AIG bonus payments controversy
| Industry | Financial services |
|---|---|
| Headquarters | New York City , United States |
The AIG bonus payments dispute surfaced in March 2009 when it was revealed that American International Group intended to distribute around $218 million (~$ in ) in bonuses to staff within its financial services segment.
Having accepted government bailout funds, AIG reported a record-breaking loss of $61.7 billion (~$ in ) for the fourth quarter of 2008, marking the largest corporate deficit recorded as of May 2024. Although an initial figure of $165 million in bonuses was made public, projections indicated that total bonuses for the financial unit might reach $450 million, with overall company bonuses potentially amounting to $1.2 billion.
This revelation sparked widespread condemnation from politicians on both sides of the aisle and media analysts. Legislative proposals were passed by both the United States House of Representatives and United States Senate aiming to impose heavy taxes on these bonuses; however, these measures never became law due to resistance from financial industry stakeholders and opposition from President Barack Obama.
In the aftermath, 15 out of the top 20 AIG executives voluntarily returned their bonuses, reimbursing the company with $50 million. Following these returns, House Majority leader Steny Hoyer declared that no further legislative interventions were necessary.
Background
AIG had insured risky financial instruments tied to the subprime mortgage crisis without conducting thorough risk evaluations. The company secured numerous contracts from real estate investors by offering insurance policies below prevailing market prices. While AIG profited during the Great Moderation, it failed to accumulate an insurance reserve adequate to cover potential losses—a task rendered impractical by the magnitude of exposure. Instead, the firm increased executive compensation and shareholder dividends. As a result, its investment arm became insolvent amid the 2008 financial crisis.
To prevent collapse, the Federal Reserve Bank of New York extended an emergency liquidity facility up to $85 billion to support AIG, with plans for repayment through asset liquidation. After assessing that an uncontrolled failure of AIG could exacerbate the financial turmoil, the Federal Reserve intervened at AIG’s request by acquiring a 79.9 percent equity stake as collateral for the loan risk. This bailout received backing from then-presidential candidate Barack Obama and a majority in United States Congress, which enacted the Bailout Bill authorizing this intervention.
Responses from politicians
In response to the controversy, President Barack Obama condemned the $165 million in bonuses awarded to AIG’s derivative traders, questioning how such payouts could be justified given taxpayer support. He instructed Secretary Timothy Geithner to explore legal avenues to prevent these payments and safeguard public funds.
Members across Congress voiced strong disapproval. Senator Chuck Grassley (R-Iowa) called for AIG executives’ resignation or severe repercussions. Senator Chuck Schumer (D-New York) criticized AIG’s operations as "Alice in Wonderland business practices." Senators Richard Shelby (R-Alabama) and Mitch McConnell (R-Kentucky) described the bonuses as "horrible" and "outrageous." Senator Jon Tester (D-Montana) highlighted that taxpayer support was the sole reason AIG executives retained their positions. Senator Dick Durbin (D-Illinois) deemed the bonuses unjustifiable amid ongoing government assistance. Representative Paul Hodes (D-New Hampshire) characterized AIG as epitomizing "arrogance, incompetence and greed."
Representative Barney Frank (D-Massachusetts), Chair of the House Financial Services Committee, labeled the bonuses as "rewarding incompetence," emphasizing that employees were not guaranteed job security. Representative Mark Kirk (R-Illinois) criticized AIG for distributing bonuses while depending on taxpayer bailouts and transferring funds abroad. Federal Reserve Chairman Ben Bernanke expressed frustration over the issue, while National Economic Council Director Lawrence Summers acknowledged challenges in nullifying contractual obligations despite public discontent. Council of Economic Advisers member Austan Goolsbee warned about potential adverse public reactions.
Frank clarified that congressional bailout legislation did not initially include intervention in AIG; Federal Reserve and Treasury officials independently authorized an $85 billion loan under existing laws. Subsequent congressional measures imposed stricter conditions on bailout recipients, prompting some banks to consider repaying government funds.
Representative Thaddeus McCotter (R-Michigan) accused Democrats of shielding AIG bonuses through bailout-related votes. Senator Jim Inhofe (R-Oklahoma) held accountable the 74 Senators who approved the bailout—including then-President Obama—for granting unelected officials unprecedented authority and financial resources.
Taxation of Bonuses
On March 19, 2009, the House of Representatives passed legislation imposing a 90% tax on bonuses granted by corporations that received over $5 billion in financial assistance through the Troubled Asset Relief Program (TARP). The measure focused on individuals with total household earnings exceeding $250,000 and applied to bonuses distributed after December 31, 2008. Meanwhile, the Senate proposed a different approach, suggesting a 70% tax on bonuses from any company receiving Treasury funds, divided equally as a 35% excise tax on the corporation and a 35% tax on the bonus recipient.
