Obama promises to fight AIG's $165M bonuses

WASHINGTON - President Obama and his top economic advisers scrambled to calm a nationwide furor on Monday over bonuses paid at American International Group, even as administration officials acknowledged they had known about the issue for months.

One day after the economic advisers insisted that their hands had been tied by contracts requiring the payments, Obama ordered the Treasury department to "pursue every single legal avenue to block these bonuses."

"In the last six months, AIG has received substantial sums from the U.S. Treasury," Obama said. "How do they justify this outrage to the taxpayers who are keeping the company afloat?"

David Axelrod, an Obama aide, called the bonuses "spectacularly tone-deaf."

But as anger from lawmakers increased, White House and Treasury officials offered only a general sense of how they would carry out Obama's order and few explanations for why they had not acted earlier.

White House officials said the Treasury would recapture the bonus money by writing new requirements into a $30 billion installment of government aid scheduled to go soon to the ailing insurance conglomerate. The government has already provided $170 billion in taxpayer assistance to keep AIG from failing and now owns nearly 80 percent of the company.

But administration officials conceded that almost all of the most recent round of bonuses, totaling $165 million, had been paid Friday, one day before the Treasury publicly acknowledged that it had reluctantly approved the payouts. The officials said that people who received the bonuses would probably be able to keep them.

By seeking to link repayment of the bonus money to the coming $30 billion in aid, the administration seemed to leave open the possibility that the company would effectively be repaying taxpayers with taxpayer money. A Treasury official disputed that but could not specify how else the company would give back the money.

New York launches inquiry

Increasing the pressure on the company, Andrew Cuomo, the New York attorney general, said he issued subpoenas for the names, job descriptions and performance evaluations of the employees receiving the bonuses. He said he and his office will investigate whether the payments are fraudulent under state law because they were promised when the company knew it wouldn't have the money to cover them.

"You could argue that if taxpayers hadn't bailed out AIG, the contracts wouldn't be worth the paper they were signed on," he said.

AIG spokeswoman Christina Pretto said the company was in contact with Cuomo's office.

For all the furor since details of the bonuses became public over the past several days, the issue of AIG retention payments globally has been percolating publicly since AIG was bailed out in mid-September. About $1 billion in retention payments for 2008 and 2009 are in question, but the controversy involves about half of that, about $450 million over two years, that was intended for employees of AIG's financial products unit. That unit was the source of the financial derivatives blamed for the near-meltdown at the heart of the economy's downturn.

Treasury and Federal Reserve officials said they had known about the bonus program as far back as last fall. They said they knew that AIG had paid $55 million in bonuses in December. But administration officials said that Treasury Secretary Timothy Geithner did not personally become aware until last week that an even bigger round of payments was due on March 15.

AIG executives said they would never have proceeded before getting federal approval. AIG Chief Executive Edward Liddy was brought in after the government took the majority stake, called paying the bonuses "distasteful and difficult." He is to appear before a congressional subcommittee Wednesday.

A simple story line

One reason that the bonus giveaway is such a compelling story -- and a politically troubling one for Obama if not neutralized -- is that it offers a simple story line that appears to sum up ways in which the federal bailouts have gone awry. A backlash could make it tougher for Obama to ask Congress for more bailouts and jeopardize other parts of his agenda.

"This is just the kind of issue that galvanizes public outrage," said Paul Light, professor of public service at New York University. "It's always the tangible stuff, the things that ordinary Americans can relate to."

It also highlighted a broader confusion over who controls the insurance conglomerate. The Treasury and the Federal Reserve have both pumped money into the company, but the two agencies have never made it clear which of them is in charge. Both agencies have insisted that neither of them "owns" AIG, or controls its management decisions, even though the government owns almost 80 percent of the company.

The Los Angeles Times and Associated Press contributed to this report.