By Dan Froomkin
12:39 PM ET, 03/18/2009
The public furor over the outrageous bonuses granted to AIG executives isn't exactly misdirected. It's just that the bonuses are really only a minor symptom of a major problem that President Obama has yet to sufficiently address.
As part of its massive financial bailout program, the federal government has spent $180 billion on AIG, and now owns 80 percent of the company. But the company's CEO still decided to pay out $165 million in bonuses -- to some of the very people most responsible for the cataclysm we face today.
Why couldn't the government stop this? Well, it's still not entirely clear just how hard the White House and the Treasury Department really tried. But this wouldn't have been an issue if we had simply taken AIG over outright.
Yes, we need to know more about the White House decision-making process here. But more to the point, President Obama needs to make it clear to the American people -- if he can -- why these banks and insurance companies shouldn't be under the direct control of the taxpayers who have spent so much money bailing them out.
And, yes, we know that Obama's top economic advisers tell him that's not a good idea. But he needs to explain why he believes them. And even more so, he needs to explain -- if he can -- why he thinks the growing number of outside economists who think that short-term nationalization is the only reasonable answer are wrong.
Washington Post opinion columnist Harold Meyerson argues this morning that Treasury Secretary Tim Geithner is the problem, and that "Geithner's indulgence of bankers' indulgences is fast becoming the Obama administration's Achilles' heel. The AIG debacle is the latest in a series of bewildering Geithner decisions that threaten to undermine the administration's efforts to restart the economy. So long as it's Be Kind to Bankers Week at Treasury -- and we've had eight straight such weeks since the president was inaugurated -- American banking, and the economy it is supposed to serve, will remain paralyzed. The Geithner plan to restart the banks provides huge taxpayer subsidies to hedge funds, investment banks and private equity companies to buy the banks' toxic assets without really having to assume the risk. That's right -- the same Wall Street wizards who got us into this mess, using the same securitization techniques that built mountains of debt within a shadow financial system that remains unregulated, are the saviors whom Geithner has anointed to extricate us -- with our capital, not theirs -- from the mess that they created.
"A more plausible solution would be for the government to assume control of those banks that are insolvent, as it routinely does when banks go under. It could then install new management, wipe out the shareholders, take the devalued assets off the banks' books, restart lending and restore the banks to private control at a modest profit for the taxpayers. There may be reasons that Geithner's plan makes more sense than this one, but if they exist, Geithner has failed to explain them."
It seems to me now would be a good time to review some of the earlier arguments for nationalization.
Let's see. Here's New York Times opinion columnist (and Nobel Prize winning economist) Paul Krugman: "First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn't expect the government to rescue them if necessary.
"Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can't risk letting much bigger institutions like Citigroup or Bank of America implode.
"Third, while banks must be rescued, the U.S. government can't afford, fiscally or politically, to bestow huge gifts on bank shareholders....
"How would nationalization take place? All the administration has to do is take its own planned 'stress test' for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary...
"What we have now isn't private enterprise, it's lemon socialism: banks get the upside but taxpayers bear the risks. And it's perpetuating zombie banks, blocking economic recovery."
Here are Matthew Richardson and Nouriel Roubini writing in a Washington Post opinion piece: "As free-market economists teaching at a business school in the heart of the world's financial capital, we feel downright blasphemous proposing an all-out government takeover of the banking system. But the U.S. financial system has reached such a dangerous tipping point that little choice remains.....
"Nationalization -- call it 'receivership' if that sounds more palatable... is the only option that would permit us to solve the problem of toxic assets in an orderly fashion and finally allow lending to resume. Of course, the economy would still stink, but the death spiral we are in would end."
Here's former Clinton labor secretary Robert Reich writing for Talking Points Memo: "The real scandal of AIG isn't just that American taxpayers have so far committed $170 billion to the giant insurer because it is thought to be too big to fail -- the most money ever funneled to a single company by a government since the dawn of capitalism -- nor even that AIG's notoriously failing executives, at the very unit responsible for the catastrophic credit-default swaps at the very center of the debacle, are planning to give themselves over $100 million in bonuses. The scandal is that even at this late date, even in a new administration dedicated to doing it all differently, Americans still have so little say over what is happening with our money....