Some legal analysts expressed concerns regarding constitutional issues, particularly referencing prohibitions against bill of attainder and ex post facto legislation. Nonetheless, other experts pointed out that retroactive tax laws enacted for brief periods have been upheld by courts. The bill’s broader scope—applying to multiple companies rather than a single entity—and its inclusion of future bonuses were seen as factors reinforcing its constitutionality.
In an editorial for the Wall Street Journal, Citi employee Jonathan Clements argued that such a tax might discourage earnings beyond $250,000 and unfairly penalize those who had already spent their bonuses. CNN coverage underscored worries that altering contractual terms post-agreement could deter private firms from engaging with the federal government. President Obama cautioned against demonizing investors and entrepreneurs essential to economic progress.
Following these criticisms, a spokesperson for Senate Majority Leader Harry Reid indicated a temporary halt to reevaluate the strategy. House Majority Leader Steny Hoyer suggested that the tax might no longer be necessary due to some bonuses being repaid but acknowledged its value in drawing attention to the matter.
In the end, no tax specifically targeting TARP-related bonuses was enacted. President Obama revisited this proposal during his 2010 campaign; however, Congress showed little enthusiasm for implementing such measures at that time.
Limitations on Base Salary
Representative Brad Sherman introduced legislation aimed at capping base salaries for employees at companies receiving $5 billion or more in TARP funds by taxing all non-bonus compensation exceeding $500,000. The bill intended to encompass all types of remuneration—including amounts disguised as bonuses—to prevent circumvention. Despite these efforts, the proposal did not become law.
Media Reactions
Across the political spectrum, commentators expressed strong disapproval regarding the bonus payments. Conservative commentator Charles Krauthammer advocated for completely eliminating bonuses, while Mort Kondracke called for severe public sanctions. On MSNBC, host Rachel Maddow criticized contracts guaranteeing bonuses even when employees contributed to corporate failures. Chuck Todd characterized public sentiment as a "lynch mob," and Comedy Central host Jon Stewart denounced executives as "not good people." The editorial board of The New Jersey Star-Ledger demanded accountability, spotlighting the $62 billion loss and questioning why highly compensated executives remained in place.
CNN’s Carol Costello highlighted fears that public outrage had reached a critical threshold. Conservative voice William Kristol questioned capitalism’s viability under such excesses and urged Republicans to condemn these practices. Forbes contributor Robert Lenzner attributed AIG’s bailout and bonus controversy to reckless leadership—particularly former chairman Maurice "Hank" Greenberg—labeling it "cowboy capitalism" fueled by arrogance. Slate’s Karim Bardeesy likened AIG’s corporate culture to corrupt regimes necessitating external intervention.
MSNBC host Keith Olbermann described the bonuses as "rewards for failure," while law professor Jonathan Turley raised concerns about potential fraud in hastily drafted contracts and warned of escalating social unrest nearing a breaking point. Journalist John Kelso noted public fury reminiscent of revolutionary uprisings directed at privileged executives. Bloomberg’s Susan Antilla reported widespread demands for responsibility and transparency. Fred J. Joseph, president of the North American Securities Administrators Association, echoed these sentiments with vivid imagery of public revolt.
The Washington Post reported increased security measures at AIG Financial Products offices amid death threats and resignations, with employees fearing for their personal safety. The Associated Press mentioned heightened police presence in executive neighborhoods and advised staff to avoid displaying company insignias or traveling openly. Reuters quoted a senior banker who compared the atmosphere to a modern French Revolution targeting financial institutions.
NBC Connecticut obtained records documenting numerous death threats against AIG personnel and their families, some identifiable due to contact information provided.
In The Wall Street Journal, James Taranto calculated that combined federal and local taxes on bonuses could surpass 100%, effectively taxing recipients beyond their actual bonus amounts.
Economist Thomas Sowell criticized politicians who both contributed to the financial crisis and now condemn bonus payouts, asserting that those familiar with existing laws acted within legal boundaries despite political backlash.
Mike Cassidy of the San Jose Mercury News described these bonuses as redefining what it means to be a "bank robber," arguing that financial insiders consciously ignored public opinion in pursuit of excessive compensation.
