U.S. tightens grip on AIG over bonuses

WASHINGTON —  The government will deduct $165 million in proposed aid to bailed-out American International Group Inc. to recoup the cost of bonuses paid to employees of the giant insurer last week, Treasury Secretary Timothy F. Geithner said Tuesday.

In a letter sent to congressional leaders, Geithner said he persuaded AIG Chief Executive Edward M. Liddy last week to scrap or cut hundreds of millions of dollars in future salaries and other compensation after determining that the bonuses already granted would be “legally difficult to prevent.”

Geithner said the company would be required to pay the $165 million from corporate operating funds as part of the final terms for a previously announced $30-billion line of credit from the government. In addition, the credit line will be reduced by the same amount.

The action came amid growing public outrage over the bonus payments made last week to employees who created and sold the risky financial instruments that were largely responsible for bringing the New York conglomerate to its knees and helping wreak havoc in world financial markets.

“There is ire that almost verges . . . on hate,” said Sen. Dianne Feinstein (D-Calif.).

The outrage was fueled Tuesday as additional details of the bonuses emerged. The top seven bonus recipients were awarded more than $4 million each, with the largest totaling more than $6.4 million, New York Atty. Gen. Andrew Cuomo said.

Twenty-two people received more than $2 million, and 73 received more than $1 million. And even though the bonuses were aimed at retaining key employees, at least 11 are no longer with the company.

Seeking to undo those payments and other AIG retention bonuses, Congress is stepping in with proposals that would, in effect, tax the extra income so that recipients would be left with little or none of it.

At least three bills have been introduced in the House this week seeking to place an excise tax of 95% to 100% on the $165 million in bonuses paid to about 400 employees of AIG’s Financial Products division. House Speaker Nancy Pelosi (D-San Francisco) said legislation could be considered by the end of the week.

Senate Finance Committee Chairman Max Baucus (D-Mont.) and Sen. Charles E. Grassley (R-Iowa) were drafting similar legislation slapping large excise taxes on companies and employees when bonuses are paid by any firm receiving government bailout funds. Senate Majority Leader Harry Reid (D-Nev.) predicted it would pass overwhelmingly within days if the AIG bonuses were not returned.

“When a child breaks his curfew, he should get grounded. When someone commits a crime, he should be punished,” Reid said. “And when an employee brings his company and our economy to the brink, he’s not rewarded with multimillion-dollar bonuses paid by the taxpayers.”

Grassley, the senior Republican on the Senate Finance Committee, asked Treasury Inspector General Eric Thorson to open an inquiry into the AIG bonus payments and determine whether top Treasury officials had some role in approving the payments, according to Grassley’s office.

The inquiry could turn the heat back on the Obama administration, which has expressed outrage over the payments and wants to challenge them.

In a letter to Thorson obtained by The Times, Grassley asked whether Treasury officials made any previous efforts to block the bonus payments or demanded that the payments be waived before releasing taxpayer bailout funds to the company. Thorson also would examine whether there are contracts that compel the payments and, if so, when those legal obligations were created.

Reid joined Feinstein and 11 other Senate Democrats in writing to AIG’s Liddy on Tuesday demanding that the bonus money be repaid. Lawmakers used the threat of tax legislation to force the issue, something they are likely to repeat today during a scheduled appearance by Liddy at a congressional hearing.

“Mr. Liddy, I urge you to fix this mess because . . . if you don’t fix it, we will,” said Sen. Charles E. Schumer (D-N.Y.), who organized the writing of the letter.

Schumer also had a message for the people who received the bonuses: “If you don’t return it on your own, we will do it for you.”

There was broad agreement in Congress that the issue had to be addressed at a time when many Americans are struggling to hold on to their homes and jobs because of a financial crisis that AIG and other huge financial institutions helped precipitate.

“A lot of these bonuses are more than my constituents make in a lifetime,” said Sen. Amy Klobuchar (D-Minn.). “We are at risk of losing their trust.”

Rep. Gary Peters (D-Mich.) said he was particularly angry to hear that the bonuses had to be paid because they were required under a contract. The government is forcing General Motors Corp. and Chrysler to rework their contracts with employees as a condition for getting federal bailout money.

“People are just outraged by this, particularly in the Detroit area, where autoworkers are being asked and are agreeing to alter their contracts,” Peters said.

He introduced a bill Monday to place a 60% surtax on top of the normal 35% income tax on bonuses over $10,000 paid by a company in which the U.S. government has at least a 79% stake. AIG is the only company in that category.

Democrats tended to blame corporate greed. Republicans harshly criticized Geithner, though they stopped short of calling for his resignation.

Geithner approved the bonuses last weekend after determining that they were contractual obligations by AIG that could prompt lawsuits if not paid. His decision came less than two weeks after federal officials agreed to extend AIG an additional $30-billion line of credit on top of the $150 billion in bailout funds the government had already sunk into the company.

“What I’d like a full explanation of is how the Department of the Treasury handed over $30 billion a mere two weeks ago and didn’t have any idea that this outrage was going to occur,” Senate Minority Leader Mitch McConnell (R-Ky.) said.

In a contentious briefing dominated by the AIG issue, White House Press Secretary Robert Gibbs said that President Obama retained confidence in Geithner.

On Monday, Obama had ordered his administration to “pursue every legal avenue” to challenge the bonuses. Legal experts said that would be difficult and could lead to lawsuits.

Some lawmakers said they were concerned about the legality of a tax that would wipe out the bonuses in their entirety, but one tax-law expert saw no impediment to doing so.

“Congress can tax anything they damn well please,” said professor Bryan Camp of Texas Tech University’s School of Law.

Mark Scarberry, a law professor at Pepperdine University, said the legislation would have to be designed carefully to assure it would not be challenged as an illegal taking under the Constitution, rather than a tax.

Before the AIG payouts became known, Congress had taken steps toward taxing bonuses, but pulled back. The Senate adopted an amendment to the economic stimulus bill that would have required recipients of bailout funds to repay bonuses above $100,000 or face a 35% excise tax.

The provision was dropped in conference negotiations with the House and replaced with a watered-down provision from Sen. Christopher J. Dodd (D-Conn.) that exempted bonuses in contracts signed before Feb. 11. The AIG contracts were signed early last year.

Dodd received $280,238 in campaign contributions from AIG and its employees from 1989 to 2008, more than any other member of Congress, according to the nonpartisan Center for Responsive Politics. A spokeswoman for Dodd said he was unaware of the AIG bonuses at the time of the conference committee talks.

Baucus, who was one of the negotiators on the stimulus bill, said Tuesday that he was not aware the provision had been dropped from the legislation. “That should have passed, but it didn’t,” he said.

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jim.puzzanghera@latimes.com

janet.hook@latimes.com

Times staff writer Ralph Vartabedian contributed to this report.