Can Paulson Fire Naughty Executives?

How much control does the Treasury have over personnel at AIG?

Henry Paulson

A week after the American International Group received an $85 billion bailout, personnel from its life insurance subsidiary, AIG General, held a weeklong retreat in Monarch Beach, Calif., that cost more than $400,000. At the town-hall debate on Tuesday, Barack Obama railed against the company’s excesses, suggesting that “the Treasury should demand that money back and those executives should be fired.” The Treasury can demand whatever it wants, but can it give company execs the boot?

Not in theory. It was widely reported that the Federal Reserve, with backing from the Treasury, loaned AIG $85 billion in exchange for an 80 percent stake in the company. If that were true, the government would be able to hire or fire at will, since it would control the board. But as the Explainer has noted previously, the Fed didn’t hand over any cash upfront—just the assurance of cash should it be needed during the next two years. In exchange for this line of credit, AIG granted the government the right to buy stock equal to 80 percent of the company. At this point, the government has veto power over certain company actions, like the sale of major assets or the payment of dividends to shareholders. But as long as the Treasury hasn’t yet purchased the stock, it’s not an owner with full authority over AIG’s managers (and junkets).

In practice, the situation is a little different. As a condition of the $85 billion line of credit, Treasury Secretary Henry Paulson insisted that AIG chief executive Robert Willumstad stand down. Now that the deal has come to pass, it’s likely that AIG will acquiesce to additional human-resources advice coming from the Treasury. Whether the executives who authorized a fancy retreat (including $23,000 on spa treatments) should really lose their jobs is another question. The trip was planned long before the bailout, as a reward for top-performing life-insurance agents—not the top dogs responsible for AIG’s collapse.

As part of the $700 billion bailout authorized last week, Congress moved to rein in corporate excess by lowering the cap on federal corporate deductions for executives’ pay to $500,000 from $1 million, allowing “clawbacks” (recovering pay if an executive is found to have engaged in fraud), and banning “golden parachutes” (bonuses for underperforming executives upon termination). These measures do not have retroactive influence over the AIG deal. The financial products manager whose complex investment strategy is at least partly to blame for AIG’s collapse, Joseph Cassano, is receiving $1 million a month in consulting fees, and former chief executive Martin J. Sullivan received a $5 million performance bonus.

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Explainer thanks Suresh Sundaresan of Columbia Business School.