Economy -- A Pain In The AIG

March 16, 2009

by Faiz Shakir, Amanda Terkel, Satyam Khanna, Matt Corley, Benjamin Armbruster, Ali Frick, and Ryan Powers

ECONOMY

A Pain In The AIG

One of the main reasons the federal government had to intervene and use billions of taxpayer dollars to prop up the nation's financial institutions is that they were considered to be "too big to fail." In other words, these companies had become so massive that their collapse would send shockwaves throughout the U.S. and global economies. No company has come to symbolize this problem more than insurance giant AIG, in which taxpayers now have an 80 percent stake after the federal government committed $170 billion to rescue it from bankruptcy. "Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high," wrote the Treasury and Federal Reserve in a joint statement on March 2. As New York Times columnist Paul Krugman has explained, "AIG is in trouble because it wrote many credit default swaps, in effect guaranteeing others against losses it lacked the resources to cover. We, the taxpayers, are now covering those losses. ... But this means that US taxpayers have now assumed the downside risks for all of AIG's counterparties." AIG has proved to be in no rush to repay this favor, highlighting the risk in the government's current strategy.

BONUS OUTRAGE: On Saturday, AIG revealed that it still planned to pay $165 million in bonuses to executives in its financial products unit, the same unit "that brought the company to the brink of collapse last year." As the New York Times pointed out, these awards "are in addition to $121 million in previously scheduled bonuses for the company's senior executives and 6,400 employees." After finding out about the scheduled payments, Geithner called AIG chief Edward Liddy to tell him that they were "unacceptable and had to be renegotiated." In a letter on Saturday, Liddy replied that AIG was legally bound to "proceed" with the bonuses, and he did not want employees to "believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury." This response set off a wave of outrage from Obama administration officials, even though many of them have opposed tougher restrictions on CEO pay. Yesterday on ABC's This Week, National Economic Council Chairman Lawrence Summers said, "There are a lot of terrible things that have happened in the last 18 months, but what's happened at AIG is the most outrageous." House Financial Services Committee Chairman Barney Frank (D-MA) also said that AIG was "abusing the system."

FINDING OUT WHERE THE MONEY IS GOING: Yesterday, AIG also revealed the names of dozens of the big banks it has paid off with the bailout money. The Washington Post reports, "The disclosure, which the company said was made after consulting the Federal Reserve, revealed that AIG paid more than $75 billion in the final months of 2008 to numerous domestic and foreign banks, as well as to various U.S. municipalities." Major recipients included Goldman Sachs, Deutsche Bank, Merrill Lynch, Morgan Stanley, and Bank of America. Approximately $12 billion also "went to pay off municipalities in dozens of states for whom the firm had created complex investment agreements." The disclosure was an "about-face" for AIG, which had been resisting lawmakers' calls for increased transparency. In fact, all firms that have received money under the Troubled Assets Relief Program (TARP) have been able to escape with inadequate oversight. Bailed-out CEOs have retained their corporate jets and refused to answer questions about how they are spending taxpayer money. Just last week, a House oversight subcommittee grilled TARP watchdog Neil Barofsky on questionable investments made by bailed-out firms and what influence lobbyists have exerted. Barofsky promised officials that he would provide that information when he releases his report.

THE RATIONALIZATION FOR NATIONALIZATION: What this weekend's disclosures highlight is the shortcomings of the Treasury's current strategy to prop up the financial system. Basically, the federal government continues to pump billions of dollars into these institutions without receiving full control over how taxpayer dollars are spent in return. Bank nationalization has been floated by people such as Krugman and NYU economist Nouriel Roubini, to former Fed chairman Alan Greenspan and Sen. Lindsey Graham (R-SC). Geithner, however, has so far refused to say that nationalization is on the table. But it should be. "The American taxpayer would be ill-served to receive anything less for putting in the vast amount of money needed to restructure and recapitalize [the banks]," explained Adam Posen, Deputy Director of the Peterson Institute for International Economics. "And the American taxpayer, just like any acquirer of distressed assets, deserves to reap the upside from their eventual resale." Geithner has put forward a plan to subject the country's 20 biggest banks to "stress tests," in order to assess whether they have the resources to survive. Krugman has explained that these tests could be the key for an administration move toward nationalization, by "not hid[ing] the results when a bank fails the test, making a takeover necessary." As the Wonk Room's Pat Garofalo has written, "Geithner's public-private investment fund may get toxic assets off the banks' books," but it also depends on Wall Street "being willing to buy the junk currently clogging up the banks. And the longer nationalization is delayed, the longer the solvency of the entire banking system will be in question. Thus, more good banks will get dragged down into the mud with the bad."

