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Obama Moves to Block AIG Bonuses

  Politics    2009/03/19 18:19

A tough-talking President Barack Obama moved yesterday to block the $165 million in bonuses for American International Group executives that prompted a new wave of outrage at corporate America and taxpayer bailouts.

Despite the aggressive approach, it's unclear whether he can get the payments back. But the White House said it would modify the terms of AIG's pending $30-billion bailout installment to at least recoup the $165 million the bonuses represent. That wouldn't rescind the bonuses, just require AIG to account for them differently.

Separately, state Attorney General Andrew Cuomo said he will subpoena the names of AIG officials involved and copies of their employment contracts to determine whether the bonuses are legal, given the firm's weak finances.

Manhattan-based AIG was saved from insolvency by $170 billion in taxpayer-backed loans - and reported a $61.7-billion loss in the fourth quarter last year. It revealed on the weekend that it used more than $90 billion in its federal aid to pay out banks, some of which had received their own U.S. government bailouts.

Yesterday, Obama gave voice to rising disgust since Saturday, when the bonuses became public. Cuomo said the bonuses were paid to members of the specific AIG unit at the root of the firm's near-collapse from bad, mortgage-backed debt.

"How do they justify this outrage to the taxpayers who are keeping the company afloat?" Obama asked. He asked Treasury Secretary Timothy Geithner "to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole."

AIG has said it had no choice but to pay the bonuses under agreements signed last year before it got into difficulties and sought a bailout. Spokeswoman Christina Pretto said: "We are in contact with the attorney general and will, of course, respond to his request."

Obama didn't specify a possible legal strategy for blocking the payments. However, Cuomo said he was investigating whether the employment contracts cited by AIG were legally flawed - technically "fraudulent" - under state debtors and creditors law. They would be, he said, if AIG management knew when it signed them that weak finances would render them unable to pay the bonuses without outside help. Contracts can be renegotiated, he said, adding, "You could argue that if the taxpayers didn't bail out AIG those contracts would be worth the paper they're printed on."

Experts in corporate law said the Obama administration has an important advantage in the controversy. In return for the bailout, the government now owns 80 percent of the company. "They're the big dog in the room now and can put some leverage on AIG to straighten this out," said attorney Jim Ervin, a partner at Benesch, Friedlander, Coplan & Aronoff Llp in Ohio.

Attorney Ross Albert, a partner at Morris Manning & Martin Llp of Atlanta, said it's difficult to be specific about the government's options without seeing the contracts in question, but added, "If the bonus is based on achieving some bench mark and it turns out the bench marks achieved were through accounting hocus-pocus, not reality, they wouldn't even have a legal right to this bonus," Albert said.

But Stephen Breitstone, a tax specialist in the Mineola law firm Meltzer, Lippe, Goldstein & Breitstone Llp, said the law Cuomo cited is intended for cases where companies facing bankruptcy are seeking to keep money away from creditors by giving it to employees or others. "If he can prove that's what this is, that's a pretty bold accusation," Breitstone said.

Labor and employment attorney Carmelo Grimaldi, who works with Breitstone, said, "I think the government is going to have a difficult situation given the fact that these contracts were made. If they provide for bonuses, AIG faces a breach of contract if they don't pay these bonuses."

This story was supplemented with Bloomberg News and Associated Press reports.

Challenges to AIG's actions

President Barack Obama wants to block bonuses paid by AIG. Here are two weapons in his arsenal:

NEW TERMS. Modifying terms of AIG's pending bailout installment to at least recoup the equivalent in bonuses.

MAJORITY OWNERSHIP. The government owns 80 percent of AIG - an important advantage because it can force the company to change practices.

State Attorney General Andrew Cuomo has begun issuing subpoenas for AIG information.

KEY PROBE. He is investigating whether AIG employment contracts were "fraudulent" by promising bonuses executives knew the company could not afford.

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