Pre-empting The Pay Rules

Speaking of czars, the White House's pay czar, Kenneth Feinberg, wants to cut salaries for firms receiving lots of TARP money:

The Obama administration's pay czar is planning to clamp down on compensation at firms receiving large sums of government aid by cutting annual cash salaries for many of the top employees under his authority, according to people familiar with the matter.

Instead of awarding large cash salaries, Kenneth Feinberg is planning to shift a chunk of an employee's annual salary into stock that cannot be accessed for several years, these people said.

This would be a major shift to really cut into take-home pay at places like Bank Of America and Citigroup. Finally they will feel some measure of pain for their roles in crushing the economy... 'scuse me?

Several firms that received large taxpayer bailouts have adjusted executive compensation to trim cash payouts before the Obama administration's pay czar issues new rules. Some fear those rules will go too far, preventing them from attracting the talent they need to remain competitive.

Company officials and lobbyists say Bank of America Corp., Citigroup Inc., GMAC Financial Services Inc. and others are reworking their pay plans to ensure compensation reflects executive performance. They are giving executives more of their compensation in stock and stock options, and spreading pay over a longer period. And they are adopting plans to recapture some pay when bets go bad.

Kenneth Feinberg, the Treasury Department's special master for executive compensation, is expected by next week to announce compensation guidelines for the top 75 earners at the seven firms that received the most taxpayer money. His rules are expected to include some of the same measures companies already have adopted.

I guess acting in advance of the pay rules is tantamount to implementing them, and these new rules are setting the standard for the industry, with even Goldman and JP Morgan employees getting paid more in stock than cash, so it's a win all around, no?

Well... except one-third of Wall Street expects a bigger bonus this year. And it's not clear how bonuses, especially in terms of stock options, would factor into the pay scheme. Believe me, if there's a loophole, the banksters will find a way to exploit it.

Best Democracy Money Can Buy

For your reading pleasure, some snapshots of the banks and financial interests controlling our economy and eating up hundreds of billions in public money:

Their lobbyists:

A review of lobbying reports filed indicates that finance, insurance and real estate (FIRE) interests paid over $42 million to lobbyists who worked to defeat mortgage write-down in bankruptcy (cramdown) in the first quarter of 2009, as well as other anti-consumer legislation such as capping credit card interest rates.

$13 million of that comes from TARP recipients.

Then we have the bonus babies:

The 2008 AIG bonus pool just keeps getting larger and larger.

In a response to detailed questions from Rep. Elijah Cummings (D-Md.), the company has offered a third assessment of exactly how much it paid out in bonuses last year.

AIG now says it paid out more than $454 million in bonuses to its employees for work performed in 2008.

That is nearly four times more than the company revealed in late March when asked by POLITICO to detail its total bonus payments. At that time, AIG spokesman Nick Ashooh said the firm paid about $120 million in 2008 bonuses to a pool of more than 6,000 employees.

And there are the fraudsters:

New York AG Andrew Cuomo just issued 100 subpoenas to investment firms in his expanding investigation of pay-to-play schemes that defraud public employee retirement funds, and announced the participation of 100 officials in 36 states' attorney general offices in the probe.

(This pension fund placement agent scandal looks like a doozy.)

And finally, you have the good old American greedheads:

The White House, auto executives and union representatives were all able to come to an agreement last week to keep Chrysler out of bankruptcy. But the car company's creditors -- Wall Street banks and hedge funds -- refused repeated compromises and drove the company under.

The refusal doomed a major American auto company to bankruptcy, but it may have been a smart business move for the lenders.

Many of the Wall Street firms holding Chrysler bonds may also own credit default swaps that they bought to hedge their bets. These swaps, which are essentially like an insurance policy on the bonds should Chrysler default, were likely mostly issued by AIG.

AIG, thanks to the government bailout, has paid off swaps in the past at 100 cents on the dollar. Under the deal they would have had to accept with Chrysler, the bondholders would have received as little as 30 cents on the dollar, for example.

Why take 30 or 35 cents on the dollar from Chrysler when you can get the whole buck from the American taxpayer?

Like one of these hedge fund managers recently said, "This is America!" It sure is. The land of the "we're going to bring down your car company so taxpayers can indirectly bail us out with our credit default swaps from the company paying out millions in bonuses, freeing us up with more money to put into defrauding public pension funds, and our lobbyists will ensure it."

The Lesson

I don't know that I have much to say about the dysfunction in the Obama economic team that wouldn't just be a rewrite of Glenn Greenwald's piece, but it may be worth it to just disseminate the information. Here's the story so far:

Banks lost a ton of money by making terrible bets based on fanciful notions that housing prices would go up 20% year over year approximately forever. All the while the executives sat on each other's boards and handed out giant bonuses and compensation packages to each other while the financial sector grew essentially out of control. In the process, they used their money and power to effectively buy Capitol Hill and make sure their portion of the economy could keep growing, whether through usurious interest rates, a total lack of oversight (including by some of the same people now charged with overseeing the banks) or just massive wealth transfers. When everything came crashing down, the very last thing these banking interests wanted to do was admit defeat or give back any of their money and power. At the same time, the entire country was furious at them. So they set to work bribing who they knew would be top officials in the next government, people like Larry Summers, who honestly didn't even need to be bribed. And every time Congress or the executive branch threatened to end their party and put limits on their power, they found in Summers and other officials a willing partner in subverting the rules that would make them give back their bonuses and excessive compensation, which by the way the taxpayer is funding. We, the taxpayers, are told that this is necessary to ensure financial sector participation in the program to rid the banks of all of their bad assets at a potentially massive taxpayer expense. However, left unsaid is the fact that the same banks are planning to game the system by passing the same bad assets back and forth among each other at high prices, and using tricky accounting tactics to pretend that the assets on their books have value.

I think we can go to Greenwald now:

Rubin, Summers and Greenspan succeeded in inducing Congress -- funded, of course, by these same financial firms -- to enact legislation blocking the CFTC from regulating these derivative markets. More amazingly still, the CFTC, headed back then by Born, is now headed by Obama appointee Gary Gensler, a former Goldman Sachs executive (naturally) who was as instrumental as anyone in blocking any regulations of those derivative markets (and then enriched himself by feeding on those unregulated markets).

Just think about how this works. People like Rubin, Summers and Gensler shuffle back and forth from the public to the private sector and back again, repeatedly switching places with their GOP counterparts in this endless public/private sector looting. When in government, they ensure that the laws and regulations are written to redound directly to the benefit of a handful of Wall St. firms, literally abolishing all safeguards and allowing them to pillage and steal. Then, when out of government, they return to those very firms and collect millions upon millions of dollars, profits made possible by the laws and regulations they implemented when in government. Then, when their party returns to power, they return back to government, where they continue to use their influence to ensure that the oligarchical circle that rewards them so massively is protected and advanced. This corruption is so tawdry and transparent -- and it has fueled and continues to fuel a fraud so enormous and destructive as to be unprecedented in both size and audacity -- that it is mystifying that it is not provoking more mass public rage.

At the same time, the exact same banks which the government has propped up to the tune of trillions of dollars will not lift a finger to help out industries that produce tangible goods, further crumbling them and increasing the financial sector share of the economy.

And the lesson we have to learn here is that the financial sector bought government and has thus far gotten what they paid for.

