Prof. Reich, I appreciate your comments as always. I'd be much happier if it were you and not Geithner in charge at Treasury.

Be that as it may, I don't think it is correct to characterize what is going on as a "sordid story of government helplessness." I think it is incompetence and gutlessness.

What would be so difficult about it if the Secretary of the Treasury made clear to the guys in charge at AIG that if they don't find a way to convince each and every one of the people who have their hand out for a bonus that they should voluntarily refuse said bonus? Why is it so very impossible for our Secretary of the Treasury to stand up and act like he's, oh I don't know, Secretary of the Treasury? He should be telling them to stick their friggin contracts up their asses. Instead of sounding like people way out of their league our government spokesmen should be reminding each and every one of the thieves at AIG of the old adage lawyers are so very fond of: "contracts are made to be broken."

Break the God Damned contracts if need be but do not hand over anymore of the taxpayers' dollars to a bunch of thieves!

It is maddening and not at all a tale of helplessness. It is a tale of an industry that has for far too long been telling the government what to do and now that it is broke both the industry and the government refuse to accept their new and reversed positions. Our government leaders like Gaithner see their job as servicing these swine instead of hanging them as they should. It is time for heads to roll and contacts to be broken and indictments to be issued in all this.

What would be so difficult about it if the Secretary of the Treasury made clear to the guys in charge at AIG that if they don't find a way to convince each and every one of the people who have their hand out for a bonus that they should voluntarily refuse said bonus?

Congress should pass a law banning payments over $400,000/year to someone who works at a bailed-out corporation.

That would render that part of these contracts null-and-void.

Tim Geithner urged Congress NOT to pass any real limits on executive compensation in the Stimulus Package. Current law is his fault.

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http://www.nytimes.com/2009/02/10/business/economy/10bailout.html

Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.
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While AIG might be contractually obligated to pay the "bonuses," nothing says that the execs need to take them. Perhaps the suggestion that criminal prosecution might be on the way should there not be a refusal of the "bonuses" would clarify the right/wrong distinction in some of these guy's brains.

Right on the money, as usual, Robert. I think something that Kevin Phillips said the other day on Huffington Post was also quite germane: "Before Bernanke went to the Fed in 2006, for Pete's sake, he was chairman of the White House Council of Economic Advisers under George W. Bush. Imagine if FDR had retained Herbert Hoover's chief economic adviser and loyal Republican Fed Chairman in 1933."

As far as Geithner is concerned, he played a key role in initiating the bailouts of Fall 2008, working closely with the Bush administration. So with Bernanke heading the Federal Reserve and Geithner as Sec. of Treasury, we have two men who were key factors in developing the disastrous polices from 1999 to 2008. This does not seem like real change. Unless President Obama changes course pretty quickly, he's going to be led off the cliff by his own economic advisors.

Over at Americablog, they made a great point.

Back when automobile firms were teetering on bankruptcy and got government $$, the contracts *they* had with workers weren't quite as etched in stone as these bonus contracts are. Indeed, members of the "fiscally responsible" GOP were quite adamant that union givebacks were needed.

Where are these voices now? I suppose givebacks are fine when the contract being thrown away is between a line worker and a car company, but when it is between a white collar millionaire and a failed securities firm, then things are different.

Sure seems like OBAMA and GEITHNER will spread their palms out and smile sheepishly, saying "well shucks, taxpayers, there's really nothing we can do"

which makes them both powerless
and complicit in fraud

I am fucking pissed
this is not who I voted for
and Obama has done so many good things

Obama likes to take the long view but he is betraying voters if he doesn't put his fist down soon. Or maybe he doesn't represent us anymore. Or maybe he never did

AIG is obviously gaming the system big time.

When Saddam gamed the system (oil for food) he was invaded, put on trial, convicted and hanged. AIG executives should be reminded. Obama should demand action. The US gov't could threaten to call in the $175 billion loan to AIG, payable by COB 3-16.

The wimpass running AIG who the gov't put in charge could renegotiate the bonuses or the gov't could send AIG into bankruptcy 3-17, and all bonuses go to zero dollars, and the executive 'experts' on swaps who ruined the company can be thrown out on the street, or into court and from there to jail.

AIG is in trouble because it sold CDSs far exceeding its reserves -- it was essentially "kiting" IOUs that could never be paid. Its counterparties bought them knowing they would never be paid -- it was pure speculation (and apparently often a way to satisfy govt. regulations on their side).

