REUTERS - Embattled insurer American International Group agreed on Saturday to revamp its system for paying bonuses after the Obama administration objected to plans for hundreds of millions of dollars in such payouts.
AIG, bailed out three times by taxpayers for a total of up to $180 billion, will sharply cut remaining 2009 salaries for top executives of its AIG Financial Products unit and realign 2008 bonuses to tie them to restructuring and repayment targets, AIG Chairman Edward Liddy said in a letter to Treasury Secretary Timothy Geithner.
He said Geithner phoned him on Wednesday to object to the bonus structure.
AIG Financial Products was the unit that made bad bets on toxic mortgages and credit default swap contracts that led to the company's near collapse.
Separately, AIG is expected to disclose the identity of counterparties to the credit default swaps it wrote to guarantee complex debt securities, a source close to the company said on Saturday. The timing of the announcement was not yet clear.
Liddy said the firm was legally obligated to make already-committed 2008 employee-retention payments, the value of which were set early last year before problems at the Financial Products unit became public.
"Some of these payments are coming due on March 15, and, quite frankly, AIG's hands are tied," Liddy said in the letter obtained by Reuters. "Needless to say, under the current circumstances, I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them."
Liddy, who was appointed to run AIG by the Treasury in September after the initial government bailout, said he would work with Geithner to resolve the issue. Liddy said he was not part of any bonus program.
AIG had promised to pay about $1 billion in retention bonuses over a period of several years, half of which has already been paid. About half the total was due to be paid to staff of AIG's main insurance businesses and the rest to employees of the largely unregulated AIG Financial Products.
According to company documents obtained by Reuters on Saturday, the financial products unit is obligated to pay $220 million in employee retention payments for 2008, $55 million of which were paid in December and $165 million required to be paid by Sunday.
The company had also promised $327 million in retention payments for 2009.
Liddy's pledge to revamp 2008 bonuses and find ways to claw back retention payments came after Geithner's call to him this week.
Liddy said in the letter to Geithner that "the conversation was a difficult one for me."
An Obama administration official said on Saturday it was unacceptable for Wall Street firms receiving government assistance to pay million-dollar bonuses, but concluded that the retention payments were legally binding.
The department will continue to negotiate with AIG to bring the payments down and seek to recoup the funds through mechanisms outside of those contracts, the official said.
AIG came under fire in October for lavish spending on a corporate and client retreat just days after its initial rescue put 80 percent of the company's shares in taxpayer hands. The Treasury is working to tighten compensation rules on financial institutions that receive government assistance.
The Treasury wants to spread out payments from a separate 2008 bonus pool of $9.6 million to AIG's top 50 executives, paying half upfront -- an average payment of $112,000 each -- and tie remaining payments to meeting benchmarks for selling assets and government repayment.
Liddy said there was more flexibility for 2009 and the firm would use its best efforts to cut 2009 retention payments by at least 30 percent.
The firm is taking steps to reduce AIG Financial Products compensation, and the 25 highest-paid active employees at the unit will see their remaining 2009 salary cut to $1, from an annual average of $270,000 up to $500,000, Liddy said.
The remaining officers at the unit -- with a title of associate vice president or higher -- will see remaining 2009 pay reduced by 10 percent and non-cash compensation reduced.
"AIG also is committed to seeking other ways to repay the American taxpayers for AIG Financial Products retention payments," he said.