On the Edge of the Volcano By ALEXANDER COCKBURN

On the Edge of the Volcano

By ALEXANDER COCKBURN

Since last September Barack Obama has been trying to pull off the tricky shot of backing bailout schemes at taxpayers’ expense for the Wall Street operators who have brought the economy to its knees, while simultaneously presenting himself as a populist crusader battling for economic justice and the regular folks on Main Street. Right now, for the first time since he was elected president, he’s perilously close to plummeting from this high wire act and ending up publicly derided as Mr Facing-Both-Ways, a toxic label for a man whose moral keynote has always been that he’ll play it straight with the American people.

On the boil these past days has been the travails of American International Group (AIG), a vast insurance company which in the recent go-go years, now merely a fragrant memory, decided to ramp up its business by issuing coverage in the form of various intricate financial instruments to high rollers – Societe Generale, Deutsche Bank, Goldman Sachs, Merrill Lynch – without setting aside solid contingency funds in case all the high rollers – technically known as the counterparties -- turned out to have bet the wrong way, which of course they did.

AIG’s first rescue installment came in September 2008. Republican Treasury Secretary Hank Paulson successfully promoted a bailout plan, supported by candidate Obama, in which a $150 billion package went to AIG, a substantial tranche of which then went straight to Paulson’s previous employer, Goldman Sachs. The AIG bailout decision involved Paulson, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and currently Secretary of the Treasury. When AIG recorded an ensuing $61 billon loss in the fourth quarter of 2008, Treasury pumped in another $30 billion.

The rationale for dishing out these colossal sums was that if AIG defaults on its insurance contracts, covering the losses of the “counter parties”, the whole show would go down the tubes. One internal AIG memo prophesized what it called a “systemic failure,” with losses exceeding a trillion dollars. Bailout duly followed, with AIG effectively becoming 80 per cent owned by the US government.

Amid the bailout negotiations an obvious hot potato was the issue of bonuses to AIG executives and big-time derivatives traders. The bonuses were rationalized as being necessary to keep these players tied to the very company they had helped to loot. All parties to the negotiations – Paulson, Geithner (still at the New York Fed), Obama, senior Democrats and Republicans in Congress – were well aware that public indignation at the $800 billion bailout for AIG and the big banks was at boiling point. Millions in bonuses to bankrupt gamblers bailed out by Uncle Sam is an impossible sell.

As Obama’s stimulus bill worked its way through the Congress, Oregon senator Ron Wyden, a Democrat, joined with Republican Olympia Snowe of Maine to attach an amendment to the bill capping executive bonuses for companies taking bailout money at $100,000. This provision sent off alarm bells across Wall Street and inside the Treasury Department and it was mysteriously killed in the conference committee in order to protect the AIG executives. Wyden jokes, “it didn’t die by osmosis.”

So who killed the ban on AIG bonuses? This week all the major players swore, hand on heart, they never, ever knew that $165 million in bonuses had been assigned to AIG personnel. Out in Los Angeles President Obama told Jay Leno as much. Treasury Secretary Geithner claims he only found out last week. Senator Chris Dodd, chairman of the Senate Banking Committee, swore day after day that he too never knew.

The bonuses were not secret. These so-called “retention payments” for 130 people at AIG were approved two days after the September 16 bailout, disclosed in a September 26 federal filing. They soon became a focus of extreme interest to politicians like New York attorney general Andrew Cuomo, well aware of the smoldering public mood. On December 15 Bloomberg News quoted Representative Elijah Cummings of the House Committee on Oversight and Government Reform, as writing that “Liddy [AIG’s CEO] should testify under oath on why retention payments are going to thousands more people than first disclosed." Cummings cited an earlier Bloomberg News report disclosing that AIG was scheduled to give as much as a year’s pay to about 10 percent of the staff at units that are being sold. Recipients were told to keep the awards secret.

On Wednesday Dodd came clean—sort of. Yes, he had accepted language in the recent stimulus bill which okayed bonuses consequent upon bailout money already released by the US government. Facing a tight reelection race next year and well aware that this admission would not play well with Connecticut voters, Dodd emphasized that he’d been pressured to okay the language by the Treasury Department, suggesting that Bush-era holdovers from Hank Paulson’s team warned that unless the AIG bonus contracts were protected the entire stimulus package could be vulnerable to a constitutional challenge. Dodd thus passed the poisoned chalice to Treasury Secretary Geithner, White House economic czar Larry Summers and… Obama.

