U.S. to claw back AIG bonuses, lawmakers eye tax

The Obama administration turned up the heat on AIG on Tuesday over its employee bonuses, saying the embattled insurer will be forced to repay U.S. taxpayers before it gets another bailout of $30 billion.

Treasury Secretary Timothy Geithner laid out the conditions in a letter to congressional leaders as irate lawmakers moved quickly toward legislation that would slap a heavy tax on $165 million in bonuses paid by American International Group Inc.

The AIG affair has aggravated public anger over the rescues of big business as President Barack Obama's new administration works to stabilize the financial system and pull the economy out of recession.

We will impose on AIG a contractual commitment to pay the Treasury from the operations of the company the amount of the retention awards just paid, Geithner said in the letter.

He also said the Treasury would deduct $165 million from the $30 billion in additional taxpayer funds announced for AIG on March 2.

We will continue our aggressive efforts to resolve the future status of AIG in a manner that will reduce the systemic risks to our financial system while minimizing the loss to taxpayers, Geithner wrote.

And we will explore any and all responsible ways to accelerate this wind down process.

(Geithner's letter can be seen in full at www.treas.gov/press/releases/docs/pelosi.pdf)

The government now holds about an 80 percent stake in AIG, a giant that once stood astride the financial system but is now surviving on three federal bailouts worth up to $180 billion.

Edward Liddy, AIG's chief executive, is sure to face heated questions on Wednesday when he testifies before the House of Representatives Financial Services Committee.

Representative Barney Frank, chairman of the powerful panel, said AIG should be sued to get those bonuses back.

The House and Senate are making their own efforts to recoup the AIG bonus money. House Speaker Nancy Pelosi told reporters several committees have been working on legislation that the House could act on quickly.

Other options could include enlisting the U.S. attorney general to recover excessive pay at firms getting bailout aid and clamping down on bonuses at such firms.

AIG did not return calls and e-mails seeking comment.

'THE COUNTRY IS ANGRY'

Beyond the bonuses, anger flared anew on Sunday when AIG disclosed that Goldman Sachs Group Inc and a host of European banks were the major beneficiaries of $93 billion in payments from the insurer -- more than half of the U.S. taxpayer money spent to rescue it.

Executives at other financial firms receiving bailout money have also been paid bonuses, including Merrill Lynch and Morgan Stanley.

But AIG has fueled far more outrage because it has received more of the public's money than any other financial firm.

AIG was due to have paid bonuses on Sunday to employees of its financial products unit, which made bad bets on toxic mortgages and credit default swaps that hobbled the company.

Obama -- who took office eight weeks ago and inherited the financial crisis and recession from the Republican administration of George W. Bush -- expressed outrage on Monday about the AIG bonuses.

Obviously, the president is committed to working as quickly as possible with Congress to find ways to recoup this money, said White House spokesman Robert Gibbs.

Several lawmakers introduced tax bills likely to worry other businesses taking part in the government's many financial rescue programs.

A bill by Democratic Representative Gary Peters would put a 60 percent tax on bonuses over $10,000 at any company in which the government has an equity stake of 79 percent or more.

The special tax would be in addition to the top 35 percent income tax rate plus state and local taxes, making it possible to recover 100 percent of the bonuses, Peters said.

Max Baucus, the Democratic chairman of the Senate Finance Committee, and Charles Grassley, the panel's top Republican, proposed a 70 percent tax on bonuses for executives at firms getting money from the $700 billion financial bailout package.

The proposal would require these companies to pay a 35 percent excise tax, with the other 35 percent to be paid by the bonus recipient. The tax would be retroactive to January 1.

The country is angry and I am angry, said Baucus. Companies that shouldn't be paying bonuses are ... and it's got to stop. The tax code is one way to do it.

Geithner said the Treasury was working with the Justice Department to determine whether provisions of the recently passed economic stimulus bill covering compensation for bailout recipients might be useful in clawing back the bonuses.

But he acknowledged the stimulus law would only pave the way to negotiations with the company.

New York Attorney General Andrew Cuomo said AIG created 73 millionaires with bonuses of $1 million or more. He has said he will subpoena AIG for more information about the bonuses, including the names of the recipients.

Senate Republican leader Mitch McConnell sought to pin much of the blame on the Obama administration, saying it should not have approved the additional $30 billion for AIG two weeks ago without getting assurances it would not be spent on bonuses.

This administration could have and should have ... prevented this from happening, he said.

(Additional reporting by Kim Dixon, Donna Smith, Richard Cowan, John Poirier, David Lawder, Thomas Ferraro, Susan Cornwell, Jeremy Pelofsky, Caren Bohan, Corbett Daly and Tim Ahmann in Washington, and Grant McCool and Jonathan Stempel in New York; Writing by John O'Callaghan; Editing by Chris Wilson)