AIG bonuses threaten to sully Obama’s reputation

Since last September, Barack Obama has been trying to pull off the tricky shot of backing bail-out schemes at taxpayers' expense for the Wall Street shysters who have brought the economy to its knees, while simultaneously presenting himself as a populist crusader battling for economic justice  and the regular folks on Main Street.

Right now, for the first time since he was elected president, he's perilously close to plummeting from this high-wire act and ending up publicly derided as Mr Facing-Both-Ways, a toxic label for a man whose moral keynote has always been that he'll play it straight with the American people.

On the boil these past days have been the travails of American International Group (AIG), a vast insurance company which in the recent go-go years, now merely a fragrant memory, decided to ramp up its business by issuing coverage in the form of various intricate financial instruments to high rollers - Societe Generale, Deutsche Bank, Goldman Sachs, Merrill - without setting aside solid contingency funds in case all the high rollers - technically known as the counterparties - turned out to have bet the wrong way, which of course they did.

Barack Obama risks being derided as Mr Facing-Both-Ways on AIG

AIG's first rescue instalment came in September 2008. Republican Treasury Secretary Hank Paulson successfully promoted a bail-out plan, supported by candidate Obama, in which a $150bn package went to AIG, a substantial tranche of which then went straight to Paulson's previous employer, Goldman Sachs.

The AIG bail-out decision involved Paulson, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and now Obama's Treasury Secretary. When AIG recorded an ensuing $61bn loss in the fourth quarter of 2008, the Treasury pumped in another $30bn.

The rationale for dishing out these colossal sums was that if AIG defaults on its insurance contracts, covering the losses of the 'counterparties', the whole show would go down the tubes. Further bail-out duly followed, with AIG effectively becoming 80 per cent owned by the US government.

Amid the bail-out negotiations an obvious hot potato was the issue of bonuses to AIG employees. All parties to the negotiations - Paulson, Geithner (still at the New York Fed), Obama, senior Democrats and Republicans in Congress - were well aware that public indignation at the total $800bn bail-out for AIG and the big banks was at boiling point. Millions in bonuses to bankrupt gamblers bailed out by Uncle Sam is an impossible sell.

This week all the major players swore, hand on heart, they never, ever knew that $165m in bonuses had been assigned  to AIG personnel. Out in Los Angeles President Obama told Jay Leno as much last night. Treasury Secretary Geithner claims he only found out last week. Senator Chris Dodd, chairman of the Senate Banking Committee, swore day after day that he too never knew.

The bonuses were not secret. These so-called 'retention payments' for 130 people at AIG were approved two days after the September 16 bail-out, disclosed in a September 26 federal filing. They soon became a focus of extreme interest to politicians such as New York attorney general Andrew Cuomo, well aware of the smoldering public mood.   

In December, Bloomberg News quoted Representative Elijah Cummings of the House Committee on Oversight and Government Reform, as saying that "Edward Liddy [AIG's CEO] should testify under oath on why retention payments are going to thousands more people than first disclosed." Cummings cited an earlier Bloomberg News report disclosing that AIG was scheduled to give as much as a year’s pay to about 10 per cent of the staff at units that are being sold. Recipients were told to keep the awards secret.

On Wednesday Chris Dodd came clean. Yes, he had accepted language in the recent stimulus bill which OK-ed bonuses consequent upon bail-out money already released by the US Government. Facing a tight re-election race this year, and well aware that this admission would not play well with Connecticut voters, Dodd emphasised that he'd been pressured to OK the language by the Obama White House. Dodd thus passed the poisoned chalice to Treasury Secretary Geithner, White House economic czar Larry Summers and... President Obama.

Bonus are rewards for working hard. You don’t give them to thieves and deadbeats

At first the White House put up Summers to argue that America is a nation of laws, among them the law of contract, as applied to AIG employees. Only a man who had to resign the presidency of Harvard after claiming that woman are in many ways stupider than men (Summers quit in 2006) would be capable of such a folly.

Obama is in the process of asking millions of Americans - autoworkers, pensioners, veterans - to accept annulment of contractual obligations to them by the US government. Suddenly they're asked to respect retention contracts to AIG losers, many of whom have quit the company anyway. 

Tossed on the third rail by Dodd, scorched by Republican jeers for hypocrisy and double dealing, the White House rushed into damage control. Invective against the executives of AIG poured from Obama's lips, although not so fierce as the suggestion by the Republican senator from Iowa, Chuck Grassley, that the AIG top brass "follow the Japanese example and resign or go commit suicide".

After reading their constituents' emails, taking phone calls and watching the talk shows, on Thursday, after about 30 minutes of debate, 243 Democrats and 85 Republicans joined in voting 'Aye' to a House bill that would impose a 90 per cent tax on bonuses given to employees with family incomes above $250,000 at AIG and other companies that have received at least $5bn in government bail-out money. It would apply to any such bonuses issued since December 31. It was opposed by six Democrats and 87 Republicans. The Senate is passing a slightly more restrained version.

Rough though the week has been, there is a silver lining for the White House. It stems from the very word that has landed Obama and his team in such trouble - 'bonus'. A bonus is something people can relate to. You hope to get it at Christmas. It’s a reward for working hard. You don’t give bonuses to thieves and deadbeats.

Yet at the same time as the uproar over $165m in bonuses is in full spate, Obama has approved bail-out of AIG to the tune of about $200bn, much of it passed on to the infamous 'counterparties' like Goldman Sachs and foreign banks.

Among those who have pointed this out is former New York governor Eliot Spitzer, who contributed an acrid column to the Slate website. It's his first surfacing since he was politically destroyed in a sex scandal, certainly contrived by major Wall Street players, worried that when the roof fell in - as it did - he would be telling his attorney general to issue indictments.

The fact that Spitzer feels secure in entering public life again, lashing the Wall Street gangsters, shows how vulnerable Obama and his administration are to charges that they have no serious plan beyond bailing out the big Wall Street banks, and no intention of asserting control of the assets they substantively own, by formally taking them over.

Obama is dancing on the edge of a volcano, and already he's been burned – deservedly so. ·