[Congressional Record (Bound Edition), Volume 156 (2010), Part 4]
[Senate]
[Pages 4664-4666]
[From the U.S. Government Publishing Office, www.gpo.gov]




                         AIG SEVERANCE PAYMENTS

  Mr. GRASSLEY. Mr. President, I recently asked Secretary Geithner why 
the Treasury Department is allowing AIG to pay millions of dollars of 
severance pay to executives given the billions of dollars of taxpayer 
assistance AIG has received.
  At one point I even said that AIG has the American taxpayer over a 
barrel and that AIG has outmaneuvered the administration.
  Mr. Kenneth Feinberg, the Treasury Special Master for executive 
compensation, insisted he was not outmaneuvered by AIG. As it turns 
out, he was not outmaneuvered by AIG. Instead, he was outmaneuvered by 
Secretary Geithner. Let me explain what I mean.
  In February, 2009, we enacted the Recovery Act. The law required 
Secretary Geithner to take control of the runaway executive 
compensation at companies that the American taxpayer bailed out.
  Congress provided Mr. Geithner with several tools to accomplish this 
critical job.
  By far the most important and most flexible tool Congress gave Mr. 
Geithner was a general mandate to require bailed-out companies like AIG 
to meet ``appropriate standards'' for executive compensation.
  This rule was applicable to compensation already in place, 
compensation in the future, and compensation for all executives, not 
just a handful of the most senior executives.
  What happened to this tool?
  Well, even before the law was passed the bonuses, retention awards, 
and incentive compensation were ``grandfathered.''
  That means that while one part of the statute banned them for a 
handful of senior executives, another part said they had to be paid if 
the payments were based on a contract that existed in February 2009.
  We all remember the outrage when people learned that this provision 
was quietly added by the Senate drafters on the other side of the aisle 
because it required AIG to pay massive bonuses in March 2009 and again 
earlier this year.
  Secretary Geithner was quoted in the press at the time saying that 
``Treasury staff'' worked with the Senate drafters on the grandfather 
carve-out. Well, the damage was done.
  The grandfather loophole was law. You might say the American taxpayer 
was outmaneuvered by Treasury staff too.
  The President instructed Secretary Geithner to ``pursue every single 
legal avenue to block these bonuses and make the American taxpayers 
whole.''
  The next step required Treasury to implement the law and use the 
tools Congress gave Mr. Geithner to put the brakes on runaway executive 
compensation at firms where taxpayers are footing the bill.

[[Page 4665]]

