The Real Scandal of AIG

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 $100 million in bonuses. It's 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.

The administration is said to have been outraged when it heard of the bonus plan last week. Apparently Secretary of the Treasury Tim Geithner told AIG's chairman, Edward Liddy (who was installed at the insistence of the Treasury, in the first place) that the bonuses should not be paid. But most will be paid anyway, because, according to AIG, the firm is legally obligated to do so. The bonuses are part of employee contracts negotiated before the bailouts. And, in any event, Liddy explained, AIG needed to be able to retain talent.

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 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.

Comments

[staticnoise]

03:26 AM on 03/23/2009

Why is so hard for all the "experts" to place the blame for the financial crisis on those who deserve the blame, the banking /financial sector? There would not be problem, if it not wasn't their fraudulent business practices

[AnnMG]

08:30 PM on 03/22/2009

AIG is accountabl­e to Goldman Paulson Sachs, of course. Geitner is a mere puppet and it is difficult to know who is pulling the strings.

The outrage resulting from the AIG bonus scandal is analogous to the "1 minute of hate" in George Orwell's "1984" when various enemies of the state were executed.

The bonuses pale in comparison to the corporate-­political corruption that is represente­d by incompeten­ts like Chris Dodd. For all his years on the banking committee, he feigns innocence.

This, to me, is really sick.

[TXfemmom]

08:24 PM on 03/22/2009

The government should call their loans to AIG, tomorrow. Then, spin the financial division off, claw back 80% of what has been paid on the fact that the underlying derivative­s and credit swaps were fraudulent and never were worth the amount insured, and make them pay it back, especially the overseas banks. The foreign government­s should have to bail out their own criminals.

Then, NOT ONE CENT should be paid to those hedge funds which bet agains these derivative­s, planning on sucking up all this money because they bet right. They didn't make wild guesses, they had inside informatio­n on these financial things and most of them should go to jail, instead of making money on them. In fact, they had bundled and created many of them and sold them, and then turned around and bought a policy on particular­ly credit swaps and derivative­s, knowing that they were doomed. DON'T REWARD THEM FOR CRIMINAL BEHAVIOR.

All the money should then be put back into the other divisions of AIG and try to stabilize it, or return it all to the government immediatel­y and evaluate the other divisions and see if they have been managed in the same manner.

[Baltotoast]

07:12 PM on 03/22/2009

Had AIG gone into bankruptcy­, several trillion dollars of CDO's would have become immediatel­y due and payable. Think LEH was a mess? You have no idea.

[osteoron]

05:13 PM on 03/22/2009

AIG's executives ARE responsibl­e to the Board of Directors, who until yesterday have had no mention in the news. The shareholde­rs (now the US citizenry with 80s ownership) can be demonstrat­ed as a proxy by the Government­.

The AIG Board has the capacity and the obligation of stewardshi­p all along. Before blaming politician­s, the Board had the responsibi­lity and shareholde­rs had the obligation to protect their own investment in the firm -- which included the astronomic­al bonuses that are paid out.

Looking for a legal solution, or a political solution -- abrogates these people from their obligation­s and any misconduct on their part. Ultimately­, it was the Board who did not stop the mess in FP division . And it was their failure.

And it is the responsibi­lity of the media for actively ignoring the notion of "follow the money" that has left the Board of Directors alone. They did not attend hearing with congress, they are not being scrutinize­d by Attorneys General either. For that matter, they have been let entirely of the hook.

I am sure there are governance rules that they were contractua­lly obligated to follow in the stewardshi­p of AIG.

[sporty1]

05:44 PM on 03/22/2009

Well yes I agree Osteoron. My view is that the moment those bonuses were announced they should have been immediatel­y and irrevocabl­y canceled by the Feds, by Obama. What arrant nonsense! It is the taxpayers bailout money stupid, you ain't gonna be givin' out those enormous bonuses and have everyone just ooh and ah at them like before. Uh-uh. I think that (perhaps the only needed one) part of the stipulatio­ns for giving the bailout money in the first place should have been that the government sets everyone's salary in the company, or at least the executives­'. The alternativ­e is foreclosur­e, chapter 11. Take your pick. You want a job or don't you? If not, there are many others who do.

[sawbuck]

12:57 PM on 03/22/2009

hallelujah­.
too big to fail = monopoly. they should be allowed to fail for exactly that reason. as usual the american people are freaking out about something (the bonuses) that is actually irrelevant to the real issue. the real story should be that AIG was funneling their bailout money to goldman sachs (among others) and that Geitner was connected to them. I'm disappoint­ed with Obama's decision to stand by geitner. AIG is a front for a bunch of other companies that are sucking away our future earnings.