I think I'll watch some basketball. Go Villanova! Your government is in control. You are free... to do as we tell you...

Stop The Legalized Theft

Alan Grayson has a controversial idea: rich corporate executives should stop stealing public money.

I introduced a bill - the 'Pay for Performance Act' - to put an end to this theft. It's on the House floor today. It bans unreasonable and excessive pay to employees of financial institutions that are running on taxpayer money. The bill is based on two simple concepts. One, no one has the right to get rich off taxpayer money. And two, no one should get rich off abject failure. If the government owns a chunk of a bank, that bank must pay its employees reasonably, and all bonuses must be performance-based.

But first, let's be clear about what has happened. The government owns stakes in many companies through the TARP program, and Congress tried to put executive compensation restrictions on those companies. Big banks, though, were able to carve out an exception for any contract signed before February. AIG executives drove a truck through that exception and stuffed their pockets with our money. This bill closes that loophole [...]

Everyone agrees that Congress must act to reign in these excesses. These bad banks have come close to destroying our economy. They did so to enrich the small group of employees who made horrible, and in some cases, illegal bets. Calling these bad banks "casinos" is a disservice to casinos, who must actually by law hold money to back all the bets they've taken in. Calling these con artists "bank robbers" is a disservice to bank robbers, who can only steal as much money as the bank holds at the time, without tapping into taxpayer funds, too.

It's time for action, and Congress is acting.

Jane Hamsher has the rundown of the conservative howling on the floor of the House. I believe there's a case to be made that the government shouldn't be setting compensation targets for private firms. But the sad truth is that none of these firms are private anymore. Many are almost completely reliant on public money, and so long as the government is a top shareholder, they ought to be able to set the rules to protect their investment.

London is overrun with protesters right now, with thousands of people demanding a change to the rules of global laissez-faire capitalism which have nearly destroyed this economy, and Republicans can go ahead and stick their fingers in their ears and choose not to hear it. I would not advise the Obama Administration to do the same, however. And there are some very disturbing signs. Picking as number two at Treasury the guy who wrote the law deregulating the banks, for example. And putting the taxpayer on the hook for several trillions of dollars solely to save the financial system, often in total secrecy, too. Joseph Stiglitz' op-ed today gets right to the point:

Treasury hopes to get us out of the mess by replicating the flawed system that the private sector used to bring the world crashing down, with a proposal marked by overleveraging in the public sector, excessive complexity, poor incentives and a lack of transparency [...]

Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.

Even if this thing works in the short term, we will have lost because the behemoth of the financial sector will be restored to its former glory. The need is to restructure and re-balance the economy.

...Grayson's bill, the Pay For Performance Act, passed the House by a vote of 247-171. Check out Grayson's floor speech. "We should not be paying arsonists to put out his own fire." Nice.

Set Up A Meeting With France, Mr. President

By now, Barack Obama has probably landed in London on the eve of the G20 summit, his first international conference as President. He has vowed to participate as a listener rather than just dictating terms. He should sit down with Nicolas Sarkozy:

Responding to a popular outcry, the French government issued a decree Monday banning stock options and limiting bonuses for bankers or auto executives who lay off workers after accepting government aid to weather the economic crisis.

Prime Minister François Fillon, announcing the measures, said France was the first European country to lay down such legal restrictions on executive pay. Although not retroactive, they will run through 2010, he said in a statement, and they could be extended.

"There is no question of some people escaping from the consequences of the crisis while others suffer unemployment or pay cuts," he added, pledging to monitor compliance with the decree carefully because "it is a question of justice."

Banks and auto companies were singled out because they have received extensive aid since the financial crisis broke out in September, leading to economic turmoil across the globe. President Nicolas Sarkozy allocated $14 billion in October to prevent France's six main banks from sinking and loaned $8 billion under favorable terms to the country's three main car companies.

I mean, this is almost a parallel situation. Societe Generale, one of the largest French banks, was a major AIG counter-party, and two weeks ago they admitted the granting of huge stock options to their executives. After public outrage, the French government, under duress, made the changes. And the Left in France remains dissatisfied.

The Socialist Party, France's main opposition group, criticized the decree as "perfectly insufficient," saying the ban should be retroactive and extend beyond banks and auto companies. In a statement, the party charged that Fillon chose to issue a decree instead of passing a law because he was afraid of a parliamentary debate on the government's efforts to address the crisis.

That is how an oppositional movement works. In America we have a few lonely cries in the wilderness, and Elizabeth Warren has been courageous in trying to get some accountability from the Treasury Department (alas, they have been stiffing her at every opportunity). But by and large most political leaders that would be seen as "on the Left" are supporting the Geithner plan, and the fury over the AIG bonuses has petered out. And people who should be giving out all their money on the street under threat of prison like Hank Paulson can whine about not getting more "credit" for saving the economy, and nobody bats an eyelash.

I know the political dynamic is easier in France, with the party on the left in opposition to the ruling party. Democrats are wary of criticizing Obama over the bank bailouts. But they must speak. We are at risk of >slipping into a Japanification (h/t Krugman), where we never do what's necessary to rescue the banks, and we slide along with zero growth and tied-up financial markets for a decade. Delay simply makes this problem worse, and makes the inevitable takeover and restructuring more expensive.

There is at least a possibility we can get out of this all right, if the PPIP becomes a prelude to determining solvency and nationalization. Perhaps the Congress needs to grant Treasury additional resolution authority to wind down units like AIG and nonbank financial institutions. But at the very least, the Administration can respond to public anger, as the political environment has shifted. People are not blaming the President for the economy right now, but at some point that will end. I appreciate their movement on many other fronts. But we have to rip off the band-aid and take the necessary steps to recapitalize the banks and ultimately tamp down the financial sector as a share of the overall economy.

Give Us Free Money Or We'll Shoot This Economy

Pretty much cementing his status as New York State's next governor, Attorney General Andrew Cuomo has clawed back a significant portion of the AIG bonuses. I imagine this takes the Senate and the President off the hook, at least in their mind, to pass the House's bonus tax bill.

The New York State attorney general, Andrew M. Cuomo, said on Monday that he had persuaded nine of the top 10 bonus recipients at the American International Group to give the money back, as the Senate retreated on plans to tax such bonuses.

Mr. Cuomo said he was working his way down a list of A.I.G. employees, ranked by the size of their bonuses, and had already won commitments to pay back $50 million out of the total $165 million awarded this month. But in a reversal of the stand he took last week, he said he did not intend to release any names.

“If the person returns the money, I don’t think there’s a public interest in releasing the names,” Mr. Cuomo said in a conference call with reporters.

In Washington, the Senate majority leader, Harry Reid, said that efforts to recover bonuses like the ones at A.I.G. through punitive taxes would be delayed. Other officials said momentum in Congress had slowed considerably, given misgivings voiced by President Obama.

Cuomo expects something like $80 million to come back to the US government once this is all said and done. Economic problem solved!!!

I hope the larger issue doesn't vanish, that the compensation system on Wall Street distorts outcomes, and the size of the financial sector relative to the economy makes no sense for an industrialized nation. The bonuses, and the particular bonus tax bill, are entirely besides the point.

But this story from the WSJ suggests that the Big Money Boyz got Obama and his team in a room and unfurled a movie screen and played the Kennedy assassination from an angle they've never seen before*.

