Fed And Treasury Put ‘Intense Pressure’ On Feinberg To Make Exceptions For Big AIG Bonuses

Special Master for Compensation Kenneth Feinberg

Special Master for Compensation Kenneth Feinberg

With 2009 coming to a close and the stock market having rebounded from its March low, “Wall Street is ready to pat itself on the back for its huge gains with big bonuses.” Despite the brouhaha caused by bonuses in the last year — and the role that perverse pay incentives played in bringing about Wall Street’s collapse — large financial institutions have been setting aside billions for bonus payments, and in 2009 may eclipse the record compensation levels of 2007.

This makes Steven Brill’s upcoming New York Times Magazine article (already available online), which examines Special Master for Compensation Kenneth Feinberg’s quest to craft pay packages for firms receiving extraordinary government help, particularly timely. Brill focuses especially on AIG, and Feinberg’s struggle to not only assuage public anger over the AIG bonus pool, but to keep at bay a variety of government players intent on influencing his final decision.

Feinberg wanted to ensure that AIG’s compensation correlated to the long-term strength of the firm by tying it to the company’s stock performance. However, Brill wrote that “Feinberg’s push for long-term accountability was met with what Feinberg calls ‘intense pressure’ from officials at the Treasury Department and from the Federal Reserve Bank of New York”:

Officials at Treasury weighed in on A.I.G.’s side, according to Feinberg. Herbert M. Allison, the assistant secretary for financial stability, and the official to whom Feinberg reported day to day, confirms pressing Feinberg to consider, he recalls, “the fact that we were dealing with a highly volatile stock that seemed to the employees to have a less than reliable value”…Those at the Fed were even more insistent that Feinberg make exceptions for A.I.G.

Feinberg subsequently allowed some employees at AIG to receive up to $1.5 million in cash bonuses.

Of course, both AIG and its government allies argued that huge pay packages are necessary for AIG to rebound to profitability and pay back the government. However, a new study highlighted by the Huffington Post’s Grace Kiser refutes that very notion. In fact, Raghavendra Rau and Huseyin Gulen of Purdue University and Michael Cooper of the University of Utah found that, between 1994 and 2006, “the 10 percent of companies with the most highly paid CEOs earned unusually low returns in both the near- and long-term.”

“Overall, our results show a strong negative relation between pay and future returns,” the researchers wrote, adding that highly-compensated CEOs tend to become overconfident, engaging in “wasteful capital expenditures and empire building.” So it would appear that Treasury and the Fed’s pressure was based on an entirely faulty premise, but some AIG executives will still end the year with a huge payday because of it.