Bonus rage closes in on AIG

Officials turn up heat on troubled insurer: Obama says he wants to block $165 million in bonuses. New York AG vows to force firm to name execs.

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By Jennifer Liberto, CNNMoney.com senior writer

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Obama wants government to use 'every legal avenue' to block AIG bonuses.
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WASHINGTON, D.C. (CNNMoney.com) -- Anger over $165 million in bonuses doled out to American International Group senior employees reached a fevered pitch on Monday, prompting the Obama administration to vow to recoup the money and a New York prosecutor to subpoena the firm for recipients' names.

President Obama said Monday that he has asked Treasury Secretary Tim Geithner to use the government's role as a majority owner of the troubled insurance company and "every legal avenue" to stop the bonuses.

"It's hard to understand how derivative traders at AIG warranted any bonuses," Obama said.

But the bonuses -- set out in contracts made before the government became so deeply involved in the company -- would be hard to reverse.

In fact, a Treasury official confirmed to CNNMoney.com that the government can't stop the bonuses from going to employees. But it could try to recoup the money.

Treasury plans to make $30 billion in bailout funds pledged on March 2 contingent on a promise by AIG to reimburse the government an extra $165 million for the bonuses, according to the Treasury official.

The government has stepped in four times to help AIG through $170 billion in bailout packages, in large part because it had issued risky credit default swaps -- a kind of insurance for bad loans made by banks and investment companies.

It remains to be seen how much of those billions the government will be able to get back.

"If the market stabilizes, there could be valuable assets at the end of the day, but there's a lot of ifs," said Rob Haines, an analyst with research firm CreditSights.

For its part, AIG said it had no plans to try to rescind the bonuses, part of $450 million paid out in 2008-09 to employees in AIG's key financial products division. An AIG spokesman on Monday referred to a letter Chief Executive Edward Liddy wrote to Geithner last week saying that he found the bonuses "distasteful" but the company "must proceed with them."

'Taxpayers have a right to know'

Meanwhile, New York Attorney General Andrew Cuomo said on Monday that he planned to subpoena AIG for details of the employee bonuses.

"We believe the taxpayers have a right to know what's happening to their money," said Cuomo, who said he had sent AIG a letter Monday seeking a list of employees who received bonuses.

AIG told the attorney general's office that the checks were issued on Friday, and "their point is there's nothing you can do," Cuomo said.

After weeks of criticism and a weekend of smackdowns, AIG on Sunday finally revealed which firms received billions in federal bailout money, which included several European institutions and two big Wall Street firms, Goldman Sachs (GS, Fortune 500) and Merrill Lynch.

AIG, which has avoided bankruptcy because of taxpayer funding, said it released the list of trading partners or counterparties, along with the sums they received, because the company "recognizes the importance of upholding a high degree of transparency with respect to the use of public funds." AIG said it made the announcement after consulting with the Federal Reserve, which has led the bailout of the company.

The pressure on AIG is likely to only get worse in coming days.

Liddy, who was brought in as CEO in September after the government's first bailout, is expected to testify before a House Financial Services subcommittee on Wednesday.

"Because the federal government has about an 80% stake in the company, AIG must be open and transparent about how it spends taxpayers' money," subcommittee Chairman Rep. Paul Kanjorski, D-Pa., said in a statement. "These counterparties and the recent bonuses, among other topics, will certainly be important issues that my colleagues and I intend to investigate further at the hearing."

AIG spokesman Nicholas Ashooh said Liddy plans to use his appearance on Capitol Hill to explain, among other things, AIG's progress untangling its credit default swaps and its plans to sell companies and securities to pay back the government.

The panel will also hear from Scott Polakoff, acting director of the Office of Thrift Supervision; Joel Ario, the Pennsylvania insurance commissioner; and Rodney Clark, a director in charge of Standard & Poor's insurance ratings. To top of page

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