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AIG BONUSES: AUDIT REPORT OF THE SIGTARP

HEARING

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED ELEVENTH CONGRESS

FIRST SESSION

OCTOBER 14, 2009

Serial No. 111–42

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

JIM COOPER, Tennessee

GERALD E. CONNOLLY, Virginia

MIKE QUIGLEY, Illinois

MARCY KAPTUR, Ohio

ELEANOR HOLMES NORTON, District of

Columbia

PATRICK J. KENNEDY, Rhode Island

DANNY K. DAVIS, Illinois

CHRIS VAN HOLLEN, Maryland

HENRY CUELLAR, Texas

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

BILL FOSTER, Illinois

JACKIE SPEIER, California

STEVE DRIEHAUS, Ohio

——— ———

DARRELL E. ISSA, California

DAN BURTON, Indiana

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

BRIAN P. BILBRAY, California

JIM JORDAN, Ohio

JEFF FLAKE, Arizona

JEFF FORTENBERRY, Nebraska

JASON CHAFFETZ, Utah

AARON SCHOCK, Illinois

BLAINE LUETKEMEYER, Missouri

ANH ‘‘JOSEPH’’ CAO, Louisiana

RON STROMAN, Staff Director

MICHAEL MCCARTHY, Deputy Staff Director

CARLA HULTBERG, Chief Clerk

LARRY BRADY, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on October 14, 2009 .......................................................................... 1

Statement of:

Barofsky, Neil M., special inspector general for the Troubled Asset Relief

Program, Office of the Special Inspector General ...................................... 19

Letters, statements, etc., submitted for the record by:

Barofsky, Neil M., special inspector general for the Troubled Asset Relief

Program, Office of the Special Inspector General, prepared statement

of ..................................................................................................................... 22

Cao, Hon. Anh ‘‘Joseph’’, a Representative in Congress from the State

of Louisisana, prepared statement of .......................................................... 147

Clay, Hon. Wm. Lacy, a Representative in Congress from the State of

Missouri, followup question and response .................................................. 85

Connolly, Hon. Gerald E., a Representative in Congress from the State

of Virginia, prepared statement of .............................................................. 149

Issa, Hon. Darrell E., a Representative in Congress from the State of

California, prepared statement of ................................................................ 10

Towns, Chairman Edolphus, a Representative in Congress from the State

of New York:

Binder of documents relating to hearing ................................................. 96

Prepared statement of ............................................................................... 4

(1)

AIG BONUSES: AUDIT REPORT OF THE

SIGTARP

WEDNESDAY, OCTOBER 14, 2009

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10:10 a.m., in room

2154, Rayburn House Office Building, Hon. Edolphus Towns (chairman of the committee) presiding.

Present: Representatives Towns, Issa, Cummings, Kucinich,

Tierney, Clay, Watson, Connolly, Quigley, Kaptur, Norton, Kennedy, Van Hollen, Cuellar, Murphy, Welch, Foster, Speier,

Driehaus, Burton, Mica, Duncan, McHenry, Bilbray, Jordan, Flake,

Fortenberry, Chaffetz, Schock, Luetkemeyer, and Cao.

Staff present: John Arlington, chief counsel—investigations; Lisa

Cody, investigator; Brian Eiler and Neema Guliani, investigative

counsels; Linda Good, deputy chief clerk; Jean Gosa, clerk; Adam

Hodge, deputy press secretary; Carla Hultberg, chief clerk; Marc

Johnson, assistant clerk; Mike McCarthy, deputy staff director;

Leah Perry, senior counsel; Jason Powell, counsel and special policy

advisor; Jenny Rosenberg, director of communications; Joanne

Royce, senior investigative counsel; Mark Stephenson, senior policy

advisor; Alex Wolf, professional staff member; Lawrence Brady, minority staff director; John Cuaderes, minority deputy staff director;

Rob Borden, minority general counsel; Jennifer Safavian, minority

chief counsel for oversight and investigations; Frederick Hill, minority director of communications; Adam Fromm, minority chief

clerk and Member liaison; Kurt Bardella, minority press secretary;

Seamus Kraft, minority deputy press secretary; Christopher Hixon,

minority senior counsel; Brien Beattie and Mark Marin, minority

professional staff members.

Chairman TOWNS. Good morning.

I would like to welcome a new member to the committee, on the

minority side, Representative Joseph Cao represents the Second

District of Louisiana. How do you pronounce that?

Mr. CAO. It is like cow with a G.

Chairman TOWNS. After consultation with the ranking member

and pursuant to committee rule 8, I am assigning him to the Federal Workforce Committee. I welcome the gentleman and look forward to his contribution.

I yield to the ranking member of the committee, the gentleman

from California, Congressman Issa.

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Mr. ISSA. Thank you, Mr. Chairman. Before we start this important hearing, I think it is important to have our newest Member

seated.

Representative Cao asked for this committee, competed for this

committee, made the case for why the things that happen in his

home parishes in Louisiana are so critically related to this committee, and I agree with him. This committee, of course, after Hurricane Katrina, certainly has been down to his District a lot. But,

more importantly, this is a Member who has requested it because

he believes that this committee has an important part in routing

out waste, fraud, and abuse in Government.

Mr. Chairman, I would ask unanimous consent after the vote

that he have a moment just to speak.

Chairman TOWNS. I will yield to him 2 minutes at this time.

Mr. CAO. Thank you, Mr. Chairman.

I would like to thank the ranking member for the opportunity

and the honor to serve. I am very honored to be on this committee

in order to serve to make sure that we, as a body, as the Government, work and function in a very effective and efficient manner.

I know that after Hurricane Katrina we experienced a tremendous amount of fraud and waste down there at the District. One

of the messages that I campaigned on when I was running for U.S.

Congress was to make sure that we operate at the Governmental

level in a very ethical fashion, so I am glad to be able to serve on

this committee to make sure that everything that we do here as a

Body to be transparent and to be more and ethical.

So with that I yield back my time, Mr. Chairman. Thank you

very much.

Chairman TOWNS. I thank the gentleman. We are delighted to

have you on the committee and look forward to working with you.

This is a very active committee. Of course, we are certain that you

will fit in well.

Just over a year ago the U.S. economy lurched toward near ruin.

Venerable financial institutions staggered toward collapse and the

market was in free-fall. Americans were stunned as their savings

disappeared overnight, the value of their homes plummeted, and

their jobs disappeared. To save the economy from going from recession to depression, the Federal Government launched the largest

bailout of private companies in history. America’s leading financial

firms were on life support when the Treasury Department injected

them with hundreds of billions of dollars of taxpayers’ money.

AIG, once the largest insurance company in America, became the

single largest recipient of bailout dollars. AIG was the victim of one

of its own divisions, AIG’s Financial Products, which engaged in

the risky and unregulated trading that many blamed for the company’s collapse.

The American taxpayers came to the rescue with an $85 billion

bailout of AIG last September. That was followed by more money

in October. More again in November. And still more in March of

this year. In the end, the Federal Government had committed $180

billion to save AIG.

Americans were justifiably outraged when they learned shortly

thereafter that AIG was paying $165 million in bonuses to executives at the very division that caused the collapse of the company.

3

But even that figure pales before what the Special Inspector General learned in the course of his audit, which he is releasing at our

hearing today. Not long after the last administration had shoveled $85 billion

into the failing giant, Federal Reserve officials learned that AIG’s

units planned to distribute a combined total of $1.7 billion in bonuses and other extraordinary compensation. That is the justification for giving bonuses to people who drove their firm off a cliff and

very nearly crashed the U.S. economy. Wasn’t there something seriously out of whack here? This does not make a lot of sense to me.

It turns out it wasn’t always that way at AIG. The SIGTARP

audit found that AIG’s compensation used to be weighted toward

long-term incentives that were payable only at retirement. In other

words, they used the classic golden handcuffs. But in 2007, when

losses began to mount, AIG new management decided to update

their compensation plans. The golden handcuffs were replaced by

golden envelopes. The era of instant gratification had arrived at

AIG. Long-term incentives were rejected in favor of short-term

gains.

Don’t get me wrong: Americans don’t resent people who make a

lot of money. We all want to make a lot of money. But what infuriates people is when bosses at bailout companies, virtual wards of

the State, continue to rake in millions, in effect, our millions. That

is the problem.

It just doesn’t seem right that people who caused this tragedy

should be so richly rewarded. You know, this is sort of unusual.

Generally, when people are rewarded, it is the fact that they have

done a fantastic job and they receive extra benefits for doing a

great job. You are not generally rewarded when you are taking the

company down the wrong road.

Unfortunately, this is still very much an issue. AIG’s current

bonus proposal is under review by the Treasury Department’s Special Master, Ken Feinberg. We will be hearing from Mr. Feinberg

2 weeks from now at our second hearing on executive compensation.

Today we welcome back Special Inspector General Neil Barofsky,

who just completed his audit of AIG’s compensation. Perhaps today

we will shed additional light on what many American taxpayers

are asking: why didn’t the Federal Government impose pay concessions on bailout companies? Why were huge bonuses paid to executives of firms that would now be bankrupt but for a taxpayer bailout? How much more in lavish bonuses will the American taxpayer

be required to foot? What have we learned about executive compensation and corporate performance from our experience with

AIG?

Again, I want to thank Mr. Barofsky for appearing here today

and for the outstanding work that he has done.

[The prepared statement of Chairman Edolphus Towns follows:]

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Chairman TOWNS. At this point I would like to yield 5 minutes

to the committee’s ranking member, Mr. Issa of San Diego, CA.

Mr. ISSA. Thank you, Mr. Chairman. And thank you for holding

this hearing on SIGTARP’s audit today. I look forward to the Special IG’s testimony and his report.

Mr. Chairman, I believe examining the Federal Government’s

role in AIG bonus is important and it must be done by this committee. It is clear that this committee, having broad jurisdiction and

the willingness to do oversight, cannot be discounted.

As you might imagine, I would say that financial services should

have helped prevent this and overseen it every step of the way, as

should the New York Fed. But you also find that today I am concerned that the era of political bankruptcies is just beginning.

We certainly as a committee cannot continue to ignore vital

issues—and I will ask about these—related to the role of Fannie

Mae and Freddie Mac, the bailouts of General Motors and Chrysler, and the future of FHA. I know this committee will not shrink

from its duty.

Last March the American people learned that employees of AIG

Financial Products [FP], the very division responsible for making

the bets that sank the company, were getting hundreds of millions

of dollars in retention payments for what ultimately had been their

failure. AIG’s CEO told us that the company needed to retain

AIGFP employees because they had technical skills to unwind the

company’s risky investments in order to pay back the taxpayers;

however, it is clear that it was not about paying back the taxpayers. In fact, during the so-called unwinding, that $180 billion,

much of it went to paying 100 percent on the dollar for, in fact,

credit defaults or insurance programs which would not have ordinarily in bankruptcy been paid full. And, more important, the

Treasury made a decision, at the very time in which mark to market was on everyone’s lips, not to, in fact, purchase these credit defaults at their market. You had pieces of paper which were floating

around at a market rate of 20 or 30 cents on the dollar or more,

and, in fact, we paid 100 cents on the dollar.

Many people during this hearing will probably not have realized

that AIG was a conduit for paying Goldman Sachs and others billions of dollars at 100 cents on the dollar when, in fact, that paper

would ordinarily have been discounted considerably; meaning permanently these people who got $168 million in retention bonuses

were part of a larger political bankruptcy that led to the higher

price being paid, in fact, 100 cents on the dollar when, in fact, the

market rate was a fraction of that.

Mr. Chairman, I might point out this went on under the Bush

administration. This is not something that this President did anything but inherit. I hope that we will recognize that what we are

doing here today is talking about a pattern of mistakes that I will

characterize mostly as political bankruptcies being run by the Government.

The pattern of rewarding failure during the Bush administration,

unfortunately, appears to continue during the current administration. Rather than learning from the mistakes of his predecessor,

President Obama has entangled the Federal bureaucracy across the

private sector. Rather than letting failed companies fail through a

9

bankruptcy system, we constantly are putting money in and then

political influence.

Mr. Chairman, General Motors was a political bankruptcy.

Chrysler was a political bankruptcy. The American people and

their kids and grandkids will pay the price.

The lesson we ought to take from the story of AIG retention

bonus today is: rewarding failure through a policy of bailouts and

circumventing the rule of law and ordinary procedures within

bankruptcy cost the taxpayers far more than if, in fact, we had

back-stopped what we were obligated to back-stop; if we had said

to the bankruptcy court, you determine what portion the Federal

Government should pay and the American people will step up to

the plate. However, no one, no one on either side of this dias, for

a moment believes that 100 cents on the dollar would have been

what the American people would have paid. Tens of billions of dollars were paid out because this was a political bankruptcy and not

handled by a Federal judge, as our law requires.

Mr. Chairman, I thank you for your indulgence and yield back.

[The prepared statement of Hon. Darrell E. Issa follows:]

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Chairman TOWNS. I thank the gentleman for his opening statement.

Anyone seeking recognition at this time? The gentleman from

Maryland, Mr. Cummings, is recognized for 3 minutes for an opening statement.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

As I listened to Mr. Issa I could not help but remember—and I

hope we don’t get amnesia—that it was a Republican President and

a Mr. Paulson who was appointed by President Bush, who came to

this Congress saying that the sky was falling. Come on. Give me

a break. And what this Congress did, and mainly Democrats trying

to help this President get us out of this mess, was to do something

that we did not like: to hold our nose and to address this issue the

way we did. So let’s not get amnesia here.

