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Show Me the Money

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Then, as the media pounced on the story, AIG’s senior management studied the contracts to see what, legally, they could get out of. On March 16, 2009, two days before Liddy testified, Patrick Shea, a partner at Paul Hastings retained by AIG, wrote a letter to Thomas Baxter, general consul of the New York Fed, affirming the legality of the $165 million payouts. “The failure to pay [these contracts] would expose AIG FP and AIG to double damages and attorney fees under the Wage Act.”

Sensing a tough legal fight, Attorneys General Andrew Cuomo and Richard Blumenthal of Connecticut brought the weight of public pressure, Cuomo by threatening to release some of the names, Blumenthal by trying to make some of the traders testify publicly. Panic and confusion erupted in Wilton and in FP’s offices in Paris and London. On Friday afternoon, two days after Liddy’s testimony, Gerry Pasciucco, FP’s chief operating officer, hastily e-mailed his staff a form to sign indicating what percentage of the money they would return by Monday afternoon. “To the extent that we meet certain participation targets,” Pasciucco wrote, “it is not expected that the names would be released, at all.”

One trader fired back an e-mail: “Gerry, the statement ‘to the extent that we meet certain participation targets, it is not expected that the names would be released, at all’ suggests we are being blackmailed. Is Mr. Cuomo above the law?”

Over the weekend, the Working Families Party sent protesters up to AIG executives’ homes in Connecticut. By Monday, only a handful of employees, now being represented by their own lawyers, had agreed to sign their name to a document, even given COO Pasciucco’s assurances it wasn’t legally binding. Only some $45 million of the $165 million had been pledged (and to date only $19 million has actually been returned). By the middle of the week, Jake DeSantis, a 40-year-old commodities trader, spoke for his colleagues in his remarkable op-ed in the New York Times. If the public felt DeSantis’s letter was arrogant and out of touch, he reinforced a feeling of moral outrage among his fellow FP traders. “This had nothing to do with reality,” one FP executive says. “It has everything to do with politics. These guys were out to get votes and trying to appeal to the everyday man so they can win elections. That’s what March was all about.”

T he hysteria of March didn’t solve the problem of what to do with the $198 million that AIG was scheduled to pay FP employees in Spring 2010. Talks between AIG and Treasury continued. By mid-April 2009, the broad contours of a deal took shape. Treasury explored the idea of AIG slashing the 2010 retention contracts by 50 percent, according to people involved in the talks. “There was a view that this would take a tremendous amount of pressure off FP,” one AIG executive says. In return for a reduced number, AIG pressed to have the retention payments made in installments, since many of them didn’t trust they would be paid a lump sum in March 2010. “You would eliminate the risk that the money would get held up,” the source said. AIG also wanted Treasury to agree to publicly affirm support for the FP employees.

“I would really like to put a size-12 boot up the ass of every one of you.”

Shortly before 10:00 on the evening of April 10, Hennessy, the New York Fed lawyer, e-mailed Liddy and Reynolds with the subject line “Urgent: Comp.” He indicated that there was “UST acceptance” with the 50 percent deal, but cautioned some details needed to be “further socialized.”

Over Easter weekend they drafted Liddy’s letter, and on the afternoon of April 11, Kelly of Human Resources sent the draft for Geithner to Michael Hsu, a Treasury official assigned to the AIG issue. “We continue to think that a 50 percent reduction is possible,” Kelly wrote. In a draft of Liddy’s letter to Geithner dated April 11, 2009, marked “Highly Confidential,” Liddy outlined the proposal with five bullet points detailing how he would cut FP contracts by 50 percent and instead pay FP traders based on their performance in winding down the portfolio.

Negotiations continued over the next several weeks. Treasury pressed for deeper cuts. In a second letter to Geithner dated May 7, Liddy stated that no FP employees would earn more than $2 million in total compensation and that cash salaries up to $500,000 would be recalibrated based on performance. “The amount of any award over $500,000 will be paid only when and if certain additional individual performance measures are met,” Liddy wrote. “A deal appeared very, very close,” said a person close to the talks.

A few weeks later, Hsu traveled from Washington to Wilton to meet with FP COO Pasciucco and explained that the Treasury was going to name a pay czar to handle the compensation issue. A few days earlier, Hsu had learned for the first time that FP traders had only returned $19 million of the $45 million pledged last winter and was not happy about it. According to two people familiar with the talks, Hsu asked Pasciucco why the pledges to Cuomo hadn’t been honored. (Ironically, some at Treasury think that Cuomo, by complicating the political situation, had made their job much harder.) The FP COO was defensive. He said the pledges shouldn’t be an issue. “That’s a big problem,” Hsu said.


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