AIG anticipated major losses and rigged bonuses

aigloss

Rep. Barney Frank (D-Mass.), who read from the contracts in question at a hearing of a subcommittee of the House Financial Services Committee Wednesday, suggested AIG executives structured the contracts in such a way in anticipation of dramatic losses

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Story Transcript

REP. BARNEY FRANK (D-MA): The problem is not the dollar amount but the incentive structure. It’s a heads they win; tails they break even. I looked at the contract that is being invoked as unassailable, and here’s what it says: "The bonus pool for any compensation year, beginning with the 2008 compensation year, will be affected by the incurrence of any realized losses arising from any source, subject to the limitations set forth in Section 3.07." And Section 3.07 says: "Notwithstanding any other provision of the plan, for any compensation year, beginning with 2008, there shall be a $67.5 million limit per year on the extent to which the pool can be reduced," so that it means that if in fact they have a net loss for the year, they still get the bonuses. This is the problem; this is the problem with those contracts. And I think whoever signed these contracts ought to be called into account on the part of the company. It’s a problem with compensation structures going forward. What it says is, here, given the 70-30 split of distributed income, if the losses in the year exceed $225 million, then that loss above $225 million is irrelevant to reducing the bonus pool. Two hundred and twenty-five million turned out to be a rounding error in their losses, so they give themselves contracts which effectively insulate them from losses. That’s one of the things we have to look at, this situation in which you get a bonus when it goes up. So what they do is they count any gain, and that goes into the bonus pool. If those gains are offset by huge losses, there’s a very limited effect to which they go into the bonus pool. What I think we should be doing is exercising our rights, as the owners of this company, and bring lawsuits. It is one thing for the federal government to say, because the Federal Reserve lent the money and then Treasury followed up, "We are going to invalidate these contracts where both parties to the contract say they want to go forward." That causes some problems in people’s minds, the question of the federal government abrogating the contract. It’s not something we should do statutorily. But we’re the effective owners of this company. What we ought to be doing is exercising our rights as the owners to bring lawsuits, to say, "These people performed so badly, the magnitude of the losses are so great, that we are justified in rescinding the bonuses." That may be a controversial lawsuit, but it is a better one than trying to interfere under a regulatory authority. And I think it’s worth trying. And I think that there could be a good case made that the bonuses granted by people who in fact incurred great net losses by that work ought not to be granted. We will also be asking Mr. Liddy to give us the names of the recipients. They have sent us some information under the confidentiality rules. I’ve spoken to Chairman Kanjorski about this. We will be asking for their names. If Mr. Liddy declines to give us the names, then I will convene the committee to go to subpoena for the names.

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