Geithner says bank fee can recoup AIG bonuses

Geithner said Congress could help recover the deeply irresponsible bonuses by passing an Obama administration proposal to levy fees on large financial firms.

American International Group Inc on Wednesday was expected to pay about $100 million in bonuses to employees of its Financial Products unit, which was responsible for making bad bets on credit default swaps that brought the insurance giant to the brink of collapse.

AIG is honoring the bonus contracts as the White House tries to recoup a $180 billion bailout which averted the insurers almost certain bankruptcy amid the financial crisis.

Those contracts were outrageous. They should never have been permitted, Geithner said in testimony to the U.S. House of Representatives Ways and Means Committee.

Obama has proposed a fee on the largest financial companies to collect around $90 billion over 10 years to recoup taxpayer losses resulting from financial bailouts.

The White House has shifted to a more aggressive stance on Wall Street since the Democrats lost a Senate seat in a special election in Massachusetts in January. The election highlighted voter resentment against big banks and big bonuses in the wake of massive bailouts during the financial crisis.

AIG is making the bonus payment more than a month ahead of schedule to employees that agreed to accept less than they were promised two years ago in retention contracts. AIG said on Tuesday it achieved a reduction of about $20 million from about $195 million in bonus payment obligations -- short of a $26 million reduction target.

That leaves about $75 million in AIG bonus payments still to come this year.

Geithner sought to channel ongoing outrage over the AIG bailout and bonuses into legislative action for financial reforms and the bank fee.

Now, if you join with us in passing this proposed fee on our largest financial institutions, then you'll be able to say, as we do, that the American taxpayer will not pay a penny for what happened at AIG, Geithner said.

GEITHNER GRILLING

With Democrats at risk of seeing their big majority in Congress eroded in November's elections, lawmakers have been increasingly critical of Obama administration policies that some say have favored Wall Street over job growth and struggling homeowners.

Geithner, who was grilled last week by a House panel over his role in the AIG bailout when he headed the New York Federal Reserve, took more criticism on Capitol Hill over the insurer.

Last year, the president was outraged at the $45 million in bonuses. A year later, the $100 million in bonuses is now, oops, said Rep. Kevin Brady, a Texas Republican. The administration's handling of AIG resembles the Keystone Cops. It would be funny if it wasn't leaving taxpayers crying about it.

Later, speaking on Bloomberg Television, Brady said he thought Geithner should resign, saying, This economy is not recovering as it should. He is the point person on the economic packages.

The Obama administration currently estimates taxpayer losses from the Troubled Asset Relief Program at about $117 billion -- a figure expected to decline as recovery takes hold. The largest losses are attributable to rescues of automakers and AIG as well as mortgage modifications.

HIRING TAX CREDIT QUESTIONED

Geithner faced skepticism from Democratic lawmakers on merits of the Obama administration's proposal to give firms a $5,000 tax credit for every new employee hired this year.

Surely, the Treasury can come up with a better way to promote job growth than a proposal that may be 90 percent ineffective, said Rep. Lloyd Doggett, a Texas Democrat.

Among objections voiced by Doggett and other Democrats, were that it would throw money at firms that would have hired anyway, it would not help firms that struggled to hang on to valued employees during the recession, and it would not last long enough to make a real difference to companies.

Geithner responded by acknowledging that the proposal was controversial but said the administration was willing to work with lawmakers on changes to the plan.

Republicans also said the Obama budget did not go far enough to reduce deficits in future years.

If you're going to solve our fiscal situation, why don't you do that? Why don't you give us a budget that gets us to a sustainable level? asked Rep. Paul Ryan of Wisconsin.

Geithner said the huge deficits were inherited from the Bush administration and we're proposing a budget, again, that takes the huge mess we inherited, cuts that deficit dramatically.

(Reporting by David Lawder; Editing by Andrew Hay)