Treasury ignored AIG pay, watchdog says

TARP Special Inspector General Neil M. Barofsky said the Treasury Department paid “scant attention” to AIG’s compensation structure. PHOTO: AP PHOTO

NEW YORK—American International Group Inc.'s announcement last week that it will report a $1.4 billion loss in the $2.15 billion sale of its Taiwanese life insurance operations may mean it will report losses on sales of other assets in the future, analysts say.

Separately, a special inspector general with the Troubled Asset Relief Program last week said the U.S. Treasury Department gave little consideration to AIG's compensation plans, including its controversial retention bonuses, when the government bailed out AIG last year.

In the asset sale, AIG last week said it had reached an agreement to sell its 97.57% share of Nan Shan Life Insurance Co. Ltd. to a consortium of Primus Financial Holdings Ltd. and China Strategic Holdings Ltd., both of which are based in Hong Kong. The deal for Nan Shan, which is Taiwan's largest life insurer, is subject to certain conditions, including regulatory approval.

In a filing with the Securities and Exchange Commission, AIG said it would report a net loss of about $1.4 billion in the fourth quarter in connection with the sale.

Observers said the loss reflects the value of the insurer on AIG's books, less its sale price.

Paul Newsome, an analyst with Sandler O'Neill & Partners L.P. in Chicago, said, “I think the sale is more of a reflection of the very difficult (mergers and acquisitions) environment than necessarily valuing things less than what they're worth, in a sense, because you're seeing lots of companies trade below book value.”

John L. Ward, chief executive officer of Cincinnati-based Cincinnatus Partners L.L.C., said the unit was sold despite the anticipated loss because it was an “opportunity to bring cash into the company, and the accounting that's related to this transaction is secondary.”

He also said there is a good chance the life insurer “would have required more capital in the future, and so by selling it now, AIG also benefited by taking away the uncertainty” of a capital shortfall in the future.

However, Cathy Seifert, an equities analyst with Standard & Poor's Corp. in New York, said the sale may be an indication about future asset sales. “We may see the same thing, which implies to me that asset valuations may be too high” on AIG's books, she said.

Mr. Newsome said he also believes AIG will sell more assets for less than book value, “because the financial market is recovered, but it's still far from perfect,” and selling a lot of insurance assets in a difficult market means “you're going to end up having them sold for relatively little money.”

On the other hand, Ms. Seifert said the recent narrowing of credit spreads “will help the valuation of the assets on their books.”

An AIG spokeswoman declined to comment.

Meanwhile, in testimony before the House Oversight and Government Reform Committee, TARP Special Inspector General Neil M. Barofsky said the Treasury Department paid “scant attention” to AIG's compensation structure, which involved 620 corporate and business unit programs, after the federal government rescued the company last fall, and relied instead on information from the Federal Reserve Bank of New York that was focused on AIG repaying the government assistance.

In fact, Treasury Department officials did not know the magnitude of the retention payments that would be paid to employees of AIG Financial Products Corp., which was blamed for the company's near-collapse, until two weeks before the March payout, Mr. Barofsky said.

Virtually everyone at the unit received retention awards, Mr. Barofsky said in the report, which noted that even a kitchen assistant was paid a $7,700 retention bonus.

Distribution of the retention bonuses—of which about $168 million was paid in March with an additional $198 million to be paid next March—prompted an uproar among lawmakers, who demanded the funds be paid back. About $69 million already was repaid by late last year.

Mr. Barofsky told the House panel that the payments were not subject to compensation restrictions because they were made possible by agreements in place before Feb. 11.

He noted that Kenneth Feinberg—the special master charged with overseeing executive compensation at AIG and other major TARP recipients—has been attempting to recover $45 million paid to the most highly compensated executives, but AIG management has said reclaiming the entire amount would be difficult because many employees who originally received retention awards have left the company. A little more than $19 million was as of Aug. 31, according to Mr. Barofsky's report.

In his report, Mr. Barofsky said Mr. Feinberg “has informed AIG management that the total should be reduced,” but added that Mr. Feinberg's office “has not indicated by how much this amount is to be reduced.”

“We're certainly all hopeful AIG will follow his recommendations,” Mr. Barofsky told the House panel.

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