AIG's Liddy Asks Employees to Give Back Bonuses

By MICHAEL R. CRITTENDEN and PATRICK YOEST

WASHINGTON -- American International Group Inc., bowing to public outcry and harsh criticism from federal officials, has asked some of its employees to give back at least half of the controversial bonuses handed out in recent days.

AIG Chairman and Chief Executive Edward Liddy, appearing before a U.S. House subcommittee, said the company has asked employees at its financial-products division who received more than $100,000 to "step up" and return at least half the payments.

"We've heard the American people loudly and clearly these past few days," Mr. Liddy said, claiming that some employees have already volunteered to give up their entire bonus. He warned, however, that the request could backfire if the employees who received the retention bonuses decide to resign from the firm. "They will return it, but they will return it with their resignations," Mr. Liddy told the House panel.

Meanwhile, President Barack Obama said he will seek legal authority over the financial system that will give the federal government power to step into contract issues. (See related article.)

Rep. Paul Kanjorski, who chairs the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises that held Wednesday's hearing, said AIG management ignored warnings from him and other lawmakers not to make the payments because of the potential public outcry.

"Something is seriously out of whack, and AIG needs to fix it now," Rep. Kanjorski (D., Penn.) said.

Mr. Liddy, acknowledging the criticism in his testimony, said that the public's "patience is especially thin" and that the company is working to repay taxpayers "to the maximum extent possible."

Mr. Liddy said that the "cold realities of competition" for customers and employees played a role in the firm's decision to make the payments, which have spurred a public backlash given the roughly $170 billion the government has used to prop up the troubled insurer.

"Because of this, and because of certain legal obligations, AIG has recently made a set of compensation payments, some of which I find distasteful," Mr. Liddy said.

Describing the financial-products division, Mr. Liddy called it an "internal hedge fund" that exposed the company to extreme market risk. The result, he said, was that "mistakes were made at AIG on a scale few could have ever imagined possible."

"Those missteps have exacted a very high price, not only for AIG but for America's taxpayers, the federal government's finances and the economy as a whole," said Mr. Liddy, who took over AIG as part of the government's rescue of the firm in September.

Some lawmakers said Mr. Liddy shouldn't be the target of all the criticism. Rep. Spencer Bachus (R., Ala.), the top Republican on the House Financial Services Committee, said little could be done by the government except to allow AIG's new management to repair problems at the company and to recover as much taxpayer funds from the company as possible.

AIG Chairman and CEO Edward Liddy addresses members of the House of Financial Services Committee to explain why bonuses were paid to the company's executives. Video courtesy of Fox News.

"You can vilify this new management if it makes you feel better, but resolving a company as large and complex as AIG is no easy task," Rep. Bachus said. "The government trying to get more involved than it is, is just going to be a sad experience."

Among those receiving blame for AIG's problems was the Office of Thrift Supervision, which shared partial oversight over the insurer after the company applied for and received a savings and loan charter. Acting Director Scott Polakoff said the OTS missed an opportunity to head off problems at AIG's financial-products division because it didn't expect the housing market to so badly deteriorate.

"OTS should have in 2004 stopped this book of business with an understanding, with an anticipation, with an analysis, that the real-estate market might have gotten as bad as it's gotten," Mr. Polakoff told the subcommittee.

Lawmakers have introduced or vowed to draft a raft of legislation targeting AIG and its executive compensation. House Republicans on Wednesday were set to use a procedural maneuver to try to bring up a vote on legislation related to AIG. The resolution would require the Treasury secretary to put in place a plan to recoup the AIG bonuses within two weeks and would require Treasury approval for any future bonus payments made by recipients of money under the Troubled Asset Relief Program.

Meanwhile, Rep. Charles Rangel said the House would take up a bill Thursday that would impose a 90% tax on bonuses paid to top-earning employees at AIG and other companies receiving big government bailouts. The New York Democrat, who chairs the tax-writing House Ways and Means Committee, said Wednesday the tax would hit employees making more than $250,000 a year.

Lawmakers also said they were planning to issue a subpoena for the names of AIG executives who received the $165 million in bonus payments. House Financial Services Chairman Barney Frank (D., Mass.), said he would ask Mr. Liddy for the names of bonus recipients. If the company doesn't provide those names, he said, Congress will formally subpoena them from the company.

The request sparked a tense exchange between Messrs. Frank and Liddy over whether the names would be kept confidential. Reading what he said were threats that have been made against his employees, Mr. Liddy said he was concerned for the safety of bonus recipients if the names are made public.

Rep. Frank said he would consult with law-enforcement officials about the "despicable" threats, but he said the information should be made public.

Mr. Liddy said AIG "will obviously comply with the law" but repeatedly declined to answer questions about whether the company would provide the names. "I want to protect the well-being of employees," Mr. Liddy said, apologizing for being what he himself described as "evasive."

View Slideshow

Jason Reed/Reuters

AIG CEO Edward Liddy prepared for his testimony Wednesday afternoon.

New York Attorney General Andrew Cuomo, who on Monday subpoenaed AIG seeking the names of individuals in the financial-products unit who received retention bonuses, criticized Mr. Liddy's proposal asking for the voluntary return of some bonus money as "too little, too late."

"The American people have a right to know what is happening with massive amounts of their money. Mr. Liddy needs to understand this," Mr. Cuomo said. "If AIG is really serious about getting these bonuses back, they should comply with the subpoena we have issued." The insurer has said it will "respond appropriately" to Mr. Cuomo's subpoena.

AIG also said Wednesday it is putting its downtown Manhattan headquarters and a nearby office building up for sale. AIG spokesman Mark Herr said the company is evaluating the sale of 70 Pine Street and 72 Wall Street as part of its efforts to boost operations.

Write to Michael R. Crittenden at michael.crittenden@dowjones.com and Patrick Yoest at patrick.yoest@dowjones.com