How Geithner's Bailout Plan Created The AIG Bonus Scandal

by: Chris Bowers

Wed Mar 18, 2009 at 17:18


In order to protect its bailout plan, the Obama administration protected the bonuses.

Back in January and February, there were some votes to try and block excessive employee compensation at financial institutions receiving bailout money. In the Senate, this took the form of the Snowe amendment, which was supported by all 58 Democrats, and also by three Republicans. In the House, it took the form of the TARP Reform Act, which was favored by 242 Democrats and 18 Republicans. Overall, across the House and the Senate, only 10 Democrats, compared to 193 Republicans, voted against legislation that might have stopped the bonuses.

Unfortunately, despite overwhelming Democratic support for limiting executive compensation, in order to save their public-private partnership bailout plan, the Obama administration worked against these limits:

As word spread Friday about the new and retroactive limit -- inserted by Democratic Sen. Christopher Dodd of Connecticut -- so did consternation on Wall Street and in the Obama administration, which opposed it.(...)

The administration is concerned the rules will prompt a wave of banks to return the government's money and forgo future assistance, undermining the aid program's effectiveness. Both Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, had called Sen. Dodd and asked him to reconsider, these people said.

This story is widespread now: Dodd weakened the language at the urging of Treasury officials. It has leaped from the blogosphere to places like CNN.

Tim Geithner's public private partnership plan caused the AIG bonus scandal. This is because Geithner's plan needs voluntary private participation and, as many of those private investors and institutions have made clear, they won't join in if their compensation packages are threatened:

Officials at the Federal Reserve and the Treasury Department are increasingly worried that the controversy could discourage investors from joining a new government effort to revive consumer lending as well as a separate plan that relies on private money to buy toxic assets from banks, sources familiar with the matter said.(...)

A senior executive at one of the nation's largest banks said he had heard from several hedge funds that they would not partner with the government for fear that lawmakers would impose retroactive conditions on their participation, such as limits on compensation or disclosure requirements.

As such, on behalf of the Obama administration, Tim Geithner and Larry Summers joined with congressional Republicans to block legislation that would have retroactively blocked the bonuses. This was done in the hope of securing more private participation in the administration's public-private partnership bailout plan.

This scandal is the direct outcome of Geithner's bailout plan. Because the Obama administration is pursuing a public-private partnership bailout strategy, and because Wall Street wouldn't participate in this plan if their bonuses were threatened, the Obama administration blocked legislation that would have blocked Wall Street bonuses. They really should have pursued temporary nationalization instead.
Chris Bowers :: How Geithner's Bailout Plan Created The AIG Bonus Scandal

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How Geithner's Bailout Plan Created The AIG Bonus Scandal | 36 comments
. (0.00 / 0)
So let's say there is no bonus "scandal." Just where the fuck does that leave us as a country or an economy?

Mindless populism FTL

Let's say there are no "toxic assets" (4.00 / 4)
That leaves us with Geithner's plan.

The problem is, there are "toxic assets", and there is a bonus "scandal" - the question is what to do next, not what the world would look like if it never happened.

[ Parent ]
Temporarily nationalization (4.00 / 4)
To avoid the scandal, the Obama administration needed to go the route of temporarily nationalization. Not going that route caused the scandal.

So, if there had been no scandal, that means we didn't pursue the public-private partnership bailout plan. That is where we would be as a nation without this scandal.

