Obama Counters AIG … Maybe
Right on cue the administration seems to be launching a counter offensive against AIG to prevent the payment of those bonuses. As I mentioned this morning the public outcry against AIG was creating a potential political nightmare for Obama. Populist rage against massive payouts to failed companies is already bad enough, but for large amounts of taxpayer money to be syphoned off as bonuses to the very people who caused the financial system melt down could push the reaction over the edge and prevent further rescue efforts.
Here’s the report from the New York Times:Obama Orders Treasury Chief to Try to Block A.I.G. Bonuses
Also, Andrew Cuomo is going to dig in. Here’s his letter to AIG today demanding information about those bonuses: Cuomo Letter to AIG. Note the heavy handed ending to this letter. Cuomo raises the potential threat of an investigation of fraud. I think this line of attack has some credence in view of the disaster AIG has brought upon itself and the rest of us.
Finally Robert Reich weighs in on whether we should nationalize AIG: Reich: The Real Scandal of AIG
So it seems that there is going to be a coordinated effort to stop the payments.
But, to the extent that these bonuses are indeed ‘contractual’ obligations, which is what AIG CEO Liddy says they are, it may be very difficult to prevent the pay out. The public relations disaster that this would represent would be enormous. It would make the administration look both feeble and in cahoots with Wall Street.
This is one reason I have advocated nationalization of failed financial companies. Had we forced AIG through a legal reorganization with the government providing the necessary financing to re-establish the company, any prior contracts such as these bonuses would have been automatically eliminated in court. They would have no standing. Voiding onerous contracts is one reason companies enter bankruptcy voluntarily. It might still be possible for the government to argue credibly that the existence of $170 billion in bailout money amounts to de facto reorganization and that the contracts are therefore nullified.
If that doesn’t work we should do what I argued this morning: renege on the contracts and resort to a court fight in front of a jury. Once the case gets before a jury here in New York City I would give little or no chance to the claimants case!
Legalese is there to be broken or challenged in these extreme circumstances. And we have all the cards: AIG is still negotiating the terms of the next round of taxpayer support. They need another $30 billion to stay afloat. This seems exactly the moment to tell them to stop payments. Or maybe we withhold some of that $30 billion.
Anyway: AIG is going to be a defining case for Obama. He has to stand with the taxpayers on this one. Otherwise the rest of his agenda will simply be that much harder to enact, because his strength will have been tested and found wanting.
Addendum:
The comments too and fro over at the Robert Reich column for TPM is highly instructive and worth a read. There are lawyers there arguing strongly that AIG has no choice but to make the payments. This may be true. But it merely reinforces my view that strong and immediate action is always preferable. AIG needs to be taken over entirely and the offending people fired. that’s the appropriate response to such massive incompetency. the parts of AIG that are still profitable can then be sold off to recoup some money for the taxpayers. Allowing big payments to incompetent traders and financiers, however legal they are, is inviting a populist uprising against any further bailouts. The economic damage of that is far larger than the downside of potential legal actions by a horde of upset derivatives salesmen/women.
I see this as a question of priority. So we should take the course of action that helps the most people and damn the consequences. Hemming ourselves in by legal niceties is a privilege of calmer times.
