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Bonuses Attacked, But What About Bailout?

POSTED: 04:52 PM ET, 03/17/2009 by The Editors

The bonuses granted to American International Group officials have become a lightning rod for public anger over the past and present excesses of executives in the financial industry.

They also have energized the debate over whether the $170 billion federal bailout of the insurance giant has been effective or defensible.

New York Attorney General Andrew Cuomo said in a letter to Congress today (PDF) that the bonuses "made more than 73 millionaires in the unit which lost so much money that it brought the firm to its knees." He says he has subpoenaed the company for the list of recipients.

The former New York governor, Eliot Spitzer, writes today on Slate that beyond the bonuses, the bailout has allowed AIG to pay billions to many of the counterparties in its bad deals. The counterparties are largely the same banks that, in turn, have received government bailouts themselves. Spitzer argues that this is the real scandal because it represents "the same insiders protecting themselves against sharing the pain and risk of their own bad adventure."

Others maintain that despite justified public anger at the bonuses, the bailout is working. Rick Newman at U.S. News advises everyone to "breathe deep" and realize that despite the justified anger over the bonuses, the payouts made by AIG to its counterparties are "sensible."

The bonuses that raise the most public outrage went to AIG's Financial Products unit, which has now been recognized as ground zero for the near-collapse of the financial system last year. The relatively small London-based unit came to public attention last fall. And in December, The Washington Post's Robert O'Harrow Jr. and Brady Dennis published a three-part narrative on the rise and downfall of the division, which feasted on risky instruments called credit-default swaps.

When AIG disclosed last year that it would award $400 million in planned bonuses and retention payments, lawyers for the Federal Reserve did not object, determining that otherwise the company would face costly lawsuits and penalties.

But President Obama yesterday vowed to "pursue every legal avenue to block these bonuses." And today Congress stepped in, with Senate Democrats promising to move quickly to pass a measure that would tax up to 98 percent of the bonus money.

By The Editors |  March 17, 2009; 4:52 PM ET Economy Watch
Previous: AIG Rage Swells, Center Funneled Money to Murtha Supporters, Sentencing in D.C. Tax Scam | Next: Wall Street's Refusal to Learn; New Earmark Rules, Same Problems; Feds Target Madoff's Sons

Comments

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The devaluation of a Business Contract in the USA is a very scary venture.

The misdirection is to blame the Company instead of the people told "No" by the American public in these bailouts.
No means no.

NPD out of control with power, is ugly isn't it?

The people have power in their Country, and can withhold funds (with a sabatical) from the vermacht, that is currently breeching the Constitution and ignoring them.

The People are still a Constitional Republic ,even if the Hill and the Oval offices are not.

The removal of the sanction of a Contract by Congress might backfire later, as lawyers bust out their own Irrevocable trusts.

We cannot call this Congress the brightest light bulbs in the neighborhood. Any intervention now, only leads back to themselves.

The "Cart before the horse" again...still puts them over their own cliff.
Repeating the same as last time, will achieve the same.

If the enemy cell intent is to break the financial backbone of the Country, the Democrats in Congress are leading and championing the "enemy of the people" charge for Alqueda.

Posted by: dottydo | March 17, 2009 7:26 PM

Maybe I'm being a bit dull here, but the Financial Products Group is in London, so one would assume the recipients are likely to be in the main British Citizens, so just how are they going to claw back 98% of the bonuses in tax from people who don't pay tax here...?

Posted by: scarlettbueller | March 17, 2009 7:41 PM

Geez this seems a bit scary that the president and congress can create a law that retroactively taxes someone who has annoyed them. The 19 non-citizens who blew down the trade center and are siting in Gitmo get more consideration of their rights. When tax dollars were transferred to AIG, the original law forbade bonuses, but Sen Dodd chimed in with an amendment that specifically allowed them (he gets most of his campaign money from AIG). Why the outrage? Congress should have read what they signed off on.

