AIG rescue assured much bigger payday at other banks


Treasury Preserves Bank Payday with AIG Rescue Cash

By Mark Pittman and Christine Harper
Bloomberg News
Tuesday, March 24, 2009

NEW YORK -- The U.S. Treasury Department preserved a payday for five banks that was worth almost 200 times the bonuses handed out at American International Group Inc. through a government rescue.

As part of a bid to prevent the insurer's failure, the U.S. settled derivatives and loan contracts worth $32.7 billion with Goldman Sachs Group Inc., Merrill Lynch & Co., Societe Generale, Deutsche Bank AG and UBS AG. That’s about half the $66.7 billion that those companies, the five biggest beneficiaries of loans and capital infusions for AIG, said they spent on pay and benefits last year for employees, some of whom created or traded toxic subprime assets that proved deadly for lenders.

The bonuses paid by AIG and the banks were allowed under a congressional exemption from compensation limits on companies getting government rescue funds. The Treasury staff requested the exception to avoid lawsuits over agreements signed before Feb. 11, Secretary Timothy Geithner said last week.

"The issue of excessive compensation extends beyond AIG and requires reform of the system of incentives and compensation in the financial sector," Geithner said today in testimony prepared for the House Financial Services Committee.

AIG's bonus payments were "deeply troubling," Geithner said. The Treasury secretary said he demanded that the compensation contracts be renegotiated and was told by Chief Executive Edward Liddy that they were "legally binding."

... 90 Percent Tax

The $165 million paid to employees of New York-based AIG represents 0.0014 percent of the $11.6 trillion committed by the government to combat the credit crisis, according to data compiled by Bloomberg. The $32.7 billion is 0.3 percent of the total federal loans, guarantees and cash. Nine out of the top 10 recipients of the insurer's bonuses agreed to give the money back, New York State Attorney General Andrew Cuomo said yesterday.

The AIG bonuses prompted the House of Representatives to approve a 90 percent tax on bonuses to workers at companies that received more than $5 billion in capital from the Troubled Asset Relief Program.

Geithner said last week that the Treasury's staff asked Senator Christopher Dodd, a Connecticut Democrat and chairman of the Senate Banking Committee, to change compensation limits that were part of this year's economic-stimulus bill.

The law was approved by Congress Feb. 13 and signed by President Barack Obama the next week. AIG's bonuses qualified under the provision exempting contractual arrangements that predated Feb. 11.

... No erosion

Banks can pay bonuses without eroding capital if they were funded from profitable trades that were settled through financing provided by the government to AIG, said Sylvain Raynes, a derivative consultant in New York and author of "The Analysis of Structured Securities," (Oxford University Press, 449 pages, $109.45).

The payments from AIG helped the banks offset losses in other operations. Goldman Sachs reported a fourth-quarter loss of $2.12 billion in the three months ended Nov. 28, its first since going public in 1999. The firm reported net income of $3.22 billion a year earlier.

The government cash paid out by AIG may have prevented the banks from defaulting on their own trades with investors and other lenders. Federal Reserve Chairman Ben S. Bernanke and Geithner’s predecessor, Henry Paulson, said in September that had the insurer gone bust, the financial industry would have seen a cascade of bankruptcies.

... 'Necessary' Money

"Absent this money, it wouldn't have been sufficient to allow the banks to pay bonuses or anything else," said Lynn Turner, chief accountant for the Securities and Exchange Commission from 1998 to 2001. "It's safe to draw the conclusion that the money was necessary to pay bonuses."

Dodd said he would support an amendment to rescind the exemption last week. The House of Representatives has passed legislation to tax bonuses at a 90 percent rate and the Senate is considering its own measure.

"There's a hose hooked up between the American taxpayers’ pocketbook and the bank accounts of some people getting bonuses," Senator Byron Dorgan, a North Dakota Democrat, said in an interview. "There is obviously something dreadfully wrong and I want it to be investigated."

Treasury spokesman Isaac Baker said in an e-mail that there were conversations between Treasury and Dodd's staff about the exemption from pay restrictions.

"Treasury staff raised a general concern about broad legal challenges to the retroactivity of the amendment, including constitutional claims, but did not insist on any changes or receive any resistance from the senator's staff," Baker said.

... 'Assert Our Rights'

House Financial Services Committee Chairman Barney Frank said March 22 that the government should "assert our rights" as AIG's owner and sue to recover the $165 million. Frank, a Massachusetts Democrat, made the comments on CBS television's "Face the Nation."

The exemption pursued by the Treasury included signed bonus contracts for carmakers, AIG and banks that receive more than $5 billion from TARP.

Of the five biggest recipients of U.S. funds paid to the government-owned insurer through Dec. 31, only New York-based Goldman Sachs and Merrill Lynch, now part of Bank of America Corp. in Charlotte, North Carolina, also got TARP funds. Each received $10 billion.