  What did Treasury do?
  One thing Treasury apparently did was hire a Wall Street executive 
compensation lawyer from a firm that specializes in helping highly paid 
executives maximize their pay, but more about that later.
  Despite the public outcry over the loophole, which permitted AIG 
employees and others to walk away with millions, Treasury wrote a 
regulation that actually expands the loophole even further.
  That's right, in the face of overwhelming public outrage, Treasury 
quietly worked to expand the loophole! Let me explain how they did 
that.
  The grandfather provision in the law that Congress enacted protected 
three things: bonuses, retention awards, and incentive compensation. It 
did not protect severance. Let me repeat: it did not protect severance.
  But in what appears to be an effort to protect severance agreements 
despite the statutory language, the regulations Treasury drafted 
expanded the term ``bonus'' beyond its normal meaning.
  Unlike bonuses, severance payments are intended to ease someone out 
the door, not reward them for doing a great job. Severance is basically 
the opposite of a retention bonus.
  But, after Treasury drafted the regulation, suddenly, severance 
payments were also protected by the grandfather loophole, just like 
bonuses. Treasury must have known exactly what it was doing.
  AIG had an executive severance plan that dated back to March 2008. It 
was just the sort of contract the grandfather provision would protect 
if Treasury expanded the loophole.
  And what was the impact of the Treasury regulation on the bottom 
line? What did American taxpayers have to pay?
  Because of this regulation, AIG recently paid two of its executives 
$1 million and $3.9 million in severance pay. We don't yet know how 
many others have received severance or may receive it in the future.
  As the law was passed, these payments would not have been protected 
by the grandfather provision because they were not a bonus, retention, 
or incentive payment.
  But Treasury officials took care of that. Rather than setting 
appropriate standards for executive severance payments generally, as 
the law passed by Congress required, the regulation leaves AIG free to 
pay excessive severance payments to many of its executives. Then, the 
American taxpayer gets the bill.
  The Recovery Act told Mr. Geithner that he ``shall'' require each 
bailed-out company to meet appropriate standards for executive 
compensation. This command covers all types of executive compensation 
for all executives, not just bonuses for the most senior executives.
  It is a command, not a suggestion. And the grandfather provision that 
protects certain bonuses does not apply to this more general provision.
  But the Treasury regulation almost completely ignores this mandate. 
It does address one form of executive compensation. The regulation bars 
tax gross-up payments for senior executives.
  That is the practice of allowing the company to pay the executive's 
income taxes for him. Now don't get me wrong--tax gross-up payments 
should be banned for companies that were bailed out, and I am glad to 
see that this was done.
  But Congress gave Mr. Geithner a powerful tool that should have been 
used to curb other types of inappropriate executive compensation as 
well.
  That includes tax gross-ups, extravagant severance payments, and 
other goodies to which Wall Street thinks it is entitled.
  Secretary Geithner should have used the tool as it was intended. It 
is like using a big tractor to plow a little flower garden.
  There is nothing wrong with banning tax gross-ups or planting flower 
gardens, but you could have done so much more with the tool you had.
  If Secretary Geithner had done what he was directed to do in the law, 
we would not be witnessing this spectacle.
  AIG is paying multimillion-dollar severance payments at taxpayer 
expense to executives who chose to resign rather than work for the 
maximum salary of $500,000 per year set by the Special Master.
  This is a scandal as far as I am concerned. The American taxpayer, as 
well as Mr. Feinberg, was outmaneuvered by Secretary Geithner and his 
staff. And it all happened before the Special Master's first day on the 
job.
  There is another troubling matter that I must address. I mentioned 
earlier that the Treasury Department hired at least one Wall Street 
executive compensation lawyer from a firm that specializes in helping 
wealthy executives maximize their pay.
  There is nothing wrong, as a general matter, with hiring talented 
people with expertise in technical legal subjects to draft regulations 
and administer the law.
  But there are some red flags here that need a little sunshine. We 
need to be sure that the people working on these issues at Treasury 
have dealt with any potential conflicts of interest carefully and 
openly.
  Recently I learned that at least one Treasury official previously 
worked for Wachtell, Lipton, Rosen and Katz, a top Wall Street law 
firm. Wachtell, Lipton has represented at least two former AIG 
executives.
  The firm's job was to look out for the interests of the executives, 
not the shareholders. They were paid to make sure the compensation 
contracts, including severance provisions, were as generous as possible 
for their clients.
  Wachtell, Lipton also represented Bank of America on its 
controversial Merrill, Lynch acquisition in 2008. A Wachtell attorney 
who worked on that deal joined Treasury in the spring of 2009.
  He said that he then worked on the Treasury executive compensation 
regulations. These are the regulations I have been describing: the 
regulations that were to govern AIG, Bank of America and all of the 
other bailed-out companies.
  This situation raises a host of questions, for example:
  How many other Treasury officials have similar potential conflict 
issues?
  Why wasn't the attorney recused from participating in the drafting of 
a regulation that was going to have a direct effect on Bank of America, 
his former client, and AIG executives, his firm's former clients?
  Did the attorney comply with the revolving door provision of the 
President's Executive order, which prevents appointees from working on 
matters that relate to their former clients?
  The President has committed to publicly disclosing all the waivers 
issued to exempt appointees from his ethics executive order. If this 
attorney recused himself, as he should have, why was that recusal not 
also disclosed so that the public would know about the potential 
conflict?
  At a minimum there is the potential for an appearance of impropriety 
here.
  What we know so far raises serious questions and red flags. But there 
also are facts we do not know.
  Therefore, I am asking that the special inspector general for TARP 
investigate these issues and report his findings to Congress and the 
public as soon as possible.
  Specifically, I am asking the inspector general to examine why 
Treasury did not set appropriate compensation standards pursuant to 
section 111(B)(2) of the Recovery Act sufficient to prevent severance 
payments like those AIG recently paid to its former general counsel and 
chief compliance officer.
  I am also asking him to determine whether Treasury officials working 
on executive compensation matters have fully complied with the 
revolving door provision of the President's Ethics Executive order.
  In the meantime, there are still numerous documents that I have 
requested that have not been provided to me despite assurance that I 
was going to get them.
  There are many questions I have asked that remain unanswered, and I 
will continue to seek information on these issues.
  I call on Secretary Geithner to stop stonewalling. Oversight is 
important. Oversight is necessary to protect the

[[Page 4666]]

American taxpayer. I take that duty seriously, and I am not going away. 
American taxpayers deserve to know where their money is going.
  Mr. President, I ask unanimous consent that a copy of my letter to 
special inspector general Barofsky be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                                      U.S. Senate,


