The political class in Washington — that means the White House and Congress — is bracing itself: they fear the latest outrage that involves AIG insurance could become catalyst for outrage against the bailouts, banks and perhaps even corporations in general.
The latest bailout-realted corporate outrage is a “high concept” one that even a jar of sauerkraut sitting on the shelf on Vons Supermarket on University Avenue in San Diego could grasp: a company that received a big bucks bailout from the American government…meaning taxpayers…and then got more big bucks again has given nice, big million dollar “bonuses” to well-fed executives at a time when an increasingly larger number of Americans can’t pay their bills, face losing their homes, and are in shock because they lost jobs that were once secure.
Even the jar would know before it’s opened and placed on hot dogs that it boils down to this: a company that is said to be “too big to fail” also feels its fatcat executives are too much above average Americans to experience what every student experiences from teachers, every employee experiences from bosses and (almost) every business experiences from the often brutal marketplace: consequences for failure. Meanwhile, the Obama administration is worried, the New York Times reports:
The Obama administration is increasingly concerned about a populist backlash against banks and Wall Street, worried that anger at financial institutions could also end up being directed at Congress and the White House and could complicate President Obama’s agenda.
The administration’s sharp rebuke of the American International Group on Sunday for handing out $165 million in executive bonuses — Lawrence H. Summers, director of the president’s National Economic Council, described it as “outrageous” on “This Week” on ABC — marks the latest effort by the White House to distance itself from abuses that could feed potentially disruptive public anger.
“We’ve got enormous problems that need to be addressed,” David Axelrod, Mr. Obama’s senior adviser, said in an interview. “And it’s hard to address because there’s a lot of anger about the irresponsibility that led us to this point.”
“This has been welling up for a long time,” he said.
UPDATE: Obama has not minced words:
“Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay,” Obama said in remarks prepared for delivery at an event at the White House. “How do they justify this outrage to the taxpayers who are keeping the company afloat?”
“This is a corporation that finds itself in financial distress due to recklessness and greed,” he added.
When the public learned last fall that automakers flew in their private jets to go to Washington to beg for bailout money because their companies were nearly broke, there was a quantum shift in public opinion — one that hit like a lightening bolt through the political class and led to the first attempt get bailout moeny for automakers to flop in Congress.
The bottom line is this: The news that AIG is now giving huge contracted bonuses so executives can continue to live in the lifestyles to which they are accustomed makes the automakers private jet p.r. fiasco look almost like an act of Mother Teresa-like sacrifice.
This public relations fiasco — accompanied by the impact of the image of corporations not just in the bailout but in general –is huge. Just look at some of these headlines and leads on stories:
–CBS: White House May Want AIG Money Back:
The Obama administration is looking for ways to recoup at least some of the $165 million American International Group, Inc. paid out in bonuses over the weekend, despite accepting billions in government aid to stay afloat, reports CBS News correspondent Peter Maer.
The White House continues to negotiate with AIG to bring any payments in line with the government’s priorities, an administration official told CBS News.
President Barack Obama is scheduled to speak Monday morning on AIG while rolling out his plan to help small businesses. He’s expected to voice anger over the bonuses and could elaborate on administration efforts to recover some of the money, reports Maer.
The administration official said that the bonuses “long been known about inside and outside AIG. But we didn’t want to accept them.”
The White House is seeking what are described as “mechanisms” to recover money spent on bonuses, but the company insists some of the bonuses are part of legally binding contracts signed before the government’s bailout.
–Washington Post dot.comments: Tar and Feathers for AIG Here are a few of them:
TabLUnoLCSWfromUtah wrote, “…for a company to enter into a written agreement that represents a poor business decision raises serious questions about the integrity of those ruthless business people who can use the legal system to rip off both the company they “work for” and the rest of us. Somehow somebody needs to be responsible and lose in such “legally” questionable deals…”
hc2254 said, “What’s the worst that could happen? Millions of millionaires lose their faux wealth? Millions of thousandaires have to work for their money rather than rely on that racetrack called the stock market? We have to burn this house down to save it.”
profco wrote, “Retention bonuses to keep “top talent”? Where exactly do all these AIG executives think they are going to find jobs in the financial sector these days? Let them leave AIG bcause they don’t get their bonuses–and find out what the real world is like.”
pjc8300892 suggested that “Everyone who got a bonus should go under the IRS microscope to see how much of that bonus the tax payers can recover.”
–Reuters blog: Monday’s blue mood: AIG outrage
It’s on front pages, news shows and all over the Web: outrage at the bailout of AIG, the troubled insurance giant that — so far — has gotten $173 billion in U.S. taxpayer money and has given out $165 million in bonuses to the very executives who brought the company to its knees.
A quick Web search of “AIG outrage” for March 2009 gets 190,000 hits, ranging from Al Jazeera (”Outrage against AIG set to mount”) to USA Today (”AIG bonus outrage plays Treasury officials for saps”). Part of the outrage stems from the Obama team’s contention that there’s nothing they can legally do to stop these bonus payments.