... Derivative contracts

A second group led by Calyon, the Paris-based investment bank of Credit Agricole SA; Frankfurt's DZ Bank AG; and Barclays Plc in London, received payments from AIG totaling $17.2 billion, according to the company. No legislation has been submitted to recover bonuses at foreign companies that received money in the insurer's rescue.

Lenders owed money from AIG's derivative contracts were led by Paris-based Societe Generale with $11 billion, followed by Goldman Sachs with $8.1 billion; Frankfurt's Deutsche Bank, with $5.4 billion; Merrill Lynch, at $4.9 billion; and Zurich-based UBS, which received $3.3 billion. The totals exclude amounts from securities-lending programs.

Of the biggest U.S. banks, JPMorgan Chase & Co. received $400 million from AIG, and Morgan Stanley got $200 million. Both are based in New York. Bank of America was given $700 million.

SocGen spokeswoman Laura Schalk declined to comment last week, although the bank said March 22 that senior executives would hand back stock options in response to public "indignation" over bonus awards.

The bank's 8.6 billion euros ($12 billion as of Dec. 31) of total compensation and benefits included 1.17 billion euros of bonuses, according to the 2008 annual report.

... Bonuses Cut 'Significantly'

UBS spokesman Mark Arena said bonus pools were "significantly" reduced last year. UBS's 16.3 billion Swiss francs ($15.5 billion) in total 2008 compensation included 2.1 billion francs in bonuses, down 80 percent from a year earlier, the bank said in filings.

Goldman Sachs and Deutsche Bank don't disclose bonus figures. The New York bank said the payments in 2008 fell 65 percent across the firm and dropped about 80 percent for more senior employees.

Deutsche Bank, Merrill Lynch and Goldman Sachs all have said the AIG payments weren't related to employee pay.

"Absolutely not at all," David Viniar, Goldman Sachs's chief financial officer, said on a conference call with journalists March 20. "It really didn't affect the bottom line of Goldman Sachs."

... 'Smoke and Mirrors'

"I am not saying that we would have been unaffected," Viniar said. "I don't think there is any company in the world that would have been unaffected by a failure of AIG because all of the world's financial markets would have been affected."

For Goldman Sachs' 30,067 employees, the $8.1 billion that came from the U.S. government via AIG was equivalent to about three-quarters of the firm's $10.9 billion in compensation for last year. Pay and benefits were down 46 percent from 2007, the bank said. Goldman Sachs employees averaged $363,654 in compensation during 2008.

"Congress' outrage over $165 million in bonuses is simply a smoke-and-mirrors attempt to distract the American people from the fact that they used taxpayer money to bail out these companies in the first place," Representative Scott Garrett, a New Jersey Republican, said in an interview.

"Where was the outrage when $40 billion in TARP money was pumped into AIG for the benefit of its counterparties?" he said.

... Cuomo subpoena

Congress may not have yet focused on the bonus issues for the banks because lawmakers "probably haven't thought of it yet," he said.

Merrill Lynch bonuses of $3.6 billion prompted New York’s Cuomo to subpoena company executives because they were paid days before its sale to Bank of America on Jan 2. The company lost a court bid to prevent Cuomo from revealing the recipients.

The bonuses included $13 million to David Sobotka, who ran fixed income, including mortgages and structured finance, for the investment bank and now leads its proprietary trading unit.

"There have been 694 people who have gotten more than $1 million each at Merrill," said Senator Dorgan, who is seeking to form a select committee to investigate the causes of the crisis. He recommended that the U.S. attorney general create a task force to investigate financial crimes.

The biggest Merrill bonus, $33.8 million, was received by Andrea Orcel, who advised Royal Bank of Scotland Group Plc to buy ABN Amro Holding NV, a transaction that ended with the largest loss in U.K. corporate history, at $34 billion.

... 418 Employees

The U.K. government injected 20 billion pounds ($29 billion) into the bank and took control. Orcel and Sobotka were identified as being among the biggest Merrill Lynch bonus recipients by the Wall Street Journal earlier this month. Sobotka didn't reply to a call to his office and Orcel didn't reply to a message left for him with Tim Cobb, a London-based spokesman for Merrill.

According to documents obtained by Connecticut Attorney General Richard Blumenthal, 418 AIG employees received bonuses ranging from $1,000 to $6.4 million. At least 73 people made $1 million or more, and seven got $4 million or more, Blumenthal said.

Blumenthal said the documents show $218 million in payouts, not $165 million. He couldn't account for the difference.

The House bill taxing bonuses would affect employees whose household income is more than $250,000 at companies that received more than $5 billion. JPMorgan took $25 billion as part of the first round of infusions. Citigroup Inc. got $45 billion and agreed to allow the government to become its biggest shareholder. Bank of America, including Merrill Lynch, has received $45 billion in cash and a backstop on $118 billion in assets.

... Winners and Losers

Some members of Congress say they’ll find a way to rein in compensation for employees of bailed-out companies.

"The one law that seems to have no exceptions is that Wall Street always wins, and everyone else always loses," said Representative Alan Grayson, a Florida Democrat and a member of the House Financial Services Committee.

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