[ Parent ]
. (0.00 / 0)
That's a bit of a large step. We don't even know what the unintended consequences of nationalizing AIG would have been. It's not like you nationalize a company and stock holders in other companies in that industry sit idly by. But I do know that the consequences of AIG giving out 175 million in bonuses aren't really much to bitch about.
[ Parent ]
you seem to imply (4.00 / 2)
we or you know what the unintended consequences of not nationalizing AIG will be. It's not like you pump money into a financial instrument ant the executives begin behaving differently. We are in uncharted and very dangerous waters and not taking action to build a new financial infrastructure is certainly fraught with as much danger as trying to replace the fractured shards of the former structures (using and rewarding the old personnel to boot).
[ Parent ]
"We don't even know what the unintended consequences of nationalizing AIG would have been. " (4.00 / 4)
Here's what I don't get: Geitner, Summers & Co. constantly describe with such certainty about the havoc that nationalization would wreak on the banking and financial industry. And their conclusions are constantly being accepted without any evidence. While on the other hand proponents of nationalization are constantly being told they have to "prove" that any move toward nationalization has to be based on evidence that it would would not produce some kind of domino effect on the financial industry. The fact is all these conclusions about "what stockholders would do" are based on pure supposition. And there needs to be other criteria--fairness to taxpayers, long-term impact on the economy, effect on popular mood, and others--that need to be part of the equation.
[ Parent ]
. (0.00 / 0)
What's so hard about realizing that you can set off a banking panic if you botch nationalization? People lose money when things get nationalized, so if they suspect they might be next, they could pull out prior to it happening and collapse the bank before the government can get to it. The proof is just the logical conclusion. People don't like to lose money.

But that's besides the point. People are going off advocating drastic measures, in areas they know dick about, because of some bonus money that got given out. As though this bonus money is the center of the financial crisis. Please.

[ Parent ]
Thanks for proving my point (4.00 / 3)
It's just accepted on face value that nationalization of a bank would cause a run on the bank. Can't you even imagine any other possible scenarios, like for instance, nationalization actually increasing the confidence people have in the bank because they know the government will back up the holdings? Afterall, the bank runs during the Great Depression occurred before FDIC. During the savings and loan debacle, there weren't any runs on savings banks when the governments took over those institutions. You're just accepting the arguments of the Wall St. and MBA crowd without question.  
[ Parent ]
It's worth noting that Britain had a run on a bank (4.00 / 1)
In September 2007, Northern Rock faced a run when it became apparent that it's access to credit was shot. Although the government didn't do the necessary thing and nationalise it until February (when it was gratefully received) they stopped the run on the bank by guaranteeing deposits.

I wouldn't say you should follow the British model entirely - we've been far too tentative in many areas and have had serious oversight problems - but nationalisation is not to be feared. If you wipe out the shareholders, there's nothing they can do any longer and the public, far from rushing to remove their money from the bank, will probably actually put money in, since the government is less likely to go bankrupt than non-nationalised banks (and I'm not just speculating here - that's exactly what happened in the Northern Rock case).

Forgotten Countries - a foreign policy-focused blog

[ Parent ]
. (0.00 / 0)
The point is isn't that it WILL cause a bankrun, it's that it could. I'm not the one trying to be Nostradamus. People make good decisions by listing possibilities, not dismissing them offhand. Sorry if I like to balance things like the potential collapse of the financial system against the media getting pissy about some fucking bonus money.
[ Parent ]
What do you mean by "temporary nationalization?" (4.00 / 1)
I don't think that anyone has suggested that the administration nationalize all the banks.

Those that have suggested nationalization generally have conceived it as nationalization of only the worst banks.  They haven't ruled out partnerships with banks that are struggling but meet capital requirements.

So, a public-private partnership was probably inevitable in even a nationalization scheme, and some funds would have been given to entities that would have paid bonuses.

The chain of causation is a little odd here, anyway.  The government already nationalized AIG.  However, many are arguing that the bonuses could not have been stopped even in AIG's case.  But let's say that's wrong: if Obama (let's stop pretending Geithner is President) had been concerned about bonuses in the slightest, it would have been simple to apply the Dodd proposal to the one entitity that was already nationalized, thus avoiding the AIG scandal and avoiding nationalizing other entities.  

[ Parent ]
the government (4.00 / 2)
effectively nationalized AIG.  But not formally, and the differences matter here.   The government is the majority shareholder, but there is a CEO, and a board, and minority shareholders who still have rights to consider.  

[ Parent ]
Fair enough. (0.00 / 0)
But then, to acheive the "total" nationalization that supposedly would have avoided the bonus issue, the CEO, board, shareholders, and executives, would need to be eliminated - no small task.  

Even if nationalized, to run the system smoothly, the government will need some of the old management around, and banking executives are going to demand compensation to the limits of their bargaining power - which means, even in a nationalization model, exorbitant fees/salaries will be paid.  