The fact still remains that we have a lot to do. I’ve said many

times, starting back in December 2008, AIG has not been truly

honest with the Congress or the United States of America. I have

met with Mr. Liddy, after I wrote a letter to him, and he constantly

told me, the former chairman, he constantly told me about bonuses,

and every time he never gave us all the information.

After my letter of December 1st, Mr. Liddy responded a few days

later that it would be 168 employees receiving these payments in

amounts between $160,000 and $4 million. Mr. Liddy and I then

exchanged a series of letters and even sat down face-to-face to discuss the issue, and I explicitly asked that AIG be a good corporate

citizen. Mr. Liddy assured me that AIG would be just that.

Well, AIG cutoff all communications, and later we learned that

it was 4,500 people, not 160 people, would be receiving bonuses and

retention payments totaling, as the chairman has already said,

over $1 billion. Further, around 400 employees at the Financial

Products division, which is the very division that brought AIG

down and brought the country down, as far as I am concerned, we

found out that they were getting $450 million in so-called retention

payments. The same Financial Products division that brought AIG

to its knees would be rewarding its traders’ reckless risk-taking

with enormous corporate payouts to stick around and undo their

handiwork.

National unemployment was 8.5 percent when this happened. It

stands to reason that there were very talented people out of work,

traders on Wall Street, that might have been able to do this work

without hundreds of millions of dollars in retention payments.

Mr. Chairman, I see my time is running out, but I want to be

very, very clear. I think we have done the best that we can do, and

we are going to have to continue to be vigilant. Nobody likes what

AIG did, and this report certainly does not shed a brilliant, wonderful light about what they did.

I want to thank you, Mr. Barofsky, for all that you have done,

because you have presented yourself in a very forthright way and

we appreciate it, and we will continue to work with you to try to

make sure we get to the bottom of these bonuses and these junkets

and whatever.

Mr. Chairman, thank you for your indulgence.

Chairman TOWNS. I would like to thank the gentleman from

Maryland for his statement.

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Anyone else seeking recognition? The gentleman from Indiana,

Mr. Burton.

Mr. BURTON. Real briefly, Mr. Chairman, I am glad you are holding these hearings. I think it is extremely important that we look

into this very thoroughly.

I think this should also include other issues of great significance

and importance. There have been allegations that there has been

special treatment given to some Government officials regarding

loans at Countrywide. We had a hearing on that at some point in

the past. During that hearing, we asked the chairman of Countrywide a great many questions about preferential treatment, and it

has been in the papers a lot.

I hope—and I know the ranking member shares our position on

this—I hope that we will have a very thorough investigation on not

just AIG but other things where there might have been some corruption.

Chairman TOWNS. Anyone else seeking recognition? The gentleman from Ohio, Mr. Kucinich.

Mr. KUCINICH. Thank you very much, Mr. Chairman, for holding

this hearing. I think that those Members who are concerned about

the conduct of people in the Senate or in the House, we understand

that the purpose of this committee, Government Oversight, is to

monitor the activities that are going on in the private sector and

in Government, but the rules of the House require that the structure that has been set up by the House, which is the Ethics Committee, be used, and that this committee is not the appropriate

place to start going after other Members of Congress. Once we

start that, what else are we going to do in this committee?

The American people are relying on us to be able to try to

straighten out this economy and to make Wall Street accountable.

Now, whatever flaws Members of Congress may have—and all of

us do—I think that the Ethics Committee is the appropriate venue

for those. If people have complaints to bring, they ought to do that.

But to keep trying to bring it up in this committee, to challenge

the conduct of other Members of Congress, be they in the House

or in the Senate, I think——

Mr. BURTON. Would the gentleman yield?

Mr. KUCINICH [continuing]. I think actually what it does is it

slows the momentum that we need to build, bipartisan, that we

need to build——

Mr. BURTON. Would the gentleman yield?

Mr. KUCINICH [continuing]. To be able to accomplish the goals of

this committee.

Mr. BURTON. Would my colleague yield?

Mr. KUCINICH. I will in a minute. This committee has to deal

with over $13 trillion in spending that has been put out there by

the Treasury and by the Fed.

I think my colleagues on the other side certainly know that I

haven’t pulled any punches when it has come to the administration

at all, nor will I. I will not. But come on, we can’t use this committee to snipe at each other all the time. We’ve got to focus, keep our

eye on the ball. I’m glad we are having a hearing on AIG bonuses,

but we need to go a lot deeper.

Mr. BURTON. Would the gentleman yield?

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Mr. KUCINICH. I will yield.

Mr. BURTON. What I said in my remarks was that there have

been allegations that some Government officials—I didn’t mention

Members of Congress—some Government officials may have gotten

preferential treatment from places like Countrywide. When I was

chairman, we followed it where it led for 6 years. So I am not talking about Congressmen, but I am talking about people in Government who have very high positions who may have preferential

treatment in order to do things.

I think we need to investigate that. I don’t know that it is going

to——

Mr. KUCINICH. Reclaiming my time.

Mr. BURTON. I don’t know that it is going to mean to Members

of Congress, but——

Mr. KUCINICH. Reclaiming my time, I want to say that there

were some investigations that Mr. Burton had when he was chairman, Mr. Burton, that I supported. But the one thing I thought

was important when you were chairman, and it is important when

Mr. Towns is chairman, is that, look, we follow investigations

wherever they lead, but if someone wants to imply expressly or otherwise that there are people that we have to look at within the

Congress of the United States, I say that is what the Ethics Committee is all about.

Mr. BURTON. Would the gentleman yield?

Mr. KUCINICH. My time is expired, but I think that we are going

to put this on the table here and either put it to rest or this committee is going to end up becoming an armed camp going against

each other. I don’t think we need to do that. Let’s keep our eye on

the ball. Let’s challenge Wall Street. Let Mr. Barofsky get a chance

to tell us what he has found and make these firms on Wall Street

accountable, and if there is anybody in the Government holding

hands with them, you know, let’s look at them, too.

Chairman TOWNS. The gentleman’s time has expired.

Mr. Mica of Florida.

Mr. MICA. Thank you, Mr. Chairman.

Let me just say for the record, again we hear blame it on Bush.

I think our ranking member did indicate that some of the crisis did

start during the Bush administration. The TARP was created partially under the Bush administration. At least half of the funds

were left to the current administration.

I believe if we just look at what we are doing here today, we are

looking at the distribution on Friday, March 13, 2009—that is this

year, this administration—when AIG began distributing $165 million. That is when we had a significant amount of TARP money

into this. We are here today to hear report of the Special Inspector

General on that money from that account in this year. That is why

we are here. People had their hands in the cookie jar during this

administration, and we need to find out what took place and how

the taxpayer once again got ripped off. This $165 million is only part of nearly two-thirds of a billion of

bonuses that I want to hear about that were used or abused or misused by AIG.

I would like to yield to our ranking member, if I may.

Mr. ISSA. I thank the gentleman.

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For my friend and colleague from Ohio, Mr. Kucinich, please understand that our request to continue on the Countrywide investigation recognizes that, first of all, the Senate Ethics Committee

has made it clear that the recipients on the Senate side that are

known about committed no ethical violations as recipients. That

clearing is a clearing very narrowly of the recipients, not of the

company that clearly was spending millions of dollars through a

discount program to curry favor.

I have offered the chairman and would reiterate the offer to the

chairman that we could redact any—and I repeat any—any and all

loans related to Members of Congress, and I would happily investigate the question of what did they want to do with Franklin

Raines, what did they want to do with the Postmaster General,

what did they want to do with a key Republican staffer on the Financial Services Committee to provide VIP loans; not what did

those people do in return. What I am most concerned with is what

did Countrywide want and, if possible, what did they get, but, most

importantly, what did they want.

For the chairman’s and the subcommittee chairman’s edification,

please understand Mr. Kucinich, I have been told that no laws

were violated under existing statutes by Countrywide. That begs

the question for the American people should there have been a law,

and if there is not a law don’t we have an obligation to say do we

want to have corporate America providing in secret millions of dollars in discounts to high-ranking Government officials in the future, because if we do nothing then the status quo is it is ethically

and legally allowed.

Chairman TOWNS. The gentleman from Florida’s time has expired.

Anyone else seeking recognition? The gentlewoman from California.

Ms. WATSON. Thank you so much, Mr. Chairman. This is a very

important and significant hearing. I am going to take my full 5

minutes, but I would like to yield a minute——

Chairman TOWNS. It is 3 minutes, ma’am.

Ms. WATSON. Three minutes. OK. I would like to yield a minute

to Mr. Kucinich.

Mr. KUCINICH. I want to thank the gentlelady, just to respond to

my colleague, and that is that, look, I don’t hold any grief for anybody who is doing anything wrong, especially Members of Congress, but we had better be careful about using our positions to

promote innuendo or to inadvertently smear someone else’s name.

I yield back.

Ms. WATSON. At the beginning of 2008 AIG was the world’s largest insurance company, with operations in 130 countries and more

than $1 trillion in assets; yet, by the end of 2008 AIG was relying

on $150 billion in Federal money for its survival as a result of the

complex derivatives being pedaled in their Financial Products division. Despite the fact that it was the self-destructive business practices driven by short-term gain rather than long-term sustainability of the Financial Products division, which resulted in the

Government owning 79.9 percent of the business, it was revealed

in March that these same employees would be receiving $165 million in so-called retention bonuses. I don’t understand, if you are

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doing your job and you do it satisfactorily, why do you have to have

a bonus? You are being paid for doing your job.

So this revelation has rightly stoked outrage on behalf of the

American taxpaying public. In this recession, Americans outside of

Wall Street have seen their jobs, their savings, and their sense of

security diminished, while those responsible for the reckless business practices that led to the crisis receive rescue funds from the

Government and bonuses completely unrelated to the market performance of their employer or the actual caliber of their work.

I sincerely hope—and I want to thank our witness—that we will

have the necessary information. This is the Oversight Committee,

and we need to be watching with a close eye to how we handle taxpayers’ money.

I am very, very pleased that we have this opportunity, Mr.

Chairman, to hear from our witness.

Thank you.

Chairman TOWNS. Thank you. I would like to thank the gentlewoman from California for her statement.

Anyone seeking recognition? Congressman McHenry from North

Carolina?

Mr. MCHENRY. Thank you, Mr. Chairman. I would like to yield

my time to the ranking member.

Mr. ISSA. Thank you, Mr. Chairman.

Just for the record, if we look at AIG going into the pre-bank- ruptcy period, it is commonly stated that they had over $1 trillion

in assets. Reviewing the June 2008 financials, what you discover

is to get $1 trillion you have almost $400 billion worth of the value

of bonds that have not been sold. So if you have ever had a kited

value on a balance sheet, it is when you say you have a trillion,

but then you have $400 billion worth of assets that are basically

if somebody would buy my bonds. That is probably more telling of

the fact that the underlying assets were going to go down, but that

asset was already effectively zero unless somebody wanted to pay

for it.

Further, because there was a further comment by Mr. Kucinich,

let’s understand that if, in fact, because there was a Member of

Congress, two Senators, actually, involved in receiving Countrywide loans, if that is our basis to say it is innuendo if we want to

go after an organization that dumped onto the American people not

billions but trillions in total and has cost the American people hundreds of billions of dollars worth of losses because of their action

in coordination with the GSEs, then I think we miss the whole

point of how can we say we can’t go there. This side of the aisle

certainly would be more than happy to do any and all limitations

in the documents so that we were not looking at Members of Congress but looking only at Countrywide.

But today there are boxes of documents sitting at Bank of America which Bank of America said they would like to give us but for

reasons of not being sued by individuals involved in that whose

names would be on it they wanted to have a subpoena, and yet we

won’t give one.

I might mention that this committee asked and received the

same company, Bank of America, a waiver on attorney-client privilege in order to get the full facts related to Merrill Lynch. If we

17

can not only subpoena but demand and negotiate a waiver of attorney-client privilege, how could we not at least look at the documents related to what did now B of A but then Countrywide individuals attempt to do to influence Government actions that led to

hundreds of billions of dollars of loss to the American people.

I yield back.

Chairman TOWNS. The gentleman from North Carolina. Anyone

else seeking recognition?

[No response.]

Chairman TOWNS. Let me just say, before we move forward, to

the gentleman from California, that this is not a super Ethics Committee. The Ethics Committee has its role and its function and I

think they will do a good job, but I don’t see, in terms of this committee—and I must say to the gentleman who served here as the

Chair of this committee, and I must admit I enjoyed working with

him, he may have probably set a record in terms of the amount of

subpoenas that he issued, but he did not subpoena anybody from

the Congress. I think we need to just think about it. And let’s put

it all in the proper perspective so we can move forward, and let’s

not lose sight of the bigger picture. We are talking about companies

that received TARP money, Government money, and then just sort

of, like, gave it to people who really didn’t perform well. And then

when questioned they said it is retention. Why would you keep

somebody that is not performing well? You wouldn’t do it on your

staff.

On that note I yield back.

The gentleman from Massachusetts.

Mr. TIERNEY. I will yield my time.

Chairman TOWNS. Yes.

Mr. KUCINICH. Mr. Chairman, I came here today to talk about

AIG, and I assume that we will listen to Mr. Barofsky in a minute

to hear about AIG. I appreciate the work that he has done. But I

also think that this committee ought to be cautious about using

this committee as a platform to go after other Members. That is

what the Ethics Committee is about if there is a question about the

conduct of other Members. Sometimes we on this side are in the

majority, sometimes you on the other side are in the majority, so

we have to be careful from our respective positions about setting

a precedent here that would inevitably lead to calls in the future

to issue subpoenas for other House Members that are involved in

similar controversies.

