March 23,2010

Grassley asks for investigation of Treasury Department’s failure to implement regulations on executive compensation for TARP participants

WASHINGTON – Senator Chuck Grassley today asked the Special Inspector General for TARP to investigate why the Treasury Department did not follow through on the mandate fromCongress in last year’s stimulus bill to require that all TARP recipients, including AIG, meetappropriate standards for executive compensation.

“Since the Treasury Department failed to do this, we now see the multi-million severance payments going to departing TARP executives, such as the $3.9 million paid in severance to AIG’s former general counsel, who left the job voluntarily,” Grassley said.

Grassley also asked the TARP watchdog to determine if Treasury Department officialswith potential conflicts of interest were permitted to draft the Treasury regulations that govern executive compensation, including severance at bailed out companies such as Bank of America, AIG and others.

Grassley described his request of the Special Inspector General in a statement placed intoday’s Congressional Record. The floor statement text is below. Click here to read Grassley’sletter of request to the Special Inspector General.

Last week, Grassley questioned the Treasury Secretary about the failure of theDepartment to act on the congressional mandate to impose appropriate standards on executivecompensation. “It seems as if the Treasury Department unnecessarily tied the hands of theSpecial Master for Compensation before he even assumed his duties,” Grassley said. Click hereto read that news release and letter.

Floor Statement of Senator Chuck Grassley
AIG Severance Payments
March 23, 2010

Mr. President. I recently asked Secretary Geithner why the Treasury Department isallowing AIG to pay millions of dollars of severance pay to executives given the billions ofdollars of taxpayer assistance AIG has received.

At one point I even said that AIG has the American taxpayer over a barrel and that AIGhas outmaneuvered the Administration.

Mr. Kenneth Feinberg, the Treasury Special Master for executive compensation, insistedhe was not outmaneuvered by AIG.

As it turns out, he was not outmaneuvered by AIG.

Instead, he was outmaneuvered by Secretary Geithner. Let me explain what I mean.In February, 2009, we enacted the Recovery Act. The law required Secretary Geithner totake control of the runaway executive compensation at companies that the American taxpayerbailed-out.

Congress provided Mr. Geithner with several tools to accomplish this critical job.By far the most important and most flexible tool Congress gave Mr. Geithner was ageneral mandate to require bailed-out companies like AIG to meet “appropriate standards” forexecutive compensation.

This rule was applicable to compensation already in place, compensation in the future,and compensation for all executives, not just a handful of the most senior executives.What happened to this tool?

Well, even before the law was passed the bonuses, retention awards, and incentivecompensation were “grandfathered.”

That means that while one part of the statute banned them for a handful of seniorexecutives, another part said they had to be paid if the payments were based on a contract thatexisted in February, 2009.

We all remember the outrage when people learned that this provision was quietly addedby the Senate drafters on the other side of the aisle because it required AIG to pay massivebonuses in March 2009 and again earlier this year.

Secretary Geithner was quoted in the press at the time saying that “Treasury staff”worked with the Senate drafters on the grandfather carve-out. Well, the damage was done.The grandfather loophole was law. You might say the American taxpayer wasoutmaneuvered by Treasury staff too.

The President instructed Secretary Geithner to "pursue every single legal avenue to blockthese bonuses and make the American taxpayers whole."

The next step required Treasury to implement the law and use the tools Congress gaveMr. Geithner to put the brakes on runaway executive compensation at firms where taxpayers arefooting the bill.

What did Treasury do?

One thing Treasury apparently did was hire a Wall Street executive compensation lawyerfrom a firm that specializes in helping highly paid executives maximize their pay, but more aboutthat later.

Despite the public outcry over the loophole, which permitted AIG employees and othersto walk away with millions, Treasury wrote a regulation that actually expands the loophole evenfurther.

That’s right, in the face of overwhelming public outrage, Treasury quietly worked toexpand the loophole. Let me explain how they did that.

The grandfather provision in the law that Congress enacted protected three things:bonuses, retention awards, and incentive compensation. It did not protect severance. Let merepeat: it did not protect severance.

But in what appears to be an effort to protect severance agreements despite the statutorylanguage, the regulations Treasury drafted expanded the term “bonus” beyond its normalmeaning.

Unlike bonuses, severance payments are intended to ease someone out the door, notreward them for doing a great job. Severance is basically the opposite of a retention bonus.But, after Treasury drafted the regulation, suddenly, severance payments were alsoprotected by the grandfather loophole, just like bonuses. Treasury must have known exactlywhat it was doing.

AIG had an executive severance plan that dated back to March 2008. It was just the sortof contract the grandfather provision would protect if Treasury expanded the loophole.And what was the impact of the Treasury regulation on the bottom line? What didAmerican taxpayers have to pay?
Because of this regulation, AIG recently paid two of its executives $1 million and $3.9million in severance pay. We don’t yet know how many others have received severance or mayreceive it in the future.

