AIG's Trustees Shun 'Shadow Board,' Plan to Recruit Directors

By Hugh Son
Bloomberg News
May 13, 2009

May 13 (Bloomberg) -- American International Group Inc.'s three trustees, assigned to manage the U.S. stake in the insurer, are seeking new board members to overhaul pay practices and restore confidence after four government bailouts.

The panel is leaving the day-to-day running of New York- based AIG to its executives and focusing on recruiting new directors, the trustees said in prepared testimony for a House Committee on Oversight and Government Reform hearing today. The stewards said they may announce news on the search "shortly."

"The trustees should not become, in effect, a shadow board or management team, because that would make it impossible to recruit and maintain talented directors and managers," trustees Jill Considine, Chester Feldberg and Douglas Foshee said in joint testimony.

The trustees, appointed in January, are under pressure to show they are protecting the $182.5 billion U.S. investment in the firm, deemed by regulators too important to financial markets to fail. AIG came under scrutiny in March after paying $165 million in bonuses to employees of the unit blamed for the company's near collapse.

The trustees, who wield the government's 77.9 percent stake in AIG through a trust and control votes on asset sales, mergers and the selection of executives, may also face criticism in their first public appearance.

There are "major concerns about the accountability of the trustees," Representative Darrell Issa of California, the ranking Republican on the oversight committee, said yesterday in a statement. "The government may have created an entity that is accountable to no one" because the trustees can vote the Treasury's shares.

Liddy to Testify

Chief Executive Officer Edward Liddy is also scheduled to testify before the House committee chaired by New York Democrat Edolphus Towns. When Liddy last appeared before Congress in March, lawmakers blamed him for allowing AIG to award bonuses to employees in the insurer's Financial Products division that sold credit-default swaps.

"It is critical that we not lose sight of the fact that we are partners," Liddy said in remarks prepared for today's hearing. "Rampant, unwarranted criticism of AIG serves only to diminish the value of our businesses around the world -- to the detriment of our shareholders, including taxpayers."

The trustees asked Liddy to develop a new employee compensation plan by year-end. In a May 7 letter to Liddy, the trustees said that compensation should encourage appropriate risk taking and align employees' interests with those of shareholders.

Returning Bonuses

Liddy, selected by the U.S. in September to run the company after AIG agreed to turn over a stake in exchange for a bailout, told Congress in March that he asked Financial Products employees paid bonuses exceeding $100,000 to return half. Liddy had said bonuses were necessary to keep employees at businesses the company was trying to unwind or sell to repay the U.S.

AIG has postponed its annual meeting, previously scheduled for May 13, in which new board members were to be elected. The company has said directors Virginia Rometty, Michael Sutton and Edmund Tse would be stepping down.

The U.S. has committed $182.5 billion to rescue the insurer, including an investment of as much as $70 billion, a $60 billion credit line and $52.5 billion to buy mortgage-linked assets owned or backed by AIG. The company had tapped more than $45 billion of that line as of last week.

The insurer doesn't need more government aid, Liddy said in his testimony.

"We are stabilizing AIG's liquidity so that we do not need support beyond those amounts that the government has already authorized," Liddy said. The "state of the economy" will play a role in whether AIG needs more help in the future, he said.

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