Mar 19, 2009

Federal Reserve officials knew for months about bonuses at American International Group but failed to tell the Obama administration, according to government and company officials, exposing problems in a relationship that is vital to addressing the financial crisis.

As pressure mounted on AIG employees to return the bonuses, new details emerged yesterday about what the Fed, the Treasury Department and the White House knew regarding the payments and when. AIG executives said the Fed was informed three months ago by the company that it would pay $165 million by March 15 to employees working at its most troubled division. The Treasury and White House said they learned of the payments from Fed officials only days before they were due.

Close coordination between the Fed and the administration is now more important than ever as they near the launch of two signature programs to rescue the financial system, which together could reach $2 trillion and are aimed at reviving consumer lending and purchasing soured assets and loans from ailing banks.

Treasury Secretary Timothy F. Geithner, a central figure in the decision to bail out AIG last fall as president of the Federal Reserve Bank of New York, said in an interview yesterday that he had not been aware of the size of the bonuses and the timing of the payments.

"I was stunned when I learned how bad this was on Tuesday [March 10]," Geithner said. "I shouldn't have been in that position, but it's my responsibility and I accept that."

Two days later, Geithner told the White House. The last-minute disclosure irked some of the president's senior advisers, but they refuse to point fingers now, saying the timing had little impact on the outcome or the president's public statements this week.

"Would I have liked an earlier warning system on this? Yeah," said David Axelrod, a senior White House adviser. "Would it have markedly changed things? Probably not. The legal constraints are the legal constraints."

One source familiar with the discussions said the company had provided details about the bonuses to senior Treasury officials at least a month ago. A Treasury spokesman said last night that was not true.

Democrats and Republicans in Congress are increasingly questioning how Geithner could not have known about the bonuses, given his past role in AIG's bailout, which has totaled more than $170 billion.

"I'm sick and tired of hearing the administration and the Secretary of the Treasury say, 'I just found out about it,' " Rep. Paul E. Kanjorski (D-Pa.) said yesterday.

The dispute over AIG's payouts represents the most pressing controversy confronting the administration as it addresses the financial crisis. Some private firms say the furor has made them wary of joining the federal initiatives to help save the economy. Government officials add that the newly charged political environment will make it difficult to ask Congress for more rescue funds.

When the government rescued AIG in mid-September, no one was more central to the decision than Geithner.

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