The AIG bonus payments controversy began in March 2009, when it was publicly disclosed that the American International Group (AIG) insurance corporation was going to pay approximately $218 million (~$ in ) in bonus payments to employees of its financial services division.
AIG is notable for having received taxpayer bailouts and in the fourth quarter of 2008 posted a loss of $61.7 billion (~$ in ), the greatest ever for any corporation. Beyond the $165 million in bonus payments that were announced in March 2009, the total bonuses for the financial unit is unknown; it was estimated that it could have reached $450 million and bonuses for the entire company could have reached $1.2 billion.
The event sparked widespread outrage among both Democratic and Republican politicians, and from media commentators on all sides of the political spectrum. Both the House of Representatives and the Senate adopted bills that taxed these bonuses at a very high rate, but these bills were never signed into law and were opposed by the financial sector and President Barack Obama.
In the end, some AIG employees, including 15 out of the 20 top executives of the company, paid back the bonuses they received to the company. In total, 50 million dollars in bonuses paid were returned to AIG. Following this announcement, House Majority leader Steny Hoyer concluded that the scandal did not warrant a legislative response.
Background
AIG had insured the toxic financial assets that caused the subprime mortgage crisis without making rigorous risk assessments. They attracted many contracts from Real Estate investors because their investment insurance policies were cheaper than market value. With the windfalls they made during the Great Moderation, they neglected creating an insurance fund large enough to cover what they were insuring, which would have been impossible given the sums involved. Instead, they raised the salaries and bonus of the firm's executive, and paid higher dividends to its shareholders. The investment section of the firm thus became insolvent during Financial crisis of 2007–2008.
The Federal Reserve Bank of New York bailed out AIG by providing an emergency credit liquidity facility of up to $85 billion, which will be repaid by selling off assets of the company. After assessing that a disorderly failure of AIG could worsen the current financial and economic crisis, and at the request of AIG, the Federal Reserve Bank of New York intervened. The Federal Reserve required a 79.9 percent equity stake as a fee for service and to compensate for the risk of the loan to AIG. Presidential candidate Barack Obama supported this bailout at the time, along with most of Congress, who adopted the Bailout Bill that enabled it.
Responses from politicians
On the wake of the scandal, President Barack Obama said, "[I]t's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?" and "In the last six months, AIG has received substantial sums from the U.S. Treasury. I’ve asked Secretary Geithner to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole."
Politicians on both sides of Congress reacted with outrage to the planned bonus payments. Senator Chuck Grassley (Republican, Iowa) said "I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide." Senator Chuck Schumer (Democrat, New York) accused AIG of "Alice in Wonderland business practices" and said "It boggles the mind." Senator Richard Shelby (Republican, Alabama) said "These people brought this on themselves. Now you're rewarding failure. A lot of these people should be fired, not awarded bonuses. This is horrible. It's outrageous." Senator Mitch McConnell (Republican, Kentucky) echoed his comments, saying "This is an outrage." Senator Jon Tester (Democrat, Montana) said "This is ridiculous." and AIG executives "need to understand that the only reason they even have a job is because of the taxpayers." Senator Dick Durbin (Democrat, Illinois) said "I've had it." and "The fact that they continue to do it while we pour in billions of dollars is undefensible." Representative Paul Hodes (Democrat, New Hampshire) said "I think AIG now stands for arrogance, incompetence and greed."