We have to realize we are setting a precedent with what we do

here, and I just ask my friends—and you are my friends—on both

sides of the aisle to be cautious about what you are advocating

here, because if we want to start subpoenaing mortgage records in

an investigation that deals with improper influence, we want to

start subpoenaing mortgage records of Members of Congress, this

committee does that and doesn’t leave that up to Ethics, than what

is to stop us from subpoenaing financial contributions and to start

asking people to give testimony under oath about the financial contributions that they got from certain interests? This is why. This

is not the work that this committee ought to be doing. If we start

investigating each other—and I assume there would be a lot of opVerDate 11-MAY-2000 15:24 Apr 19, 2010 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 U:\DOCS\55101.TXT KATIE PsN: KATIE
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portunities that we can all have doing that—we wouldn’t be doing

anything else. It would just be a partisan morass.

So let’s lift our eyes a little bit higher than that. That is not in

any way to dismiss the gravity of any improper conduct anywhere

by anyone, but it is to say that we create a structure in our system

here to deal with questions about the conduct of Members of Congress.

If there is a problem and that structure is not working properly,

then Members of Congress have to account for that and we have

to make it work. But we can’t be using this committee for the purposes of trying to bring down each other. It is just not right.

So, Mr. Barofsky, today we are going to talk about AIG I assume

and we are going to talk about the bonuses and what we can do

to stop a practice from, when the American people gave all this

money out, to make sure that their money is not being mis-spent,

so I thank you for being here and just want to say welcome.

Chairman TOWNS. Thank you very much.

Mr. Fortenberry of Nebraska, yield 3 minutes.

Mr. FORTENBERRY. Thank you, Mr. Chairman. I would like to

yield as much time as he would like to consume to Mr. Issa.

Mr. ISSA. I thank the gentleman.

Mr. Kucinich, you are my friend and fellow Clevelander and I

would hope that what I say now you hear so that you don’t have

to give an answer that is completely off what I said previously

again.

I am perfectly willing to have the subpoena include no Members

of Congress, none, none of their records, none of their mortgages.

This is not about Members of Congress, the House or the Senate.

The Senate Ethics Committee has already spoken that there was

no violation for receiving these by two Senators. We don’t need to

look further. That has been done. However, I hope the gentleman

will realize that Countrywide did this for a reason. Countrywide individuals, including a whistleblower, have already told us that they

intended to influence for the benefit of Countrywide and its ability

to, now we know, put toxic loans onto the books of the GSEs. That

is, in fact, what happened.

So, Mr. Barofsky, I appreciate your indulgence. It is very clear

that is not what this hearing is about today, but on Thursday when

I request a subpoena, which I notice the chairman, I would hope

that everybody would allow for a straight up or down vote on the

merits of the request for subpoena. That request will be narrow.

We do not want to investigate Members of Congress. Other committees may do that. What we want to do is we want to know what

was it that internal memos and documents related to other people

in and out of Government, what were they trying to achieve, why

did they give tens of millions or hundreds of millions of dollars of

discount to a broad array of people.

We are not interested in the people they didn’t want influence

from and we are not interested in Members of Congress. I might

say, when we are saying on this side of the aisle we don’t want

anything to do with the Members of Congress, we are more than

happy to look toward Countrywide, because Countrywide is the organization that has led, more than any other single organization,

to the loss of billions of dollars of American taxpayer money.

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So although Mr. Barofsky can do a good job cleaning up after the

flood and trying to deal with the liquidity of the market and so on,

we have an obligation to make sure this never happens again. And

this will happen again if corporate America is allowed to bribe people around Government in order to get them either to do things for

them or, in this case, turn a blind eye to billions of dollars, tens

and hundreds of billions of dollars, of toxic loans being put onto the

backs of the American people through these GSEs which had the

full faith and credit of the American people. That is what it is

about, and it is more important that we make sure it doesn’t happen again than, in fact, whether $165 million went to a group of

people who are now unemployed.

That is what we are here talking about. Mr. Kucinich, you are

my friend. I hope you hear this time: I do not want in this subpoena to ask for anything related to Members of Congress, but I

cannot allow this to continue, us seeing no evil when, in fact, we

know there was evil.

I yield back.

Chairman TOWNS. Moving forward, we will turn now to the sole

witness, Mr. Neil Barofsky, the Special Inspector General for the

troubled asset relief program, whose office has just completed an

audit of the hundreds of millions of dollars of retention bonuses

AIG has already paid and the millions more it expects to pay.

It is committee policy that we swear in all of our witnesses,

please stand and raise your right hand.

[Witness sworn.]

Chairman TOWNS. Let the record reflect that he answered in the

affirmative.

Let me just say that you know the rules. We generally give you

5 minutes, but we are going to give you 10, and then of course go

into questions and answers, because we think your report is just

so valuable that you need additional time, so 10 minutes.

STATEMENT OF NEIL M. BAROFSKY, SPECIAL INSPECTOR

GENERAL FOR THE TROUBLED ASSET RELIEF PROGRAM,

OFFICE OF THE SPECIAL INSPECTOR GENERAL

Mr. BAROFSKY. Thank you, Mr. Chairman. I will try to stay

under that.

Mr. Chairman, Ranking Member Issa, members of the committee, it is a privilege and honor to return to testify before this committee and discuss with you today the audit that we released this

morning into the circumstances surrounding AIG Financial Products payment of approximately $168 million in retention bonuses

to more than 400 employees earlier this year.

Last fall policy decisions were made by the policymakers at

Treasury and the Federal Reserve that a failure of AIG would have

such a high systemic cost that it was worth the unprecedented bailout and use of taxpayer dollars to save that company. The Federal

Reserve went first.

In September it gave a line of credit of $85 billion to AIG and

followed that by sending teams in to take a close, long, hard look

at AIG’s executive compensation structure. What they found was a

mess. More than 600 different programs, some entitled bonuses,

some deferred compensation, some retention plans affecting more

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than 50,000 employees, programs so diverse and decentralized that

AIG senior executives, themselves, weren’t involved in the approval

of many of these plans and didn’t have a full sense of what they

were. A mess so sprawling that even as we concluded our audit late

this summer executives at the Federal Reserve Bank of New York,

at AIG, and the Fed’s consultants still did not have their arms

wrapped around the entire AIG executive compensation structure.

The Fed—and by the Fed I am referring to the Federal Reserve

Bank of New York—looked at executive compensation from its

unique perspective. It looked at the amount of money involved and

concerned whether bleeding of cash would impact AIG’s ability to

repay its loan. They looked to see whether the structure had perverse incentives that would encourage executives to make decisions

that would be not in the best interest of the company and, most

importantly from the Fed’s perspective, inhibit the ability to repay

the loan.

Treasury, on the other hand, paid scant attention to the executive compensation structure. Other than discovering and figuring

out who the 50 or so employees that would be subject to its executive compensation restrictions that were included in the November

$40 billion TARP bailout, Treasury did little more. As a result,

when the March 2009, earlier this year, AIG Financial Products retention payments came through, Treasury didn’t know about them

until 2 weeks beforehand, and they didn’t know the scope of those

payments, that they were going to apply not just to essential personnel, but also to non-essential, people who worked in the mail

room, in the kitchen, in the file room.

Our audit concludes that this was a failure. It was a failure of

oversight by Treasury, which essentially abdicated its role in favor

of allowing the Federal Reserve, notwithstanding the fact that the

Fed had different interests and different concerns than Treasury,

as reflected perhaps most clearly by the fact that its agreement

with AIG included no provisions relating to executive compensation.

Our audit also concludes that Secretary Geithner did not find

out, did not learn of these bonus payments until just days before

they were made, but this, too, is a failure. It is a failure of communications and it was a failure of management.

Executives and senior officials at FRBNY knew about these

bonus payments back in the fall of 2008 when Secretary Geithner

was then president of FRBNY, but none of them alerted him or elevated this issue, according to our audit’s findings, notwithstanding

the explosive nature and controversial nature of the payments.

At Treasury, they didn’t find out until 2 weeks before, but even

then it took them 10 days to elevate this issue to the Secretary’s

level, even though the Fed had warned them, when they notified

them about the size of these payments, of the intense press and

congressional concern about them, and said, in their words, that

they were not going to be easy for Treasury and Fed to defend.

Based on these failings, our audit contained three recommendations. First, when we were conducting our audit we learned that

the special master, Kenneth Feinberg, while doing his evaluation

of AIG’s executive compensation, had not been in touch with

FRBNY officials, even though he spent the better part of a year

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studying AIG’s executive compensation and spent a lot of resources

on hiring consultants. We made a recommendation, and after receiving a draft version of this report we have been informed that

Treasury has adopted this recommendation and Mr. Feinberg is

now dealing with his counterparts at the FRBNY.

We also make two recommendations looking forward. First, that

in the future if Treasury is going to be making this type of investment, this type of bailout of a company, that it have policies in

place to make sure that there is going to be a comprehensive and

not ad hoc review of the executive compensation and other politically sensitive issues so that they know in advance when these

issues are lurking around the corner.

Second, to the extent that Treasury continues to rely on other

Federal agencies or other entities to conduct its compliance for it,

to outsource its oversight, that it do so with policies in place, a plan

in place, for if there is anything that we have learned from this

audit and the circumstances of March of this year, a failure to give

clear directions and have a clear communication protocol with an

oversight entity that is doing the oversight for you is a recipe for

the disastrous consequences and results that we saw earlier this

year.

Mr. Chairman, ranking member, members of the committee, that

concludes my opening statement for today and I look forward to answering any questions that you may have.

Thank you.

[The prepared statement of Mr. Barofsky follows:]

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Chairman TOWNS. Thank you very much for your statement, and

thank you for the work that you have done. You have done a superb job, and we thank you for it.

Let me begin by saying AIG is now proposing to pay another $198 million in bonuses, so we have history repeating itself.

Shouldn’t those bonuses be reduced, given the poor performance of

the company?

Mr. BAROFSKY. I think these are exactly the issues that Mr.

Feinberg is now grappling with, is looking at these bonus payments, not just within respect to Financial Products but in the

overall picture of AIG’s bonus situation. There is an opportunity

that is here because of the advance knowledge that really didn’t

exist last time because it took so long for senior officials at Treasury to know about them until just days beforehand. But I think

those are very important considerations that are going to be addressed.

Chairman TOWNS. I know after the media got onto the situation

last year, during the spring, the uproar over AIG’s bonuses, AIG

announced that its executives had agreed to return $45 million.

How much of that really was collected?

Mr. BAROFSKY. As of the conclusion of our audited field work in

August it was $19 million had been collected.

Chairman TOWNS. Less than 50 percent?

Mr. BAROFSKY. Less than 50 percent.

Chairman TOWNS. If I read your report correctly, some of these

executives are refusing to give back the money unless they can get

commitment that they are going to get the bonus the next year, so

they are holding it in ransom.

Mr. BAROFSKY. I think it was described to us as a wait and see

attitude. They want to see what they are going to be getting after

Mr. Feinberg conducts his review of the $198 million next March

before they commit or fulfill their commitment to pay back the bonuses. I think that is correct.

Chairman TOWNS. What about those that left the company?

Mr. BAROFSKY. AIG has noted that it would be difficult for them

to enforce collecting the money for those that have left the company.

Chairman TOWNS. You know, the media has focused on the $165

million of bonuses AIG paid out in March, but is not it true that

shortly after the AIG bailout last September the Federal Reserve

learned that AIG had planned to pay over $1.7 billion in bonuses

and retention plans?

Mr. BAROFSKY. That is correct, Mr. Chairman. Across all the different programs affecting approximately 50,000 AIG employees

worldwide, that is the approximate number. I say it is an approximate number because, as I mentioned, even today they still don’t

have—or at least as we concluded our audit work—they still don’t

have their arms wrapped around all the various AIG bonus and retention and deferred compensation structures.

Chairman TOWNS. Right. Why didn’t the last administration ex- tract any bonus concessions out of AIG in return for the $85 billion

bailout?

Mr. BAROFSKY. Well, the Federal Reserve put no restrictions in.

They view themselves as a creditor, as opposed to having made an

66

investment, and the only provision in their agreements related to

general governance issues, which is what they use to take a look

at AIG’s bonus structure, and why they focus on issues related to

paying back money. And this is one of the criticisms of our report.

When Treasury outsourced its oversight to the Federal Reserve,

Federal Reserve had a far different interest and approach to executive compensation than what Treasury had to do as an investor on

behalf of the Government people. So their concerns were based on

getting money to pay back the loan but didn’t focus on the issues

that this Congress, when it enacted the TARP, required Treasury

to consider when using TARP funds.

Chairman TOWNS. Right. Is it true that AIG’s management still

does not have a complete picture of AIG’s different bonus and retention obligations? Did AIG ever really know where all the money

was going?

Mr. BAROFSKY. As of the time we concluded our audit work, that

is correct. They did not know. This was an incredibly decentralized

system. It was, as I mentioned in my testimony, a mess.

Chairman TOWNS. Right. I knew Treasury and the New York

Feds have been on the ground for months at AIG. Have they taken

any steps to address this problem?

Mr. BAROFSKY. The Federal Reserve, to its credit, when it came

in in September recognized what a mess it was, and they hired an

outside consultant, Ernst and Young, who has assisted them in getting their arms wrapped around these programs. Some of the basic

data took 5 or 6 months to pull out of human resources. So they

have been making an effort and have committed resources, but the

task is such an enormous one, but they have been trying to get

their arms wrapped around these issues.

