven't paid back in full the $45 million in bonuses they promised to return last spring in the wake of public outrage.

Yesterday, the Wall Street Journal reported that AIG's outgoing counsel would be paid several million dollars in severance after she resigned over Feinberg's mandated curbs on her compensation.

Click here to read Feinberg's executive compensation determinations.