In recent days, in spite of public furor over huge bonuses paid at American International Group Inc., the administration has concluded that it needs the private sector to play a central role in fixing the economy. So over the weekend, the White House worked to tone down its Wall Street bashing and to win support from top bankers for the bailout plan announced Monday, which will rely on public-private investments to soak up toxic assets.

But weeks of searing criticism by politicians and the public had left bankers leery of working with the government. After brainstorming about what to do about that problem, the White House resolved to try to take control of the debate, according to several administration officials. In weekend television appearances, President Barack Obama and other administration officials tempered their criticisms of the financial sector.

Meanwhile, Treasury Secretary Timothy Geithner and his colleagues worked the phones to try to line up support on Wall Street for the plan announced Monday. They told executives they don't favor using the tax code to retroactively penalize specific individuals who had received bonuses, according to people familiar with the calls. They asked officials to sign on "in pencil, not ink," and to "validate" or "express support" for the plan, these people say.

Some bankers say they turned the conversations into complaints about the antibonus crusade consuming Capitol Hill. Some have begun "slow-walking" the information previously sought by Treasury for stress-testing financial institutions, three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions.

The banksters have a gun to the head of the executive branch. There's no other way to say it.

* - h/t to Bill Hicks.

P.S. Maybe those Wall Street tycoons should get themselves to France, where the Parliament has introduced an executive-pay limit law after businesses failed to accept a voluntary agreement. The difference being that French politicians actually pay attention to their citizens.

The Truth Behind The Armchair Constitutionalists

Whenever I hear media stars like Lawrence O'Donnell and Howard Fineman pontificating over whether something is Constitutional or not, I get extremely wary, particularly considering they have spent several years arguing about detainee policy and wiretapping and torture in mostly POLITICAL terms instead of the constitutional aspects. Suddenly when Congress tries to set tax policy toward a particular class of wealthy people the media gets out their social studies texts. I imagine there can be a fair amount of reasonable argument around this, but Scott Lemieux, claims the Constitutional concerns are groundless.

Ed -- regrettably echoing the hapless Charles Krauthammer -- says that "Bills of attainder" and "ex post facto" are two phrases well-known to high school freshmen taking mandatory civics classes, so they must certainly be known to Congressmen." The ex post facto clause, however, has been held since the early 19th century to apply exclusively to criminal cases. The prohibition on bills of attainder is even less relevant; it certainly prohibits Congress from convicting AIG traders of criminal offenses without a trial, but says absolutely nothing about Congress's ability to set tax policy.

Another blogger, in addition to the clearly erroneous claims, asserts that the bill violates the equal protection clause. The obvious problem with this argument, however, is that it proves too much. The tax code discriminates in countless ways -- against renters and wage earners and in favor of homeowners and investment income earners, for example. It was been well-settled for decades that such discrimination require only some rational relationship to a legitimate government interest. The policy taxing bonuses for corporations that would have gone bankrupt without public support bears a much clearer relationship to a legitimate public objective than a law preventing anyone but an optometrist or ophthalmologist from putting lenses in glasses frames, which the Supreme Court upheld unanimously.

The debate about whether a large excise tax is good public policy ought to go forward. But let's be clear what these Constitutional questions are all about. The average salary of practically everyone you see on the teevee is well beyond the national average, and in most cases beyond the $250,000 a year cited in the House bill, and used as a dividing line in Obama's budget to reset marginal tax rates from 35% to 39%. And so, for Overton Window purposes, characterizing any effort to reduce income inequality as unconstitutional makes a whole lot of sense. Take a look at Mark Haines, CNBC's latest hero, arguing that no company can be "run well" by anyone making under $250,000 a year. Because they've been run so well by the overclass to this point.



Here's a separate interview between Haines and Rep. Brad Sherman (D-CA):

HAINES: It does not go far enough, sir?

SHERMAN: Absolutely -- it doesn't deal with the Merrill Lynch bonuses, since they were paid in December, and worse than that it doesn't deal with million-dollar-a-month salaries. More importantly, we should have AIG in receivership, they should've been put in receivership months ago, and we would have saved tens of billions of dollars. We wouldn't see tens of billions going to the richest on Wall Street, and overseas -- and of course, these bonus contracts would have been voided. We need receivership, and we need limits on salaries as well as bonuses.

HAINES: Well, receivership ... I think most people agree, that would have caused some systemic problems.

SHERMAN: Most people on Wall Street agree. But most people on Main Street do not.

HAINES: And what do the people on Main Street know about running a financial system?

SHERMAN: What do AIG executives know about running a financial system? [crosstalk] They only know how to destroy one.

HAINES: This is witch-huntery. I'll be perfectly honest with you.

SHERMAN: We don't have to hunt the witches. We know who they are.

HAINES: You and people who share your opinions seem to think, you know, let's hold salaries on Wall Street to $100,000. Do you have any idea what Wall Street would look like if you do that?

SHERMAN: Well, first of all, I wouldn't set the limit at $100,000.

HAINES: Well, whatever. $250[,000]. All the business would go -- all the business would go overseas, that's the bottom line.

SHERMAN: Obama's position is $500,000 plus unlimited restricted stock. That's where I'm at as well, although I was actually at a higher level before Obama's statement. But for you to assume that Wall Street is acting in the national interest flies in the face of recent reality.

There's a multi-pronged attack here. Congress cannot tax exorbitant bonuses of companies they bailed out because it's unconstitutional. Corporations can only be run well by the rich because greed is virtuous. Only investor participation can save the financial system, so government had better not get any ideas about capping executive compensation. And those executives must be kept happy and lavished with gifts because they are so wise in the ways of exotic financial instruments that they are the only ones who can defuse them, a fairly ridiculous idea.

Similar arguments made during the 1997 Asian financial crisis, when currencies and stock markets collapsed in much of Southeast Asia, turned out to be a smokescreen to protect the executives who were partly responsible for the mess. Recovery from that crisis required Indonesia, South Korea and Thailand to close or consolidate banks. In all three countries, bankers protested, claiming that their connections with borrowers were critical to recovery.

In South Korea, cozy relationships between banks and the large conglomerates called chaebols were a major reason for the crisis. But after the crisis hit, Korean bankers and companies insisted that the complexity of chaebols like Samsung and LG — with their many separate but interwoven businesses — meant that outsiders would not be able to distinguish good loans from bad.

In Thailand, some argued that the preponderance of family-owned businesses — and the lack of clarity about precisely which family members were really in charge — meant that only bankers already working in big institutions like Bangkok Bank and Siam Commercial Bank could determine which borrowers were creditworthy.

The leaders of Thailand and South Korea did not listen to such arguments, and thank goodness. Some of the leading Thai banks were taken over by the government. After the crisis, a civil servant in charge of one such bank noted that its bad loans were much bigger than had been indicated before the takeover, largely because of an internal coverup. Only when outsiders took over did the public discover the full scope of the losses.

We have a major inequality problem in this country. Wages for workers have stagnated while the rich grow ever richer. It is well within the public interest to address that, and because this has become so extreme as to affect consumer spending and economic activity, it's more vital now than ever. Wall Street has decoupled salary from performance and perpetuated a culture of greed in the belief that such greed made sense for the overall economy. But an oversized financial sector that produces nothing but imagined wealth actually debilitates a country. Simply put, astronomical profits from making side bets on the economy should be discouraged, making the same profits from inventiveness and innovation would be encouraged in the exchange.

