http://www.bloomberg.com/apps/news?pid=20601087&sid=a4iG4N0ZcsTU&refer=home

Jan. 27 (Bloomberg) –– American International Group Inc., the insurer that nearly collapsed because of losses on credit- default swaps, offered about $450 million in retention pay to employees of the unit that sold the derivatives, according to two people familiar with the situation.

About 400 workers at the financial products unit may get the money in two installments, said the people, who declined to be named because the payments were confidential. The business was responsible for about $34 billion in writedowns since 2007 as the market value of swaps AIG sold to banks plunged amid the subprime mortgage market collapse.

The payments bring to more than $1 billion the amount AIG has committed to keep its employees from leaving. The New York- based insurer took a federal bailout in September to avoid bankruptcy and is selling units to repay the government. AIG disclosed the existence of the unit’s retention program in regulatory filings, including a quarterly report in August.

“We adopted and disclosed this contractual retention program months before the government provided support to AIG,” said Christina Pretto, a spokeswoman for the insurer. “It was clear, given the market environment, that we would need to retain employees to manage the complex issues arising in our financial products business, which we are now unwinding.”

Chief Executive Officer Edward Liddy has been providing data on employee compensation to Congress, saying retention programs are needed to keep the value of the units from eroding as AIG seeks buyers. The payments have drawn criticism from legislators including Representative Elijah Cummings, the Maryland Democrat who said that the awards are unnecessary while employment markets are weak. The U.S. lost almost 2.6 million jobs in 2008.

‘Extremely Disappointed’

“I was extremely disappointed –– but not surprised –– to learn that AIG will be awarding bonuses to the very division that drove the company into the ground,” said Cummings, a member of the House Committee on Oversight and Government Reform, in an e-mail. AIG shouldn’t be awarding “millions of unmerited dollars to employees while at the same time begging the U.S. government for financial life support.”

The insurer started the retention plan for the financial products unit in the first quarter of 2008, AIG said in a filing. The program guarantees a minimum level of pay through 2009 for employees, who had $563 million wiped out from existing compensation plans in the third quarter of 2008, AIG said.

Pretto said AIG cut almost $800 million of deferred compensation to the unit’s employees and that the most senior workers will get less than half their usual compensation.

Joseph Cassano

Joseph Cassano headed the financial products unit until stepping down in March after his operations drove a $5.29 billion quarterly net loss for AIG. The financial products business was founded in 1987 by Cassano and other ex-employees of Drexel Burnham Lambert, the securities firm that helped popularize “junk-bond” investing before it collapsed.

Cassano built financial products into a business providing guarantees on more than $500 billion of assets at the end of 2007, including $61.4 billion in securities tied to subprime mortgages.

AIG had to seek an $85 billion federal loan in September after downgrades of its credit rating, which the company previously said could force more than $10 billion in collateral calls from the debt investors who bought swaps to protect against losses. The bailout expanded to $150 billion in November, partly to fund an entity designed to retire the swap contracts by purchasing the underlying assets from banks.

Congressional Hearing

AIG kept Cassano on as a consultant, paying him $1 million per month until lawmakers lambasted the company on compensation and perks in an Oct. 7 hearing. He earned $280 million since 2000, according to Representative Henry Waxman, former chairman of the House Committee on Oversight and Government Reform, which held the October hearing.

There is “no assurance” that the retention programs will work, AIG said in the November filing. At least 30 AIG managers have defected to competitors since September, according to data compiled by Bloomberg. Zurich Financial Services AG, Switzerland’s largest insurer, has announced at least six hires.