Chairman TOWNS. Is it fair to say, based on your audit, that

there was a breakdown in communications between Treasury, of

course, and the Federal Reserve regarding AIG’s plan?

Mr. BAROFSKY. I think that would be kind to have it as a breakdown. I think that they were essentially, after Treasury invested

the $40 billion, communications were virtually non-existent.

Chairman TOWNS. Right. And then I think my final question before I yield: are Treasury’s pay restrictions truly enforceable? How

hard would it be for TARP recipients to circumvent the bonus restrictions, if they just said we are not going to do it and started

looking for ways and methods?

Mr. BAROFSKY. It is particularly difficult with agreements like

this that were executed prior to February 11, 2009, which is the

cutoff date in ARRA, which set forth these restrictions.

But on the flip side, we have to remember that we are also, with

respect to AIG, we own 80 percent of the company, and I think

sometimes it is important for the Federal Government to recognize

the leverage that is associated with having such a significant ownership interest when seeking to renegotiate these payments.

Chairman TOWNS. Right.

I now yield 5 minutes to the gentleman from California, Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman.

I have called this a political bankruptcy and I stand by that. Had

a genuine bankruptcy occurred, is not it true that all these contracts would have been immediately void or voidable?

67

Mr. BAROFSKY. Mr. Issa, I am not a bankruptcy expert, so I am

not sure, but certainly——

Mr. ISSA. Has someone mentioned that to you at some point?

Mr. BAROFSKY. No, no. I don’t want to be definitive, but I am

pretty sure that a bankruptcy would certainly impact those types

of contractual obligations.

Mr. ISSA. You know, I fly United Airlines back and forth every

week, so I sit and stand with the flight attendants who watched

their obligation for their pension be shut off the day they went into

bankruptcy and what they got was pennies on the dollar, so I’m

very familiar in that sense with how broad bankruptcy can be, even

if I hadn’t had to deal with it in my own business life.

But looking forward, the special master, Mr. Feinberg, he is

going to make these decisions, the pay czar, if you will. Are you

going to have full access and oversight as the IG of his decision

process?

Mr. BAROFSKY. Absolutely. That is clearly within our jurisdiction.

Mr. ISSA. The next time we have you back or in an interim report

if you can, can you do us a favor, I believe on both sides of the

aisle, and de-aggregate, if you will, $165 million and all these numbers, and give us the amount that would be fair and reasonable

that should be paid that would be paid, if you will, in somebody

else’s opinion, and/or the amount of people whose bonuses are not

in question.

I bring this up for a moment. I am not trying to say that we

shouldn’t have done a better job. As a matter of fact, the second

half of what I am going to ask is very much about that. But is not

it true that $165 million, some of those people should have gotten

what they got, and some of those people got relatively small bonuses compared to others; is not that true?

Mr. BAROFSKY. I think that is a difficult question to answer because of the policy implications. As you noted, if there was a bankruptcy it is likely that none of these people would have received

any bonuses. What the value of these individuals is really beyond

the scope of our work. It would be difficult for me to answer that

question.

Mr. ISSA. OK. Well, hopefully you will be able to do it in some

future time.

Would you also, every time we get a report, give us the base pay

of the individuals relative to bonus so that we know over the covered period how much they made in pay. In other words, if you pay

$1 billion in salaries and you have $165 million in bonuses, you

have 16.5 percent bonus. On the other hand, if you pay $100 million in base pay and $165 million in bonuses you have 165 percent.

We need to know that. I think it is going to help this committee

understand, or at least the American people understand the magnitude, because I believe up until now we have been dealing with

these, first of all, small numbers compared to the trillions that are

still floating around in the risk pool, and we probably have been

stepping on some individuals who simply—sort of the janitor’s

bonus for not leaving and letting the toilets back up. You know,

perhaps we should look at those as not all equal.

Let me go to one other question, though, because, you know,

when you talked about abrogating responsibility to the Fed, you

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really abrogated it—or we abrogated it as a Government through

Treasury to Mr. Geithner; is not that true?

Mr. BAROFSKY. He was the president of FRBNY at this time, yes.

Mr. ISSA. And the question for us here today is: what did he

know and when did he know it and why didn’t he know it if today

he is the Treasury Secretary? Was he inept? And I am going to go

through a quick set of questions for you.

My understanding is your investigation only went up to the senior vice president, probably AIG relationship monitoring. That

would be the highest level that was interviewed; is that roughly

right?

Mr. BAROFSKY. As far as interviews are concerned, I know we did

talk to the senior vice president level, but I also personally spoke

to higher ranking members at FRBNY.

Mr. ISSA. OK. So if the senior vice president in the area that we

think over risk management would have been the person to talk to,

if above that you have an executive vice president, today it is

Sandy Krueger, above that you have a first vice president, today

it is Christine Cumming, above that you have a president. And, of

course, above that you have the Board of Directors and the chairman of the Board, and above that you had Tim Geithner.

How do we know today that no one in that chain knew—we assume many of them did—and that none of them talked to Mr.

Geithner? In other words, in your opening statement you said, well,

the Fed didn’t know. Well, how do we know they didn’t know if

these individuals haven’t been personally interviewed to find out if

they spoke to anyone at the Fed, Federal Reserve Bank of New

York, including Mr. Geithner?

Mr. BAROFSKY. When we do our review we obviously request a

broad range of documents, we ask to speak to a broad range of people, we ask to be identified a broad range of people, and in this

audit, like all our audits, we talk to senior people at the Federal

Reserve, as well as at Treasury, as well as at AIG, and one of the

questions that we asked was: was communications up and to the

then president, current Secretary, Mr. Geithner. We review those

documents. We talk to a number of individuals. We talk to the individuals that we think are necessary.

As far as Secretary, himself, he has publicly made statements

about the time of his knowledge, and we saw nothing in our report

or in our interviews that would indicate that he was not being

truthful. From our perspective this is a significant failing in management, but I also think it is important to note—and this is sort

of what gets to one of our recommendations—is that the Federal

Reserve did not view, until very recently—I mean until recently before the payments were made—didn’t really view these as much of

a big deal. They were looking at this purely from a dollars and

cents perspective of $165 million, which, while significant, was a

drop in the bucket compared to their over-arching concern, which

was paying back the debt. They were not concerned, and that is the

problem about Treasury outsourcing this, because while Treasury

may have been and would have been required to have been more

sensitive to these issues, the Federal Reserve was looking at this

from a creditor, and $168 million from a creditor’s perspective just

wasn’t that much of a concern.

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So I am confident that audit team took the steps that were necessary to answer that question. It is a question that I wanted them

to answer about when Mr. Geithner became aware of this.

And I would also like to note that we share our information and

drafts of this audit report and we check in both formally and informally to make sure that we have our facts right. There is nothing

that could prevent individual officials at the Federal Reserve from

lying to us. There is nothing that could prevent them from withholding documents that we requested. But we saw no indication of

any of those things occurring, and I stand by my audit team’s work

on this and in their belief that we didn’t see anything that indicated that he knew before March 10th.

Mr. ISSA. Thank you, Mr. Chairman.

Chairman TOWNS. The gentleman’s time has expired.

I yield 5 minutes to the gentleman from Maryland, Mr.

Cummings.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

Thank you, Mr. Barofsky. You talked during your opening statement about this failure to communicate somewhere between Treasury and the Federal Reserve. Who is dropping the ball there? I

guess what I am trying to do is trying to figure out how do we

make sure that there is communication that needs to happen. I

mean, so how would you remedy that? I looked at your recommendations and you seem to talk about a plan, but how do you

think we ought to try to deal with that?

Mr. BAROFSKY. I think the issue is that, once the decision was

made that the Federal Reserve was going to take the lead of doing

oversight and doing compliance, there wasn’t any protocol established. There wasn’t any communication. What types of things are

we interested? What types of things are we looking at? Whether it

was because of a lack of resources or a lack of commitment, the Fed

was sort of left off to its own.

What we recommend is to learn the lesson here and to establish,

first of all, in any extent possible Treasury should directly be involved in providing oversight when it is TARP money. This is

Treasury’s responsibility ultimately. But in those circumstances

where it is decided to outsource, there has to be established plans,

policies, and procedures. Treasury needs to identify for the Federal

Reserve what are the issues that it wants it to followup on, and

then they have to maintain and followup. Set guideposts. Set milestones. Make it a priority to have that level of communication.

I think ultimately it is difficult to assign blame squarely on one

entity or the other, but ultimately it was Treasury’s responsibility

to provide oversight for the first $40 billion.

Mr. CUMMINGS. Now, in my discussions and letters with Mr.

Liddy, exchange of letters with Mr. Liddy, the former CEO, he used

all kinds of terms like retention payments, bonus payments, and he

didn’t use these words, but he did say that they needed to keep certain employees for winding down. They were the only people that

could wind down.

It seems like it was all kinds of reasons why they were keeping

these folks, but then, when I see that we have an unemployment

rate of 8.5 and we are supposed to believe that AIG would not have

been able to replace—and I do have a lot of empathy for kitchen

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assistants and mail room assistants getting $7,000 bonuses, and we

are supposed to believe that AIG Financial Products could have

unwound the problem trades without so-called crucial employees,

retaining them, I’m talking about the big, big money. As you know,

it was not lightweight bonuses. These people got some nice, nice,

nice funds.

So, I mean, in your research did you find that there was a need

to keep folks on? It seems like it is such a wide range of folks who

were getting bonuses. And when you get down to the mail room,

when you’ve got millions upon millions of people unemployed in our

country, you have to wonder.

Mr. BAROFSKY. Congressman, I think you are absolutely accurate. I don’t think that it is defensible to suggest that if AIG did

not pay a retention payment to a mail room employee or a kitchen

assistant that employee, A, would necessarily leave and, if that employee left, whether it would be difficult to replace that position,

given the state of the economy.

But I also think the first part of your statement, this also is a

problem with transparency. I, too, was left with the impression

after the hearings and all the public announcements that these

payments were going to those who were necessary and involved to

unwind these complex transactions, and it was one of the things

that surprised me the most as I saw the audit work come in, that

this was essentially to every single employee at Financial Products.

Here the failure of transparency goes to what we were discussing

just a moment ago: the fact that Treasury had outsourced this and

wasn’t aware of this information meant that it couldn’t be transparent about these payments because they didn’t have that knowledge.

As I have discussed in other reports and I will be discussing in

my quarterly report, which I will be discussing with this committee

next week, there is a cumulative effect from these failures of transparency.

Mr. CUMMINGS. No doubt about it. And the question becomes I

think AIG was just ingenuous, at best, and outright deceptive, at

worst, because I am going to tell you, based upon all the communications I got, and then to find out this kind of information, what

that means is somebody simply was not telling the truth. I think

that is why the American people got so upset about this and will

get even more upset, because they feel that they have been—you

know, they think they are doing one thing, but yet still they are

losing their houses, their homes, their savings, and everything

while other people are getting these bonuses and saying they are

supposed to be retention payments when really a lot of these people

did not fit that category.

Mr. BAROFSKY. I think so. And I would throw one other possibility in there, which is just incompetence. The list that we received

that put the positions with the bonus payments, that was something AIG had to create. It wasn’t a document that existed beforehand, that they created in response to our audit. So it may be that

we were the first person to even ask the question of who were the

people who actually got these bonuses and what their jobs were.

But I don’t know. I don’t know which category it fits within.

Mr. CUMMINGS. Thank you very much, Mr. Chairman.

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Chairman TOWNS. Thank you very much.

I now yield 5 minutes to the gentleman from Indiana, Mr. Burton.

Mr. BURTON. Thank you, Mr. Chairman. I just have a couple of

questions, then I will yield to Mr. Issa.

Mr. Issa mentioned that it would have been better, in many of

our opinions, if we had let all these problems go through the regular bankruptcy procedures, but there were decisions made by the

administrations to bail out a number of these companies.

When the bailout procedures took place, there evidently was no

provisions put in those agreements that said that, since the Government is loaning that money or spending that money to buy

stock in those companies, that the Government has the right to review the bonus procedures, was there?

Mr. BAROFSKY. No. Absolutely not. Very limited circumstances

for a limited number of employees.

Mr. BURTON. There are a lot of people that believe we are not

out of the woods yet as far as the economy is concerned. In the

event that this comes up again in the not-too-distant future and

that we don’t go down the bankruptcy court route, could we put in

those agreements that the Government is bailing out an industry,

could we put in those agreements a specific language that would

say that the Government has to review and approve any bonuses

before they are given?

Mr. BAROFSKY. It certainly would be a possibility.

Mr. BURTON. Well, that is the one thing I would like to point out.

I was not for the bailouts and did not vote for them, but it seems

to me if we were going to do that and we were going to take the

taxpayers’ money, we certainly should have had provisions in there

that controlled the way that money was going to be spent because

it was taxpayers’ money. And when you talk about these huge bonuses, it seems to me they could have put a lid on some of that.

But we should have gone through the bankruptcy procedure, in

my opinion.

With that, let me yield to my colleague.

Mr. ISSA. Thank you. I thank the gentleman for yielding.

I want to ask from this side of the aisle, because I think your

answer was good and I want to make sure both sides have asked

it, if I understand correctly you said everyone got a bonus, and

clearly, in your opinion, not everyone needed to get a bonus in

order to be retained or, if they weren’t retained because they didn’t

get a bonus, they could have been replaced, including, as Mr.

Cummings I think alluded to, you know, basic clerical personnel

who had no special skills; is that correct?

