The federal pay czar is trying to force the American International Group to reduce $198 million in bonuses promised to employees of its trading unit, where problems posed a threat to the global financial system last year.
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Times Topics: Kenneth R. Feinberg | American International Group Inc.
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But the Treasury’s special master for compensation, Kenneth Feinberg, is running into legal hurdles because those bonuses fall outside new rules against bonus payments at companies receiving government assistance. The bonus agreements at issue were struck before last year’s emergency rescues by the Treasury and the Federal Reserve, and thus are not directly covered by the new rules.

The problem is a recurring one. A.I.G. payments early this year to the same employees elicited public outrage, though government officials said then that they had little legal authority to rescind pre-existing contracts.

To strengthen his hand, Mr. Feinberg is threatening to reduce the compensation packages he does control, according to a person close to the talks. That could mean shrinking the pay of other A.I.G. executives — including its new chief, Robert Benmosche — if the firm does not claw back part of the bonuses for the people in its trading unit, known as A.I.G. Financial Products.

At companies that received extraordinary government support, Mr. Feinberg’s task is to monitor and enforce rules governing new pay packages. He can approve or reject cash pay that exceeds $500,000 for top executives.

Mr. Benmosche, hired by A.I.G. late this summer, received a compensation package that includes $3 million initially and about $4 million in stock that he must hold for five years, as well as annual bonuses based on performance.

A.I.G. has a variety of employee bonus programs. The Financial Products group began a two-year retention program in January 2008, before its government rescue, designed to keep skilled employees from leaving and jeopardizing its derivatives portfolio .

After A.I.G. paid $165 million in retention bonuses to that group in March, it promised to try to recover much of the money to quell the uproar that ensued.

But the insurance company has recovered only $19 million of the $45 million it asked the recipients to repay, according to an audit of its compensation program and the government’s oversight.

A company spokeswoman, Christina Pretto, said in a statement that the people who had received that money had “until the end of the year to fulfill their commitments,” and that the company believed those people would honor them.

But the special inspector general for the Troubled Asset Relief Program, Neil M. Barofsky, who conducted the audit, said some of the money appeared to be unrecoverable, because the employees had resigned rather than return the pay.

Other people are still weighing tax issues arising from those bonuses, and some have asked the insurer to dock their paychecks in the future, rather than make a single payment now.

The inspector general’s audit will be the subject of a hearing Wednesday by the House Oversight and Government Reform Committee.

The report stated that Mr. Feinberg had “informally advised A.I.G. not to pay the full $198 million,” scheduled for payment next March, but did not reveal how sharply Mr. Feinberg hoped to pare the bonuses.

The amount of the bonuses at A.I.G. is quite small relative to the record amount of government assistance received by the firm over the last year, roughly $182 billion.

The $165 million in bonus pay made last March coincided with the news that A.I.G. had just posted the biggest loss in American history and would need a bigger rescue package. That led to stormy Congressional hearings and tours of the suburbs where some bonus recipients lived.

Company officials argued at the time that only a handful of the employees of financial products bore responsibility for the disastrous derivatives trading, and it was unfair to blame everybody for the harm caused by a few. The company also said it wanted to honor its commitments because skilled people might resign en masse if bonuses were rescinded.

The new audit pointed out that the bonus program for the Financial Products unit was unusual because it included payments to unessential people. It cited a $7,700 bonus for a kitchen assistant, a $7,000 bonus for a mailroom assistant and $700 for a file administrator.

The audit also described the lack of coordination between the Federal Reserve and the Treasury over A.I.G.’s compensation program. It said Fed officials had their own conversations with company officials about compensation last fall, and were further briefed over the winter by compensation specialists at Ernst & Young brought in to help.

But the Fed did not convey any of the information it had gathered to the Treasury until just before the bonuses were scheduled to be paid in March. Then, the Fed sent an e-mail message to the general counsel at the Treasury, the report stated, warning that the looming bonuses had “garnered press and congressional attention” and would “not be easy for Treasury and the Fed to defend.”

That message promised to supply more detail, but nothing followed for about a week.

“Despite the strong language” of the Fed’s messages, the audit found “that the e-mail did not raise any flags in Treasury.”

Stephen Labaton contributed reporting.

WASHINGTON (CNN) -- The Inter-American Court of Human Rights has been asked to investigate whether Panama tortured an Ecuadorian citizen who was being held as an illegal immigrant, an official hemispheric human rights organization said.

Jesus Tranquilino Velez Loor was arrested November 11, 2002, and deported to Ecuador on September 10, 2003. During that time, he was held without receiving procedural guarantees, the right to be heard and the right to present a defense, said the Inter-American Commission on Human Rights.

"The case also involves the lack of investigation of complaints of torture presented by Mr. Velez Loor before the Panamanian authorities, as well as the inhumane conditions of detention under which he was held in several Panamanian penitentiaries," the human rights commission said in a release Tuesday.

The human rights panel, which is part of the 35-nation Organization of American States, said it referred the case to the court last week because Panama did not adopt sufficient measures to address issues raised in a previous commission report.

Velez Loor "was sentenced to a prison term for having repeatedly entered Panama illegally. ... Panamanian law provides that foreign nationals, who repeatedly enter Panama, without the necessary papers, will be imprisoned for two years and then deported," Panama said in a 2006 report.