As the law was passed, these payments would not have been protected by the grandfatherprovision because they were not a bonus, retention, or incentive payment.

But Treasury officials took care of that. Rather than setting appropriate standards forexecutive severance payments generally, as the law passed by Congress required, the regulationleaves AIG free to pay excessive severance payments to many of its executives. Then, theAmerican taxpayer gets the bill.

The Recovery Act told Mr. Geithner that he “shall” require each bailed-out company tomeet appropriate standards for executive compensation. This command covers all types ofexecutive compensation for all executives, not just bonuses for the most senior executives.

It is a command, not a suggestion. And the grandfather provision that protects certainbonuses does not apply to this more general provision.

But the Treasury regulation almost completely ignores this mandate. It does address oneform of executive compensation. The regulation bars tax gross-up payments for seniorexecutives.

That is the practice of allowing the company to pay the executive’s income taxes forhim. Now don’t get me wrong -- tax gross-up payments should be banned for companies thatwere bailed-out, and I am glad to see that this was done.

But Congress gave Mr. Geithner a powerful tool that should have been used to curb othertypes of inappropriate executive compensation as well.

That includes tax gross-ups, extravagant severance payments, and other goodies WallStreet thinks it’s entitled to.

Secretary Geithner should have used the tool as it was intended. It’s like using a bigtractor to plow a little flower garden.

There’s nothing wrong with banning tax gross-ups or planting flower gardens, but youcould have done so much more with the tool you had.

If Secretary Geithner had done what he was directed to do in the law, we would not bewitnessing this spectacle.

AIG is paying multimillion dollar severance payments at taxpayer expense to executiveswho chose to resign rather than work for the maximum salary of $500,000 per year set by theSpecial Master.

This is a scandal as far as I am concerned. The American taxpayer, as well as Mr.Feinberg, was outmaneuvered by Secretary Geithner and his staff. And it all happened beforethe Special Master’s first day on the job.

There is another troubling matter that I must address. I mentioned earlier that theTreasury Department hired at least one Wall Street executive compensation lawyer from a firmthat specializes in helping wealthy executives maximize their pay.

There is nothing wrong, as a general matter, with hiring talented people with expertise intechnical legal subjects to draft regulations and administer the law.

But there are some red flags here that need a little sunshine. We need to be sure that thepeople working on these issues at Treasury have dealt with any potential conflicts of interestcarefully and openly.

Recently I learned that at least one Treasury official previously worked for Wachtell,Lipton, Rosen and Katz, a top Wall Street law firm. Wachtell, Lipton has represented at leasttwo former AIG executives.

The firm’s job was to look-out for the interests of the executives, not the shareholders.They were paid to make sure the compensation contracts, including severance provisions, wereas generous as possible for their clients.

Wachtell, Lipton also represented Bank of America on its controversial Merrill, Lynchacquisition in 2008. A Wachtell attorney who worked on that deal joined Treasury in the springof 2009.

He said that he then worked on the Treasury executive compensation regulations. Theseare the regulations I have been describing: the regulations that were to govern AIG, Bank ofAmerica and all of the other bailed-out companies.

This situation raises a host of questions, for example:

• How many other Treasury officials have similar potential conflict issues?
• Why wasn’t the attorney recused from participating in the drafting of a regulation thatwas going to have a direct effect on Bank of America, his former client, and AIG executives, hisfirm’s former clients?
• Did the attorney comply with the revolving door provision of the President’s ExecutiveOrder, which prevents appointees from working on matters that relate to their former clients?
• The President has committed to publicly disclosing all the waivers issued to exemptappointees from his ethics executive order. If this attorney recused himself, as he should have,why was that recusal not also disclosed so that the public would know about the potentialconflict?

At a minimum there is the potential for an appearance of impropriety here.What we know so far raises serious questions and red flags. But there also are facts wedo not know.

Therefore, I am asking that the Special Inspector General for TARP investigate theseissues and report his findings to Congress and the public as soon as possible.

Specifically, I am asking the Inspector General to examine why Treasury did not setappropriate compensation standards pursuant to Section 111(b)(2) of the Recovery Act sufficientto prevent severance payments like those AIG recently paid to its former General Counsel andChief Compliance Officer.

I am also asking him to determine whether Treasury officials working on executivecompensation matters have fully complied with the revolving door provision of the President’sEthics Executive Order.

In the meantime, there are still numerous documents that I have requested that have notbeen provided to me despite assurance that I was going to get them.

There are many questions I have asked that remain unanswered, and I will continue toseek information on these issues.

I call on Secretary Geithner to stop stonewalling. Oversight is important. Oversight isnecessary to protect the American taxpayer. I take that duty seriously, and I am not going away.

American taxpayers deserve to know where their money is going.