The near-collapse of the systemically important American International Group, Inc. (AIG) highlights broad failures of the U.S. financial system, Treasury Secretary Timothy Geithner said Tuesday. In addition, he called the $165 million in bonus payments amid an unprecedented influx of taxpayer dollars deeply troubling, and outlined the Treasury's efforts to recoup the bonuses. As of Monday, $30 million of the $165 million had been returned.
Testifying before the House Financial Services Committee with Federal Reserve Chairman Ben Bernanke and New York Federal Reserve Bank President William Dudley, Geithner pledged to work on improving the regulatory structure in order to prevent another situation.
I share the anger and frustration of the American people, not just about the compensation practices at AIG and in other parts of our financial system, but that our system permitted a scale of risk-taking that has caused grave damage to the fortunes of all Americans, Geithner said in prepared testimony.
He admitted that he first became fully aware of the bonuses on March 10th, finding the compensation payments deeply troubling.
Consulting with AIG CEO Edward Liddy upon learning of the payments, Geithner realized that demanding repayment risked doubling or tripling the amount paid to the employees.
Liddy explained that the contracts for the retention payments were legally binding and pointed out the risk that, by breaching the contracts, some employees might have a claim under Connecticut law to double payment of the contracted amounts, Geithner explained.
Much of the public anger has fallen upon Mr. Liddy, but this is not fair, Geithner told lawmakers.
In addition, the vast majority of AIG employees do not deserve the public criticism, Geithner said.
Moving forward, the Treasury is working with the Department of Justice to examine how they can recoup the bonuses, Geithner said.
The issue of excessive compensation extends beyond AIG and requires reform of the system of incentives and compensation in the financial sector, he said.
In his testimony Thursday, Geithner said he will offer details about regulatory reform. In the meantime, Geithner pledged that the Obama administration and Congress will work together in order to achieve truly comprehensive regulatory reform and eliminate gaps in supervision.
The decision to intervene and save AIG from collapse came from the decision that its disorderly collapse could cause large and unpredictable global losses with systemic consequences -- destabilizing already weakened financial markets, further undermining confidence in the economy, and constricting the flow of credit. Geithner noted.
A disorderly failure of AIG risked deepening and prolonging the current recession, he added.
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