The executives have the power to demand this money, regardless of the structure of the financial rescue plan.  That's the consequence of being too big to fail, more than the shape of the plan.  

[ Parent ]
CEO (4.00 / 1)
The CEO was eliminated.  The current CEO was installed last year by the Bush Treasury Department.
[ Parent ]
OK (0.00 / 0)
If I'm following...

AIG is the only company that was nationalized.  Some in this thread are noting that it was only "effectively" nationalized.  The difference, apparently, is that there is a management buffer that prevents direct control from the government.  But, now you've mentioned that the CEO is a government appointee, so that buffer isn't as powerful as one might expect.

So, it still seems to me:

1.  Regardless of what the problems may have been with working in partnership with banks, the administration could have adopted a different set of rules as to AIG.  AIG is ultimately under government control and doesn't have the theoretical leverage to opt out if compensation is cut.  Obama didn't really care about these bonuses.  If he did, he had options, at least symbolic ones as to AIG.

2.  No matter what happens, we are stuck with the bank executives performing at least some of the work.  As long as we need them, some of them will demand exhorbitant compensation.  So, even if Obama did care, ultimately the problem of greedy executives holding up the taxpayer is unavoidable to some degree.

[ Parent ]
Not sure about it all (0.00 / 0)
He was put in by the Bushies, but I think he is pretty independent other than that.  Liddy is actually  the former CFO of the company Rumsfeld was the CEO and was on the board of Goldman Sachs, among other things.  Obviously, a well connected guy.

[ Parent ]
Receivership (4.00 / 1)
I think this is one of the times you actually have to use the technical term "receivership", because AIG is nationalized.  But the next step was never taken to restructure dept.  I'm not sure what laws allow the government to do that -- it might just be bankruptcy laws -- but obviously, that has not happened with AIG.

While I agree this needs to be done, it isn't a silver bullet.  This scandal is one of the few things it would have stopped.  Most issues, like money going to foreign banks, the total cost and so on, would largely be the same.  But share holders would be wiped out, as potentially would bond holders, which would lesson the cost a little bit.

But the normal receivership system wouldn't work as there is no entity to just buy the banks after restructuring.  We'd have to own the banks for a while, in all likelihood.

[ Parent ]
total cost to the US taxpayer would not be the same (0.00 / 0)
Putting AIG into receivership does not mean the government assumes its liabilities, so that step would very much change the relationship with foreign banks. This is not an FDIC situation where the US government insured anything. The government would have stepped in with taxpayer funds to avoid broader financial disruption, but it would have significant leverage to convince foreign governments, the Europeans for example, that they have to pony up for their own bank's irresponsible speculation in AIG's "regulatory arbitrage."
[ Parent ]
Liabilities (0.00 / 0)
All this is true in theory, but the same could be said for bankruptcy.  Assuming the government was actually trying to fix the problem instead of just letting the company crash, then yes, it would assume a lot of the liabilities.  However, it wouldn't assume all and could to some degree pick and choose, so there are huge advantages.

As I keep saying, I am very much in favor of Obama seizing the  banks, putting them in temporary receivership, cleaning out the finances, etc. and getting them back into working order.  But many people here are acting like all Obama has to do is snap is fingers and this nationalization things kicks in and everything is magically solved.  My understanding is this is way oversimplifying the problem.

[ Parent ]
thanks for the clarrification (4.00 / 3)
this sheds some better light as to what and how this happened.  Chris Dodd got screwed!
Geithner ran the NY Fed (4.00 / 6)
I suspect Geithner's problem may be that he ran the NY Fed  at the time all these complex financial instruments were designed. He didn't question any of it at the time, but we have to assume he did understand what was happening. If he understood the instruments, that means that he must have been convinced that they were legitimate. In order to admit that they weren't actually legitimate and that instead they brought down the financial industry, he would have to admit that his previous judgement was dead wrong.

Hard as it may be to believe, Geithner probably doesn't believe that AIG had a central role in triggering the financial meltdown. As the head of the NY Fed, he must have created a strong rationalization for what they were doing. That rationalization is probably strong enough that he thinks of AIG and the investment banks as victims of the economic meltdown rather than as central players in causing that meltdown.

