"It bears noting that 47 percent of the $165 million pool went to Americans (approximately $80 million)," according to Mr. Cuomo.

Of the 53 percent of the money that went to employees who were not American citizens, much of it was paid to those with the conglomerate's AIG Financial Products office in London. That unit was responsible for the disastrous losses on credit default swaps involving securitizations of subprime mortgages that nearly forced the entire company into bankruptcy, prompting a massive federal bailout in return for a 79.9 percent taxpayer stake in the firm.

During a teleconference, Mr. Cuomo said while he would like to secure the return of the remaining bonus payments, he did not believe his jurisdiction extended to London.

Later in the week, however, AIG issued a statement that it "deeply appreciates that a number of executives who work for Financial Products in Europe have volunteered to return recent retention payments."

The statement cited "several employees, including Mauro Gabriele, president and CEO of Banque AIG, and Jim Shephard, ceputy CEO of Banque AIG," both of whom "made this offer prior to the company's formal request on March 18."

On March 20, AIG noted, the pair "resigned from their roles given shared concerns regarding their ability to conduct business in the current hostile environment toward Banque AIG and AIG FP employees generally."

At the same time, noted the statement, the two are "fully committed to ensure that Banque AIG continues to operate normally and meet its obligations in these extraordinary conditions, and, as a result, they remain in their roles and have committed to effect an orderly transition."

AIG said that in its March 14 letter to Treasury Secretary Tim Geithner, the company argued that "resignations at Banque AIG could raise risks with respect to derivatives written out of Banque AIG, and we are in ongoing discussions with French and U.K. regulators, as well as with the Federal Reserve Bank of New York and the U.S Treasury Department, about this matter."

"Banque AIG and FP employees continue to successfully execute precisely the job asked of them–to de-risk and unwind the FP business," AIG noted, reporting that "to date, they have reduced the trade count from 44,000 to 28,000–nearly 40 percent."

Mr. Cuomo praised those at AIG who returned the bonuses. "I would like to say this to the individuals who have given the money back: You have done the right thing. You have done what this country now needs and demands," he said. "We are living in a new era of corporate and individual responsibility. I thank you for setting an example for the rest of the company."

While issuing his statement of thanks, Mr. Cuomo concluded by saying that his "investigation and security assessment continues." The attorney general has been looking into whether the bonuses were granted in a fraudulent process because the company was aware that its finances did not support them.

Edward Liddy, AIG's government-appointed chief executive officer, has said that while he found the bonuses distasteful, they were a contract agreement arranged before his tenure and could not legally be cancelled. Mr. Liddy has also argued the bonuses were necessary to keep good talent that would maintain AIG's competitive position.

The bonuses were the subject of legislation in the U.S. House of Representatives, which passed a measure to impose a 90 percent tax on the payments.

However, after President Obama and others raised questions about the bill's impact on future government dealings with the private sector to jump-start the economy, as well as its constitutionality, the Senate postponed any action on the bill.

The bonuses made daily headlines last week, as political players pointed fingers at one another to pin blame for allowing such additional compensation to be paid by a firm bailed out by the federal government to those who might have had something to do with AIG's financial debacle.

(Dozens of stories about the AIG controversy are available in the archives of the NU Online News Service. Readers may search under AIG at www.property-casualty.com.)

REGULATORY REFORM

Meanwhile the Obama administration last week asked Congress for authority to have a federal regulator and resolution power over large insurance companies.

"Let me be clear. The days when a major insurance company could bet the house on credit default swaps with no one watching and no credible backing to protect the company or taxpayers from losses must end," Mr. Geithner said in testimony before the House Financial Services Committee.

The entities covered under newly proposed federal authority will be "financial institutions that have the potential to pose systemic risks to our economy, but that are not currently subject to the resolution authority of the Federal Deposit Insurance Corp." This would include "bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm posing substantial risk to our economy," he noted.

The characteristics of an insurance company the administration wants as triggers for federal regulatory authority include "the financial system's interdependence with the firm, the firm's size, leverage (including off-balance sheet exposures) and degree of reliance on short-term funding." Another characteristic will be the importance of the firm "as a source of credit for households, businesses and governments and as a source of liquidity for the financial system."

As to authority to put companies into conservatorship or receivership, Mr. Geithner said "the regulator of these entities will also need a prompt, corrective action regime that would allow the regulator to force protective actions as regulatory capital levels decline, similar to that of the FDIC with respect to its covered agencies."

Mr. Geithner said what he is asking from Congress is only the first step, noting that a comprehensive framework for regulatory reform will cover four broad areas–systemic risk, consumer and investor protection, eliminating gaps in the regulatory structure, and international coordination.

"In the coming weeks, I will present detailed frameworks for each of these areas," he said.

In a research report, the Washington Research Group said the proposal by Mr. Geithner aims to "give a systemic risk regulator unprecedented power over financial firms of all types."

That means, the report said, that "federal regulators will have the power to examine the books, capital position and leverage at insurance companies, hedge funds, private equity firms, and any other financial firm."

The administration proposal is a move to "usurp" the state regulatory and guaranty fund system, according to Francine Semaya, Insurance Transactional and Regulatory Practice group chair with Nelson Levin de Luca & Horst LLC.

Ms. Semaya–who is also president of the International Association of Insurance Receivers, as well as chair of the American Bar Association Federal Involvement in Insurance Regulation Modernization Task Force (FIIRM)–said her interpretation of the proposal is that it would supersede the federal bankruptcy code in supervision of the parent company of an insurance carrier, and gain authority over the underlying insurance subsidiaries.

The criteria to establish eligibility for such action, according to an outline of the plan, will be:

o Whether the financial institution in question is "in danger of becoming insolvent."

o Whether its insolvency "would have serious adverse effects on economic conditions or financial stability in the United States."

o Whether taking emergency action "as provided for in the law would avoid or mitigate those adverse effects."

New York Insurance Superintendent Eric Dinallo, in reaction to Secretary Geithner's testimony, said the administration is looking for "some kind of oversight and resolution of the holding companies and lightly regulated parts of these conglomerates, like we saw at American International Group."

However, he added, "I believe that insurance companies standing alone–even very large ones–don't present the same systemic risk as the financial supermarkets or large, leveraged institutions."

"I think we have to parse this out a bit. It wasn't the insurance companies that caused this problem at AIG. The slow, conservative business of insurance or commercial banking, standing alone, do not present systemic risk," added Mr. Dinallo.

At the same time, Mr. Dinallo lauded Mr. Geithner, who he said is doing a good job. "We should remain flexible, not idealogical," he said. "It took Treasury Secretary Henry Morgenthau and President Franklin Roosevelt 10 years to work out of The Depression. We can't just give Mr. Geithner 10 weeks, and we have to try different things."