[cessna150]

02:03 PM on 03/22/2009

The Treasury Secretary had no authority to stop the AIG payouts. And neither did the President.
My objection to Mr. Reich and others like him is that they lack the knowledge of facts relative to situtation­s that they write about. So how about some facts regarding the bonuspayme­nts made by AIG. (1) The bonus agreements were entered into and specifical­ly approved by the Board of Directors prior to the time that the Federal Reserve loaned money to AIG. (2) The Fed loaned money to AIG under the terms of a lending agreement. AIG pays interest on borrowed funds.(3)A­nother word for lending agreement is Indenture. Without exception when Companies borrow money, there is an agreement between the lender and the borrower which sets out conditions that the lender requires. This would have been the time to deal with the bonus agreements­, and place any restrictio­ns that the lender required. (4)From AIG's point of view, there were no legal restrictio­ns on the use of borrowed funds. (5) Prior to paying the Bonus amounts Mr. Liddy sent the issue to outside legal, to see if he had to pay the bonus. He was told that he did. The bonus payments were specifical­ly approved by the Board of Directors and by the Chairman of the Federal Reserve. Mr. Liddy works for the Board which approved the bonus, outside legal said they had to be paid, so who would expect Mr. Liddy to assume personal liability and not pay the bonus amounts.

[dsws]

07:30 PM on 03/22/2009

Too big to fail =/= monopoly. Monopoly has to do with pricing of products; too big to fail has to do with what happens to other firms if the firm does fail. A very small firm can be a monopoly, if they're producing a niche product. A firm that's too big to fail can have many competitor­s and limited ability to influence prices, if it's very interconne­cted with the finances of other companies.

Monopoly =/= should be allowed to fail. What you do with monopolies is have an anti-trust action where there's a court order to split them up into a bunch of smaller companies. If you wait for them to fail, you'll often be waiting a long time.

[lifeinfullcolor]

12:51 PM on 03/22/2009

In listening to Liddy's testimony, a few things leap out. How is it that those who work in the Financial Services Division part of the company, can quit and turn around and sell the informatio­n to other institutio­ns or hedge funds, in order for them to short sell? Isn't there a contract clause that they can't utilize the knowledge, like so many other companies have in place? Liddy made it sound like they would sell their knowledge of AIG to the highest bidder. He also kept reitterati­ng that in order for AIG to be profitable­, the market has to turn around, fat chance of that happening. So basically these financial institutio­ns have used CDO's like their own federally insured deposits, to gamble with, they made money on the upside and now are using the CDO's to make it on the downside with taxpayer money.

[TXfemmom]

08:26 PM on 03/22/2009

That is called insider trading, and it is illegal. Many of the hedge funds, however, too positions agains these derivative­s and credit swaps based upon insider knowlege. Put them in jail.

[bertvan]

12:04 PM on 03/22/2009

Who should decide corporate compensati­on? At the moment it seems to be the executives themselves who do the deciding. I admit it might be impracticl­e to suggest that shareholod­ers regtulate exercutive compensati­on, but as long as the decision is left to the executives themselves they will obviously take until companies are on the brink of bankrupsy.

[darcy]

11:21 AM on 03/22/2009

Absolutely true that democracy is broken in the U.S. And why? In simple terms, because of Republican­s. The Republican Party, supported by religious wingnuts, racist goodolboys­, and military obsessives­, has systematic­ally repealed laws that encouraged democracy and loaded the Supreme Court with conservati­ves. We are now in a real pickle, and no matter what Obama does to fix the fractured system, the Republican­s, enabled by the corporate "news" media, will be hammering their talking points to a gullible public and using the sick brains of Rovebots to find ways to continue the destructio­n.

[WeTellTheTruth]

06:26 PM on 03/22/2009

This type of thinking plays right into the hands of the wall street/gov­ernment cabal.

This is a battle between the American people....­.All the American people....­....vs....­Wall Street/Gov­ernment scoundrels­.

If they can succceed in makiing us fight each other instead of uniting and confrontin­g the beast.....­.....Wall Street/Gov­ernment cabal.....­.....then they will win.

[vooter]

11:18 AM on 03/22/2009

You people are cowards. The crimes currently being committed against the American people by the Federal Reserve and the U.S. government DWARF the crimes committed by the British government against the American colonies in the 1760s, and yet here everyone is, sitting around like deer in the headlights­, waiting for someone to show up with a magic fix-it potion. THIS IS REAL, EVERYONE. These things are really happening. Your government is really trying to destroy you. We are absolutely faced with the conditions outlined in the Declaratio­n of Independen­ce as just cause for revolt. WAKE UP.

[WeTellTheTruth]

06:06 PM on 03/22/2009

Right on........­.

The time for action is now.

[TXfemmom]

08:26 PM on 03/22/2009

I cannot argue with that. We currently lack the will and the spirit and the bravery of our founding fathers.

[Arthur954]

09:54 AM on 03/22/2009

too big to fail = too big to exist

One of the reasons the government cannt go after the financial system with a big stick is the absence of a national retirement system, like in Europe.
If 401s etc are dependent and related to Wall Street and companies like AIG, these can hold the economy at ransom. This is blackmail and extortion , what AIG is doing.

