GAO Urges Treasury to Require Concessions From AIG Stakeholders

By Rebecca Christie and Hugh Son
Bloomberg News
March 31, 2009

March 31 (Bloomberg) -- The U.S. Treasury should demand that American International Group Inc., the insurer rescued by taxpayers, seek concessions from employees, creditors and derivatives counterparties as a condition of its aid, the Government Accountability Office said.

The GAO report released today also highlighted the Treasury's new pledge to hire "outside vendors" to help with executive compensation requirements. The department delayed new pay restrictions on banks and other companies that receive government aid after Congress included new, tougher limits in last month's economic stimulus legislation.

The Treasury has made progress in several areas of monitoring the bailout effort, also known as the Troubled Asset Relief Program, GAO said. The congressional watchdog offered six recommendations, including a call for the department to require AIG to seek concessions from its staff and others with a stake in the company's prospects.

"Treasury could require that AIG seek to renegotiate contracts with its employees, similar to the contract for retention bonuses with AIG Financial Products' employees, and with existing counterparties that would face substantial losses were AIG to have its credit downgraded or fail," the GAO said.

"If such concessions are not considered to be in the government's interest, the reasons should be clearly articulated and explained," it said.

A group of 27 lawmakers last week called for a federal probe into whether AIG should have been forced to renegotiate its counterparty contracts with Goldman Sachs Group Inc. and other banks.

Four Bailouts

The U.S. has propped up New York-based AIG four times, with total aid now valued at $182.5 billion, since September after a cash shortage left the insurer unable to back up protection sold to banks on their fixed-income holdings.

Treasury Secretary Timothy Geithner said last week that AIG met its commitments fully. He told the House Financial Services Committee that regulators explored "every possible means" to scale back those payments.

"We have no legal mechanism in place for dealing with this, like we deal with the banks; we did not have the ability to selectively impose losses on their counterparties," Geithner said at the March 24 hearing.

AIG committed more than $1 billion in retention pay to employees last year. About $450 million of that total was for workers at the Financial Products unit, including $165 million paid this month.

Bonuses Returned

Nine of the top 10 bonus recipients agreed to return the money, New York Attorney General Andrew Cuomo said March 23. At least $50 million would be retrieved, and possibly as much as $80 million of the $165 million paid this month, he said.

Christina Pretto, an AIG spokeswoman, didn't immediately return a call requesting comment. Treasury spokesman Isaac Baker also did not have an immediate comment.

GAO's new recommendations include a call for Treasury to do a better job reporting the money the government receives from bank aid recipients, such as dividends. Today's report cited "ongoing communications challenges" and said the Treasury has been "hampered" by questions about its overall bank rescue strategy.

In its official response, the Treasury said it planned to ask banks for more information about what they do with rescue funds. Starting in April, the Treasury will begin collecting information from all banks that receive capital injections, not just the 21 biggest banks surveyed in monthly lending reports that began this year, the Treasury said.

"Treasury made significant progress in implementing every GAO recommendation," said Neel Kashkari, who runs the Treasury's financial stability office. He said the Treasury has hired more staff, strengthened its internal controls and made more information public.

Today the Treasury unveiled an overhaul of its bank rescue website, The new website includes a map that displays aid received by each state, as well as a slate of program documents and press releases.

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