If it turns out that you can make a comfortable living at zombie institutions but can’t earn big bucks there, then smart, confident, ambitious, greedy people will leave their jobs and go do other things. In a good way! Maybe they’ll start small businesses. Maybe they’ll join non-enormous, better-managed firms and help them grow and prosper. That’s the kind of thing smart, confident, ambitious, greedy people ought to be doing. Putting their talents to work in the pursuit of profitable market exchanges. Not putting their talents to work trying to run scams at taxpayer expense.

There are promising signals that the Administration is taking concerns about executive compensation seriously, although there are far better ways than having a secretive institution like the Federal Reserve "oversee" giant corporations (which they failed to do in the run-up to this crisis). Perhaps one way is to actually tie pay to performance through Silicon Valley-style compensation schemes, but the best way is through the tax code with rates at the highest marginal levels (I'd insert an additional rate above $1 million or more) that look more like the pre-Reagan era. Which is why those who wed themselves to the establishment elite get so nervous with clawback provisions like the AIG bonus tax. They don't want anyone in Washington getting any funny ideas about marginal tax rates. After all, it's unconstitutional.

Why Not Anger?

Shorter everyone who presumes to speak for everyone: This rabble-rousing is sure making it harder to continue with our legalized theft!

I don't want to completely dismiss the pushback from those who find the public anger over the AIG bonus babies distasteful. Without question, the larger scandal concerns the counter-parties and the use of AIG as a conduit to reward multinational banks, especially because the company made the counter-parties whole instead of forcing them to take a haircut. Joe Nocera makes additional good points. But whines that people are angry about the wrong thing hardly obscures the fact that people ought to be angry, extremely angry, at the hash financial, political and media elites have made of our collective economic well-being.

This anti-anger consensus among our political elites is exactly wrong. The public rage we're finally seeing is long, long overdue, and appears to be the only force with both the ability and will to impose meaningful checks on continued kleptocratic pillaging and deep-seated corruption in virtually every branch of our establishment institutions. The worst possible thing that could happen now is for this collective rage to subside and for the public to return to its long-standing state of blissful ignorance over what the establishment is actually doing.

It makes perfect sense that those who are satisfied with the prevailing order -- because it rewards them in numerous ways -- are desperate to pacify public fury. Thus we find unanimous decrees that public calm (i.e., quiet) be restored. It's a universal dynamic that elites want to keep the masses in a state of silent, disengaged submission, all the better if the masses stay convinced that the elites have their best interests at heart and their welfare is therefore advanced by allowing elites -- the Experts -- to work in peace on our pressing problems, undisrupted and "undistracted" by the need to placate primitive public sentiments.

While that framework is arguably reasonable where the establishment class is competent, honest, and restrained, what we have had -- and have -- is exactly the opposite: a political class and financial elite that is rotted to the core and running amok. We've had far too little public rage given the magnitude of this rot, not an excess of rage. What has been missing more than anything else is this: fear on the part of the political and financial class of the public which they have been systematically defrauding and destroying.

Consider that AIG is currently suing the federal government, which owns the company, for the return of $306 million in tax overpayments. I don't see these same elites shaking their heads soberly at AIG for their "populist anger" at trying to get $300 million from the entity that handed them $185 billion. Oh yeah, and with the real amount of the bonus increasing (now it's $218 million), before long the amount in bonuses and the amount requested from the government in tax overpayments will be equal, I'm willing to bet.

I agree that the fact that populism moved the House to pass the admittedly crude excise tax bill represents a great hope that finally, politicians are more worried about the public perception than their standing among the elites (the Senate remains out of reach, but only for now). People understandably reject a government and an economy owned by elites, and desire a voice in their affairs again.

And that's the point: only this true, intense, and -- yes -- scary public rage can serve as a check on ongoing pilfering by the narrowed monied factions who control our Government for their own interests and who otherwise have no reason to stop. Who else is going to impose those checks? The bought-and-paid-for, incomparably subservient, impotent and inept Congress? The establishment-loyal, vapid political press? An executive branch run by the very people who are most vested in, dependent on, and loyal to the financial system that produced these disasters? Only a healthy fear of the populace -- exactly what has been missing -- can achieve that.

Now rage can lead to bad outcomes, but I struggle to see how it could be functionally worse than the society of the pwned in which we live currently.

Lucian Bebchuk and Dean Baker have more.

Dodd Held Hostage

I really feel bad for Chris Dodd getting caught up in the populist fury over AIG, in a way that is truly unfair to him. He wrote an executive compensation amendment for the stimulus. He was hounded by Treasury officials and Administration leaders to water it down, and wanting to keep at least some of the provisions in the bill he did so. There was no indication that AIG executives stood to benefit when he made changes to the bill. In fact, language that is LAW TODAY would still allow the Treasury Department to claw back bonuses if they found compelling public interest (which, according to Dodd, is happening as we speak). Despite the media and conservative jabber he's been completely consistent on this issue, the facts of which have been well-known for over a month. The flip-flop from the conservative business press, which a month ago were calling Dodd's amendment too restrictive and are now calling it a giveaway, is astonishing.

Here he is at a press conference today. Sadly, I'm not sure it'll be enough. The right was already smearing Dodd for a sweetheart mortgage he apparently received through Countrywide, and this offered another opportunity to pile on. Instead of the greater lesson that executive compensation is a festering problem that we must deal with (good again on Ben Bernanke for addressing that today), commentators are pointing fingers and deciding on Dodd as the scapegoat. "He gets all that campaign money from AIG!" No shit, so the chairman of the Senate Banking Committee gets campaign contributions from financial services interests? They apparently swayed him so much that he only offered an amendment to take all their bonuses away!

The end of Dodd's statement is particularly good:

"Standing in a community of my state, this isn't about my job, it's about their jobs. It's about their future and their children. And I'm not in the business of getting re-elected to office, I'm in the business of doing my job that I got elected to do. And I'm going to do my job."

I think he understands the reality, and that this all may cost him re-election. Scapegoating is a very easy and familiar action, but it doesn't make it right. And anyway, plenty in government knew about these bonuses. Talk to them for a minute.

Why AIG Matters

I didn't think it was necessary to spell out why $165 million dollars in bonuses for individuals who tore down their companies is probably a bad thing. But there does appear to be a mild backlash against the over-the-top nature of the public anger, including from White House officials. And given that the numbers are a fraction of one percent compared to the bailout money AIG took from the government (that will never get paid back) or the Fed's huge program to buy up mortgage-backed securities, they may have a point. So, OK.

Obviously there's a political importance because the nation is following the issue so closely. But far more essential than that is how this is tied to income inequality and the stratifying gap between the rich and poor. Kevin Drum is absolutely correct to note that the standard practice in corporate boardrooms is to call bonuses a reward for performance right up until the moment that the performance tanks, at which point they become necessary for retaining talent.

Of course they got their comp locked down when they saw the storm ahead of them. This is what executives always do. Back during the dotcom bubble, corporations handed out trainloads of cheap stock options even though the practice was heavily criticized. Why? Because the stock market was going up and it was a nearly guaranteed way to make lots of money. After the bust, they suddenly took the criticisms to heart and largely stopped the practice. Why? Because the stock market was going down and it wasn't easy money anymore [...]