It was an unregulated gambling operation on a global scale. More importantly, AIG was breaching its fiduciary duty to its bondholders and stockholders and thus presumably violating its corporate charter.

Now the taxpayers are not only expected to pay off those bets -- bets that even the parties to never really expected to be paid -- but also to fund bonuses to the con artists that dreamed up the con?

This is fraud, pure and simple. They inflated a bubble with imaginary money created through absurd levels of leverage in promises that they knew could not be kept so that they could skim real money off the top and stash it in their bank accounts.

These people are criminals, and these bonuses are the fruits of their crime.

And they're still doing it. And the Obama administration is too afraid. or too compromised, to even try to stop them.

I am completely disgusted.

My father used to tell the story of a plow horse they had when he was a kid. The horse would bolt to the barn before they got the harness completely off him. They tried any number of times to break the horse of this habit. Finally, in a fit of frustration, Dad tied the horse to the windmill before removing the harness. A running jump, a sudden stop, and the horse learned to stand still until released.

AIG needs a windmill treatment. It's obvious no kinder method will break their greedy habits.

There needs to be some criminal liability here -- in fact, there might even be grounds for RICO charges.

AIG's agreement to the bailout terms, and failures of disclosure, constitute a criminal conspiracy of truly epic proportions.

Maybe I don't understand, but I thought that in a contract, party A commits to do X and in return party B commits to do Y. Now, we are told that AIG has a "contractual obligation" to pay big bucks to execs in its Financial Products division. My question is: what did the execs have to do in return? Show up for work? Eat lunch every day? Avoid starting World War III? Keep their members zipped up?

Seriously, what would a sane counterparty expect them to perform that would be worth the payment of $100,000,000+. And did they perform it?

If we are all to bear the expense of these contracts, I think we are entitled to see the complete terms.

The solution seems entirely simple to me: Tax any bonus given from a company that has received federal bailout funds at 100%, with no exemptions, deductions, etc. If you got a bonus (or whatever language AIG is using), it's going right back to the government (at least in 12 months; one shudders to consider what they might do with the $ in the meantime.)

Perfectly clear to me. What am I missing?

Go AIG!!! As Zero says in 'The Producers', "Flaunt it baby, flaunt it!" I love watching the indignation of the nation at AIG's Darwinian feeding frenzy of executive excesses. I hate to reduce the obscene to the absurd, but its called 'Capitalism', with a capitol C. For those of us who are generally poor and lead simple lives, it makes little difference

I posted the following on another thread, it seems appropriate here too;

I'm beginning to really resent politicians who are aware of how pissed off the public is at these unwarranted bonuses being paid to the executives who caused this economic tsunami, using this awareness to fight to be first in front of the TV cameras to condemn and demand retribution from these cretins when all the while nothing actually happens. Its comparable to Democratic Committee chairmen like Conyers and Leahy bloviating about the Bush administration, again, while nothing comes of their hot air.

The irony is its the same politicians who at best either stood idly by while this economy was being raped or at worst helped this armaggedon along.
Fe Fi Fo Fum, I smell the stench of a demagogue

There needs to be a sign on Interstate 95 just outside D C. 'Beware of strong winds around the Capitol Building.'

We must abide by the law for a corporate bonus but not for governmental torture?

I guess this is something we need to put behind us.

I'd like to see these contracts. Surely there must be some wording in the contracts that ties the bonuses to performance. And surely the case can be made that the execs of AIG failed in their performance, ergo no bonus. It's unfathomable that a company would sign a contract guaranteeing huge bonuses without any requirements for job performance. There are escape clauses in virtually all contracts.

These guys are delusional.

Hate to break up a good populist bonfire but I do believe that Prof Reich is correct on 2 key points

The linchpin doesn't hold

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

1. More than likely the bonuses would have been paid. At best, it would be a close call.
2. Employment agreements have a high priority in bankruptcy contrary to what Reich contends
3. They aren't in bankruptcy and thus little or no chance that the contracts would be unenforceable.

Yes it sucks

But life's a bitch, then you die

This simply illustrates the crux of the problem with the entire bailout.

As orchestrated by the Obama Administration, the very goal was to take these companies, which were so wired-into all the financial powder kegs that needed to be tended carefully and supported, and infuse money into them in order to keep them functioning as profit-making companies. Same owners, same board, same stockholders, etc.