Mr. BAROFSKY. I do believe that.

Mr. ISSA. So very clearly somebody who made the decision to give

these bonuses made a decision that was in the best interest of

making everyone happy and not the best interest of the American

taxpayers or even AIG; is that correct?

Mr. BAROFSKY. I think that at the time these contracts were entered into it was before the Government bailout, but ultimately yes,

the decision was made not to try to renegotiate these payments and

go forward with them. That is correct.

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Mr. ISSA. OK. I want to go back down a track for a moment. You

made a decision not to speak or speak directly with some people

in the chain of command who may have talked to somebody at the

New York Fed about these bonuses prior to the document production. And I know you said sometimes people withhold documents.

But if I understand correctly, individual members of the board, the

then president, the first vice president, and the executive vice

president that were in place at that time may not have been asked,

Did you speak to anyone at the Fed or even at Treasury about

these bonuses prior to the date you currently know of; is that correct?

Mr. BAROFSKY. I don’t have the exact list of people that my audit

team interviewed; however, again, I think we followed this information to its appropriate conclusion with those——

Mr. ISSA. Then can I ask that as a supplemental—and I will put

it in writing if you need it—that each of these individuals who

were in place at that time be asked, What did you know? When did

you know it? And who did you tell? That each of those people, if

they haven’t been asked personally, not document production but

personally, if they knew about it and/or if they spoke to anyone at

the Fed, if each of these people could be interviewed either through

interrogatories or actual interviews and you could get back to us

so we could be satisfied that these people who, to me, logically are

part of the trail that has to be followed, have been followed?

Mr. BAROFSKY. If you would send us a letter I would be happy

to forward that communication on to the Federal Reserve and

FRBNY and be happy to report back to you the responses.

Mr. ISSA. OK. And then, last, if we had gone through ordinary

bankruptcy, obviously FP would not have made everybody whole

unless the Government threw the money in. But let me ask one

final question. The individuals who received the greatest amount

of these bonuses, the ones that really trigger our inquiry today,

they negotiated basically paying 100 cents on the dollar. Where

was the expertise in unwinding used to pay less than 100 cents on

the dollar when, in fact, these products in their market, those who

unloaded these products prior to getting 100 cents on the dollar,

unloaded them from anywhere from a nickel or a dime up to maybe

forty cents on the dollar. Where was that expertise used, if anywhere?

Mr. BAROFSKY. That is a tremendously important question, and

we are going to be addressing it in an audit that we are going to

be putting out next month that studies the counter-party payments

and the decision by the Federal Reserve to pay 100 cents on the

dollar, so I look forward to sharing that audit with you and, of

course, would be happy to come back and testify about that audit.

Mr. ISSA. Thank you.

Thank you, Mr. Chairman.

Chairman TOWNS. The gentleman’s time has expired.

The gentleman from Ohio, Mr. Kucinich.

Mr. KUCINICH. Thank you very much.

Mr. Barofsky, when did the last administration become aware of

AIG bonus and retention plans? Was it before or after the $85 billion bailout?

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Mr. BAROFSKY. It would have been after the September bailout, the September infusion of $85 billion from FRBNY.

Mr. KUCINICH. On page 11 of your audit report you state that the

New York Fed spent months after October 2008 influencing

changes to future compensation decisions. Exactly what influence

did they have over AIG compensation decisions, and did the officials make the decisions for AIG?

Mr. BAROFSKY. We are going to be studying that issue a lot more

closely on corporate governance. It is an audit that we have pending right now, we are doing in connection with GAO.

Mr. KUCINICH. OK.

Mr. BAROFSKY. It is going to really look at the Government’s role

in making those types of governance decisions.

Mr. KUCINICH. Thank you. Now, during this period did officials

from the Federal Reserve use their influence to try and streamline

AIG’s compensation structure so it would be easier to understand

and manage?

Mr. BAROFSKY. Yes. They worked with AIG, with a consultant,

to get a better sense of what the entire structure was and advising

AIG to make a better, more comprehensible structure.

Mr. KUCINICH. During the testimony in front of the House Committee on Financial Services on March 24, 2009, Secretary

Geithner and Chairman Bernanke both admitted that they had

seen AIG’s SEC filing and knew a great deal of information in the

public domain regarding AIG’s excessive bonus programs; however,

neither of them claim to have known about the retention bonus

plans for AIGFP employees until March 10, 2009. Now, have you

examined AIG’s SEC filing in early September 2008? And if so,

were the retention bonus plans for AIGFP employees included in

that filing?

Mr. BAROFSKY. Generally speaking I think that they would have

been aware of those bonus plans. I think the testimony was the

specific size and scope of the amounts that went out in March

2009, earlier this year.

Mr. KUCINICH. Well then, given Mr. Geithner’s heavy involvement in the bailout of AIG as the president of the Federal Reserve

Bank of New York, now Mr. Barofsky, it is really hard to believe

that he wasn’t informed of the retention bonuses for AIGFP employees prior to March 10th, especially since they were awarded retention bonuses of $69 million in December 2008. Was Mr.

Geithner informed of the bonus plans? And if not, why not?

Mr. BAROFSKY. I think we have not seen evidence that he was

informed of the size and scope of these retention plans. As to the

why not, I think that he should have been. I think it was a failure,

again, as I said before, a failure of management. The one explanation I would offer is the one I offered earlier, which is, to a certain extent, the Federal Reserve officials who were looking at this

just didn’t identify it as significant an issue as it really was, and

that may have contributed to that failure to raise it up.

Mr. KUCINICH. I think it is very important for Members to regard

closely what Mr. Barofsky just said, because there is legislation in

another committee that would give the Fed even broader jurisdiction in matters relating to the economy, and they can’t even handle

simple things like being able to keep track of bonuses that are

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going out the door at a time that they are being asked and the Fed

is being asked to pump money into the economy to prop up the

AIGs of the world.

Now, Mr. Barofsky, did you come across any information that

would explain why these Federal Reserve Bank of New York officials did not immediately inform Mr. Geithner about the payments?

Why didn’t they tell him?

Mr. BAROFSKY. What they explained to us was, in substance, they didn’t think it was such a big deal. The $168 million was a

drop in the bucket. Their concern, their focus, was on repaying——

Mr. KUCINICH. Think about that bucket.

Mr. BAROFSKY. No, it is a big bucket. But their concerns were

misplaced. I mean, frankly, this was sort of the problem of the

outsourcing of oversight to an entity that just doesn’t have the political sensitivities, particularly at that time, that you would expect

from Treasury, of looking at this not from just a dollars-and-cents

of moving the beads on the abacus, but more fundamental questions that we are addressing, which is: is it fair? Is it right to give

$168 million to the very individuals responsible for driving that

company into the hole that it was that put it on the brink of bankruptcy.

Mr. KUCINICH. Thank you, Mr. Barofsky.

Mr. Chairman, the Constitution of the United States makes it

very clear that the power to coin money and regulate the value

thereof is reserved to the Congress. Now, we gave that away in the

Federal Reserve Act of 1913. But we had better look twice before

we consider giving the Federal Reserve any more power, and we

should also consider whether or not it is time for Congress to try

to make up for some of the damage that was done to the American

people by outsourcing our money supply and the supervision of it

to the Federal Reserve. They can’t keep track of small matters, let

alone large matters. Time for us to start thinking about changing

the direction we have with that institution.

I thank you. I yield back.

Chairman TOWNS. Thank you very much. I thank the gentleman

from Ohio for his statement.

I now yield 5 minutes to the gentleman from Tennessee.

Mr. DUNCAN. Thank you very much, Mr. Chairman.

I agree with the comments that most of the people have made

here today, Mr. Burton and Mr. Kucinich both, and I think there

is widespread agreement, and I think almost all of the American

people just think these bonuses are ridiculously excessive. But we

are talking today more specifically about the AIG bonuses.

The AIG bailout funds, according to the time line and sheet, the briefing that we have been given, totaled $180 billion; is that correct?

Mr. BAROFSKY. The total commitments add up to $180 billion.

Mr. DUNCAN. I mean, that is a mind-boggling figure that nobody

can really humanly comprehend, but some banks and companies

have paid back some of the bailout money. Do you know how many

have paid back, of the companies or the banks or the firms that

got bailouts?

Mr. BAROFSKY. The precise number will be in our quarterly report next week. I don’t have the number at my fingertips. It is

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about $70 billion or so, but I don’t remember the exact amount of

what it is right now.

Mr. DUNCAN. How much of the $180 billion has AIG paid back?

Mr. BAROFSKY. I think the total amount that is outstanding, ac- cording to GAO’s most recent report, is about $120 billion outstanding of the $180 billion.

Mr. DUNCAN. So $120 billion. And the bonuses that we are talking about, they wanted to pay $243 million in bonuses; is that correct?

Mr. BAROFSKY. For AIGFP it was about $60 million in December,

the $168 in this March, and another $198 that is due next March.

Mr. DUNCAN. So how much is that in total?

Mr. BAROFSKY. It is a little bit over $400 million.

Mr. DUNCAN. So it is $400 million. In one of our papers it was talking about just the $243 million. What is the largest of those bonuses? How large are those bonuses?

Mr. BAROFSKY. I believe that they went up to $4 million for an

individual.

Mr. DUNCAN. For an individual, $4 million. And then in your report it says that the Treasury put down these rules and said the

annual compensation limit of $500,000 proposed by February 2009

was not retained; that is correct?

Mr. BAROFSKY. That is correct.

Mr. DUNCAN. And then bonus payments to senior executive officers are limited to one-third of total compensation. What is the

highest compensation that is being received by somebody at AIG at

this time?

Mr. BAROFSKY. I’m not sure AIG overall. I know recently the pay

package for the new CEO of AIG was recently approved, and I

think that could be, with incentives, of up to $10 million.

Mr. DUNCAN. Was how much?

Mr. BAROFSKY. It is $10 million with various incentives, if he

meets all his incentives. I think that is approximately the number.

I don’t have the number right before me.

Mr. DUNCAN. Well, I agree with all these others that these bonuses—first of all, these bailout funds shouldn’t have been paid, we

shouldn’t have gone in this direction, but even National Review

Magazine had an editorial comment, and they said that they ordinarily wouldn’t be in favor of the Government being involved in the

compensation of any private business, but when a business had accepted a bailout money, that they sought justification for limiting

salaries and bonuses in that situation. I certainly agree with that,

and I think about 99.9 percent of the American people agree with

that and feel that these bonuses have been ridiculous and excessive.

Thank you very much.

Chairman TOWNS. I thank the gentleman from Tennessee.

I now yield 5 minutes to the gentlewoman from California, Ms.

Watson.

Ms. WATSON. Thank you very much.

According to an article in the Wall Street Journal yesterday, the

moves made by Kenneth Feinberg, the special master for compensation at the Treasury Department, to more clearly tie compensation to long-term performance are aimed squarely at salaries,

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not bonuses, which are restricted by rules passed by Congress earlier this year. Do you agree with the Wall Street journal’s assessment that there is a legal differentiation between an executive’s

salary and their bonuses, and that Kenneth Feinberg’s authority is

limited only to their salary?

Mr. BAROFSKY. I think that I would really defer to his office for

their current definition of their authority, but I think that his jurisdiction and scope is fairly broad. There are certain legal limitations

that he is operating under. For example, bonus programs or programs that were executed prior to February 11th are specifically

exempted from the statute of being controlled by the executive compensation restrictions that are in EESA as amended. But with that

said, there is an amount of leverage that comes from being a significant equity owner of these companies, and I think that Mr.

Feinberg views his role broadly and will be making advisory opinions beyond just the scope of what is completely spelled out in the

statute.

Ms. WATSON. Recent news reports have stated that Mr. Feinberg

is planning to shift a portion of an employee’s annual salary into

stock that cannot be accessed for several years to better tie pay to

performance in the financial sector; however, some have made a

counter argument that making stock a part of an executive’s annual salary creates an incentive to boost the stock price in the

short term rather than focus on long-term shareholder value. Do

you agree that tying compensation to stock will create this counterintuitive short-term incentive?

Mr. BAROFSKY. I think a lot of that depends on the terms and

conditions that are associated with the bonus payment. I think that

is a legitimate concern, but perhaps it is one that can be addressed

by the way the restrictions are spelled out.

Ms. WATSON. You know, in your opening statement you said it

was a mess. That is why we are trying to get detailed with it, because it is a mess. And, as I said before, it is like trying to unscramble rotten eggs. So can you recommend any other guidance

for how to structure compensation so that it encourages reasonable

and sustainable work performance?

Mr. BAROFSKY. I think what we will do and what we will continue to do is to try to bring as much transparency to this process.

It is ultimately not our role to make the policy decisions, but it is

our role to bring as much transparency to the decisionmaking process so that you, the policymakers in Congress and the policymakers

in the Executive have all this information available to them to

evaluate those decisions and tweak them, whether it is through different policies and procedures by Treasury or through legislation of

this body. We will continue to fulfill that role.

Ms. WATSON. And according to your report, despite promises

from AIG that they would attempt to recover some of the $165 million worth of bonuses paid in March, so far they have only recovered $19 million of the $45 million they asked recipients to repay,

and apparently part of the problem is that some employees resigned so they could keep their money instead of returning it. So

can you explain why, if AIG was contractually obligated to pay the

bonuses as part of retention bonus plans agreed on in January

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2008, the employees are not obligated to continue working for AIG

in order to receive the extra money?

Mr. BAROFSKY. In the agreements, once they receive their retention payment they can leave, and that way, if they quit, they

wouldn’t be able to receive the future retention payments of 2010.