IRAQ -- POLL: IRAQIS OPTIMISTIC, STRONGLY FAVOR U.S. TROOP WITHDRAWAL: According to a new ABC News/BBC/NHK poll, "Dramatic advances in public attitudes are sweeping Iraq." The poll's key findings include increasingly optimistic attitudes regarding personal safety, a democratic government, and President Obama's plan to withdraw U.S. troops from the country. "Eighty-four percent of Iraqis now rate security in their own area positively, nearly double its August 2007 level," and "seventy-eight percent say their protection from crime is good, more than double its low," the poll reveals. Moreover, "the number of Iraqis who call security the single biggest problem in their own lives has dropped from 48 percent in March 2007 to 20 percent now." The poll also shows rising support for a democratic government in Iraq, as "a new high, 64 percent of Iraqis, now call democracy their preferred form of government." Additionally, Iraqis say they strongly support President Obama's troop withdrawal plan: "81 percent either support the current timetable for withdrawal of U.S. forces by 2011" or say it should be sped up.

NATIONAL SECURITY -- CHENEY INSISTS OBAMA'S CHOICES 'RAISE THE RISK...OF ANOTHER ATTACK': In an interview with CNN's John King yesterday, former vice president Cheney declared that President Obama's decisions to close Guantanamo and end torture, among other policies, "raise the risk to the American people of another attack." When King asked whether Cheney thought Obama "has made Americans less safe," Cheney replied, "I do." He defended the Bush administration's torture and detention policies as "essential to the success we enjoyed of being able to collect the intelligence that" prevented new attacks after 9/11. "And now he [Obama] is making some choices that, in my mind, will, in fact, raise the risk to the American people of another attack," Cheney said. In February, Cheney told Politico that Obama's refusal to use torture meant "there's a high probability" of a nuclear attack on America, and he accused Obama of being "more concerned about reading the rights to an Al Qaeda terrorist than they are with protecting the United States." In reality, torture made Americans -- both at home and those serving overseas -- less safe. Former FBI special agent Jack Cloonan testified that the Bush-Cheney policies had convinced him that "revenge in the form of a catastrophic attack on the homeland is coming."

CONGRESS -- WHEN ASKED FOR GOP ALTERNATIVES TO OBAMA'S BUDGET, McCONNELL COMPLAINS WE'RE 'GETTING DOWN IN THE WEEDS': Since President Obama unveiled his budget last month, Republicans have been relentlessly attacking his comprehensive proposals. Yesterday on ABC's This Week, Senate Minority Leader Mitch McConnell (R-KY) kept up the drumbeat, saying in reference to Obama's budget proposal, "It taxes too much, it spends too much, it borrows too much." Host George Stephanopoulos repeatedly pressed McConnell for a comprehensive Republican alternative budget. Yet each time, McConnell simply attacked Obama's plan. He said that he and his colleagues would be offering amendments to "reframe" what the Democrats have proposed but will likely not be offering a comprehensive plan. Stephanopoulos asked McConnell, "But shouldn't you have a comprehensive approach that lays out the trade-offs?" "Well, we’re just sort of getting down in the weeds here about procedure," McConnell complained. As the New York Times has pointed out, by not offering a full counterproposal, Republicans have made a decision "that will spare them from outlining potentially painful decisions required to bring federal books more in line with their call to hold down spending, cut taxes and reduce the deficit." In many ways, the GOP's strategy is a repeat of it did during the economic recovery package debate -- opposing Obama's plan for political reasons and picking out small provisions as excuses to block the entire bill.

