Report: AIG Devises New Formula for Employee Bonuses

American International Group Inc (AIG) has formulated a new "forced ranking" system to determine bonuses and rate employee performance, Wall Street Journal said, citing people familiar with the matter.

AIG, which was bailed out by the U.S. government at the height of global financial crises in 2008, is struggling to incentivize employees to stay on after final batch of retention awards are paid out in the coming weeks, the Journal said.

Some senior managers in divisions such as compliance, legal and human resources have already left the insurer in the last few months, the paper said, citing a person familiar with the matter.

Some of AIG's 100 most highly paid employees, who fall under U.S. pay czar Kenneth Feinberg's oversight, are among the "pilot group" participating in the forced ranking system, an AIG spokesman told the paper.

The company is ranking employee performance from 1 to 5 to help it decide who will get a pay raise and larger incentive awards, the paper said.

About 10% of the employees will receive a "top" ranking, 20% will be rated "excellent," and 50 percent will see their performance rated "solid," according to the paper.

AIG is aiming to pay bonuses for 2009 to eligible employees by the end of March, the people told the paper. AIG could not be immediately reached for comment by Reuters outside regular U.S. business hours.

The Wall Street Journal; Reuters.

Geithner Draws Fire Defending AIG Bailout

Democrats and Republicans alike pummeled Treasury Secretary Timothy Geithner today over his role in the $180 billion bailout of insurance giant AIG Inc., venting public anger over Wall Street's return to prosperity while unemployment stands at 10 percent.

Geithner, one of the original architects of the government's 2008 response to the financial crisis as president of the Federal Reserve Bank of New York, defended the use of taxpayer money as necessary to head off "potentially catastrophic damage to the economy."

But members of the House Committee on Oversight and Government Reform hammered away at why regulators allowed American International Group to pass on billions of the bailout money to big Wall Street and international banks that were business partners.

"In effect, the taxpayers were propping up the hollow shells of AIG by stuffing it with money. And the rest of Wall Street came by and looted the corpse," committee chairman Edolphus Towns, D-N.Y., told Geithner.

Geithner clearly was getting no cover from committee Democrats on the day that President Barack Obama was to give a State of the Union address intended to assure Americans he shares their economic priorities.

Rep. Marcy Kaptur, D-Ohio, suggested Geithner was more beholden to banking interests than to taxpayers at the New York Fed and cut him off abruptly when he tried to deny it.

Kaptur later called Geithner's performance weak and said it showed that "he shouldn't have been appointed in the first place." She said in an interview that he should go "but removing him would be an empty change without eliminating the revolving door between Washington and Wall Street."

Both Geithner and Federal Reserve Chairman Ben Bernanke have found themselves on the defensive, both targets of political discontent and rising voter anger over bailouts and bonuses.

Bernanke was scrambling for support for confirmation for a second term. And Geithner faced speculation over whether his influence was fading after Obama reset his economic priorities to go with a far more aggressive attack on Wall Street and large banks that had been recommended by former Fed Chairman Paul Volcker.

But if Geithner risked being hung out to dry by the administration, it was not obvious in his testimony, in which he swung back hard against congressional criticism.

"Deciding to support AIG was one of the most difficult choices I have ever been involved in, in over 20 years of public service. The steps that were taken were motivated solely by what we believed to be in the public interest," Geithner said.

He also repeated an insistence that he played no direct role in AIG deals to pay back banks that were business partners or in withholding information about them from the public.

AIG eventually received an aid package from the government of more than $180 billion. The committee subpoenaed 250,000 pages of documents from the Fed. Lawmakers want to know why so many bailout dollars were funnelled to big banks with deals with AIG and revelations that officials from the Treasury Department and the New York Fed worked to keep the details of such decisions from the public.

Bernanke also told the panel he was "not directly involved in negotiations" on payments from AIG to big banks such as Goldman Sachs and other Wall Street firms. Those negotiations were handled primarily by the staff of the New York Fed, he said. Bernanke made the comments in written responses to questions posed by Issa.

Neil Barofksy, the special inspector general for the $700 billion bank bailout program, told the committee the New York Fed should have put "just a little effort" into trying to strike a better deal for taxpayers by getting banks owed money by AIG to accept less than 100 cents on the dollar.

But Thomas Baxter, general counsel of the New York Fed, testified that dragging out negotiations further would have resulted in AIG being "downgraded by the credit rating agencies and thrown once again to the brink of bankruptcy."

Although Bernanke and Geithner have taken the most heat, the government's bank rescue effort began under former President George W. Bush and Henry Paulson, his Treasury secretary.