Response from state authorities
On March 16, 2009, New York State Attorney General Andrew Cuomo demanded that AIG disclose "the roster of individuals slated to receive payments," along with their roles and performance evaluations at AIG Financial Products. This was intended to determine whether those awarded bonuses were implicated in the behaviors that precipitated AIG's downfall and subsequent government bailout. When AIG did not comply, Cuomo issued a subpoena for the names of bonus recipients. He disclosed that 73 employees at AIG had been granted bonuses exceeding $1 million each, stating, "AIG created over 73 millionaires within the division responsible for such substantial losses that it nearly destroyed the company, necessitating a taxpayer-funded rescue," and condemned the situation as profoundly unjust.
On March 21, Connecticut Attorney General Richard Blumenthal issued a subpoena to investigate an additional $53 million in bonuses beyond the previously disclosed $165 million.
Bonuses excluded under TARP
On February 14, 2009, the Wall Street Journal reported that Senator Chris Dodd had incorporated a retroactive cap on bonus payments within the TARP legislation. Treasury Secretary Timothy Geithner and Lawrence Summers reportedly urged Dodd to reconsider this measure.
However, on March 17, 2009, Fox Business Network revealed that Dodd had introduced a clause exempting these bonuses from TARP’s executive compensation restrictions. This exemption was later removed during conference committee negotiations and replaced with specific carve-outs supported by Geithner and Summers.
In an interview on March 18, Dodd admitted that he substituted his original language with the loophole permitting these bonuses at the insistence of the Obama Administration. He subsequently retracted his earlier denial of knowledge regarding these legislative changes. Connecticut media outlets criticized Dodd for this reversal; a New Haven Register editorial branded him "a lying weasel," while a columnist for the Hartford Courant urged him not to seek re-election. In January 2010, Dodd declared he would not pursue another term.
AIG’s defense and external reactions
AIG justified the bonus payments by pointing to contractual commitments and contended that only their executives possessed the expertise required to unwind intricate derivative contracts. Rick Newman of U.S. News & World Report characterized this justification as comparable to extortion. MSNBC host David Shuster highlighted that 52 of the bonus recipients had already departed from AIG, casting doubt on the claim that bonuses were necessary for employee retention.
Support for these payments outside AIG was scarce. Former White House Press Secretary Dana Perino argued that bonuses were essential incentives for employees and criticized negative commentary from Washington. Terence Corcoran of the Financial Post attributed blame to "massive government failure" under Barack Obama, rather than AIG itself. Evan Newmark of The Wall Street Journal dismissed critics as engaging in "hysterical, bloodthirsty ravings." Meanwhile, Andrew Ross Sorkin of The New York Times advocated for paying bonuses to retain key personnel and cautioned that violating contracts could undermine business confidence.
Joshua Zumbrun of Forbes and Eliot Spitzer of Slate maintained that public outrage over bonuses distracted from the fundamental issue: AIG utilized bailout funds to fulfill contracts with Wall Street banks and hedge funds at full value.
Conservative commentator Rush Limbaugh defended AIG by emphasizing both the legality and economic benefits of the bonuses. He stressed that these payments were merit-based, contractually mandated, and subsequently spent by recipients—thereby injecting stimulus into the private sector. Limbaugh warned that withholding bonuses would provoke litigation, noting government majority ownership through officials such as Barney Frank, Chris Dodd, and Nancy Pelosi.
Bonus Repayment
AIG's CEO, Edward M. Liddy, informed Congress that he requested employees who received bonuses exceeding $100,000 to return half of the amount. This initiative, backed by New York Attorney General Andrew Cuomo, was met with criticism from some legislators who considered it inadequate. AIG highlighted that under Connecticut’s Wage Act, withholding contractual bonuses could potentially result in a requirement to pay double the original sum.
By March 23, 2009, nine out of the ten top-earning AIG executives and fifteen of the twenty highest-paid employees had consented to refund their bonuses. While the majority of those complying were U.S.-based staff, many international employees resisted, characterizing the demand as "blackmail" or "extortion," due to concerns over exposure from Cuomo’s inquiry.
In response to these events, House Majority Leader Steny Hoyer indicated that imposing a tax on these bonuses might no longer be necessary.
Resignation of Jake DeSantis
On March 24, 2009, Jake DeSantis, serving as executive vice president of AIG's financial products division, announced his resignation through an open letter addressed to CEO Edward Liddy. DeSantis stressed that most employees within AIG-FP were not responsible for losses related to credit default swaps and had invested their own funds via deferred compensation plans. He pointed out that staff had agreed to accept a nominal salary of $1 per year out of a sense of obligation and anticipated retention bonuses following the bailout—expectations they felt were compromised by political pressures and insufficient support from Liddy. Additionally, DeSantis committed to donating his March 2009 compensation to individuals impacted by the economic crisis.
External links
- 90% Tax on Bonuses HR 1586 passed the House on March 19, 2009.