However, if they are fired, and they are fired not for cause, they

still are actually entitled to receive retention payments, and approximately 50 or so of those who received the retention payments

in March of this year were not working at AIGFP at the time they

received those payments because they fell into that category of people who had been fired but not for cause.

Ms. WATSON. So they are sticking to the contract, rather than

the thought of trying to repay us who bailed them out that money.

The employees left and so their performance is no longer there for

anyone to review, but they have the money and got away with it?

Mr. BAROFSKY. That is correct.

Chairman TOWNS. The gentlewoman’s time has expired.

Ms. WATSON. Well, I will continue at another time. Thank you.

Chairman TOWNS. OK. I now yield 5 minutes to the gentleman

from North Carolina, Mr. McHenry.

Mr. MCHENRY. Thank you, Mr. Chairman.

Mr. Barofsky, thank you again for your testimony. We have seen

a good bit of you as of late here on Financial Services, as well,

which I am a member of. Thank you for your frank and honest testimony.

You know, let’s rewind a little bit. I know the ranking member

had some questions about who you interviewed and that whole

process, but it is clear you did not interview Secretary Geithner?

Mr. BAROFSKY. My audit team interviewed Secretary Geithner on

a number of different audits. I don’t believe that they asked questions about this specific issue during that interview.

Mr. MCHENRY. OK. Did your investigators interview Sarah Dahlgren, who was Geithner’s top bank supervisor at the New York

Fed?

Mr. BAROFSKY. Yes, we did.

Mr. MCHENRY. Yes?

Mr. BAROFSKY. Extensively.

Mr. MCHENRY. OK. Were any questions posed to her whether or

not her boss was informed of this?

Mr. BAROFSKY. Yes. And she informed us that she had not informed then President Geithner.

Mr. MCHENRY. OK. As then president of the New York Fed

Geithner?

Mr. BAROFSKY. Yes.

Mr. MCHENRY. The Treasury staff, did they report that they provided then Secretary Geithner with this information?

Mr. BAROFSKY. Not until March 10th.

Mr. MCHENRY. Not until March 10th. OK. So it seems either a

colossal failure of administration through either error or omission,

or willful ignorance in some cases, and it seems to me that Secretary Geithner is a pivotal player here as both the head of the

New York Fed, which had direct action, is that correct——

Mr. BAROFSKY. Yes.

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Mr. MCHENRY [continuing]. With the AIG bailout in the fall of

last year.

Mr. BAROFSKY. That is correct.

Mr. MCHENRY. That is correct. And he was a key decisionmaker

in the winter and spring of this year about the AIG bonuses, as

well; is that correct?

Mr. BAROFSKY. Yes, he was clearly, from the time as the president of FRBNY, there was a brief period of time where he recused

himself from matters after then President-Elect Obama identified

him as the future Secretary of Treasury until he became Secretary

of Treasury. He had recused himself from some of those matters.

But other than that window, basically from September until the

present in one job or the other he was the head of an organization

that was involved in the bailout of AIG.

Mr. MCHENRY. OK. And, according to your report, the Treasury

failed in its oversight of AIG compensation generally; is that true?

Mr. BAROFSKY. That is correct.

Mr. MCHENRY. OK. So it is kind of interesting to me, as a part

of an oversight panel, that we have as Secretary of the Treasury

someone who not only failed in his oversight and actions about the

bonuses as Secretary of the Treasury, but in his job immediately

before that—and he did recuse himself as of November 24th when

the President nominated him. You are correct. But it also seems to

me that he failed as head of the New York Fed in terms of having

oversight of this. In fact, these bonuses and these retention payments were a matter of public disclosure to the SEC by AIG. So

it was in the public purview by then, was it not?

Mr. BAROFSKY. Yes. I think, much like if anything goes wrong in

my organization I am responsible and it is my failure, since we are

criticizing both the Federal Reserve and the Treasury for failures

of communication, management, and oversight, of course, he is ultimately responsible.

Mr. MCHENRY. Certainly. Well, I appreciate your frank testimony there. You have been a straight shooter all along, which I

don’t think—it is not a partisan issue. I mean, both parties are involved in this chaos, it seems to me. But additionally you have

oversight over the pay czar, the special master for compensation,

Ken Feinberg’s operation; is that correct?

Mr. BAROFSKY. Yes.

Mr. MCHENRY. Their operation in terms of reworking these retention bonuses, could that have a negative impact on the Government’s repayment of funds from AIG?

Mr. BAROFSKY. It is possible. One could envision a scenario that,

if there really is one person who is so important, so vital to

unwinding these transactions and has such a level of information

and a decision is made that results in that person leaving, it is

theoretically possible. Now, whether those facts are true or whether it will play out that way, I don’t know. I am not in a position

to say. But it is certainly at least theoretically possible.

Mr. MCHENRY. Does your office have a plan for oversight of this

pay czar and their operations?

Mr. BAROFSKY. We have a number of audits under consideration

as we staff up. One of them that I certainly have discussed with

my audit staff will be an audit of the pay czar. We are not anVerDate 11-MAY-2000 15:24 Apr 19, 2010 Jkt 000000 PO 00000 Frm 00082 Fmt 6633 Sfmt 6633 U:\DOCS\55101.TXT KATIE PsN: KATIE
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nouncing it yet. We want to sort of see what happens, and that way

we can better structure the audit, make sure that we ask the right

questions and do it in a correct way. But I do anticipate that we

will be auditing that process. Almost certainly.

Mr. MCHENRY. Thank you, sir. Thank you for your testimony.

Chairman TOWNS. The gentleman’s time has expired.

I now yield 5 minutes to the gentlewoman from Washington, DC,

Ms. Eleanor Holmes Norton.

Ms. NORTON. Thank you, Mr. Chairman, for these important followup hearings on this matter of great concern to this committee.

Sir, I am intrigued by the legal basis for your conclusion that

AIG was required by law to distribute these bonuses. Now, my concern comes from not only my own specific concern, but one that has

also been voiced by the attorney general of the State of New York,

Andrew Cuomo. Understand that I am trained as a lawyer to respect the sanctity of contracts, so I don’t ask this question lightly.

But nor, I think, did Andrew Cuomo ask it lightly, and he apparently sent a letter to the chairman of Financial Services, Mr.

Frank, in which he takes on your conclusion that these bonuses

were legally required. I could not help but smile at a line in his

letter that he wondered whether AIG attorneys ‘‘considered the argument that it is only by the grace of the American taxpayers that

members of Financial Products even have jobs.’’

Now, I was intrigued by Attorney General Cuomo’s analysis, and

I wonder if you considered his arguments before drawing your own

conclusions. For example, AIG, which by contract apparently was

to pay people certain salaries. They seem not to have had trouble

renegotiating those salaries, which surely weren’t orally pronounced. They renegotiated those contracts, but when it came to

these retention bonuses the law didn’t allow such renegotiation or

change. I wonder if you could indicate your view of these arguments, some of which are in Mr. Cuomo’s correspondence.

Mr. BAROFSKY. Sure. I think there are two different parts here.

First is whether this was a legally binding contract. Based on what

we report on is the different legal opinions that Treasury received:

AIG counsel, from its own counsel, from Department of Justice.

Ms. NORTON. I know the conclusion, sir.

Mr. BAROFSKY. No, no. May I continue? The second part of your

question, which is a far different one, was: could they have renegotiated? And I think the answer to that question was: of course they

could have renegotiated. They could——

Ms. NORTON. Should they have?

Mr. BAROFSKY. I think the fact that right now—I will answer

that question by what is going on right now, which is basically Mr.

Feinberg is encouraging them to renegotiate, and they, as we detail

in our audit, they are——

Ms. NORTON. Well, should they have renegotiated—you know,

this is what caused outrage. This is what is making it hard for

more funds to come through here. Let’s hope we don’t have another

rolling crisis here.

Mr. BAROFSKY. Right, and I think that is——

Ms. NORTON. And if they are doing that now, does that not indicate that they should have renegotiated these bonuses rather than

arguing that by law they had to pay them? Because if by law they

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don’t have to pay them now, how could they have by law had to

pay them then?

Mr. BAROFSKY. And I think your point is very well made, especially when you look at the bailout in context. Certain times we say

contracts are inviolable and this is a binding, legal contract and

therefore it has to be followed, but if you look at it in context with

other parts of the bailout, whether the auto industry, whether it

is contracts with auto dealers or contracts with debt holders, sometimes contracts are compelled to be renegotiated and terms are

changed.

So I think your concern is right and should not confuse our finding that, while this was, indeed, a binding contract—there was an

offer and consideration and performance, three elements of any

contract—that is not to say that was the correct move to just say

that this is a binding, legal contract, here’s your check, thank you

very much. That is not our conclusion at all, and I think——

Ms. NORTON. What is your conclusion? I mean, I don’t know why

you would simply have endorsed their conclusion that, well, these

were legally binding contracts, and then you cite others who found

those contracts. I want you to know that the American people say,

are you crazy? Would these people, for example, have had any bonuses had they lost their jobs, which they retained by the grace of

the taxpayers? So your answer seems to be that yes, they could

have renegotiated them. I don’t know why that wasn’t your conclusion in the report so that people would have understood there is

real oversight going on here, that there were alternatives, that people losing their jobs and their bonuses here can expect that people

in high places who had their money would also be required to do

so.

Mr. BAROFSKY. Our conclusions I think make pretty clear, and

we point out that, first of all, we were asked the question, we answer the question, was this a legally binding contract, and the answer to that question is based on these various people that it is.

But the question that you are asking is why didn’t we suggest what

are the alternatives. The answer is that we do in our audit. We

specifically note one opportunity that was lost as far as Government leverage was the fact that $30 billion more of taxpayer money

was coming down the pike in March 2009, and this would have

been an opportunity to go back and compel a renegotiation. So I

think that——

Ms. NORTON. So that leverage, which was in the hands of

management——

Mr. CUMMINGS [presiding]. The gentlelady’s time has expired.

Ms. NORTON [continuing]. Was not used on behalf of the taxpayers.

Mr. BAROFSKY. Yes, and I think that your concerns are addressed

in our audit report. We do report, as we are required to do, on the

basic legality of whether or not there was a contract, but I think

our audit makes clear that just because that was a legally binding

contract didn’t mean that there were not other alternatives available to AIG and the Federal Government that didn’t take place,

and that these options are still on the table and are being pursued

with respect to the next traunch of payments in March 2010.

Mr. CUMMINGS. Mr. Bilbray.

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Mr. BILBRAY. Thank you, Mr. Chairman.

I would like to just echo the frustration of the Delegate from the

Federal District over how a lot of this was handled. I guess we

have just got to be reminded this is exactly the problem with big

government thinking that we are going to use that to hold big business accountable and the taxpayer and the little guy seems to get

stomped in the long run, and so I do echo the Delegate’s frustration

there.

At this time, Mr. Chairman, I would like to yield my time to the

ranking member from California.

Mr. ISSA. I thank the gentleman.

You know, your oversight and your testimony time and time

again are critical, and sometimes the most critical part is when we

revisit what you previously had been working on and perhaps not

satisfied. The last time you were before us you had deep concerns

in your previous report, and particularly as to the public/private investment program, and particularly as to the absence of a firewall

and self-dealing, including, I guess, Black Rock, who is being paid

on one side and can still invest on the other. Have changes been

implemented so that those concerns are less? And if so, could you

tell us how?

Mr. BAROFSKY. Overall, no. There have been some changes. We

are going to detail them in our report that is coming out next week.

But walls have not been implemented.

Mr. ISSA. So self-dealing is still possible with taxpayers’ money?

Mr. BAROFSKY. It is an extreme risk, and absent these ethical

walls it maintains a strong risk that we are going to be paying very

careful attention to.

Mr. ISSA. Have you reviewed Secretary Paulson’s telephone

records that have now been released?

Mr. BAROFSKY. I personally have not.

Mr. ISSA. We looked at them briefly, and what we discovered was

that his phone logs show that he was talking to obviously Secretary

Geithner a great deal, but also to now President Barack Obama.

It appears from those records as though the transition had occurred by November; that, in fact, the majority of the calls were

being made to the incoming administration not to the outgoing.

Would that surprise you?

Mr. BAROFSKY. Those events occurred before I was even sworn

in, so I——

Mr. ISSA. But you are now looking back on who knew what and

when did they know it and how the mistakes continued to be made.

Is that an area that you think is within your purview to continue

looking at?

Mr. BAROFSKY. If it is related to a specific TARP issue, absolutely. We saw no indication that anyone at Treasury, including

Secretary Paulson, knew about these AIG bonus payments at that

time, so that wouldn’t have been part of this audit. But it is certainly within the scope of potential future audit products. Absolutely.

Mr. ISSA. Now I want to followup on what Delegate Norton had

said, because I think what she hit on and your answer needs one

more, if you will, filling out.

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Even though there is billions of dollars more coming from the

Federal Government, don’t we at the dias have, if you will, a selffulfilling prophecy? We have determined at that time this is too big

to fail and the Government will put any and all money in necessary, so if the Government did not put in more money at the time

when they could have used it as leverage, if they said, look, if we

don’t get negotiated-down costs we are not going to put the money

in, wouldn’t that basically have said, you go into bankruptcy if you

don’t do it, and didn’t the employees basically all know that was

a false statement if we had made it, that we had written a blank

check, we had given the President and the Fed walking-around

money that was virtually unlimited?