What happened at AIGFP is standard practice throughout corporate America. America's corporate titans like to talk endlessly about performance-based pay and how capitalism rewards risk, but in real life compensation packages are almost always constructed to avoid as much risk as possible. If you work in a growing industry, your bonus depends on raw growth rates. If you work in a declining industry, your bonus is linked to relative growth rates. If the market is up, your bonus is paid in stock. If it's not, suddenly deferred comp and increased pension contributions are the order of the day. Heads you win, tails you win.

The AIG traders who got this sweetheart deal are nothing special. Management probably didn't even think twice about it. Of course you switch from performance bonuses to retention bonuses when the market looks stormy. What else would you do?

The decoupling of risk and profit is the issue here. Corporate titans never rise and fall on the merit of their superior intellect, and there has been a great shift to mke sure profits, both personal and corporate, are kept in private hands, while the risk is socialized. When times are flush nobody really cares about or at least pays attention to this; when the same people who wrecked the economy feel entitled to their ungodly profits, people get understandably upset.

And the tone-deafness on this from the Administration, therefore, while striking, does not surprise. The Treasury Secretary is now admitting that he asked Chris Dodd to take out the executive pay caps from the stimulus. His rationale? "We wanted to make sure it was strong enough to survive legal challenge." Actually, they wanted to make sure Wall Street didn't pull the pin out of the grenade.

If they did walk out the door, who would volunteer to work at the Chernobyl of the financial world? And what would become of the mammoth portfolio that remains?

"It would become the biggest naked position on Wall Street," one longtime Financial Products executive said, "and everybody would exploit it." [...]

"Nobody is going to give (the bonus money) back and then stay," said one of the firm's employees. "If they give back the money, then they will walk. And they will walk into the arms of AIG's counterparties."

The sense of entitlement to a system that rewards them regardless and shovels massive amounts of money and power in their direction. Heck, we learned today that 13 bailed-out companies owe $220 million in back taxes and lied to Congress about it. OF COURSE they did. That's the system they've created - protections for their corporate bottom line, riches for them personally, crumbs for everyone else. Reaganomics basically set this in motion 30 years ago, and the system has been in place for so long that any alternative path is like the true forms on the outside of the cave instead of the shadows on the inside we think represent reality. But the public knows intuitively that they've been getting a raw deal for decades, and the bonuses are only a small part of the story.

James Galbraith has an amazing piece about the limitations of the Obama economic team to reinvent a new economic ideal, rewarding work instead of wealth, returning the business of finance to its narrow role of facilitating capital flows, etc.

The deepest belief of the modern economist is that the economy is a self-stabilizing system. This means that, even if nothing is done, normal rates of employment and production will someday return. Practically all modern economists believe this, often without thinking much about it. (Federal Reserve Chairman Ben Bernanke said it reflexively in a major speech in London in January: "The global economy will recover." He did not say how he knew.) [...]

Geithner’s banking plan would prolong the state of denial. It involves government guarantees of the bad assets, keeping current management in place and attempting to attract new private capital. (Conversion of preferred shares to equity, which may happen with Citigroup, conveys no powers that the government, as regulator, does not already have.) The idea is that one can fix the banks from the top down, by reestablishing markets for their bad securities. If the idea seems familiar, it is: Henry Paulson also pressed for this, to the point of winning congressional approval. But then he abandoned the idea. Why? He learned it could not work [...]

The government must take control of insolvent banks, however large, and get on with the business of reorganizing, re-regulating, decapitating, and recapitalizing them. Depositors should be insured fully to prevent runs, and private risk capital (common and preferred equity and subordinated debt) should take the first loss. Effective compensation limits should be enforced—it is a good thing that they will encourage those at the top to retire. As Senator Christopher Dodd of Connecticut correctly stated in the brouhaha following the discovery that Senate Democrats had put tough limits into the recovery bill, there are many competent replacements for those who leave.

Ultimately the big banks can be resold as smaller private institutions, run on a scale that permits prudent credit assessment and risk management by people close enough to their client communities to foster an effective revival, among other things, of household credit and of independent small business—another lost hallmark of the 1950s. No one should imagine that the swaggering, bank-driven world of high finance and credit bubbles should be made to reappear. Big banks should be run largely by men and women with the long-term perspective, outlook, and temperament of middle managers, and not by the transient, self-regarding plutocrats who run them now [...]

This cannot be made to happen over just three years, as we did in 1942–44. But we could manage it over, say, twenty years or a bit longer. What is required are careful, sustained planning, consistent policy, and the recognition now that there are no quick fixes, no easy return to "normal," no going back to a world run by bankers—and no alternative to taking the long view.

The AIG scandal represents a reminder of the way things WERE, when Masters of the Universe ruled the world and dared anyone to challenge them. There are raw economic benefits to getting executive compensation under control - the economic burst that would come from a steep reduction in the inequality gap, with a concurrent stronger middle class, reindustrialization, and the rise of labor unions. But there are even bigger implications. It means wresting control over our country away from the ones who ruined it, who are trying to threaten, cajole and intimidate their way into maintaining control. For two years a campaign captivated America with the promise that the people have power, that mass collective action can create change. But we don't. And the bonus babies have proved it. Now there's a choice, that policymakers will eventually have to make but which can be pressured from the bottom.

Who runs this country?

Republicans In Disarray

They had no idea what to do. Vote yes and turn away from antitax ideology and upset almighty Limbaugh. Vote no, and wind up on the wrong side of the public, whose anger is palpable.

The answer? They split almost exactly down the middle on taxing bonuses for executives who received TARP money. The vote was 328-93, with 85 Republicans for it, and 87 Republicans against it.

Beautiful. Who knew this could be a wedge issue? I knew that Republicans had a long record of opposing executive pay caps, but turning on a dime never bothered them before. Meanwhile, even the efforts to blame the Obama Administration for the bonuses are becoming complicated:

Bloomberg News reports that Neil Barofsky, inspector general for the Troubled Asset Relief Program (TARP), told the House Ways and Means oversight subcommittee today that the Bush administration “specifically contemplated” paying bonuses to AIG employees in its November agreement to provide federal bailout funds to the failing insurance giant:

The TARP contract between AIG and Treasury “specifically contemplated the payment of bonuses and retention payments to AIG employees, including AIG’s senior partners,” Barofsky said.

I'm somewhat agnostic on this legislation - hopefully it begins the process of dealing with compensation rather than ends it - but Republicans have no idea how to deal with this.

Watch The GOP Blow This

House Democrats offered the excise tax for bonuses from firms that took TARP Money, the "Stuff AIG Act," and based on the chatter on the floor this morning, it looks like the Republicans will block it, which is frankly AMAZING. Because the bill came up without a rule, it requires a 2/3 vote, so this is a rare opportunity for House Republicans to obstruct and they can't miss out on that. But with the country pretty dead-set against AIG execs keeping their bonus money, you have to wrack your brain to think of a stupider position that allowing the bonuses to go forward.

Looks like the Republicans may throw their weight against the TARP bonus tax.

Yep. Boss Limbaugh has issued his veto, and the GOP pays fealty.

But talk about trying to have your cake and eat it too! Limbaugh says they have to reject the bill as excessive, but Republicans are afraid to do that. Despite being idiots, they're not idiots.

So what's the hook? They oppose the 90% tax, they claim, because... it's not 100%!

Yep. That's actually it. That's what Boehner just said on the floor.

Republicans are upset because they wanted higher taxes. Mark your calendars [...]