Rather than making him fit to deal with the problem, Geithner's experience at the NY Fed probably makes him singularly unfit to deal with the problem. He has too great a personal investment in the old rationalizations.

the Fed is still handing out trillions & trillions -- it's not just Geithner but all of them -- (4.00 / 1)
and it's all going to same few companies -- whether it comes from a bailout or a Fed program or a housing program or a stimulus or whatever...
[ Parent ]
Geithner and Summers Must Go (4.00 / 6)
I am really mad that administration officials are blaming Chris Dodd. Dodd was on the right side of the issue, and the administration wasn't. And now they're lying about it. It would be one thing to admit fault and change the policy, but they're dishonestly blaming Dodd for their own poor policy positions. That's not acceptable in my book.

Geithner and Summers are going to continue to cause headaches for Obama as long as they remain in his employ because they are working to protect Wall Street, not American taxpayers.  

Bullshit (1.33 / 6)
There's no evidence this could have allowed us to easily cancel, without severe legal liability, these particular bonus contracts that were written up in 2008.

I know that Open Left is deeply embarrassed by jumping out too far in front of this story before the timelines became clear (with Sirota literally losing his mind in blind rage), but it is time to stop.

It is time for Open Left to apologize.

Maybe Obama (4.00 / 2)
could have approved the Dodd proposal, but tacked on a signing statement about impairment of contracts.

It's good to be the king.

[ Parent ]
Maybe it is time for you to leave? (4.00 / 2)
?  
[ Parent ]
No (4.00 / 4)
Semblance has a great idea.  Chris Bowers should send a personal, handwritten letter of apology to each and every one of the bonus recepients.  He shouldn't have maligned them, the poor tender souls.  
[ Parent ]
Liability? (0.00 / 0)
Are you suggesting that if a law had been passed to prevent this that the US government would be liable? AIG? Individual members of Congress?

What are you talking about?


Support a Pennsylvania Progressive for Governor - Joe Hoeffel

[ Parent ]
There was never any optimal way to do any of this. (0.00 / 0)
It's a universe of bad options. There was no "right" or "wrong" choice.
Clarification--It WASN'T Dodd Who Weakened It (4.00 / 4)
As Glenn made clear yesterday it was Dodd who first inserted the bonus restrictions--including retroactivity.  It was all the Obama boy's doing.  And now they're trying to screw him.

Now, that's change you can believe in.

Or, you can just stick with the truth.

No belief required.


"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3

Technically (4.00 / 3)
It was Dodd who weakened it at the insistence of Treasury: http://www.huffingtonpost.com/...

It's not clear to me what Treasury threatened if he didn't weaken it - was Obama threatening a veto? Should Dodd have called their bluff?

Dodd certainly ought to feel justified in ignoring anything Treasury asks for in the future, at least as long as Geithner is still there.

[ Parent ]
At The Time (4.00 / 1)
veto threat was clearly implied as I recall.

"You know what they say -- those of us who fail history... doomed to repeat it in summer school." -- Buffy The Vampire Slayer, Season 6, Episode 3
[ Parent ]
Really? (4.00 / 1)
Over bonuses? Damn - we're in more trouble than I thought.

The implication really is pretty strong: If these people really think that the geniuses who came up with all this financial wizardry are the only ones who can extricate us from it, that means they have such a firm intellectual commitment to the rationalizations of the financial wizardry that they are unable to see it as the central culprit in the financial meltdown. Saying we have to pay these people extravagantly in order to keep them working is equivalent to the Santelli rant, and logically equivalent to blaming the people who got mortgages they couldn't afford for bringing down Wall Street.

It's highly likely that Geithner, as head of the NY Fed while the shenanigans were going on, has that level of intellectual commitment to the financial wizardry. If Obama was willing to veto over bonuses, then he probably has the same level of intellectual commitment.

In that case, our only hope is Congress micro-managing it. Given the centrists in the Senate, that's not much of a hope.

Damn.

