Rewarding failure

REWARDING FAILURE…. And here I thought AIG couldn’t possibly do anything to anger Americans even more. I stand corrected.

Insurance giant American International Group will award hundreds of millions of dollars in employee bonuses and retention pay despite a confrontation Wednesday between the chief executive and Treasury Secretary Timothy F. Geithner.

But the company agreed to revise some executive payments after what AIG’s leader, Edward M. Liddy, called a “difficult” conversation.

The bonuses and other payments have been exasperating government officials, who have committed $170 billion to keep the company afloat — far more than has been offered to any other financial firm.

The issue came to a head when Geithner called Liddy and told him the payments were unacceptable and had to be renegotiated, said an administration official who was not authorized to comment on the Geithner conversation.

In a letter to Geithner yesterday, Liddy agreed to restructure some of the payments. But Liddy said he had “grave concerns” about the impact on the firm’s ability to retain talented staff “if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”

Lawyers at both the Treasury Department and AIG have concluded that the firm would risk a lawsuit if it scrapped the retention payments at the AIG Financial Products subsidiary, whose troublesome derivative trading nearly sank AIG. The company promised before the government started bailing out the firm in September that employees would be awarded more than $400 million in retention pay this year and next.

Now, just to clarify, Liddy and AIG’s other top six executives already agreed to forgo their bonuses. How nice of them. Today’s revelations deal with bonuses for AIG’s next 43 highest ranking officers — who run the AIG Financial Products unit, which was responsible for the company’s mess in the first place.

The Obama administration was reportedly “outraged,” expressed “deep consternation,” and told AIG this was “unacceptable.” The Treasury Department forced some concessions, but was ultimately persuaded by arguments about contractual obligations.

It’s still a sketchy argument from the sketchiest of companies.