The long-building wave of "populist outrage" over craven capitalist elites with a suffocating sense of privilege has broken on the shore with the AIG bonus scandal.
Having spent the last few days on the road (the blog posts since Saturday were on auto-timer, if you must know) and putting in beaucoup hours acquainting my PC self with the DF&C's awesome new MacBook Pro (I now understand why Mac users are so loyal), I come late to the story of the moment. Nevertheless, the more complicated that story seems to become the simpler it is:
AIG, the U.S.'s largest insurance company, tanked in large part because of the possibly criminal conduct of its derivatives traders. Finding itself foundering, AIG asked the government -- that is to say American taxpayers -- for a bailout. Three more bailouts followed for a total of $170 billion in mad money that is being pumped into AIG's corpse to try to prevent a further global economic collapse.
As a consequence, the government -- that is to say those taxpayers -- are the majority shareholders in AIG. Yet until last weekend the company refused to tell us how the bailout money was spent. Turns out a big chunk went to financial institutions that are also getting bailout money, a situation that gives new meaning to the term "double dipping."
New York state Attorney General Andrew Cuomo has been far more aggressive at trying to get to the bottom of the AIG rot than the Bush or Obama administrations, some $30 billion of the bailout money remains unaccounted for and AIG's half-arsed answers concerning the rest smell like fetid Swiss cheese.
We now learn that the very derivatives traders who shat in AIG's hat, including some who have subsequently decided to spend more time with their families, received $165 million in bonuses to which they were "contractually obligated."
AIG bigs wring their hankies and semi-apologetically note that a contract is a contract and that money cannot be returned.
Congressional Democrats and Republicans, trying to outdo each other in outrage, are demanding that the bonus money be returned, and one idiotic proposal would tax every last cent of it. Also idiotic are congressional Republicans who worked with the oversight-averse Bush administration (as well as Timothy Geithner, who was to become Barack Obama's Treasury secretary) in setting the terms of the bailout who are now blaming the Obama administration for . . . what's the term? Lax oversight.
Oh, and a couple of Republicans shot the moon by suggesting that AIG execs commit suicide.
President Obama is also acting outraged while some of his key economic advisers are siding with AIG on the "a contract is a contract" assertion. So much for united fronts.
Yes, the bonuses represent only about one-tenth of 1 percent of the bailout dough. Yes, they are not bonuses in the traditional "you done good, Sonny" sense but rather guarantees of minimum pay levels no matter what the market does, although some of these bonus babies moved on despite this retention incentive and still were paid. And, yes, the hoary principle of honoring contracts is to be upheld under ordinary circumstances.
But these times are anything but ordinary, and as majority shareholders in a company that is bankrupt in all but name, our agent in the form of the government must demand the return of all bonus money, not half of money paid to employees who got especially lucrative bonuses, as was offered yesterday by AIG chief Edward Liddy.
Or alternately have that amount subtracted from the latest bailout, as Secretary "We Wuz Caught Off Guard" Geithner has proposed, as well as a full accounting of where all bailout money went.
Like I said, it's pretty simple.* * * * *A root cause the global economic meltdown is that insurers, banks and other financial institutions were not satisfied with doing what they had done for many years and probably did pretty well if they were still alive and kicking, but because they wanted to branch out and do things they were ill suited to do in the quest of quick and easy money.
Hence insurance companies wanted to be banks and banks wanted to be insurance companies, which they were able to do with the acquiescence of the Bush administration and a compliant Congress that in an exemplary display of teamwork chipped away at the regulations promulgated after the 1929 stock market crash while looking the other way as accounting procedures took on an Alice in Wonderland quality.
Liddy took over AIG last October, well after the damage was done, so the verbal lashing he took in testifying before Congress yesterday was not entirely deserved. To Liddy's credit, he said that the insurer had made mistakes "on a scale few could have ever imagined possible" and that the most egregious of those those mistakes "was that the company strayed from its core competencies in the insurance business."
Translation: We were willing to sacrifice our long-term interests for short-term gains, which blinded us to the financial risk.
In retrospect, running up obscene profits through irresponsible behavior was a piece of cake because the AIGs, regulatory and rating agencies were so mobbed up that the word incestuous does not begin to describe the extent to which they performed obscene acts on each others' behalf while disguising the risk.
Long story short, one year into the bailout frenzy no one but the fat cats on Wall Street seem pleased, although secretly so, and behind the faux populist pitchforks and torches on Capitol Hill few people in Congress seem prepared to deal with the systemic dysfunctionalities that have led to the gravest economic crisis since the Great Depression.
Perhaps the ongoing AIG debacle and the real populist outrage that Barack Obama so effectively harnessed in his improbable ride to the White House will finally be the catalyst to do more than merely throw platitudes -- and ungoldly sums of money -- at the problem. That is Obama's opportunity for the taking. He needs to do it.