At first the White House put up Summers to argue that America is a nation of laws, among them the law of contract, as applied to AIG employees. Only a man who had to resign the presidency of Harvard after claiming that woman are in some ways stupider than men would be capable of such idiocy. Obama is in the process of asking millions of Americans -- autoworkers, pensioners, veterans to accept annulment of contractual obligations to them by the US government. Suddenly they’re asked to respect retention contracts to AIG losers, many of whom have quit the company anyway.

The sight of Summers and AIG’s Edward Liddy solemnly invoking sanctity of contracts aroused particularly bitter hilarity in Louisiana. As Rebecca Mowbray reports in Thursday’s Times Picayune in an excellent piece headlined, “Contract sanctity at AIG, but not Allstate?”:

“Liddy ran Allstate Corp. from when it was spun off from Sears, Roebuck & Co. in 1995 until the end of 2006. During that time, Allstate perfected the practice of getting tough with policyholders to delay and deny claims, as documented in the book by New Mexico attorney David Berardinelli, From Good Hands to Boxing Gloves: the Dark Side of Insurance.

“While that book dealt mainly with a strategy for tamping down car insurance claim payouts to increase profitability, many believe those same practices could be seen at work en masse after Hurricane Katrina in Louisiana, where thousands of policyholders filed suit against the Illinois company…

“Evidence emerged after Hurricane Katrina that Allstate shifted the burden of paying for wind damage covered by its homeowners policies onto taxpayers by overcharging the federal flood program.”

In the wake of Hurricane Katrina Liddy’s Allstate made haste to dump contractually obligated policies the firm had issued to thousands of Louisiana homeowners.

Tossed on the third rail by Dodd, scorched by Republican jeers for hypocrisy and double dealing, the White House rushed into damage control. Invective against the executives of AIG poured from Obama’s lips, although not so fierce as the suggestion by the Republican senator from Iowa, Chuck Grassley, that the AIG top brass “follow the Japanese example and resign or go commit suicide.” After reading their constituent email, taking phone calls and watching the talk shows, on Thursday after about 30 minutes of debate 243 Democrats and 85 Republicans joined in voting "Aye" to a House bill that would impose a 90 percent tax on bonuses given to employees with family incomes above $250,000 at AIG and other companies that have received at least $5 billion in government bailout money. It would apply to any such bonuses issued since December 31. It was opposed by six Democrats and 87 Republicans. The senate is considering a slightly more restrained version.

House leader Nancy Pelosi was no doubt close to bursting from schadenfreude as she mousetrapped the House Republicans on that one. It’s a measure of just how terrified they are of the popular mood that no less than 85 Republicans voted for an individually targeted, retrospective tax levy on individuals which is probably the largest marginal rate ever imposed and certainly unconstitutional.

Rough though the week has been, there is a silver lining for the White House. It stems from the very word that has landed Obama and his team in such trouble - “bonus”. A bonus is something people can relate to. You hope to get it at Christmas. It’s a reward for working hard. You don’t give bonuses to thieves and deadbeats. Yet at the same time as the uproar over $165 milion in bonuses is in full spate, Obama has approved bailout of AIG to the tune of about $200 billion, much of it passed on to the infamous “counterparties” like Goldman Sachs and foreign banks.

Among those who have pointed this out is former New York governor Eliot Spitzer, who contributed an acrid column to the Slate website. It’s his first surfacing since he was politically destroyed in a sex scandal, certainly contrived by major Wall Street players, worried that when the roof fell in – as it did – he would be telling his attorney general to issue indictments. The fact that Spitzer feels secure in entering public life again, lashing the Wall Street gangsters, shows how vulnerable Obama and his administration are to charges that they have no serious plan beyond bailing out the big Wall Street banks, and no intention of asserting control of the assets they substantively own, by formally taking them over. Obama is dancing on the edge of a volcano.
http://www.counterpunch.org/cockburn03202009.html