Velez Loor admitted he had gone into Panama without proper papers or visas.

The commission said it received an e-mailed complaint from Velez Loor on February 10, 2004, "in which he claims to have undergone torture, forced isolation, and mistreatment at the hands of Panamanian police officers at two Panamanian detention centers without being given the opportunity to defend himself, without the benefit of any court of law, without being allowed to make a telephone call and while being deprived of all medical care."

Panama denied those allegations in the 2006 human rights commission report.

Officials at the Panamanian embassy in Washington did not return a telephone request Tuesday from CNN for comment on the latest development.

The human rights commission consists of seven members who act in a personal capacity, without representing any country, and who are elected by the OAS General Assembly.

MOSCOW, Russia (CNN) -- U.S. Secretary of State Hillary Clinton stressed Tuesday that Washington and Moscow are working together to ensure Iran's nuclear program is strictly for peaceful purposes, but Russia has stopped short of committing to Iranian sanctions.
Russian President Dmitry Medvedev greets U.S. Secretary of State Hillary Clinton on Tuesday outside Moscow.

Russian President Dmitry Medvedev greets U.S. Secretary of State Hillary Clinton on Tuesday outside Moscow.

Speaking to reporters after a closed-door meeting, Clinton and Russian Foreign Minister Sergey Lavrov indicated there has been no agreement between the countries on any sort of sanctions plan, even though Russia is not opposed to sanctions in principle.

The United States is using a two-track approach, pursuing diplomacy with Iran and going on to stronger measures -- such as sanctions -- if that effort fails.

"We are aware that we might not be as successful as we need to be," Clinton said. "So we have always looked at the potential of sanctions in the event that we are not successful, that we cannot assure ourselves and others that Iran has decided not to pursue nuclear weapons."

Clinton quoted Russian President Dmitry Medvedev's recent comment that sanctions might be "inevitable" but not at this stage. Video Watch as Clinton stresses the importance of the diplomatic track with Iran »

While the Obama administration has been cautiously optimistic about the "inevitable" comment, Russia has long believed that sanctions are not yet necessary, even though they may be a factor to consider down the road.

Lavrov said that sometimes sanctions theoretically need to be imposed when all diplomatic efforts are exhausted -- but not in the case of Iran.
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"Threats, sanctions and threats of pressure in the current situation, we are convinced, would be counterproductive," he said.

World powers have long been concerned that Iran wants to build a nuclear weapon, and those suspicions were heightened by the discovery of a secret uranium enrichment plant near Qom. However, Iran has consistently said it is developing nuclear power for peaceful purposes.

"Iran's nuclear program remains a matter of serious concern. We're working closely with Russia through the P5 and 1 process," Clinton said, referring to the diplomacy with Iran conducted by Germany and the five permanent members of the U.N. Security Council -- the United States, Britain, France, China and Russia.

"We are working to ensure that Iran moves forward with us on this engagement track," said Clinton, who added that Iran must show without any doubt it is pursuing unequivocally only a peaceful use of nuclear power.

Clinton also met with Medvedev at his residence outside Moscow. Other items on Clinton's agenda included Afghanistan, arms control and the new U.S.-Russia bilateral presidential commission.
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Clinton spoke about surmounting historical difficulties in U.S.-Russian relations, changing a relationship "once defined by the shadow of mutually assured destruction into that based on mutual respect and over time increasingly mutual trust."

"We are different countries; we have different historical experiences, different perspectives," she said. "But we are planting those disagreements in a much broader field of cooperation, and hopefully we are enriching the earth in which this cooperation can take root."

WASHINGTON (CNN) -- Sen. John Kerry said Tuesday he will offer a new explanation and clarification of a $7.5-billion Pakistan aid bill that has prompted a firestorm of anti-American sentiment inside Pakistan.
A member of an Islamic fundamentalist party protests the aid bill October 2 in Pakistan.

A member of an Islamic fundamentalist party protests the aid bill October 2 in Pakistan.

Opponents say the United States is meddling in Pakistani affairs.

Kerry, D-Massachusetts and chairman of the Senate Foreign Relations Committee, stood beside Pakistani Foreign Minister Shah Mahmood Qureshi at the U.S. Capitol on Tuesday afternoon to announce that he and other congressional leaders would release what Kerry called "report language with the force of law" to clear up questions about the nonmilitary aid bill.

The explanation would accompany the bill, which was passed unanimously by the House and Senate, when it is formally sent to President Obama to sign into law, something that could happen in coming days.

"If there are misrepresentations, we're going to clarify this," Kerry told reporters after he and Qureshi met in private.

The United States says the aid bill makes no new demands on Pakistan, but some Pakistani politicians say it will result in American micromanagement of Pakistan civil and military affairs.

Kerry said the multibillion-dollar aid package would provide "deeper, broader, long-term engagement with the people of Pakistan." He said the aid is a sign of friendship and was never intended to interfere with Pakistan's government.
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Kerry and the Pakistani foreign minister are set to meet again Wednesday. The statement of clarification will probably be submitted jointly by Kerry; Indiana Sen. Richard Lugar, the ranking Republican on the Foreign Relations Committee; and Rep. Howard Berman, D-California and the chairman of the House Foreign Affairs Committee.