Posted by: georgejones5 | March 17, 2009 7:54 PM

I say RICO. Racketeering Influenced Corrupt Organization. This is a mob organization, who thumbs their nose at the law. And, the last seven years of taxes should be closely looked at, for ALL AIG executives. Very closely.

Posted by: ffdffddfdfdfff | March 17, 2009 8:23 PM

Something tells me that the AIG bonus fiasco is a *diversion* for the real scandal (which you alluded to in your title): THE BAILOUT, particularly of the AIG's counterparties that were also disclosed this past weekend (hmmm, the timing is fishy).

Two things for the Washington Post editors to consider.

First, you should ask that AIG CEO Liddy disclose the worst-case financial exposure for AIG Financial Products (AIGFP) at his appearance before the House Financial Services Subcommittee hearing tomorrow: if say over a trillion dollars then maybe the systemic risk of the subsidiary AIGFP declaring bankruptcy to abrogate all its CDS contracts might be worth taking (thereby saving the parent AIG with its limited liability).

Second, Eliot Spitzer wrote in Slate today, "the appearance that this was all an INSIDE JOB is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation."

He suggests that the following questions that should be answered, in public, under oath, to clear the air:

+ What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?

· Was it already known who the counterparties were and what the exposure was for each of the counterparties?

+ What did Goldman, and all the other counterparties, know about AIG's financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn't they bear a percentage of the risk of failure of their own counterparty?

+ What is the deeper relationship between Goldman and AIG? Didn't they almost merge a few years ago but did not because Goldman couldn't get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG's business model was not to pay on insurance it had issued.

+ Why weren't the counterparties immediately and fully disclosed?

Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.

http://www.slate.com/id/2213942/

Posted by: msa_intp | March 17, 2009 8:55 PM

They're going to start a new reality TV show called: "WHO WANTS TO NEUTER AN AIG MILLIONAIRE?" They have even convinced Dr. Kevorkian to be the host....now this ought to be GOOOOOOOOOOOOD!!!!

Posted by: benighse | March 17, 2009 8:59 PM

Oops, regarding whether it might be worth the risk for AIGFP to declare bankruptcy thereby setting off a systemic crisis, the remedy would be for the insolvent bad banks (e.g., AIGFP’s counterparties) to be put into Chapter 7 bankruptcy (whose ENTIRE performing & non-performing loan portfolio could be orderly liquidated with no fire sales: sort of like an insurance company in runoff mode) and the trillions instead be used to recapitalize them as ultra-clean banks (whose common stock [including voting rights] would be distributed to every man, woman and child in America) run by the “expert” old management team (e.g., Citigroup CEO Pandit). For example under the Fed’s 10% reserve ratio a $700 capitalization could create $7 trillion in fresh lending capacity OVERNIGHT! Moreover the common stock of these ultra-clean (and now ultra-heavily regulated) new banks could be contributed to the Social Security & Medicare trust funds, which would then solve their $56 trillion fiscal exposure (75 year horizon)--thereby killing two birds with one stone with the same issuance of current low-interest federal debt. [And by the way, these federal entitlement trust funds should have been given first dibs on the near-riskless 20% TALF ABSs (particularly since the Medicare Hospital Insurance trust fund is projected to eat into its “seed corn” principal asset holdings by 2013).]

At risk is a failed Obama presidency that is viewed as incompetent (read the “dithering” Treasury Secretary Geithner who Paul Krugman says keeps on “offering plans that nobody else finds credible”)--and the downgrade of the United States’ AAA sovereign debt credit rating. Creating ultra-clean new banks and contributing their common stock to the federal entitlement trust funds are how President Obama could pass his proposed budget that he says serves as a blueprint to restructure the US economy to be competitive in the 21st century, balance the federal budget by 2016, and even make China Premier Wen Jiabao happy!

Posted by: msa_intp | March 17, 2009 9:27 PM

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