AIG Said to Offer $1 Billion in Retention to Workers (Update1)

By Hugh Son
Bloomberg News
January 28, 2009

Jan. 28 (Bloomberg) -- American International Group Inc., the insurer saved from collapse last year by government money, may have committed more than $1 billion to employees to keep them from leaving the company.

About 400 workers at New York-based AIG's financial products unit may get $450 million in two installments, said two people familiar with the situation who declined to be identified because the plan is confidential. That is in addition to about $619 million in retention pay going to 4,200 executives and employees at subsidiaries including life insurance.

AIG is trying to hold onto employees while it sells businesses to repay a government loan. The insurer took a federal bailout in September after the financial-products unit, which sold credit-default swaps that plunged in value amid the housing market collapse, caused about $34 billion in writedowns. AIG said the program was disclosed before the government rescue, which is now valued at $150 billion.

"I was extremely disappointed -- but not surprised -- to learn that AIG will be awarding bonuses to the very division that drove the company into the ground," said Representative Elijah Cummings, a member of the House Committee on Oversight and Government Reform, in an e-mail. AIG shouldn't be awarding "millions of unmerited dollars to employees while at the same time begging the U.S. government for financial life support."

Maintaining Value

Chief Executive Officer Edward Liddy, 63, has been providing data on employee compensation to Congress, saying retention programs are needed to keep the value of the units from eroding as AIG seeks buyers. The payments have drawn criticism from legislators including Cummings, 58, the Maryland Democrat who has said that the awards are unnecessary while employment markets are weak and has called for hearings into the compensation. The U.S. lost almost 2.6 million jobs in 2008.

"We adopted and disclosed this contractual retention program months before the government provided support to AIG," said Christina Pretto, a spokeswoman for the insurer. "It was clear, given the market environment, that we would need to retain employees to manage the complex issues arising in our financial-products business, which we are now unwinding."

The insurer started the retention plan for the financial- products unit in the first quarter of 2008, AIG said in regulatory filings, including one in August. The program guarantees a minimum level of pay through 2009 for employees, who had $563 million wiped out from existing compensation plans in the third quarter of 2008, AIG said in a November filing, without saying how much the plan would cost.

Merrill Lynch

Pretto said AIG cut almost $800 million of deferred compensation to the unit's employees and that the most senior workers will get less than half their usual pay package.

Merrill Lynch & Co., the brokerage bought by Bank of America Corp., has also been criticized by lawmakers, who questioned bonus payments made before the takeover was completed.

"I feel just like I did about the Merrill Lynch bonuses," said Senator Richard Shelby, 74, a Republican from Alabama, in an interview on Bloomberg Television yesterday when asked about AIG. "It has been a waste of taxpayers' money."

Joseph Cassano headed the financial products unit until stepping down in March after his operations drove a $5.29 billion quarterly net loss for AIG. The financial products business was founded in 1987 by ex-employees of Drexel Burnham Lambert, the securities firm that helped popularize "junk- bond" investing before it collapsed.

Subprime Loans

Cassano built financial products into a business providing guarantees on more than $500 billion of assets at the end of 2007, including $61.4 billion in securities tied to subprime mortgages.

AIG had to seek an $85 billion federal loan in September after downgrades of its credit rating, which the company previously said could force more than $10 billion in collateral calls from the debt investors who bought swaps to protect against losses. The bailout expanded to $150 billion in November, partly to fund an entity designed to retire the swap contracts by purchasing the underlying assets from banks.

AIG kept Cassano on as a consultant, paying him $1 million per month until lawmakers lambasted the company on compensation and perks in an Oct. 7 hearing. He earned $280 million since 2000, according to Representative Henry Waxman, former chairman of the House Committee on Oversight and Government Reform, which held the October hearing.

There is "no assurance" that the retention programs will work, AIG said in the November filing. At least 30 AIG managers have defected to competitors since September, according to data compiled by Bloomberg. Zurich Financial Services AG, Switzerland's largest insurer, has announced at least six hires.

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