Geithner Aides Worked With AIG for Months on Bonuses By MICHAEL M. PHILLIPS and SUDEEP REDDY WASHINGTON -- Since the fall, senior aides to Timothy Geithner have closely dealt with American International Group Inc. on compensation issues including bonuses, both from his time as president of the Federal Reserve Bank of New York and as Treasury secretary. The extent of their involvement, which wasn't widely known, raises fresh questions about whether Mr. Geithner could have known earlier about AIG's $165 million in bonus payments. When the bonuses sparked a political firestorm last week, Mr. Geithner said he learned about their full scope in early March, just days before they were paid. Mr. Geithner and Federal Reserve Chairman Ben Bernanke will be grilled by Congress on Tuesday in a hearing that is likely to focus heavily on AIG. The flap has prompted lawmakers to seek curbs on an array of bonuses, tested the Obama administration and undermined Mr. Geithner's standing as he attempts to implement measures to stabilize the financial system. Treasury officials say the department's staff kept Mr. Geithner in the dark until March 10. "Secretary Geithner, who has been actively engaged in shaping and executing the president's broad economic agenda, takes full responsibility for not being aware of these programs" before that date, Treasury spokesman Isaac Baker said Sunday in a written response to questions. This account of how Mr. Geithner and his aides were apprised of the AIG bonuses was based on interviews with government officials, lawmakers and congressional testimony. As New York Fed president, Mr. Geithner was central to AIG's initial $85 billion bailout in September, which was carried out in a tumultuous four-day period. After Edward Liddy took over as AIG chief executive, the company hired consultants to look at its payment plans around the world. One of Mr. Geithner's top bank supervisors at the New York Fed, Sarah Dahlgren, became the government's lead overseer of AIG. She sat in on AIG board meetings, joined at times by other top Fed staffers, and also participated in compensation-committee meetings. It isn't clear whether the issue rose to the board level until this month. AIG received an expanded government rescue in October and another in November, bringing the total to about $150 billion, including $40 billion in Treasury funds. In early November, the Fed, outside auditor Ernst & Young and AIG officials began examining through a committee the bonuses set to be paid to AIG's financial-products division, including those that sparked last week's furor. The committee concluded that the bonuses, which were in contracts signed before the government takeover, couldn't be legally blocked, according to a person familiar with the matter. The Obama administration has since agreed with that legal interpretation. AIG cited the retention plan in a public filing in early November, and Fed officials were aware AIG planned to pay $55 million in bonuses to financial-products employees the next month. Mr. Geithner remained involved in major AIG matters, seeking updates from Ms. Dahlgren and other top Fed staffers. He recused himself from dealing with aid to specific companies around the time of his Nov. 24 nomination as Treasury secretary. Fed officials declined to make Ms. Dahlgren available to comment on the bonus issue. Lawmakers were also scrutinizing AIG's operations. Some raised the matter of the AIG bonuses at a hearing in December where they grilled Neel Kashkari, a Bush Treasury official who remains at the department. In late January, news outlets reported that AIG planned a total of $450 million in bonuses to help retain employees winding down the complex trades in the unit at the heart of the company's collapse. In the weeks that followed, Mr. Liddy and other AIG officials briefed some lawmakers about the retention payments and other aspects of the AIG rescue. On Feb. 28, as government officials worked on a fourth AIG bailout, the New York Federal Reserve Bank emailed Stephen Albrecht, a Treasury lawyer, laying out the AIG bonus issues and promising further detail, according to two people familiar with the email. Mr. Albrecht did not return a call seeking comment. It was an intense weekend, as Treasury and Fed officials frantically prepared to close the AIG deal. "When we heard there was this executive compensation thing floating out there, we thought, 'We'll deal with this later,'" said one Treasury official. On March 2, AIG announced both record losses and $30 billion in fresh Treasury aid. The following day, Mr. Geithner appeared at a hearing of the House Ways and Means Committee. Rep. Joseph Crowley, a New York Democrat, asked the secretary about more than $160 million in bonuses that AIG would be paying to financial-products employees "in the coming weeks." Treasury officials say the AIG problem didn't register with Mr. Geithner at the hearing amid the other issues he faced. Mr. Baker, the Treasury spokesman, acknowledged that information about the financial-products bonuses was "in the public arena...for many months." But, he said, it wasn't until March 10 -- five days before the big batch of retention payments were due -- that department staff spelled out the situation for the secretary. The following day, March 11, Mr. Geithner, alert to the potential political fallout, called Mr. Liddy to protest the bonus payouts. At a congressional hearing last week, Mr. Liddy described the call as "open and frank." According to Mr. Liddy's sworn testimony from that hearing, Mr. Geithner indicated on the call that he had learned about the bonus "situation about a week" earlier. A Treasury spokeswoman said Mr. Liddy was "wrong." An AIG spokeswoman said the CEO was passing on his impression from the conversation. "If that impression was incorrect, he certainly defers to the Treasury secretary," she said. Over the weekend, administration officials contended the uproar wouldn't derail their efforts. President Barack Obama and a pair of Republican senators -- Judd Gregg of New Hampshire and Charles Grassley of Iowa, the top Republican on the Finance Committee -- disagreed with those calling for Mr. Geithner's resignation. "I think Geithner is going to survive this -- I think he has the trust of the president," Rep. Elijah Cummings (D., Md.), an Obama ally and early critic of AIG's bonuses, said in an interview. But "he has to put a very high-powered microscope on AIG," he added. âLiam Pleven, Matthew Karnitschnig and Laura Meckler contributed to this article. Write to Michael M. Phillips at michael.phillips@wsj.com and Sudeep Reddy at sudeep.reddy@wsj.com http://online.wsj.com/article/SB123777083390610069.html#printMode