"To whom should they be accountable? As long as taxpayers effectively own a large portion of them, they should be accountable to the government.
"But if our very own Secretary of the Treasury doesn't even learn of the bonuses until months after AIG has decided to pay them, and cannot make stick his decision that they should not be paid, AIG is not even accountable to the government. That means AIG's executives -- using $170 billion of our money, so far -- are accountable to no one."
And for good measure, here's that radical former Fed chairman Alan Greenspan, talking to the Financial Times a month ago: "It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring.... I understand that once in a hundred years this is what you do."
Why are you so sure all these people are wrong, Mr. President?
Obama addressed the nationalization issue briefly in a Feb. 10 interview with ABC's Terry Moran.
"Well, you know, it's interesting," he said "There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called 'The Lost Decade.' They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.
"Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [He laughs.] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country."
But as Krugman responded in his blog: "Yes, we have thousands of banks — but the problems are concentrated in a handful of big players. In fact, the Geithner plan, such as it is, already acknowledges this: the 'stress test' is to be applied only to banks with assets over $100 billion, of which there are supposed to be around 14.
"And the argument that our culture won't stand for nationalization — well, our culture isn't too friendly towards bank bailouts of any kind. Yet those bailouts are necessary; and even in America they may be more palatable if taxpayers at least get to throw the bums out."
Meanwhile, for good measure, the AIG scandal is making Geithner's preferred alternative to nationalization even more problematic. David Cho and Binyamin Appelbaum write in The Washington Post: "The firestorm over bonuses paid by insurance giant American International Group has triggered alarm at other financial firms, threatening federal efforts to draw private investors into economic recovery programs.
"It is a critical juncture for the Obama administration. Officials at the Federal Reserve and the Treasury Department are increasingly worried that the controversy could discourage investors from joining a new government effort to revive consumer lending as well as a separate plan that relies on private money to buy toxic assets from banks, sources familiar with the matter said. Treasury officials planned to outline that second program as early as this week."
So. What about what the White House knew and when?
Shailagh Murray, Paul Kane and Michael D. Shear write in The Washington Post: "Senior White House officials said last night that President Obama did not learn that bonuses worth $165 million were to be paid to executives of American International Group until Thursday, one day before they were issued and two days after his Treasury secretary was informed that the payments were going forward."
Julie Hirschfeld Davis writes for the Associated Press: "So far, the administration has been unable to match its actions to Obama's tough rhetoric on executive compensation....
"While administration officials insisted Tuesday that neither Obama nor Geithner learned of the impending bonus payments until last week, the problem wasn't new. AIG's plans to pay hundreds of millions of dollars were publicized last fall, when Congress started asking questions about expensive junkets the company had sponsored. A November SEC filing by the company details more than $469 million in 'retention payments' to keep prized employees.....
"Around the same time, Congress and Obama's team were passing up an opportunity to put in place strict laws to revoke bonuses from recipients of the $700 billion Wall Street bailout."
Davis also adds one key element to the timeline: "Unprompted, officials leaked news of the bonuses to select reporters late Saturday afternoon, highlighting what Geithner had done to try to restrain the payments. The story quickly became fodder for the Sunday news talk shows."
Should the White House have let those checks go out in the first place? More and more experts say no.
New York Times business columnist David Leonhardt this morning suggests ideas for "how to change the rules on corporate pay to reduce the odds of future crises. Throughout this crisis, policy makers, starting with President George Bush and Ben Bernanke and now including President Obama, have been a bit too deferential to Wall Street. That deference has fed populist anger, which threatens the political viability of the necessary continuing bailout of the credit markets."
Maureen Dowd writes in her New York Times opinion column: "The president needs to brush back the arrogant, greedy creeps who kneecapped capitalism, rather than cosseting Wall Street for fear of looking like an avatar of socialism."