Million-dollar bonuses might happen all over again at the bailed-out insurance firm AIG.
That was the message congressional lawmakers heard – and didn’t want to hear – on Wednedsday from Neil Barofsky, the special inspector general for the government’s financial rescue program.
AIG has promised some $198 million in bonus pay to its employees next March, Mr. Barofsky said, and the Obama administration's "pay czar" has limited say over the matter.
"So we really haven’t solved the problem yet if we have a pay czar who doesn’t have the authority to oversee the bonuses," said Rep. Blaine Luetkemeyer (R) of Missouri.
When AIG paid out similar bonuses last December and March, it stirred public outrage – including protest bus tours past the homes of some of the firm's employees.
Barofsky said the ongoing bonus quandary was “a mess” involving lapses of management both at AIG and at government agencies.
To the public, and to members of the House Committee on Oversight and Government Reform, which heard Barofsky’s testimony, the basic issue is whether Wall Street-style bonuses are deserved at a firm that is surviving thanks to taxpayer aid, and which helped to send the global economy into a deep recession.
The firm made risky investment contracts, known as credit default swaps, that it couldn’t afford to pay. Now the firm has tapped about $120 billion in government bailout money.
The pay czar for bailed-out firms, Kenneth Feinberg, says the bonuses should be reduced. But the firm says its plans would simply make good on contractual obligations.
The hearing came as The Wall Street Journal reported that overall pay in the financial sector is headed substantially higher this year, even as the fallout from last year’s credit-market collapse has pushed the US unemployment rate to 9.8 percent.
The fireworks at the hearing went beyond AIG itself, putting scrutiny on other individuals and institutions:
Treasury Secretary Tim Geithner. Mr. Geithner, who headed the Federal Reserve Bank of New York when the AIG rescue began, is “ultimately responsible” for regulators’ failure to rein in the AIG bonus payments, Barofsky said, because he led the agencies that provided AIG’s lifelines.
Geithner has said he did not learn until March about some $1.75 billion in bonuses and other compensation promised to AIG employees. But subordinates at the New York Fed learned of the payments in November, Barofsky said. He called it a “a failure of communication and a failure of management” in which Geithner played a role.
Sen. Christopher Dodd (D) of Connecticut. When asked who had inserted language into a February economic stimulus law that prevented officials from redrawing compensation deals struck prior to that time at bailed out firms, Barofsky said he believed Mr. Dodd had introduced the amendment.
The question was raised by Rep. Marcy Kaptur (D) of Ohio, who said she is “in utter disgust” at the cozy ties between Wall Street and Washington. Defenders of the provision say that a populist revolt over Wall Street paychecks could have backfired for the economy – sparking an exodus of talent at financial firms and excacerbating the crisis.
The Federal Reserve. Barofsky said the Fed showed little interest in the AIG bonuses when it extended credit to help the firm survive. He said it appeared that Fed officials saw the millions in bonuses as a “drop in the bucket” compared to the billions of dollars in federal loans at risk. Some lawmakers wondered aloud if this signaled a lack of watchdog teeth in an agency that, under Obama administration proposals, would get even more power as a bank regulator.
Countrywide Financial Corp. House Republicans said during the hearing that they will seek to subpoena evidence on a matter separate from AIG: the degree to which mortgage giant Countrywide peddled influence on Capitol Hill prior to the crisis.
• Material from the Associated Press was used in this report.
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