Paulson defended his role. "An AIG failure would have been devastating to the financial system and the economy," he told the committee.

Rep. Elijah Cummings, D-Md., asked Paulson if he understood the anger that ordinary people were feeling toward Wall Street barons who play golf with each other and are "looking out for themselves" while the rest of the country suffers.

Associated Press writers Jeannine Aversa and Jim Kuhnhenn contributed to this report.

A.I.G. Borrows Another $20.9 Billion From the Fed

American International Group has found another place to borrow billions of dollars from the government: the Federal Reserve’s commercial paper program.

The distressed insurance company disclosed Thursday afternoon that it was borrowing up to $20.9 billion from the Fed’s program, under which the central bank is buying companies' short-term debt in an effort to unfreeze the market for commercial paper.

A.I.G. already has access to two government credit lines totaling $122.8 billion in order to avoid collapse, and the company's borrowing from the commercial paper program enabled it to reduce its debt under those lines.

In a filing with the Securities and Exchange Commission, A.I.G. said four of its affiliates had exchanged commercial paper for cash from the Federal Reserve Bank of New York. It said in the filing that it would use the proceeds to refinance its outstanding commercial paper, as well as pay down its initial credit line of $85 billion.

The Fed said A.I.G. reduced its debt under the two existing credit lines to $83.5 billion, from $90.3 billion a week ago, by using cash from the commercial paper program, Bloomberg News reports. With the latest loans of up to $20.9 billion from the Fed, the insurer's borrowing now totals as much as $104.4 billion.

A.I.G. spokesman, Nicholas Ashooh said that the terms of the commercial paper program were better than those for the original $85 billion credit line, which has a higher interest rate.

"They're paying off a Fed loan with another kind of government subsidy -- it's like using one credit card to pay off another credit card," Robert Haines, an analyst at the research firm CreditSights, told Bloomberg. "If they make progress paying off debts over time, I don't think it'll be viewed as necessarily a bad thing."

A.I.G. is rapidly running through the $122.8 billion made available by the Fed. Last week, A.I.G.’s chief executive, Edward M. Liddy, said the company might need to borrow even more money.

Walter

The Fed and the $85B AIG Loan Rescue

In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced this evening. The Fed authorized the Federal Reserve Bank of New York to lend AIG the funds. In return, the federal government will receive a 79.9% stake in the company.

Officials decided they had to act lest the nation's largest insurer file bankruptcy. Such a move would roil world markets since AIG has $1.1 trillion in assets and 74 million clients in 130 countries. An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won't have to go through a tumultuous fire sale.

"[A] disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.

The bailout marks the most dramatic turn yet in an expanding crisis that started more than a year ago with the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry. The line of credit to AIG, which is available for two years, is designed to help the company meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today's rates. AIG will sell certain of its businesses with "the least possible disruption to the overall economy." The government will have veto power over the asset sales and the payment of dividends to shareholders.

The company's management will be replaced, though Fed staffers did not name the new executives. The board will remain. For customers, it will be business as usual, officials said. Taxpayers will be protected, the Fed said, because the loan is backed by the assets of AIG and its subsidiaries. The loan is expected to be repaid from the proceeds of the asset sales.

The government had resisted throwing a lifeline to AIG, hoping to entice investment firms to set up a $75 billion rescue fund. Officials opted not to bail out Lehman Brothers, which filed for bankruptcy on Monday. But by this evening, it became clearer that the private sector would not step in to help AIG, which has a greater reach into other financial companies and markets than Lehman does.

"We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy," said Treasury Secretary Henry Paulson. "I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers."

Dramatic end, high stakes

The firm's options grew more limited as the day wore on. Its already-battered share price fell another 21% with more than 1 billion shares trading hands, and plummeted another 46% in after-hours trading. At one point this morning, shares fell more than 70% - a day after losing 61% of their value.

In a statement late Tuesday night the company said, "AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis."

The company also commended the Federal Reserve and the Treasury Department for "taking action to address AIG's liquidity needs and broader financial market concerns." Furthermore, the firm expressed its gratitude to New York Governor Paterson, and other NY State as well as Federal officials.

New York State officials, who regulate the insurance titan, had urged the federal government to rescue AIG. The state attempted to help AIG on Monday by allowing it to tap into $20 billion in assets from its subsidiaries if the company could comes up with a comprehensive plan to get the much-needed capital, said a state Insurance Department spokesman.