Mr. BAROFSKY. I think that there is certainly a lot to that statement. I do think there is a tremendous amount of leverage when

you are going to continue to make additional payments and put in

conditions, and I think a good example of that is in the auto industry, where the Federal Government through the TARP had made

billions and billions of dollars of support to Chrysler and to General

Motors but then went back with the threat of bankruptcy to force

very significant concessions.

Mr. ISSA. But in that case, of course, we ultimately put them in

bankruptcy after we had had the political bankruptcy. I know that

is not within your direct testimony today, but is not it true basically that we put money in that we will never get back in a political bankruptcy before the actual bankruptcy occurred, or, if you

will, the sale of Chrysler to Fiat and the whole re-funding of General Motors?

Mr. BAROFSKY. I share your skepticism about the likelihood of

getting that money back, the early money back.

Mr. ISSA. And, by the way, just as an old car guy, do you actually

think that Fiat has technology that Chrysler didn’t have?

Mr. BAROFSKY. That is well beyond the scope of any current

audit product that we have.

Mr. ISSA. Thank you, but I figured it was worth a smile. Thank

you.

I yield back.

Mr. CUMMINGS. Thank you.

Mr. Clay.

Mr. CLAY. Thank you, Mr. Chairman.

Thank you so much for being here, Mr. Barofsky.

Mr. BAROFSKY. Thank you.

Mr. CLAY. For the better part of the year it has been painfully

evident to the American people that AIG has been due an audit.

After using taxpayer dollars to bail out an insurance company that

was once the largest in the country and possibly in the world, AIG

used those same taxpayer dollars to reward the culprits of its corporate collapse. We cannot afford to be frivolous with the hardearned income of our citizens.

Following the decline of AIG’s stock value in 2007, employee

compensation packages were adjusted to account for the loss in

value of existing plans. These changes reflect AIG’s ability to negotiate compensation benefits with its employees and suggests that

AIG could have done the same in light of its Federal assistance.

Why did bonuses and retention awards continue to be included in

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compensation packages even after AIG received the Federal bailout

from the pockets of American taxpayers? Why did that persist?

Mr. BAROFSKY. That is a vitally important question. The explanations that we have received that we report in our audit was essentially what we have heard, which is this notion of the sanctity

of the contract, but I could not agree more with your statement

that of course there was an opportunity to renegotiate these agreements, both then and as is going on right now.

Mr. CLAY. According to your findings, the 2008 bonus plan for

senior partners was restructured in October of last year. According

to this new plan, a portion of the bonuses would be paid only if the

company had been sufficiently reorganized, progressed, and repaying Federal moneys and cut the 2008 bonus pool by 30 percent.

How many of these stipulations were met?

Mr. BAROFSKY. I’m not sure how many of those stipulations had

actually been met on that issue. That is outside the AIGFP issue

but on the TARP bonus structures. I think, though, a lot of those

rules and restrictions had been superseded by ARRA and by the

mid-June Treasury regulations, and I think that the decisions

about the pay plans for the top 100 employees at AIG are going to

be determined by Mr. Feinberg. But I can followup and get more

information on that.

Mr. CLAY. And could you tell us how much of the $150 billion

Federal rescue package has been repaid?

Mr. BAROFSKY. Right now the current amount outstanding to

AIG is about $120 billion.

Mr. CLAY. I see. Retention payments to AIGFP, what justification

has AIG given regarding the payment retention awards to the FP

division, the division central to AIG’s demise?

Mr. BAROFSKY. The two arguments that have been advanced are,

one, again, that this was a binding legal agreement and therefore

they were compelled to do so. The second argument is that employees at AIGFP, some of them were essential because of their unique

knowledge, to unwinding the complex transactions that occurred.

As noted earlier, neither one of these arguments is entirely satisfying.

Mr. CLAY. Yes. And, I mean, it even got to the absurdity of retention awards being paid to non-essential staff, including almost

$8,000 to a kitchen assistant and $7,000 to a mail room assistant.

What was the justification for that?

Mr. BAROFSKY. We are still waiting to get our justification for

that. I think, again, that falls back into the first point, that these

were legally required under contract is the justification. Again, it

is not one that we share or find particularly satisfying, but that is

the explanation.

Mr. CLAY. Were the retention programs successful in retaining

these employees?

Mr. BAROFSKY. Certainly there are a number. They are still

AIGFP employees. Whether or not they are still there because of

these retention payments or because of the realities of the job market or maybe the realities of having AIGFP on your resume may

not make you the most attractive potential employee, it is difficult

to determine.

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Mr. CLAY. Can you share with the committee how many resigned

despite receiving a retention award?

Mr. BAROFSKY. I don’t have that number right at hand, but I am

sure it is a number we can find out.

Mr. CLAY. Would you get it to us, please? I thank you for your

response and I yield back.

[The information referred to follows:]

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Mr. CLAY. Thank you, Mr. Chairman.

Mr. CUMMINGS. Thank you very much.

I now yield 5 minutes to the gentleman from Missouri, Mr.

Luetkemeyer.

Mr. LUETKEMEYER. Thank you, Mr. Chairman.

Thank you, Mr. Barofsky, for your testimony today. It is very

compelling. I appreciate your thoroughness.

I am just kind of curious. I know that in the stimulus package,

I think it was Senator Dodd at the request of someone in the administration, put in there the continued authorization to pay these

bonuses; is that not correct?

Mr. BAROFSKY. I think the provision you are referring to is the

one that made it so that any agreement that had been signed prior

to February 11, 2009 would not be subject to the ARRA restrictions

that were incorporated into EESA.

Mr. LUETKEMEYER. OK.

Mr. BAROFSKY. So that is correct, that part.

Mr. LUETKEMEYER. Do you have any information as to why that

would have been in there? Did they need that in order to be able

to pay these bonuses legally, or were there concerns on their part

that they are not legal otherwise so they put this in there?

Mr. BAROFSKY. I am not familiar with the legislative intent of

why that provision was put in there.

Mr. LUETKEMEYER. OK. Did it have any impact on your audit?

Mr. BAROFSKY. It had an impact to the extent that it really made

it very clear that these would have been exempt and carved out of

any of the EESA restrictions.

Mr. LUETKEMEYER. OK. So, in other words, it emphasized the

fact that they wanted to make these bonuses available or be able

to be paid to their executives; is that correct?

Mr. BAROFSKY. There would be no TARP restriction on making

these payments.

Mr. LUETKEMEYER. OK. Thank you.

What is the percentage right now that the Government actually

owns of AIG? Did you say 80 percent? Is it still 80 percent?

Mr. BAROFSKY. It is slightly under 80 percent.

Mr. LUETKEMEYER. OK. Since we the people own that, do we

have a representative on this board of directors?

Mr. BAROFSKY. Right now the Government’s ownership interest

is managed by trustees, three independent trustees.

Mr. LUETKEMEYER. Are they represented on the board of directors?

Mr. BAROFSKY. I think they advise the board of directors. I don’t

know if they are actually on the board of directors.

Mr. LUETKEMEYER. So we don’t have representation on a board

that we own 80 percent of?

Mr. BAROFSKY. I think that is correct. I think we do not have—

the Government does not have representatives on the board of directors. I am not 100 percent sure, but I can find out.

Mr. LUETKEMEYER. Why do we not have representatives on the

board of directors?

Mr. BAROFSKY. I think the decision was made to manage the

Government’s interest through these trustees instead.

Mr. LUETKEMEYER. OK.

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Mr. BAROFSKY. But, again, I’m not sure we don’t have representatives on the board of directors, but I will find out.

Mr. LUETKEMEYER. OK. And right now we have a gentleman, Mr.

Feinberg, who is the pay czar who is going to oversee the payment

of future bonuses; is that correct?

Mr. BAROFSKY. Yes, that is true.

Mr. LUETKEMEYER. What authority does he have to do that?

Where does he get his authority from?

Mr. BAROFSKY. His authority basically arises out of ARRA, which

we were discussing earlier, and the Treasury regulations that were

issued resulting out of ARRA, which set forth the executive compensation restrictions and set forth this procedure for Mr.

Feinberg. So it ultimately draws from the statute.

Mr. LUETKEMEYER. So they supersede any contractual obligations

that AIG might have with its employees?

Mr. BAROFSKY. That is going to be one of the challenges that Mr.

Feinberg has because no, it would not. For example, it wouldn’t

trump the future retention payments that are due in March 2010.

ARRA still exempts those from EESA’s restrictions. AIG has asked

for and he can provide an advisory opinion on them, but ultimately

those remain to be binding contracts. But, of course, he can make

recommendations. He can take into account past compensation,

making future compensation decisions——

Mr. LUETKEMEYER. So we really haven’t solved the problem yet

if we have a pay czar who doesn’t have the authority to oversee the

bonuses and we don’t have a representative on the board of directors who can direct that these recommendations be taken seriously.

Is that a fair assessment?

Mr. BAROFSKY. It may very well be. I think that my understanding is from statements AIG has made to us and as they say publicly that they are working very closely with Mr. Feinberg, and certainly we are all hopeful that AIG will follow those recommendations. If not I’m sure——

Mr. LUETKEMEYER. I take that as an affirmation of my statement.

Mr. BAROFSKY. Yes.

Mr. LUETKEMEYER. Thank you, sir.

Very quickly, as my time expires here, you have made a couple

of recommendations in your report and we are just kind of curious

as to whether Treasury has implemented those. One is that Treasury continues to hide information about the value of assets in its

portfolio. Have they started coming clean? Have they started to

make more available, more transparent, what their assets are and

the value of those assets?

Mr. BAROFSKY. No. They are going to be publishing as part of

GAO’s annual financial statement for the TARP, they will be publishing under the Credit Reform Act valuations of the portfolio.

That is an annual process. They have not adopted our recommendation of sharing with the American people their internal

valuations they receive on a monthly basis. I scheduled a meeting

with them actually tomorrow. They are going to give us a briefing

on their justifications and explanations as we continue to press for

that recommendation to be adopted.

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Mr. LUETKEMEYER. Now you made several recommendations in

your report. What do you feel in your estimation is the most important recommendation that you can make? And have whoever you

need to be able to address it, have they addressed it? And if they

have, fine; if they haven’t, why not?

Mr. BAROFSKY. I think it is difficult to say because each TARP

program is different, but I think our biggest over-arching recommendations which relate to transparency, in particular on requiring TARP recipients to report on how they are using the TARP

funds. It is fundamentally important for a number of reasons, including it fuels a lot of the cynicism.

The failure to adopt this recommendation I think fuels a lot of

the cynicism that the American people have toward this program,

this perception that the TARP is a black hole. I think it is a very

unfortunate decision on Treasury’s part. The decision was made by

the last administration and continues with this administration, and

it is one that we continue to press for, but I think that is one of

the most significant failings because it is indicative of a basic attitude toward transparency that we find is lacking in the TARP program.

Mr. LUETKEMEYER. I appreciate your remarks.

Thank you, Mr. Chairman. I yield back.

Chairman TOWNS [presiding]. The gentleman’s time has expired.

Thank you very much.

I now yield 5 minutes to the gentlewoman from Ohio, Ms. Kaptur.

Ms. KAPTUR. Thank you, Mr. Chairman.

Welcome, Mr. Barofsky.

Mr. BAROFSKY. Thank you.

Ms. KAPTUR. Thank you for your work.

Could you please restate for the record to the best of your ability

how much taxpayer money has been put at risk through the funding of the TARP at Treasury, and also any estimate you might

have of the dollars that have been put at risk through the fed,

which total into the trillions, I am told. Can you clarify that for the

record?

Mr. BAROFSKY. Sure. I don’t have those numbers at my fingertips

right now. In our last audit report we put out an estimate of the

total amount of money that was related to the financial crisis outstanding, and in that we totaled it to be approximately $3 trillion

across the Federal Government, and we had breakdowns with the

Federal Reserve and Treasury in that quarterly report. I don’t have

those numbers at my fingertips, but they are reflected in that report.

Ms. KAPTUR. All right. I thank you. You know, I am in awe and

simultaneously in utter disgust at how Wall Street and the money

elites in our country take care of one another, to the point of wrapping their tentacles around the entire Federal Government of the

United States of America. That takes a lot of power.

We have 15 million people unemployed. We have millions and

millions of people being kicked out of their homes. And yet we witness this egregious behavior by those who continue to receive these

bonuses, and really an arrogant disregard for the republic and its

citizenry.

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In your testimony on page 16 you accurately state that the plans

for these bonuses at AIG and AIG’s financing risk division were exempted under the American Recovery and Reinvestment Act this

year, which explicitly stated that it did not apply to agreements on

bonuses in place prior to February 11, 2009. Who could have had

the power to insert that provision? I am going to ask your staff to

please provide for the record the exact language of the provision

that did that in the Recovery Act.

And I would like you to venture an opinion on who drafted that

language and how did it get in that major recovery bill which included our unemployment benefit extensions, it included the Medicaid payments to the States. People can disagree whether they like

the Recovery Act or not, but to have that provision in there, it

wasn’t in the House bill. How did that get in there?

Mr. BAROFSKY. My understanding is that Senator Dodd introduced the amendment that reflects that language.

Ms. KAPTUR. And basically what is the net effect of that language?

Mr. BAROFSKY. The net effect of that language is that the TARP

does not prohibit these types of bonus payments if the bonus plan

was offered prior to that date.

Ms. KAPTUR. That is unbelievable that this could happen in our

country and that Members of Congress—to the extent that your

staff can provide the exact way in which this happened legislatively

through committee, through subcommittee, however, through conference committee, I would be very grateful if you could provide it

for the record.