Not looking good. Simply not enough GOP votes to get this through, so far. Sometimes they don't come to the floor to speak when they're afraid, so there could be some hidden GOP votes out there, hiding from Boss Limbaugh. But we'll need about 60 of them.

Just hilarious. The ads write themselves.

Check out team laundry collector Eric Cantor this morning unable to commit to any solution, wanting to sound all fiery and populist but without a clue how to actually produce:



When faux populism runs up against bank lobbyists and rigid ideology, I think we can divine who wins. Somehow they believe they can turn this into a confiscatory taxation issue. Um, allow me to let you in on something: nobody in the country cares if AIG executives have to pay a lot of taxes. I mean, good luck with it, I'm sure you'll be just as successful as you were in the 2006 and 2008 elections, but here on Planet Earth, the proper political move is clear.

Late on today I can explain why bonuses representing a pittance of the overall bailout matter. For now, let us savor the implosion of the GOP, who found a nicely wrapped present under their tree and threw it in the garbage.

...Barney Frank said this two years ago during a similar vote on the Executive Compensation Act, which gave shareholders more say over CEO pay. It applies today:

I often disagree with my colleagues on the other side, but I have rarely been as baffled by the illogic of their arguments as I am today. I do not recall the last time I heard such a hodgepodge of inconsistency and innaccuracy. This is a bill that has been condemned for being A) bullying and intrusive and B) toothless. The toothless bully is, I guess, a new concept.

...Grover "Thou Shalt Not Tax" Norquist:

Grover Norquist, the top anti-tax activist in the Republican Party, has given ABC an answer about whether Republicans can vote for the AIG-bonus tax and still be in accordance with the anti-tax pledge that the vast majority of them have signed with Norquist's group, Americans for Tax Reform.

The answer: Yes, you can -- but only if it includes additional offsetting cuts in taxes or spending, too. Norquist seems to acknowledge here that the AIG tax is itself a kind of spending decrease -- the government is taking back money it already spent -- but he wants more tax decreases, too.

"If your goal is to recoup the resources that you've given people that you hadn't thought would be spent this way, you can make it not a tax increase simply by having an offsetting tax cut on honest taxpayers," Norquist explained. "Or you could do the same thing by cutting the amount of money that you were going to give AIG in the next tranche that they'll demand, so you can have the withdrawal of the resources done in less spending."

Regardless of the particular matter at hand, it's fascinating to watch Republicans drown in a pit of their own ideology.

Dodd Was Pushed - Who Pushed Him?

Chris Dodd's "admission" that he was asked by unidentified Administration officials to take out the limits on executive compensation and bonuses from the stimulus package is being treated like a bombshell, for reasons which escape me. Let's start with his statement (via email):

“I’m the one who has led the fight against excessive executive compensation, often over the objections of many. I did not want to make any changes to my original Senate-passed amendment but I did so at the request of Administration officials, who gave us no indication that this was in any way related to AIG. Let me be clear – I was completely unaware of these AIG bonuses until I learned of them last week.

Reports that I changed my position on this issue are simply untrue. I answered a question by CNN last night regarding whether or not a specific date was aimed at protecting AIG. When I saw that my comments had been misconstrued, I felt it was important to set the record straight – that this had nothing to do with AIG.

Fortunately, we wrote this amendment in a way that allows the Treasury Department to go back and review these bonus contracts and seek to recover the money for taxpayers. Again, I have led the fight to curb excessive executive compensation, and will continue to do so.”

Dodd is classier than whatever Administration official tried to rat him out on this. But the fact remains that Dodd devised the amendment capping bankster salaries, authored it, got it passed through the Senate, and then someone in the White House asked him to nix part of it, which he did, reluctantly, while keeping in the forward-looking language. And by the way, this was all public knowledge in the run-up to the conference committee on the stimulus. I fail to understand how there could be a grand conspiracy on such a well-covered subject.

The only question that remains is: Who?Who asked Dodd to take out the amendment?

The anti-bonus provision has been the subject of several posts in the liberal blogosphere today, after an anonymous administration official was quoted in the New York Times Sunday appearing to place the blame on Dodd for the weakening of the language.

Jane Hamsher cites two contemporaneous articles on the stimulus that identify top administration opposing to Dodd's original, tougher language. This one from the Wall Street Journal reports that Timothy Geithner and Lawrence Summers "had called Sen. Dodd and asked him to reconsider."

And this one, from The Hill, says President Obama himself wanted changes in the provision.

If those reports -- both anonymously sourced -- are accurate, contacts with Dodd occurred well above the "staff level." Something tells us we'll be hearing more about this.

The reporters from the WSJ and The Hill who anonymously sourced their stories could actually shed the most light on this by simply giving up their sources, but of course that's not going to happen. So we wait. Tim Geithner or Larry Summers have an opportunity to clear their names as well.

The Gang That Couldn't Shoot Straight

The politicians in the Republican Party know they have a winning issue. John Boehner put Tim Geithner on notice today, saying "What happens over the next 24 to 48 hours will determine his future." Connie Mack (R-FL) called for his resignation. Chuck Grassley wants an Inspector General review into Treasury's contacts with AIG. Sure, they're being inconsistent, but that never bothered the GOP before.

What's more, they're right. Geithner and the Treasury Department struck the limit on compensation caps because he needed vonutary private partners to pull off his "TALF" plan.

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.

There are differing arguments about the potential of the TALF plan (personally, I see it as the government putting up most of the risk and outsourcing the profits to hedge funds), but the debate has kind of been rendered moot by the Fed's announcement that they're just going to go ahead and buy up a ton more mortgage-backed securities on their own (along with long-term Treasury securities) without getting approval from Congress. This pushes the bailout numbers up by at least another trillion dollars. So the cunning Geithner plan to make the bailout slightly less costly has not only been made inoperable, but it facilitated these bonus payouts which just directly prove that the banks are bad-faith operators. And this is only going to get worse.

• Item 1: Citibank CEO lied to Congress about his own compensation package, which members of Congress are pursuing.

• Item 2: Generous retention bonuses at Fannie Mae and Freddie Mac will continue to cement the impression that the banks are taking advantage of the bailout money.

The Administration is becoming susceptible to the argument that they overly trusted banksters who are interested in personal self-aggrandizement and not fixing the economy. And the GOP knows it, and they're sticking the knife in.

Except their spiritual leaders are not being helpful.

GOP Congressional leaders have roundly condemned AIG and its executives, as part of a strategy to position themselves as heroic defenders of the taxpayers and to paint the Obama administration as weak and ineffectual. Mitch McConnell recently blasted AIG’s bonuses as an “outrage.” John Boehner said that the “American people are rightly outraged.” And Eric Cantor bemoaned the “stunning lack of accountability” on AIG’s part.

But increasingly, leading conservative media figures are moving in a different direction: Defending AIG.

Rush Limbaugh recently said: “I am all for the AIG bonuses” and attacked the Obama administration for trying to undo them. He also blasted Dem efforts to get the names of the AIG bonus recipients as “McCarthyism.”

Fox News followed suit, also comparing Dems to “Joe McCarthy.” And Sean Hannity has now derided efforts to tax the execs by saying: “In other words, we’re going to just steal their money.”

Hilarious. The White House tosses a softball right over the plate, and half the GOP wants to swing at it and the other half wants to take it.