Barney Frank, a Massachusetts Democrat who heads the House Financial Services Committee, came up with a plan in an interview on NBC’s “Today”: AIG’s execs can keep their bonuses but they don’t have to keep their jobs. “These people may have a right to their bonuses but they don’t have a right to their jobs foever,” is how Frank put it.
At the White House, President Barack Obama and Treasury Secretary Timothy Geithner are set to talk with small business owners about a plan to make it easier for them to borrow money.
–Australia’s The Age: AIG bonuses spark public fury
THE Obama Administration has begun a full-scale defence of its progress in dealing with the credit crisis and the US recession as it battles public anger over insurance giant AIG’s use of taxpayer funds to pay $US165 million ($A251 million) in bonuses to the division that sent the company broke.
–Wall Street Journal: AIG Faces Growing Wrath Over Payouts
Troubled insurer American International Group Inc., now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks and used to pay employee bonuses at the business unit that almost sank the company.
After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad.
–Boston Globe: Frank disgusted by AIG bonuses
Representative Barney Frank today blasted the bonuses that are going to AIG executives whose bad decisions pushed the insurance giant to the edge of going under before a federal bailout.
The $165 million in bonuses was to be paid to the executives by Sunday, and most are going to AIG Financial Products, the unit that sold credit default swaps, the risky contracts that caused massive losses for the insurer. AIG, which lost $61.7 billion for the fourth quarter of last year — the largest corporate loss in history — has received more than $170 billion in a series of federal rescues.
Frank, a Massachusetts Democrat who is chairman of the House Financial Services Committee, suggested that if the federal government, which now owns an 80 percent stake in the company, can’t rescind the bonuses, it could force some dismissals.
“These people may have a right to their bonuses. They don’t have a right to their jobs forever,” Frank said on NBC’s “Today” show.
Aside from these stories in the mainstream media and mainstream media weblogs, more traditional bloggers are also enraged. Here are some excerpts but go to the links to read them in full:
Apparently, the supreme sanctity of employment contracts applies only to some types of employees but not others. Either way, the Obama administration’s claim that nothing could be done about the AIG bonuses because AIG has solid, sacred contractual commitments to pay them is, for so many reasons, absurd on its face.
As any lawyer knows, there are few things more common – or easier — than finding legal arguments that call into question the meaning and validity of contracts. Every day, commercial courts are filled with litigations between parties to seemingly clear-cut agreements. Particularly in circumstances as extreme as these, there are a litany of arguments and legal strategies that any lawyer would immediately recognize to bestow AIG with leverage either to be able to avoid these sleazy payments or force substantial concessions.
Since the contracts are secret and we’re apparently just supposed to rely on the claims of AIG and Treasury Department lawyers, it’s impossible to identify these arguments specifically. But there are almost certainly viable claims to be asserted that the contracts were induced via fraud or that the bonus-demanding executives themselves violated their contracts. Independently, it’s inconceivable that there aren’t substantial counterclaims that AIG could assert against any executives suing to obtain these bonuses, a threat which, by itself, provides substantial leverage to compel meaningful concessions. Many of these executives were, after all, the very ones responsible for the cataclysmic losses.
–Former Clinton Labor Sec Robert Reich, who has an excellent blog of his own and who writes this on the Huffington Post:
AIG’s arguments are absurd on their face. Had AIG gone into chapter 11 bankruptcy or been liquidated, as it would have without government aid, no bonuses would ever be paid; indeed, AIG’s executives would have long ago been on the street. And any mention of the word “talent” in the same sentence as “AIG” or “credit default swaps” would be laughable if it laughing weren’t already so expensive.
Apart from AIG’s sophistry is a much larger point. This sordid story of government helplessness in the face of massive taxpayer commitments illustrates better than anything to date why the government should take over any institution that’s “too big to fail” and which has cost taxpayers dearly. Such institutions are no longer within the capitalist system because they are no longer accountable to the market. So to whom should they be accountable? When taxpayers have put up, and essentially own, a large portion of their assets, AIG and other behemoths should be accountable to taxpayers. When our very own Secretary of the Treasury cannot make stick his decision that AIG’s bonuses should not be paid, only one conclusion can be drawn: AIG is accountable to no one. Our democracy is seriously broken.
–Here’s just part of The All Spin Zone’s must read post:
Take a deep breath…
It was also revealed that of the nearly $200 billion that has been given to AIG by the U.S. government, more than half of that sum has been paid by AIG to just a handful of banks – most of them offshore.
And even though you and I now own 80% of the company, we apparently have no say in this debacle.
There is some good news in all of this. Progressives, conservatives, and libertarians finally have a common cause.
That fact alone should scare the hell out of every politician in Washington, DC, and every financial wizard on Wall Street.
Everyone is concerned now. It’s the word of the day. Why does that word bother me so much? It’s what you say when you aren’t bothering to think of anything specific to say and “interesting” just isn’t enough.
In my opinion, this is a good thing. The Obama Administration has been entirely too timid in its approach to the financial crisis. Here is a case where angry populism could force the Obama Administration to do the right thing, something it has been reluctant to do – temporary takeovers of insolvent financial institutions.
UPDATE: Lots of blog reaction is HERE.