Pleased with the federal government's response, New York Gov. David Paterson said Tuesday night: "Policy holders will be protected. Jobs will be saved. Business will continue." The funding became ever more crucial as the insurer was hit Monday night by a series of credit rating downgrades. The cuts meant AIG could be forced to post more than $13 billion in additional collateral.

Late Monday night, Moody's Investors Service and Standard & Poor's Ratings Services each said they had lowered their ratings. A few hours earlier, Fitch Rating had also downgraded AIG, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.

The downgrade could force AIG to post $13.3 billion of collateral, Fitch said in a statement. Also, the moves would make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors. All the while, analysts urged the company to unveil its restructuring plan.

"Management needs to address investor concerns now before the market sell-off becomes a self-fulfilling prophecy," Rob Haines, analyst at CreditSights, said Tuesday.

Global ripples

The failure of AIG could have caused unprecedented global ripple effects, said Robert Bolton, managing director at Mendon Capital Advisors Corp. AIG is a major player in the market for credit default swaps, which are insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.

"If AIG fails and can't make good on its obligations, forget it," Bolton said. "It's as big a wave as you're going to see."

AIG has had a very tough year. Rocked by the subprime crisis, the company has lost more than $18 billion in the past nine months and has seen its stock price fall more than 91% so far this year. It already raised $20 billion in fresh capital earlier this year. Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.

AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured. The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia, on Monday. This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.

The company brought in new management to try to turn the company around. In June, the company tossed out its chief executive, Martin Sullivan, and named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup, in his place.

Walter

Sources: WSJ, Barron's, AP

Why AIG Matters

American International Group is the world's largest insurer and has been Wall Street's biggest worry for a while now. The insurer is struggling to raise cash while in the midst of a government bailout. Despite the company's importance, the average American is probably not sure how, or why, its problems will affect them.

AIG's current woes and what they mean to you
At least in the short term, you probably don't need to be worried at all. The problems are with the AIG holding company, not the individual insurance company subsidiaries that you do business with, according to a source with New York State's insurance regulator. Even if AIG's holding company is forced to file for bankruptcy court protection, there's a good chance that the subsidiaries will continue to operate normally with no disruption in claims payments. That has happened in the case of other insurance holding companies bankruptcies in the past, such as Conseco.

Claims
Typically, if an insurance company falls into financial distress and is at risk of having claims that exceed the assets it holds to make those payments, the insurance regulator in its home state will take control of the firm and make payments. The state regulator will not only use the firm's own assets to make those payments but if necessary can also make payments out of a state fund into which all insurers in the state are required to pay. This guarantee applies not just to traditional insurance policies but also to retirement products that have a promised payout, such as annuities. But there are limits to the payments that will be made to customers that vary depending on which state a particular AIG subsidiary is based, according to Joseph Belth, professor emeritus of insurance at Indiana University and editor of The Insurance Forum, a newsletter often critical of the industry.

Changing from AIG to another insurer
While credit rating agencies downgraded debt held by AIG on Monday, AIG's ratings are still considered investment grade and the company's insurance subsidiaries are considered to be secure, at least for now. Belth said changing insurers is not a simple decision. "A lot depends on what kind of insurance you talk about," he said. "If you're talking about life insurance, you have to think about whether you can qualify with a new insurer, if your health has changed. But it's something you have to consider if the ratings decline into the vulnerable range."

Why you should care about problems at AIG if you're not a customer
AIG is by far the world's largest insurer and its stock is found in many mutual funds, including any S&P 500 index fund. It is also a component of the Dow Jones industrial average. All by itself, it's been responsible for dragging the Dow down more than 400 points so far this year. AIG is also active in the business of credit default swaps, complicated financial instruments used by investors to protect themselves from bond defaults. Lehman Brothers was another major player in that field. If both go away, it would create a tighter credit market for consumers and businesses trying to get loans. For this reason, there has been a debate about whether the Federal Reserve would agree to lend the company the tens of billions of dollars it needs to cover its short-term funding needs or if the Fed will try and get private firms to assist AIG instead.

AIG is an insurer, not a lender
All insurers take money they collect in premiums and invest them in different forms of assets. The idea is to make money on those investments so that the insurer can keep their premiums low and attract more clients. But AIG made a bigger investment into securities that were backed by subprime mortgages than most other insurers. As defaults and foreclosures of those loans rose, the value of those securities fell, creating big problems for the firm. In the past nine months, AIG has reported net losses of more than $18 billion, largely due to its exposure to bad mortgages.

Walter

Sources: WSJ, AP