Let me ask you this question. Do you believe that these unwarranted bonuses could have been prevented and prior bonuses

clawed back if our Government established through a civil lawsuit

or through administrative enforcement actions or criminal prosecution that the bonuses were prompted by accounting fraud? Could

we open it up?

Mr. BAROFSKY. I’m trying to go back to my days as a prosecutor

just a year ago of forfeiture and issues. There certainly are circumstances, if these payments were resulting from fraud, that

there could be opportunities for forfeiture or restitution.

Ms. KAPTUR. All right.

Mr. BAROFSKY. I’m trying to think of the specific circumstances.

But it certainly is possible.

Ms. KAPTUR. All right. That is an important statement for the

record, because I think justice has to be won through the courts to

the extent that we can, and they can’t be on the sidelines of this,

and parties to this suit should be thinking about that because the

American people don’t support this. Yet, this is going on and it has

been made the law of the land. I think most Members of Congress,

if you surveyed them, don’t even realize that provision was in the

recovery bill that was passed earlier this year.

It takes a lot of power to insert a provision like that literally puts

the firewall up against us going after those bonuses.

Mr. BAROFSKY. And, to be clear, as the wheels keep turning, I

think what we would probably need to show is an individual employee who participated in a type of fraud that resulted and included into the bonus payment. It may be more difficult to claw

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back under a fraud theory someone who is a participant to the contract and fulfilled their obligations under the contract and received

a payment. That person may be more difficult to recover. But if one

of the recipients of the bonuses was involved in a fraud that helped

lead to those, I think there would be legal remedy.

Chairman TOWNS. The gentlewoman’s time has expired.

Ms. KAPTUR. Could I ask the gentleman to provide one piece of

information for the record?

Chairman TOWNS. The problem is we are having a vote, and I

am afraid that some of the Members might not have an opportunity to—that is the problem.

Congressman Welch.

Mr. WELCH. Thank you. I will be brief.

Thank you very much for your good work. I just want to make

a brief statement.

Mr. Chairman, I think all of us are deeply troubled by AIG’s unwillingness to live up to its clear obligation to return millions in

bonuses that are totally unwarranted. Those should be returned to

the American taxpayer. The Special Inspector General’s report lays

bare the troubling extent to which AIG continues to take advantage

of the U.S. Government and the U.S. taxpayer. They acted in good

faith last fall when the company’s looming collapse posed a systemic risk to the entire U.S. economy, but the folks in AIG’s Financial Products division who helped push our economy off a cliff don’t

deserve a dime in bonuses that are financed by the American taxpayer.

I continue to urge to Department of Treasury and the Federal

Reserve to work together to recoup this money and ensure that

AIG honors its commitments and that we honor our obligation to

the U.S. taxpayers.

Thank you, Mr. Chairman. I yield back.

Chairman TOWNS. Thank you very much. I thank the gentleman

for his statement.

I now yield to Congressman Murphy from Connecticut.

Mr. MURPHY. Thank you very much, Mr. Chairman.

I want to get back to the issue of retention for a moment, but

before I do, in followup to Representative Kaptur’s questions, the

language regarding the contractual obligations of bonuses in legislation inserted in the Senate, just to be clear, that language was

in the context of an amendment that limited the awarding of bonuses to companies that receive TARP and Federal rescue funds.

Mr. BAROFSKY. Yes. I mean, the ARRA restrictions, which significantly increased the executive compensation restrictions on TARP

recipients, in the original version of the statute were much milder,

to put it mildly. But this is all part of an amendment that included

far greater restrictions which ultimately created the pay czar and

the bonus restrictions that ultimately had been incorporated into

EESA. That is correct.

Mr. MURPHY. In the context of the amendment offered by Senator Dodd in the Senate that was not part of the House version initially?

Mr. BAROFSKY. Yes. Senator Dodd’s amendment was related to

the entire executive compensation structure, was all authored by

Senator Dodd. If I didn’t make that clear, I perhaps should have.

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That was his proposal to put into EESA through ARRA the enhanced executive compensation restrictions, and part of that was

this provision. That is correct.

Mr. MURPHY. I want to come back to this issue of bonuses offered

to retain employees, because it is a key part of your report and part

of what you feel was missed in the discussions between Treasury

and AIG was the lack of real solid questioning as to some of the

declarations made by AIG.

One of the things you say in your report to start with is that the

resignations at AIGFP have been, I think you used the word particularly acute over the course of this time period. Because this is

such an important piece of the justification, I’m wondering if you

can drill down a little bit on that and what leads you to the supposition that resignations have been particularly acute at AIGFP.

Mr. BAROFSKY. Basically the numbers. I don’t have the specific

numbers right in front of me, but AIG has reported that there has

been a large number of resignations. The reasons for them could

be multi-fold. I would hate to speculate. Certainly it has been reported to us that all of the attention that occurred in March—and

there have been anecdotal stories of people going to AIGFP executives’ houses. There is bus tours that stop at their houses. Obviously that creates a lot of pressure. Also, the business is one of

winding down, and it is not the—and because of the very poor financial performance of the entity, that, too, could contribute to why

people would leave.

Mr. MURPHY. How do we going forward try to get at this issue

to make sure that it doesn’t happen again? You have, I think correctly, laid out all sorts of reasons that people may leave, many

having nothing to do with pay or compensation packages, and lots

of reasons that people would stay, having nothing to do with pay

and compensation packages, given the existing market. As we try

to chart a course forward here, how do you suggest that Treasury

or this Congress evaluate these claims that AIG or any other company may make that they must pay $1 million, $5 million, $10 million in bonus money in order to keep an employee, given all of

those competing factors? What is your suggestion as to how we

evaluate this going forward?

Mr. BAROFSKY. I think the key to any type of policy or procedure

that addresses your question must be that it be formalized and be

transparent, because I think where the biggest problems occur is

when the types of dealings or transactions or dealings or advice are

given behind the curtain. That creates the cynicism and anger that

we have seen relating to this bailout and that pervades a lot of the

TARP.

So I think what the actual policies and procedures are, that is

a more difficult question. That is something for Treasury as the

policymaker to determine and for this Body, but the structure I

think is key.

Mr. MURPHY. I guess we need your help on that, though, because, you know, transparency is wonderful, but if all they are saying is a restatement of their claim that they must pay $10 million

in bonuses in order to keep this employee, having that claim be

transparent doesn’t really help us much. It is hard for me to understand, as I think it is for many on this committee and in this ConVerDate 11-MAY-2000 15:24 Apr 19, 2010 Jkt 000000 PO 00000 Frm 00096 Fmt 6633 Sfmt 6633 U:\DOCS\55101.TXT KATIE PsN: KATIE
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gress to understand, why these bonuses were merited, given the

fact that there weren’t a lot of job opportunities out there for the

very people that were responsible for the collapse of that company.

So I would just ask you going forward to help us try to chart

those standards, help us come up with recommendations for Treasury so that we are not just reliant on the transparency piece, that

we actually have some standards in place to guarantee that this is

not just a claim of retention; that there is actually merit behind

that claim.

I thank the chairman for the time.

Chairman TOWNS. Thank you very much. I thank the gentleman

from Connecticut.

The gentleman from Illinois, Mr. Schock.

Mr. SCHOCK. Thank you, Mr. Chairman.

I would like to yield my 5 minutes to my distinguished ranking

member, Mr. Issa.

Mr. ISSA. I thank the chairman.

I am sorry it seems like all my folks are being real shy today,

but perhaps it is just my day to be tough on you. I am going to

try and bring a close to this hearing with a tough question.

Mr. BAROFSKY. Sure.

Mr. ISSA. Your testimony previously and now is that then New

York Fed Chairman Geithner didn’t know about bonuses while he

was New York Fed chairman, even though it was his responsibility

to oversee that failed AIG and, of course, the funds that went to

them; is not that correct?

Mr. BAROFSKY. We haven’t seen any indication that he knew.

Mr. ISSA. OK. So we don’t know if he knew, but it was his job

to know, and so far he said he has testified he didn’t know.

Mr. BAROFSKY. He said he didn’t know and we haven’t seen any

indication to contradict that.

Mr. ISSA. OK. So according to his testimony he failed to know

when it was his job to know.

Mr. BAROFSKY. Yes.

Mr. ISSA. And as Treasury Secretary he failed to stop, even

though he had at least a couple of days notice, he failed to stop

these bonuses and has said he just couldn’t, right?

Mr. BAROFSKY. That is correct.

Mr. ISSA. So he failed to know when he should have known. He

failed to stop when this committee on a bipartisan basis says he

should have at least halted it for a review and not simply paid it,

and now he is failing to give you transparency, you have testified,

right?

Mr. BAROFSKY. That is correct.

Mr. ISSA. So we have a Secretary of the Treasury who failed to

know what he should have known, failed to do what he should

have done, and has failed to give us transparency. That is really

what this testimony today is all about and, in fact, on a bipartisan

basis we are hearing that, one, we are not getting transparency

and, two, even if we get transparency, if we can’t trust the judgment and decisions of the Treasury, then, in fact, we are not going

to get the outcome the American people expect us to get and we

are going to continue to have non-essential people paid huge bonuses in many cases that are unnecessary with taxpayers’ dollars

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or dollars that could be returned to taxpayers. That is correct, is

not it?

Mr. BAROFSKY. There is a lot in your statement, a lot of which

I agree with.

Mr. ISSA. OK. We won’t ask for the minute part you may not

agree with. So I guess this committee is dealing with a Treasury

who is not providing transparency to the IG who has called for it

and, in fact, this is a gentleman who was confirmed by the Senate,

nominated by the President to be part of the most transparent—

I repeat, the most transparent—administration in history. I’m sure

you have heard that claim by the administration, right.

Mr. BAROFSKY. And much more importantly than being transparent to us, it is the transparency to the American people, the

taxpayers who are the investors in this program. They have been

good as far as giving us the documents and information that we

have requested, but as far as bringing the necessary transparency

to the program, I couldn’t agree with you more.

Mr. ISSA. So, Mr. Chairman, when we have said that we wanted

to go everywhere that the trail leads and to all people, I would say

today—and I am not calling on you to do this, but I am suggesting

that you and I work on a bipartisan basis to bring Secretary

Geithner here to, in fact, review thoroughly what appears to be a

pattern of not knowing, not stopping, and now not providing the

transparency that the President has tasked him to provide.

I think that the IG has been—I don’t want to say timid, but he

has certainly been respectful as he has delivered this message. But

if the summary of that message that we have all heard is correct,

then I believe that it is now time for us to bring Secretary Geithner

here to find out if, in fact, he will make a change in direction of

the large ship of State, the Treasury Department, to make them

provide the transparency the President tasked him to do.

I told you I would be tough. You are still standing, so it couldn’t

have been that tough. I want to thank you, though, for your testimony here today. I want to thank you for your respectful candor

in delivering what is not what we like to hear. We don’t like to

hear that the administration doesn’t have it right yet, and I think

both sides of the aisle have worked with you to point that out. I

thank you for this.

I would, in closing, ask if you can look through your schedule

and, I’m assuming we won’t do another hearing this soon, but I

know you are releasing additional information next week. If your

schedule allows, I think we would like to try to arrange for a less

formal, maybe a 1-hour with Members, so that we could get briefed

and have a quick discussion so that we understand what you are

releasing next week, if you can see if that is available.

Mr. BAROFSKY. Any time. We will always be available for that,

of course.

Mr. ISSA. Thank you. And I would like to thank Mr. Schock for

yielding time, and I’m sure he would yield the balance to the chairman.

Chairman TOWNS. Without objection, we would love to arrange a

joint briefing. Of course, I hope that we can do that. Not a hearing,

but a briefing of all the Members.

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Let me just close on this note by saying thank you very much,

Mr. Barofsky, for your being here. We really appreciate the work

that you are doing.

A year ago with major Wall Street firms either bankrupt or teetering on the edge, House Speaker Nancy Pelosi famously said the

party is now over. For AIG, that was true. Only massive taxpayer

bailout has kept AIG alive. Yet, despite the fact that mismanagement and poor business decisions brought the company down,

AIG’s executives still insist on extraordinary compensation. At AIG

the party might be over, but the music hasn’t stopped playing and

the musicians keep hanging around.

One of the things we have learned today is that apparently AIG’s

executives still believe that millions of dollars in bonuses or retention payments or whatever you want to call them should be paid

to them without regard to the company’s performance. In other

words, they don’t want to look at performance; they want to just

sort of say this is the way we do it, we’ve been doing it for years,

and we are going to continue to do it. In other words, not much

has changed since last spring.

Now the Special Master Ken Feinberg is reviewing AIG’s latest proposal for nearly $200 million in bonuses. The Wall Street Journal today says he is having trouble convincing AIG to reduce those

payments. He has his hands full. We will hear the record from him

2 weeks from now at our second hearing on executive compensation.

Finally, I want to thank you, Mr. Barofsky, who I think is doing

a find job in looking into these important issues. I think it is particularly important for Congress to have the facts in hand on these

important issues before we act on financial regulatory reform. I

thank you, Mr. Barofsky, in terms of making this significant contribution in this regard.

I want to thank again the Members for attending on both sides

of the aisle this very, very important hearing.

Finally, please let the record demonstrate my submission of a

binder with documents relating to this hearing. Of course, without

objection, I submit this binder into the committee records.

[The information referred to follows:]

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Chairman TOWNS. Without objection, the committee stands adjourned. Thank you.

[Whereupon, at 12:27 p.m., the committee was adjourned.]

[The prepared statements of Hon. Anh ‘‘Joseph’’ Cao and Hon.

Geral E. Connolly follow:]

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