[ Parent ]
Maybe the best out (4.00 / 2)
in this case is for congress to pass a marginal tax rate on incomes over $1 million sufficient to pay for the full bailout costs. Is there anything wrong with the government buying up all the toxic assets if it's done with taxes levied on the wealthiest?

Yes, there is - it leaves in place the financial structure that got us into this mess in the first place. Congress would also have to pass strict oversight rules.

[ Parent ]
Hedge Funds may get AIG cash (0.00 / 0)
As reported in The Wall Street Journal today, hedge funds may receive cash from AIG through Deutsche Bank.

The documents show how Wall Street banks were middlemen in trades with hedge funds and AIG that left the giant insurer holding the bag on billions of dollars of assets tied to souring mortgages. AIG has put in escrow some money for at least one major bank, Deutsche Bank AG, whose hedge-fund clients made bets against the housing market, according to a person familiar with the matter. The money will be released to the bank if mortgage defaults rise above a certain level.


I think less and less of dodd by the moment (0.00 / 0)

I think less and less of dodd by the moment. first of all, his provision was just a dog-and-pony show which he had to know damn well was just going to be negotiated out during committee. the whores in the senate voted UNANIMOUSLY for an anti-wall street executive pay measure?! Huh! That's all for show, they knew it would be negotiated out in committee. It's a wink-and-nodder where they vote one way when it's time to be counted in the public eye and then pleasure who they really work for behind closed doors during "committee" where the public does not see what is going on. And I'm so f'ing tired of hearing that if wall street doesn't get its way, then they won't participate and they'll take the whole system down with them! These bastards are criminals, and even though they've written the damn laws, it's quite likely they still broke some laws in the wall street green light go-go years of the bush era in their head rush of buying off the government after so much of their corruption was revealed in 2002. They had zero to fear at that point ... aided and abetted by the whores from both sides of the big bed ... and there was no longer any caution becoz they had been caught and paid zero price for it. They knew it was their government then. The government ... their government obviously ... has significant leverage on these criminals in the form of the justice system if they cared to deploy it rather than run around with them hand-in-hand like two giddy school children at an amusement park ready to jump on the merry-go-round. it's all a f'ing game to these jackasses.

so this whole f'ing charade gave dodd the chance to posture as being tough on wall street ... which he probably desired with his election coming up in '10 and being that his biggest past campaign contributor is the biggest disaster of the whole corrupt mess ... but it effectively did nothing. but he got his soundbite ... and that's all that mattered. And now it's down to the pointing fingers game that none of them will do upfront although reptilian deviants like emanuel will do it under the cloak of anonymity in the form of a "senior administration official". note that dodd doesn't have the guts to tell us who actually insisted upon it. if it was so important and the fix wasn't in and he damn well knew the administration was going to fight against in committee, then why have your aides deal with it so casually ... why wasn't he there?

and furthermore, this is why you know that he is full of shit and reaching for another substance-less soundbite: he's talking more bullshit about how the provisions that he put into that bill in his compromise will get the money back ... talking with certainty. And here's what these deceitful pieces of garbage will do ... they're already road testing it in the media now to see how f'ing stupid we are (geithner does this shit a lot) ... they are going to add it on to the bill that aig will never pay back. that is unless you believe that aig is going to pay back $170B!!!! meanwhile the people that gotten the money will keep it unless congress gets it back thru taxes.

This is hardly the only troubling matter involving dodd ... nor his only shady relationship with the finance industry (http://www.huffingtonpost.com/2008/06/23/dodd-repeats-denial-of-mo_n_108725.html). Shouldn't Lamont run against him? And even if dodd loses to a republican in Connecticut, what essentially is the difference between a senate republican and a senate democrat? They both vote unanimously for something that they casually let aides strip out during committee. For the most part, and there are some ... some ... notable exceptions with the democrats (including my favorite senator Bernie Sanders) ... but mainly it is equivalence of the difference between a red headed whore and a brunette whore ... who will wear a red-headed wig if you pay them enough ... they both still pull the same tired tricks to pleasure wall street. And I certainly don't mean no disrespect to women ... I am not even referring to women ... these whores are despicable saggy-assed 70-year old men.

Z

How Geithner's Bailout Plan Created The AIG Bonus Scandal | 36 comments
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