American International Group Inc. (AIG), the insurer saved from collapse by a US$170 billion taxpayer bailout, was ordered by the US Treasury to scale back its $1 billion plan to give retention pay and bonuses.

The New York-based insurer still plans to distribute about $165 million on March 15 because of legally binding contracts, said the person, who declined to be identified because the talks weren’t public.

“I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them,” Liddy wrote to Treasury Secretary Timothy Geithner in a March 14 letter, which said the contracts predated his arrival.

“With the benefit of hindsight, I would have designed these differently and at significantly lower levels.”

AIG, whose fourth-quarter loss was the worst in corporate history, earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave the crippled insurer.

Liddy has vowed AIG will repay “every penny” to the US for its bailout package by selling subsidiaries, and said the retention pay for talented people helps taxpayers by making the units attractive to buyers.

Geithner telephoned Liddy on March 11 to demand changes to AIG’s plan, an administration official said separately. The Treasury didn’t try to halt the March 15 payments after determining that AIG was legally bound to make them.

Source: Bloomberg