                                         Committee on Finance,

                                   Washington, DC, March 23, 2010.
     Hon. Neil M. Barofsky,
     Special Inspector General, Office of the Special Inspector 
         General, Troubled Asset Relief Program, United States 
         Department of the Treasury, Washington, DC.
       Dear Special Inspector General Barofsky: I have 
     communicated on several occasions during the last few months 
     with the Secretary of the Treasury and the Special Master for 
     TARP executive compensation to try to get to the bottom of 
     why AIG was allowed to pay excessive severance awards to AIG 
     executives after the passage of the American Recovery and 
     Reinvestment Act of 2009 (Recovery Act). Answers have not 
     been forthcoming and therefore I am writing to ask that you 
     investigate these matters and report your findings to me as 
     soon as possible. I am particularly troubled by a chronology 
     of events that seems to suggest a deliberate decision on the 
     part of Treasury to improperly protect executive severance 
     pay and tie the hands of the Special Master.
       The Recovery Act required the Treasury Secretary to set 
     standards for appropriate levels of executive compensation at 
     TARP recipients generally. It specifically prohibited the 
     payment of bonuses, retention awards and incentive 
     compensation to the top 25 executives at bailed-out companies 
     like AIG, but then protected many such payments by the 
     controversial ``grandfather'' provision added late in the 
     drafting process. Consequently, bonus payments, retention 
     awards and incentive compensation based on a contract in 
     existence on or before February 11, 2009, were required to be 
     paid. But the provision did not cover severance pay because 
     severance is not generally understood to be within the 
     meaning of incentive or retention bonuses. That is why I was 
     surprised to learn earlier this year that AIG reportedly paid 
     its former General Counsel $3.9 million and its former Chief 
     Compliance and Regulatory Officer $1 million in severance.
       Treasury published regulations on June 15, 2009, 
     implementing the Recovery Act's executive compensation 
     provisions. Treasury also named Mr. Kenneth Feinberg as the 
     Special Master. It appears that, despite the earlier public 
     outcry over the retention bonus grandfather loophole, 
     Treasury's regulation added severance pay to the list of 
     executive compensation items covered by the grandfather. 
     Worse still, Treasury virtually ignored the requirement in 
     section 111(b)(2) of the Recovery Act that the Secretary 
     ``shall require each TARP recipient to meet appropriate 
     standards for executive compensation.'' Section 111(b) (2) is 
     a general provision and is not limited by the more specific 
     restrictions in 111(b) (3) related to the top 25 executives 
     and the grandfather provision. Nevertheless, this mandated 
     authority was not used to regulate severance pay for 
     executives like the former AIG General Counsel. Therefore, I 
     am asking you, among other things, to evaluate why Treasury 
     did not effectively implement the Congressional mandate in 
     section 111(b) (2) to prevent inappropriate executive 
     compensation, such as excessive severance payments, more 
     broadly.
       There is another troubling matter that I am asking you to 
     review. The current Deputy Special Master joined Treasury in 
     May 2009. He told us he participated in drafting the Treasury 
     regulations. Of course, those regulations governed executive 
     compensation at TARP recipients like AIG and Bank of America. 
     The problem is that this attorney worked for the Wall Street 
     law firm Wachtell, Lipton, Rosen & Katz prior to joining 
     Treasury. While at Wachtell, it is my understanding that this 
     attorney represented Bank of America during its acquisition 
     of Merrill, Lynch in the fall of 2008. Also, the Wachtell 
     firm represents the former CEO and former CFO of AIG on 
     executive compensation matters, including severance. In fact, 
     I understand that those executives may still be planning to 
     make claims against AIG for millions of dollars of severance 
     pay.
       At a minimum this presents the appearance of serious 
     impropriety. There are several red flags and questions 
     stemming from this information including, for example, why 
     was this Treasury official permitted to work on a regulation 
     that would directly affect his former client and a client of 
     his former law firm? Did he fully comply with the revolving 
     door provisions of the President's Ethics Executive Order, 
     prohibiting appointees from participating in matters 
     involving their former clients? If he was recused, when did 
     the recusal occur and why was it not publicly disclosed? How 
     many other Treasury officials working on executive 
     compensation matters have similarly undisclosed potential 
     conflicts for which recusals have been necessary to ensure 
     compliance with the President's executive order? What are the 
     details of the other potential conflicts, if any? Therefore, 
     I also ask that you examine this situation and report your 
     findings.
       Thank you in advance for your attention to this important 
     matter. Please contact my staff if you have any questions or 
     need additional information.
           Sincerely,
                                              Charles E. Grassley,
     Ranking Member.

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