Watchdog report says Fed, Treasury failed in oversight of AIG

Treasury Secretary Timothy Geithner is "ultimately responsible" for regulators' failure to rein in massive bonus payments at American International Group because he led the agencies that provided AIG's lifelines, according to a bailout watchdog.

Geithner was president of the Federal Reserve Bank of New York before taking over at the U.S. Treasury Department in January.

He has said he did not learn until March about the $1.75 billion in bonuses and other pay promised to AIG employees. But Geithner's subordinates at the New York Fed learned of the payments in November, said Neil Barofsky, the special inspector general for the $700 billion financial bailout.

Even if no one told Geithner about the payments, "this is a failure of communication and a failure of management," Barofsky told the House Committee on Oversight and Government Reform yesterday. Geithner has been "the head of an organization that was involved in the bailout of AIG" since last September, he added.

A Treasury spokeswoman would not address the comments about Geithner's leadership.

Geithner helped lead Fed efforts starting last fall to prop up AIG with billions in emergency financing. After becoming Treasury secretary, his department and the Fed continued presenting new aid packages for AIG.

The government has committed a total of more than $180 billion to wind down the New York-based insurance and financial services conglomerate, and Treasury now owns about 80 percent of the company.

In a report released Tuesday, Barofsky wrote that Treasury did not understand AIG's pay structures when it gave the firm billions in aid last fall. He said yesterday that officials at the New York Fed "still did not have their arms wrapped around" AIG's compensation structure when he finished his audit last month.

Officials discovered 620 bonus programs totaling $455 million, and 13 retention plans allocating $1 billion, according to the report. AIG has asked employees to return some of the money voluntarily.

Barofsky criticized Treasury, under then-Secretary Henry M. Paulson Jr., for "outsourcing" its oversight duties to the Fed, which he said had different priorities from Treasury. As a financial institution, the Fed "didn't really view these [bonuses] as being much of a big deal," he said, because they were a tiny part of the AIG aid.