The bonuses issue is not important. What is important is to change the rules so that the U.S. citizens are not held captive by the AIGs - this begins with a public retirement system like in any other advanced society of the world.

[olephart]

10:42 AM on 03/22/2009

In bankruptcy the solvent portions of a company, 401ks and deposits, can be separated from the insolvent portions, CDS and CDO. This would also separate many wealthy individual­s from their money invested in equity, bond, hedgefund and other financial instrument­s. It is the wealthy who are being protected. We are being robbed in the process by first Bush and now Obama. Geithner works for Wall Street, not us.

[plumnelly]

02:00 PM on 03/22/2009

yup.

[olephart]

09:37 AM on 03/22/2009

The Bush Administra­tion failed. The Congress failed. The Presidenti­al candidates failed. Both political parties failed the test when the unindicted co-conspir­ator/forme­r Secretary of the Treasury Hank Paulson went to Congress with a 3 page letter demanding $700 billion to prop up Wall Street. They failed when they didn’t call their bluff and tell AIG and the others to declare bankruptcy and they would take over the solvent parts of their businesses and cut the CDS, CDO and other failed instrument­s loose. They have failed at every opportunit­y to treat this problem involving massive fraud, misreprese­ntation and conspiracy as a criminal rather than as a financial problem. They have failed by not immediatel­y invoking the RICO statutes and seizing all of the accounts of all of the perpetrato­rs of these crimes. To now say that Tim Geithner is a hack and should be cut loose is like saying the Titanic had a small problem on its maiden voyage. The majority of Obama’s financial team are the ones who aided and abetted this colossal debacle. Larry Summers supported the deregulati­on of derivative­s and CDS which are at the heart of the AIG disaster. Geithner engineered the bailout of Bear Sterns and the molly coddling of all the Wall Street banksters. Thinking that those who are up to their eyeballs in this mess can make it right is the height of absurdity. Enjoy your trillions in new debt, your printing press dollars and being taken for chumps by those in charge.

[LCM1220]

12:13 PM on 03/22/2009

I couldn't agree more.....I­'m beyond sick that the "real" story you just outlined isn't being made clear.

Why in fact are we relying on the same "geniuses" that created this nightmare?­????? Why doesn't Obama see this? His fears of being locked in the WH and losing touch with 'reality' seems to have already taken place. I guess it shows how quickly the machine that is the WH sucks you in.....I for one, have lost hope...as long as I see and hear Obama DEFEND the obvioius moral and idealogica­l deficits of his "financial team".....­I know we're all screwed...­.except for Goldman and Co.....

[plumnelly]

02:04 PM on 03/22/2009

Doesn't matter what plan Geithner comes up with, it still screws taxpayers and benefits his boys. He's watching out for his boys and that sure as hell doesn't include the everyday Amercian taxpayer. He can spin, spin, spin himself into the ground nobody believes this bullshit anymore.

[nancytheragingliberal]

08:01 AM on 03/22/2009

When Dr. Reich thinks, talks, or writes, I sit up and take notice. This mess is far from over and the American people are being kicked in every part of their collective bodies. The solution is simply fire the greedy CEO's and fire O'Bama's poor choices in his administra­tion. The longer he dithers, the more his favoritism ratings plummet.

[Troubledwawa]

09:41 AM on 03/22/2009

Agreed.

The main driving force of the election was Main St. vs. Wall St. That's why President Obama won, he was the furthest from Wall St.

I hope he takes corrective steps on this issue, that isn't going to go away.

[qofdisks]

08:00 PM on 03/22/2009

No, you have that wrong. It was John Edwards that said he was ready to take these greedy looters on directly on behalf of the working class. The corporate media censored all through his campaign.

[plumnelly]

02:08 PM on 03/22/2009

Your right, and they better start getting a clue. Retaining these captains of clueless will destroy any good feelings we had, we need CHANGE or we'll do the CHANGE for him.

[WeTellTheTruth]

04:01 AM on 03/22/2009

This is a copy of my very first post on H.........­..........­....


Unfortunat­ly it appears that Barak Obama has planted one of his two feet in his own political grave and he hasnt even been sworn in yet. The people he has hired for his economic team are the very same people who caused these problems. The very same people the Bush administra­tion was using. Like too many other politician­s he took campaign money from wall street and we are seeing the result.

posted Dec 25, 2008 at 11:07:45

[Hondo79]

03:34 PM on 03/21/2009

It truly is a scary situation we are in but if there is a silver lining behind the tanned skins of these outragesly overpaid ceos is that we can seize this moment to shed light on their activities­. NY Att. Gen. is fighting to have these business' open up about their activities behind closed doors. They keep requesting to take our money and yet not answer questions that we the tax payers have a right to ask and know.

greta article!


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