Key Argument for Incentives Questioned

[Joanne98]

Payouts Came After Worst Had Passed, With Riskiest Bets Settled by December

By Binyamin Appelbaum and Brady Dennis
Washington Post Staff Writers
Thursday, March 19, 2009; A01

The work of defusing the most dangerous bets placed by American International Group was largely concluded by December, according to documents and interviews, long before the company gave bonuses to employees it said it needed to retain to avoid a financial meltdown.

AIG used almost $50 billion from the Federal Reserve to end contracts with other financial firms by the end of 2008, a massive and far-reaching bailout designed to remove the company from a central role in the financial system with minimal collateral damage. The largest beneficiaries included Goldman Sachs and Bank of America.

The government relied on AIG employees to carry out much of this work. The most explosive contracts largely were the creations of AIG's Financial Products unit, and employees of that division -- the recipients of the controversial bonuses -- worked through the fall to unwind old deals.

By the end of December, the outstanding volume of the riskiest kind of bet, on highly complex derivatives, had been reduced to roughly $13 billion from $78 billion, according to the company's financial filings. The Federal Reserve has since completed its planned purchases of assets from AIG's trading partners.

Two Financial Products executives said the hardest work has been completed and their focus has shifted to the resolution of a vast but less risky portfolio of bets on more straightforward financial instruments. One said most of those trades are protected against loss and have caused few problems.

That progress contrasted with the testimony before Congress yesterday of the company's chief executive, Edward M. Liddy, who said the payment of $165 million in retention bonuses last week was necessary because the departure of key employees could result in catastrophic losses.

"The risk assessment was we've made great progress in winding down this business,
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/18/AR2009031804239.html?hpid=topnews