More bonus fallout for AIG, Treasury

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NEW YORK (CNNMoney.com) -- The fallout continued Tuesday over $165 million in bonus payments paid to executives by bailed-out insurer American International Group.

Treasury Secretary Tim Geithner said Tuesday night that the government would force on AIG a "contractual" duty to pay the government an amount equal to the total of the bonuses.

Geithner, in a letter to Congress he released publicly, said the money would be deducted from $30 billion in government assistance AIG is set to receive.

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.

Geithner also said that future bonus payments by the firm would be "subject to strict executive compensation provisions" contained in the economic recovery law enacted last month.

Separately, a New York prosecutor said Tuesday that AIG had given 73 employees bonuses of more than $1 million each.

In a letter to House Financial Services Committee Chairman Barney Frank, D-Mass., New York state Attorney General Andrew Cuomo said that the money AIG issued this year to its Financial Products employees included one bonus that was as high as $6.4 million.

The financial products division wrote the insurance contracts on high-risk mortgage-backed securities that eventually brought AIG to its knees.

"These payments were all made to individuals in the subsidiary whose performance led to crushing losses and the near failure of AIG," said Cuomo in the letter. "Thus, last week, AIG made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees, forcing a taxpayer bailout."

"Something is deeply wrong with this outcome," he added.

According to Cuomo, the top seven recipients received more than $4 million each, and the top 10 got a combined $42 million, according to Cuomo's letter. In the next tier, 22 AIG employees received a combined $72 million with those bonuses totaling at least $2 million each.

Cuomo also noted that 11 of the employees who received $1 million bonuses from AIG (AIG, Fortune 500) no longer work for the insurer, including one recipient who took home $4.6 million.

The New York attorney general dismissed AIG's claim that it paid the bonuses to retain its top talent.

Cuomo said the fact that AIG was able to cut deals with its workers for them to take salary cuts in exchange for getting retention bonuses "flies in the face of AIG's assertion that it had no choice but to make these lavish multi-million dollar bonus payments."

On Monday, Cuomo said that he had subpoenaed AIG for the names of the executives who had received bonuses. On Tuesday, AIG said it would respond.

"We are in ongoing contact with the attorney general and will respond appropriately to the subpoena," said AIG spokesman Joseph Norton. "In the meantime, AIG Financial Products continues to work diligently to unwind operations, and has made significant progress in doing so."

Cuomo's letter comes ahead of a House Financial Services committee hearing on AIG's impact on the global economy scheduled for Wednesday at 10 a.m. ET.

Though the attorney general did not call for any specific measures to be taken, "I hope the committee will address [the issue] head on."

"Everybody is offended by the message that any bonus like this sends," White House spokesman Robert Gibbs said Tuesday. "It offends our common sense, [and] it offends our values."

President Obama on Monday tasked Geithner and government lawyers with figuring out a way to recover some of those bonuses and explore "every legal avenue" to stop the payouts.

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

But some say the bonuses, which were promised before the government bailed out the insurer, could be hard to legally reverse.

Still, Senate Majority Leader Harry Reid, D-Nev., said Tuesday that the Senate Finance Committee will pursue a legislative fix that would prevent bonus recipients from keeping all their money. "And that's an understatement," said Reid.

Two key senators announced a plan to impose a hefty tax on retention bonuses paid to executives of companies that received federal bailout money or in which the United States has at least a 50% equity interest.

Sens. Max Baucus, D-Mont., and Chuck Grassley, R-Iowa -- the chairman and top Republican on the Senate Finance Committee -- said that companies would not be allowed to restructure the payments to those executives through deferred compensation to avoid the tax.