Quite clearly, there was such fear on the part of the Administration, of: [a] interfering with America's corporate structure (note the mere presence of guys like Geithner in the WH), and; [b] having the media, the Republicans and the Blue Dogs accuse the liberal in the WH of being "socialist"... that bold, radical rescue of the nation's financial system could not be accomplished without genuflecting to the altar of profit-making capitalism.

Well, profits were had. Money was made. Bonuses were paid, for years. It's the nation that took the hit. And we're still worrying about keeping the textbook model of "capitalism" alive and strong?

As we can now see, this is what happens when that's your operative priority. Maybe President Obama wasn't aware of just how screwed we were. Maybe he was, but just didn't have the nerve to seize these outfits, one and all, merge all the operations under a resolution trust-type arrangement, and use all that money OF OURS (thank you very much), to make it all work again without blowing chunks of it on more wealth for the already-wealthy.

Maybe he thought this would be enough to "stimulate" the economy, for real. Apart from the symbolism of the Masters of the Universe receiving personal paydays from the pockets of the Foreclosed (admittedly, lousy p.r.), I think most Americans would have prefered to see these companies put to death, and the officers and the stockholders told tough beans. Obama certainly could have gotten away with that, as far as the American people were concerned (and that's where he should have spent his campaign money, to fluff up grass-roots support for such a "new" New Deal!).

Stipulated, however, he might not have survived the Washington Post, NBC/GE, and TIME magazine. And that's why he did it the other way. And that's why we're screwed.

(If it were up to me, the Administration wouldn't have tapped ANY of Obama's financial team. I would have thrown Professor Reich and Paul Krugman and Nouriel Roubini into an office building, and simply said, "Fix it by any means necessary".)

The problem in a nutshell, at least as far as I can see, is that AIG is not bankrupt, because the federal government has kept it from going bankrupt.

However, AIG is also not owned by the federal government -- contrary to what the media keep reporting -- because when the Bush regime structured the original bailout, the government only received warrants equal to 80% of then outstanding common equity.

Warrants are like options in that they give the holder the right, but not the obligation, to purchase shares at a pre-set price. As far as I can determine, the Treasury has never exercised that right. Therefore, incredibly, AIG is still a private company, which means it can pay whatever bonuses it wants to whomever it wants.

If the feds allowed AIG to fail, the bankrupt company might or might not have to pay the bonuses (see thread, above) but it would cause chaos in the financial markets, as the company defaulted in billions in credit default swaps, causing a chain of defaults that would circle the globe.

Alternatively, the Treasury could exercise its warrants and finally take control of the company. Then it could at least fire the "best and the brightest" who created this mess. It might even be able to welsh on the bonuses, and defy the best and brightest to sue. (If I were the government, that challenge would be coupled with a thorough IRS audit of each and every sonofabitch who took me up on it. But, as Summers says, our government doesn't do that sort of thing, at least not since Richard Nixon was president.)

Unfortunately, it's also possible that breaking employment contracts could be construed as an event of default under all those credit default swap contracts, triggering demands for full payment from all the counterparties, demands which Uncle Sam would have to honor to keep the financial system from imploding. So welshing on the bonuses might be penny wise but pound foolish.

Either way, though, it's hard to justify allowing AIG to go on pretending it's a private company - except as a way of providing Obama Administration and Congress with plausible deniability for decisions that have to be made but that no politician would ever want to take direct responsibility for.

The solution to this is relatively simple. Since the high priced lawyers hired by the administration are not able to figure it out, maybe they should hire some low priced lawyers?

In Bankruptcy, as has been pointed out, payments to creditors would be subject to greater scrutiny and probably would require Court approval. Large payments to insider of an insolvent company are inherently suspect.

But we don't have to force them into Bankruptcy to get this same result. Since the whole bailout is an extraordinary solution, there is no reason that the solution cannot be tailored to meet the problem. Specifically give the Secretary of the Treasury the same powers as a bankruptcy trustee in dealing with the recipients of Federal bailout money.

In fact, give him more powers. A bankruptcy trustee can recover preferential payments to insiders made within a year of the filing. Let the Secretary of the Treasury reach back ten years to claw back all of those bonuses paid in the past.

The same statute which authorizes the bailout can include this simple power.

This would give the Secretary some real leverage in dealing with these crooks.