"We'll see the recession coming to an end probably this year," Fed Chairman Ben Bernanke said on CBS's 60 Minutes last night. "We'll see recovery beginning next year." "We won't be back to full employment. But we will, I hope, see the end of these declines that have been so strong in a last couple of quarters," he said.

Yesterday on CNN, former Crossfire co-host Tucker Carlson ripped The Daily Show's Jon Stewart, calling him a "partisan hack" and an operative for the Democratic party who only took on Jim Cramer and CNBC only because they criticized President Obama's budget. "I would like to see somebody have the stones to come out and say, Jon Stewart is kind of a pompous jerk, actually," Carlson added.

Pennsylvania labor leaders promised Sen. Arlen Specter (R-PA) "that they will switch union members from the Democratic Party to the Republican Party to help him win a tough 2010 primary election" in exchange for Specter's help in passing the Employee Free Choice Act, a bill that would make it easier for employees to form unions.

The U.S. military said that "four American soldiers were killed in eastern Afghanistan in a roadside explosion on Sunday" -- the "worst of several attacks by insurgents around the country." The Taliban have claimed responsibility and are threatening to increase attacks on NATO and Afghan forces "to counter the increase in American troops arriving in the country over the coming months."

In an interview with CNN's Fareed Zakaria yesterday, former National Intelligence Council head nominee Chas Freeman said the term "Israel lobby" isn't "a terribly accurate name." "It probably should be called the Likud lobby, or the Yisrael Beiteinu lobby. It's the far right wing of the Jewish community here in alliance with the far right wing in Israel," he said.

President Obama will "will kick off an all-out grass-roots effort today urging Congress to pass his $3.55 trillion budget, activating the extensive campaign apparatus he built during his successful 2008 candidacy for the first time since taking office." Organizing for America, run by the DNC, will "rely heavily on the 13 million-strong e-mail list" that Obama assembled during the campaign.

Though paygo rules have been a rallying cry for fiscally conservative Democrats, the Blue Dogs "are not demanding strict offsets for healthcare reform." Instead, the group has endorsed the Obama administration’s request that healthcare reform legislation be deficit neutral, which gives "a significant boost to the chances of health reform passing the House this year."

And finally: Sen. John McCain (R-AZ) tweets an international incident. On Wednesday, McCain announced on his Twitter page that he was "having lunch with the Canadian Amb Richard Wilson and Lindsey at the embassy." The problem is, as the Washington Post's Al Kamen notes, the Canadian Ambassador is named Michael Wilson. "Sometimes the fingers race ahead," writes Kamen.

"Pakistan's prime minister has acceded to demands to reinstate the country's former supreme court chief justice, who was fired by then-President Pervez Musharraf in 2007," defusing a "standoff between the government and its opponents."

THINK PROGRESS: Vice President Cheney's excuse for economic failures under his watch: "stuff happens."

WONK ROOM: Bank CEOs: Nationalization "doesn't work," "a mistake," "would be a nightmare."

YGLESIAS: High stock prices are not a policy objective.

NEWS HOUNDS: Fox News "asks" if the Obama administration is a bigger scammer than Bernard Madoff.

NEW YORK: "Democratic leaders in the State Senate will seek income tax increases on at least some affluent New Yorkers and a sales tax increase of a quarter of 1 percent to help balance the state budget."

MASSACHUSETTS: Gov. Deval Patrick (D) today will launch a statewide effort to turn foreclosed homes into affordable housing."

MISSISSIPPI: Mississippi holds the title of being "the state with the least information online."

"We did not torture."
-- Former White House press secretary Dana Perino, 11/18/08

VERSUS

"The allegations of ill treatment of the detainees indicate that, in many cases, the ill treatment to which they were subjected while held in the C.I.A. program, either singly or in combination, constituted torture."
-- Confidential Red Cross report, 2007

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