Resolution Finance Corp. Redux

The President is trying to put out this AIG fire that laps at his broader agenda.

Obama just took questions from reporters, and made a major bid to take control of this story. He placed responsibility for the fiasco squarely on his own shoulders, uncorked a populist blast against “greed” on Wall Street and strongly implied that Republicans blasting the big bonuses are hypocrites.

Asked if he wished he’d known about the bonuses sooner, Obama said, in the course of answering: “Ultimately, I’m responsible. I’m the President of the United States…The buck stops with me.”

“My goal is to make sure that we never put ourselves in this kind of position again,” he said, adding that the AIG story was “consuming” the public, and “rightfully so.”

Obama also moved to acknowledge public anger about the AIG saga, but said that the proper response was to place the AIG story in a larger context.

“People are right to be angry,” he said. “I’m angry. What I want us to do, though, is channel our anger in a constructive way.” Obama touted his plan for a “resolution authority” that would have power over financial firms similar to the FDIC’s over banks, and promised to “fast track” it with Congress.

The "resolution authority" could be similar to the Resolution Finance Corporation created by Roosevelt during the Depression. I think he needs to offer more information about that, because that model seems like it could work:

Jesse Jones often toyed with the salaries of corporate management, especially if they were, in his mind, “over-paid” Wall Streeters. Jones and Roosevelt knew that RFC loans always had the potential of political trouble—stirring up liberal Democrats and progressive Republicans who were blaming businessmen for getting the country into such an economic mess. Salary reductions were one way of showing that RFC, even while it was pouring billions into private business, was not enriching corporate management. Amendments to the RFC Act in 1933 required Jones to certify the appropriateness of the salaries paid by every corporation accepting loans and investment money. Jones devised a declining scale of salary reductions. Corporate management receiving annual salaries of $150,000 or more would be cut to $60,000, $100,000 or more to $50,000, and other reductions accordingly.

Clearly this would be met with outcry from Republican leaders as well as pliant hem-sniffers to the elites. The imagery of pitchforks gets used by those defending AIG to characterize the public as a mob. But a Resolution Finance Corporation charged with overseeing the winding down of insolvent companies wholly dependent on taxpayer funding would be pitchfork-free. In fact, reducing salaries and ending the bonus culture on Wall Street PRESERVES the Obama agenda, rather than wreck it for the future, as Ruth Marcus seems to be saying.

Rather than piecemeal tax provisions targeted at individual firms (though they are politically inevitable in this case), I support a wider net to deal with resolved companies. It would calm the roiling waters in the country, if explained well.

AIG Gets Their Day On The Hill

Edward Liddy, the maxed-out McCain donor who now runs AIG (when will McCain give the money back?) takes to the Washington Post's editorial pages this morning. I imagine this will also be his opening statement before the House Financial Services Committee, where he testifies today. Here's the part about the bonuses:

To prevent undue risk exposure in the meantime, AIG has made a set of retention payments to employees based on a compensation system that prior management put in place. As has been reported, payments were made to employees in the Financial Products unit. Make no mistake, had I been chief executive at the time, I would never have approved the retention contracts that were put in place more than a year ago. It was distasteful to have to make these payments. But we concluded that the risks to the company, and therefore the financial system and the economy, were unacceptably high [...]

What lessons can we draw from AIG's experience? There must be safeguards against the systemic consequences of failures of large, interconnected financial institutions. Where safeguards are lacking, such companies need to be restructured or scaled back so they no longer come close to posing a systemic risk. We have seen all too clearly where the brink lies; our corporate structures need to be pulled back from that edge.

In America, when you owe people money, you pay them. We are pressing forward with our plan to return money to taxpayers, protect policyholders, and give employees a vision of success and a path for achieving it. With the understanding and patience of the American people and the continued support of the Federal Reserve and the Treasury, we can resolve AIG's challenges and help its businesses contribute to a global economic recovery.

Well, half the people who received these retention bonuses left the company and were thus not retained. His reference to "risks to the company" suggests that the "time bomb" scenario, that AIG Financial Products employees would sue for breach of contract or that they would blow up the credit default swaps part of the business. Liddy is actually not wrong when he says, essentially, that "if it's too big to fail, then it's too big." But of course, the line about how "if you owe people money, you pay them" applies more to executives and foreign banks and even hedge funds who bet on the housing market to fail rather than taxpayers.

This hearing will consist of little more than grandstanding, of course. Right now every member of the subcommittee is being allowed to make a little speech before the questions even begin. The solution will present itself, either with Treasury deducting the bonuses from the fourth bailout given to the company, or from the excise tax plan, whether Charlie Rangel likes it or not.

The larger problem is the crisis of confidence in political leaders who are seen as continuing to shovel money to elites with a lot of fake outrage.

Finding A Scapegoat

Good to see that the Treasury Department is so concerned about the AIG bonus babies that they are throwing Chris Dodd to the wolves to deflect criticism.

The administration official said the Treasury Department did its own legal analysis and concluded that those contracts could not be broken. The official noted that even a provision recently pushed through Congress by Senator Christopher J. Dodd, a Connecticut Democrat, had an exemption for such bonus agreements already in place.

That's just not true, as both Jane and Glenn Greenwald explain pretty definitively. Under a Dodd-written amendment, the Senate version of the stimulus bill included executive compensation limits for all recipients of TARP money, only to have the amendment stripped of retroactivity and applied strictly toward future payouts, after negotiations with none other than Tim Geithner and Larry Summers:

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 wasn't a small behind-the-scenes fight, it was a major contention in the stimulus debate, subject of several articles. Obama's economic team didn't want limits on executive compensation, and Dodd did. The Administration won, and now in the midst of this furor they're trying to rewrite history by putting Dodd and themselves in opposite roles.

Dodd is a threatened incumbent who the right wing has been slandering for months, and now some anonymous official in the Obama Administration has taken the heat off themselves by allowing a firestorm based on a myth. Chris Bowers writes:

Now, some elements inside the administration have reached the point where they are placing blame for something Geithner and Summers did--block legislation that would have stripped the bonuses--on the person who wrote the legislation that would have stripped the bonuses. And that person just happens to be the most vulnerable Democratic Senators in 2010.

Glad to see that some senior administration officials value Geithner and Summers more than either Democratic Senate seats, or even more than honesty. There is a serious problem inside the Obama administration on this matter, and dismissals are needed to solve it.

In a related development, Republicans tied Democrats in the congressional generic ballot in one poll today, and took the lead in the other. I guess the new "Geithner uber alles" strategy isn't working out to well for Democrats.

I think it's premature to hype those poll numbers, especially when other ones taken at the same time show an opposite dynamic, but unquestionably, there is a rot at the heart of the economic team. This is the first incident that Obama has truly owned, regardless of the deflections. Republicans don't completely have their act together on this - they're too conflicted, having argued for free market fundamentalism for so long that the knee-jerk response is to argue for more. Even their ideas for clawing back the bonuses are crude copies of what the President has already decided. But anyone can plainly sniff out the villains here, and in addition to hyping the bogus Dodd assertion, the GOP is going after Geithner.

Reps. Steven LaTourette (R-OH) and Thaddeus McCotter (R-MI) introduced a resolution of inquiry today that would force Geithner to reveal the full extent of his department's communications with AIG.

The resolution would affect not just talks over bonuses but about the very structure of the Federal Reserve's investment in the company -- which appears to have included built-in limitations on the government's influence over management.

