Bernanke Sought Lawsuit Over AIG Bonuses
Federal Reserve Chairman Ben Bernanke testified today that he wanted to sue bailout recipient American International Group to stop the insurance giant from paying its employees $165 million in bonuses, but said Fed lawyers advised against litigation.
In today's hearing, Bernanke defended the AIG bailout, saying its collapse could have spurred another Great Depression, but said he found AIG's plan to make retention payments to executives who played a primary role in the firm's collapse to be "highly inappropriate."
I asked that the AIG-FP payments be stopped but was informed that they were mandated by contracts agreed to before the government's intervention. I then asked that suit be filed to prevent the payments. Legal staff counseled against this action, on the grounds that Connecticut law provides for substantial punitive damages if the suit would fail; legal action could thus have the perverse effect of doubling or tripling the financial benefits to the AIG-FP employees.
The chairman testified alongside Treasury Secretary Timothy Geithner in a bid for broader authority to seize troubled institutions such as AIG. As Bloomberg's Craig Torres reports, "while the Federal Deposit Insurance Corp. has the power to take over failing deposit-taking firms and wind down their assets, no such authority exists for financial firms that aren't classified as banks, such as AIG or a hedge fund with extensive links throughout the banking system."
New York Attorney General Andrew M. Cuomo yesterday announced that 18 of the 25 most senior executives at AIG Financial Products have agreed to return their bonus payments, amounting to $50 million of the pledged $165 million.
Ire over the AIG bonuses was swift and furious, with the House initially moving to pass a 90 percent tax on the biggest payouts and President Obama echoing public outrage, only to backpedal in a "60 Minutes" interview on Sunday, saying that a special tax on AIG executives would be unconstitutional.
Jared Bernstein, an economic adviser to Vice President Biden, underscored the president's reservations in an interview on ABC's "This Week."
"I think the president would be concerned that this bill may have some problems in going too far -- the House bill may go too far in terms of some -- some legal issues, constitutional validity, using the tax code to surgically punish a small group," Bernstein said. The Senate has delayed any action on the measure.
By Amanda Zamora |
March 24, 2009; 4:26 PM ET
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