Feinberg says Allison’s office told him to consult officials at the Federal Reserve Bank of New York. Those at the Fed were even more insistent that Feinberg make exceptions for A.I.G., according to Feinberg and to a senior official at the New York Fed who refused to be named because of a policy that no official can speak on the record about these matters.

The New York Fed is a Wall Street institution whose officials, perhaps more than any others on the public payroll, inhabit the world of Wall Street bankers and lawyers. (For example, the law firm advising Citigroup and General Motors in the Feinberg negotiations — Davis Polk & Wardwell — is also counseling the New York Fed on TARP matters related to A.I.G., at rates of $305 to $1,055 per hour, according to the retainer agreement.) In a little-noticed section of a report he issued in October, Neil Barofsky, the Treasury Department’s TARP inspector general, wrote that the New York Fed actually worked with A.I.G. after its 2008 bailout to set up another generous bonus arrangement for other A.I.G. executives. (Geithner was president of the New York Fed at the time, but he has said he did not become aware of the details of the A.I.G. bonus plans until March 2009, by which time he was at Treasury.) That Fed-blessed bonus plan nearly mirrored the 75-percent guarantee of 2007 bonuses that ignited the firestorm over compensation in the first place.

As the standoff over the A.I.G. stock continued, a New York Fed official told Feinberg that the Fed had done its own analysis of the stock and concluded that with all the bailout debt and other obligations, the common stock was, indeed, worthless, according to Feinberg and one person at Treasury who worked on the matter but was not authorized to speak. (Asked if they had done this analysis, Jack Gutt, a New York Fed spokesman, said that Fed officials would “not speak on the record about that or anything to do with these issues.”)

Finally, a compromise was suggested that Feinberg agreed to: The A.I.G. executives would get a form of “phantom” salarized stock that would reflect the value of onlyfour A.I.G. operating units that made money and had not been part of the company’s downfall — according to a formula to be worked out by the Fed and A.I.G. Moreover, the phantom stock would not reflect the $180 billion dollars in loans and purchases of preferred stock that the taxpayers had extended and that had to be paid back, nor any losses at other A.I.G. units. This seemed a reasonable way to create, in Kelly’s words, a stock that her people would see value in. But it does present the paradox of the top executives of a company, including its chief financial officer, declaring behind closed doors that its real stock is worthless to its employees — with the Treasury Department and Federal Reserve Bank agreeing — even as the rest of the world is buying and selling it for $40 or $50. (As of last week the stock was trading at about $29, a decline largely attributed in the business press to the growing realization that A.I.G.’s overall equity value was, indeed, unlikely ever to exceed its debt to the government.)

Thus, the A.I.G. executives who hadn’t received the cash retention bonuses got cash salaries of $450,000 and between $3 million and $4 million in this phantom salarized stock. As for Herzog, the chief financial officer, and the seven other A.I.G. executives who took the 2009 cash retention bonuses and wouldn’t give them back, Feinberg pointedly gave them cash salaries ranging from $100,000 to $450,000 and nothing else.

MANAGING EXPECTATIONS

Seen simply through a business lens, the Fed and Treasury people were arguably right to restrain Feinberg. Why obsess over $20 million or $30 million in extra payouts at businesses that have billions in other expenses and where the government had billions at risk? What if some of those people really did leave? Even if replacing them would just cause a hiccup or two, the risk wasn’t worth it.

But Feinberg did not see the issues involved in isolation from what Barney Frank calls “maintaining the public’s confidence in our capacity to govern.” In fact, as Feinberg began planning to release his decisions on Oct. 22, his principal fear, he told me, was that despite the cuts in compensation he had made and despite his reliance on measurements of long-term performance, giving out millions to each of these executives would generate a new wave of public anger. So he approached the drafting of the decisions, which would be released publicly, as more of a political challenge than a regulatory exercise, making sure that each decision first recounted in detail what the company had initially requested and then outlined all the ways he was ruling against them. There was no hint of the multiple discussions that took place after the proposals were filed — after which most companies amended their demands and ultimately, if grudgingly, came to terms with the decisions Feinberg was going to render. “Only mentioning our original proposals and then knocking them down was really clever,” one bank negotiator says.