This is the real deal, folks: resolutions of inquiry (ROIs) are a crucial procedural tool for the minority party to seek information from the executive branch. Democrats did this during the Valerie Plame/Spygate scandal and the debate over the Bush administration's extraordinary rendition. The Congressional Research Service found in a November study that ROIs oftentimes succeed in prying out information even if they fail on the House floor.

No rational Democrat can disagree that we need to know about those communications. Geithner's connections with AIG go all the way back to the initial bailout decision, and are tied to the tens of billions in payments to counterparties, which is the far more damaging element of this - essentially a double-dip for banks who already received government money. While the bonus scandal raises the right-wing phony populist ire, the drumbeat for more investigations into Geithner's contacts with AIG and what he knows about the counterparties and maybe about why the Federal Reserve is injecting billions into foreign central banks and why more than half of the AIG bailout money is leaking over the border and a whole host of other issues which involve Geithner but also the previous Administration. And the very clear potential exists to drown the entire Administration agenda into a day-by-day recitation of whether the President still has faith in his economic advisers, etc.

The President brought this upon himself through his hirings. But if he wants to find a way out, he could stop the practice of his team blaming others and start living up to his own rhetoric.

Shorter Andrew Sorkin: Leave AIG ALOOOONE

Andrew Sorkin tried to defend the indefensible today and make the case for the AIG bonuses, on the grounds that contracts must be honored.

That may strike many people as a bit of convenient legalese, but maybe there is something to it. If you think this economy is a mess now, imagine what it would look like if the business community started to worry that the government would start abrogating contracts left and right.

As much as we might want to void those A.I.G. pay contracts, Pearl Meyer, a compensation consultant at Steven Hall & Partners, says it would put American business on a worse slippery slope than it already is. Business agreements of other companies that have taken taxpayer money might fall into question. Even companies that have not turned to Washington might seize the opportunity to break inconvenient contracts.

If government officials were to break the contracts, they would be “breaking a bond,” Ms. Meyer says. “They are raising a whole new question about the trust and commitment organizations have to their employees.” (The auto industry unions are facing a similar issue — but the big difference is that there is a negotiation; no one is unilaterally tearing up contracts.)

That just seems wrong to me. Government did not write this bonus contract. I have no doubt that unscrupulous business types would use this as a pretext to wriggle out of their own contracts, but that doesn't mean it would be successful. And in fact, the parallel to the auto industry is perfectly analogous, because nobody is actually talking about breaking the contract but using taxpayer bailout money as leverage to force the outcome, which is what was done there. If this tax law to claw back AIG bonuses is pushed through, in fact the contract wouldn't be broken at all. So this sanctity of the contract strikes me as bogus. Furthermore, taking a stand now against exorbitant bonuses for bailed-out companies will serve as a deterrent to those who would search for loopholes in executive compensation caps and bonuses in the future.

Then there's Sorkin's second point.

But what about the commitment to taxpayers? Here is the second, perhaps more sobering thought: A.I.G. built this bomb, and it may be the only outfit that really knows how to defuse it.

A.I.G. employees concocted complex derivatives that then wormed their way through the global financial system. If they leave — the buzz on Wall Street is that some have, and more are ready to — they might simply turn around and trade against A.I.G.’s book. Why not? They know how bad it is. They built it.

So as unpalatable as it seems, taxpayers need to keep some of these brainiacs in their seats, if only to prevent them from turning against the company. In the end, we may actually be better off if they can figure out how to unwind these tricky investments.

Certainly the idea that the only people who can properly unwind these derivatives are the ones who wrote them is hard to swallow. It also doesn't entirely make sense.

That’s nonsensical. It’s clear they made a lot of mistakes and we need to undo what they did. If they really understood what they did in the first place, seriously, they probably wouldn’t have done much of it. Secondly, when you are trying to undo something, it is often not the case that the people who did it are the ones to put in place. People are sometimes committed to not admitting mistakes. … So that argument I think is in fact almost counter, because the argument that you take the people who made the mistake and put them in charge of undoing the mistake goes against the human impulse not to admit a mistake.

Sorkin just seems to be calling for a unilateral protection of elites because of their superior experience and intellect. I agree that it takes smarts to destroy your company AND get a bonus of well over a million dollars - some of which were retention bonuses which the individuals responded to by LEAVING THE COMPANY. But trusting them again to put the national interest ahead of self-interest just seems unwise.

If you truly want to throw up, read that report by Andrew Cuomo on who got the bonuses. This is ugly.

Taxation Everyone Can Believe In

Congress is showing that they can think of options when it comes to AIG. This is from Carolyn Maloney (D-NY), Chairwoman of the Joint Economic Committee:

Like many of you, I was outraged to learn over the weekend that AIG is paying out another $165 million in bonus compensation. For a company that has required $170 billion in U.S. taxpayer assistance and is 80% owned by the United States Government, this is clearly unacceptable. That is why I will be introducing legislation that will instruct the Secretary of the Treasury and the Internal Revenue Service to develop guidelines that tax at 100% any bonus compensation that is not directly related to a commission for any recipient of TARP funds where the United States government is the majority owner of the company. This will allow AIG to continue to meet their "contractual obligation" to pay these bonuses, but will ensure that the recipients are not allowed to keep this money.

Gary Peters (D-MI) has a similar proposal. As Chris Bowers notes, it would be hard in the current political environment for any member of Congress to vote against like this. The added bonus (for us, this time!) is that a vote would ferret out the real corporate whores, and because of the profile of this issue, everyone would know their names.

I hope the Congress chooses not to wait for the White House to come up with a solution. The Treasury and the Federal Reserve knew about this since the fall, and Obama's economic team had ample opportunity to design something that would work. It's time for the lawmakers to step in. They have no reason to wait for the White House to take the lead.

Continuing AIG Fallout

The President is trying to lessen the damage from the AIG bonus babies, perhaps by using the most recent $30 billion dollar payout as leverage:

It was unclear what legal options the government can pursue. Monday afternoon, a White House official said the Treasury Department will use a planned $30 billion infusion into AIG to compel the company to repay the bonuses to employees of its financial-products group, which is responsible for selling the exotic financial instruments that brought the company to near-collapse.

The infusion, announced March 2, won't be finalized until the company and the Treasury work up repayment options, the official said. The bonuses to the financial-products division were "found to be completely unacceptable given that AIG is already surviving on taxpayer funds," the official said.

On the more local front, New York Attorney General Andrew Cuomo will subpoena AIG to seek information on who received the bonuses. And if this continues through the next couple days, expect street actions.

The Service Employees International Union (SEIU) and the Change to Win labor federation are wasting no time in seizing the political moment as anger flares over AIG's commitment to its own executives' bonus payments.

The unions, along with several other partners, are launching takebacktheeconomy.org and planning protests on Thursday at the regional offices of bailed-out banks in more than 100 cities. The goal of the day: pressuring Wall Street into substantively changing its bonus-happy culture.

I actually find it a little sleazy for union leaders to openly discuss how to tie this in to the Employee Free Choice Act; people can make that causal connection on their own, or it can be used as a counterpoint, but I wouldn't tip the strategy so openly.

Regardless, AIG has now cemented its image as the top corporate criminal in this crisis, and this inside/outside pressure might even dislodge them from their precious bonuses.