Bernanke: AIG Bonuses "Highly Inappropriate"

Jakarta, Financeroll.com – The bonuses paid to employees of American International Group, Inc. (AIG:  News ) were "highly inappropriate," Federal Reserve Chairman Ben Bernanke said Tuesday. Testifying before the House Financial Services Committee, Bernanke outlined the reasoning behind the government's repeated interventions to prop up AIG despite severe mismanagement within the embattled insurance giant.

The Fed Chairman added that AIG must "scrupulously avoid any excessive and unwarranted compensation." "We have pressed AIG to ensure that all compensation decisions are covered by robust corporate governance, including internal review, review by the Compensation Committee of the Board of Directors, and consultations with outside experts," Bernanke said in prepared remarks.

He noted that AIG has limited bonuses and other compensation for 2008 and 2009 voluntarily, adding that New York Attorney General Andrew Cuomo has imposed restrictions on that compensation. Bernanke called the bonuses "highly inappropriate," adding that he asked that suit be filed to prevent the payments.
However, the suit was deemed untenable by the Fed's legal staff, Bernanke said, and could have had the "perverse effect of doubling or tripling the financial benefits to the AIG-FP employees" due to punitive damages. Despite the uproar over the bonuses, Bernanke defended the Fed's decision to bail out the insurance giant. The government's decision to step in and bail out AIG came in the face of "unacceptable risks" that its collapse would have cause to the global financial system, Bernanke told lawmakers.

"Conceivably, its failure could have resulted in a 1930s-style global financial and economic meltdown, with catastrophic implications for production, income, and jobs," Bernanke said. The collapse would have triggered severe shockwaves around the world, Bernanke said, from state and local governments to policyholders, from global and investment banks whose exposure exceeded $50 billion to money market mutual funds which held around $20 billion in commercial paper.

Using the collapse of Lehman and the credit crunch it triggered as an example, Bernanke noted in prepared testimony that "once begun, a financial crisis can spread unpredictably." "It is unlikely that the failure of additional major firms could have been prevented in the wake of the failure of AIG," Bernanke noted.
As a result of its loans to AIG in order to keep the insurance giant afloat, Bernanke said that the Fed is now in an "uncomfortable situation of overseeing both the preservation of its value and its dismantling." This role is a new one for the Fed, which is usually charged with maintaining price stability. However, despite its additional responsibilities, Bernanke noted that his organization's goals have remained the same, "to protect our economy and preserve financial stability, and to position AIG to repay the Federal Reserve and return the Treasury's investment as quickly as possible."

From : www.financeroll.com