Bailouts, Bonuses, Bureaucrats and Blunders – Updated

AIG is in the cross hairs of every American politician, from Senator Grassley calling on AIG executives to commit suicide to  President Obama’s false outrage.

Yesterday Mr. Obama remarked “This is a corporation that finds itself in financial distress due to recklessness and greed. Under these circumstances it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay.” He also said he’ll do whatever it takes to block these bonuses. Hmph! Take that you evil executives!

But later, administration officials had to back pedal.

But hours later, administration officials said the payouts made Friday couldn’t be extracted from their recipients without a legal fight that would cost the taxpayers even more. 

And now that every politician in American has started a war on AIG’s executives, who do they think is going to lead AIG back to profitability? How will the taxpayers be paid back if there’s nobody left to run the company. It looks like they’ve thought of that. (Whew!)

But administration officials also worry that taking too hard a line with AIG and other companies could discourage top financial experts and institutions from joining the government efforts to fix the financial system. That’s one argument that AIG itself has used to justify the bonus payments: that if certain executives leave at this point, their departures would complicate efforts to wind down the financial-products division.

The unit’s books contain many transactions that are “difficult to understand and manage,” according to an AIG document explaining the retention plan the company submitted with the Saturday letter to Mr. Geithner. “This is one reason replacing key traders and risk managers would not be practical on a large scale,” the document continued.

Well, it’s a good thing they thought of that! It’s too bad they may be too late.

A tidal wave of public outrage over bonus payments swamped American International Group yesterday. Hired guards stood watch outside the suburban Connecticut offices of AIG Financial Products, the division whose exotic derivatives brought the insurance giant to the brink of collapse last year. Inside, death threats and angry letters flooded e-mail inboxes. Irate callers lit up the phone lines. Senior managers submitted their resignations. Some employees didn’t show up at all.

“It’s a mob effect,” one senior executive said. “It’s putting people’s lives in danger.”

Politicians and the public spent yesterday demanding that AIG rescind payouts that they said rewarded recklessness and greed at a company being bailed out with $170 billion in taxpayer funds. But company officials contend that the uproar is scaring away the very employees who understand AIG Financial Products’ complex trades and who are trying to dismantle the division before it further endangers the world’s economy.

“It’s going to blow up,” said a senior Financial Products manager, who spoke on condition of anonymity because he was not authorized to speak for the company. “I have a horrible, horrible, horrible feeling that this is going to end badly.”

Here’s a good question: Where is the outrage over the government’s role in this whole mess?

The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves — for kicking off AIG’s demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

Whether or not these funds ever come back to the Treasury, regulators should now focus on getting AIG back into private hands as soon as possible. And if Treasury and the Fed want to continue bailing out foreign banks, let them make that case, honestly and directly, to American taxpayers.

And here’s another question. When did Obama and Company know about these bonuses? According to the New York Time’s Tim Geithner spent many sleepless nights last fall orchestrating the bailout of AIG. After all those hours did he have no idea that AIG had contractual obligations to pay bonuses to employees? If he didn’t know it, why not?

Behind the scenes, Mr. Geithner was the point person for weeks of sleep-deprived Bailout Weekends. It was Mr. Geithner, not Mr. Paulson, for example, who put together the original rescue plan for the American International Group.

A few follow up questions on this story would be nice. Something tells me the media will continue their indifference to who knew what and when. What does any of that matter when there’s a lynch mob to antagonize?

Update: Amid AIG Furor, Dodd Tries to Undo Bonus Protections in the ‘Dodd Amendment’ Rules

“Senator Dodd’s original executive compensation amendment adopted by the Senate did not include an exemption for existing contracts that provided for these types of bonuses,” wrote Dodd Spokesperson Kate Szostak in a response to FOX Business. “Because of negotiations with the Treasury Department and the bill Conferees, several modifications were made,” she said, without suggesting who made the change.

The provision — excluding those bonus payments — made it into the final version of the bill, and is law.

“Senator Dodd was completely unaware of these AIG bonuses until he learned of them in the past few days,” wrote Szostak. To suggest that the bonuses affecting AIG had any effect on Senator Dodd’s action is categorically false.”

Separately, Sen. Dodd was AIG’s largest single recipient of campaign donations during the 2008 election cycle with $103,100, according to opensecrets.org. Also, one of AIG Financial Products’ largest offices is based in Connecticut.

You couldn’t make this stuff up if you tried.

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