The Fed, Pitchforks and Cleaning Up Someone Else’s Mayhem

How the Fed Failed to Tell Obama About The Bonuses

Federal Reserve officials knew for months about bonuses at American International Group but failed to tell the Obama administration, according to government and company officials, exposing problems in a relationship that is vital to addressing the financial crisis.

[  ]…”I was stunned when I learned how bad this was on Tuesday [March 10],” Geithner said. “I shouldn’t have been in that position, but it’s my responsibility and I accept that.”

It doesn’t seem to matter in the rush to see who can be the most outraged, but people seem to be unaware or confused about AIG’s bail-out funds. They have received two. The original bail-out was in TARP under the Bush administration ($150 billion) - in that bail-out, the largest of the two, negotiations over bonuses were not even considered – it was reported later that AIG bonuses would total $400 million. That bail-out was revised ( note the contrast in faux Republican outrage between now and then – they voted for TARP and never accused anyone in the Bush administration of not being up to the task of handling the money – even when Paulson changed course and suddenly decided to amend the AIG funds to buy $40 billion in AIG shares. Paulson wasn’t in over his head, but Geithner is? In early March of this year AIG got another chunk of fed assistance to the tune of $30 billion in government guaranteed credit. Why is Geithener or Dodd for that matter being held responsible for a bail-out whose conditions were dictated by a previous administration. Maybe I’m missing something, but TIME’s peice

“Treasury staff was informed about the new bonuses in a Feb. 28 memo that the March 15 [bonus-payment] date was upcoming,” a Federal Reserve source tells TIME. A Treasury Department source, speaking on background, confirmed the e-mail memo and its contents, saying, “Everybody knew that [AIG] had a retention issue.”

becomes somewhat less urgent when we remember that the bonuses were part of a package – a contract negotiated by a combination of Fed Charman Ben Bernake and former Tresury Secretary Hank Paulson. The details of the Wall St rescue package are complex.  Yes current SOUST Timothy Geithner, was at the time head of the Federal Reserve in New York. Putting that fact out is like saying you’re resposnible for decisions made on the 10th floor because you’re on the 9th floor and have daily contact with those guys.

Last week, Hank Paulson — who bears responsibility for the crisis in numerous ways — demanded that $700 billion be transferred to him in order to purchase toxic assets from his Wall St. friends, and while there was much howling of outrage in many quarters, no other framework was ever considered.

(3) Public opinion is largely ignored, as always, and public anger is placated through illusory, symbolic and largely meaningless concessions. Much is being made over the allegedly strong oversight provisions to limit the Treasury Secretary’s power, accomplished through the creation of two oversight panels — one that is composed of 5 administration officials (including the Treasury Secretary himself, the Federal Reserve Chairman and the SEC Chairman — the definitive foxes guarding the hen house), and another that is appointed by Congress but which — as is true for everything Congress touches — has little real authority over what is done.

Identically, executive compensation limits — used to bestow the plan with its populist bona fides — are minimal and extremely limited. Worse, the public is being told that the financial services industry must pay for any losses to the Treasury still outstanding after five years, but the bill requires nothing of the sort, simply requiring that the president “propose” a plan for recoupment, not that Congress enact any such plan.

And, most of all, while not as absolute as it was in the original Paulson proposal, the Congressional plan still vests extraordinarily vast and centralized power in the Treasury Secretary – just as Paulson demanded. As the NYT put it this morning: “During its weeklong deliberations, Congress made many changes to the Bush administration’s original proposal to bail out the financial industry, but one overarching aspect of the initial plan that remains is the vast discretion it gives to the Treasury secretary.”

We’re in the very tedious though potentially politically damaging who said what and when did they say it stage. Liberals that don’t like Geithner – which probably comes from an overly protective and unnecessary instinct to protect President Obama – seem to have already made up their minds. Republicans, those actual pols that just voted for a $700 bail-out without oversight are like wingless chickens trying to get some political traction. The right-wing pundits – which I’ll get back to – have fallen off the faux populist tea wagon to defend the bonuses. To reintegrate, anyone that has kept up with the news knew that AIG, and Freddie Mac and Merril Lynch for that matter, were going to get compensation and bonuses. We knew that AIG’s total bonuses were going to be in the $400 million range. Why this time-line would cause any heated debate becomes odd in that light,

March 10 Geithner finds out about impending bonuses.

March 11 After 6 p.m., Geithner calls AIG CEO Edward Liddy to express outrage and says the bonus payments are unacceptable and Liddy must go back and renegotiate. Geithner and Treasury lawyers look for legal solutions to avoid paying the bonuses.

March 12 Geithner informs the White House about the bonuses. Later in the day, senior aides tell President Barack Obama. Geithner and Treasury lawyers keep looking for legal avenues to avoid paying the bonuses.

March 13 Geithner and Treasury lawyers still seeking a legal way out. Geithner speaks with Liddy again and after some back and forth, AIG agrees to modify the bonuses and recoup the money in $30 billion AIG restructuring agreement. Geithner then asks Liddy for a letter to codify the changes.

March 14-15 Following the March 13 deadline, Treasury attorneys look for a legal way to recoup the bonus payouts. On the evening of March 15, Obama asks the economic and legal team to intensify efforts to find ways to recoup the bonuses.

So Geithner didn’t know the specifics of page 310, paragraph four, section two where it says oops, some executive bonuses to the tune of $116 million are due for payout. TIME says no, Geithner learned about the bonuses or at least some at Treasury learned about them on Feb. 28. We now know that because of contractual entanglements the bonuses couldn’t be simply canceled, so even if TIME’s newest timetable is correct, what difference would that 12 days make in practical terms. There aren’t any facts I can find to justify not believing him and it turns out, the issue seems to contain more symbolic impact, then actual to be actual fodder for the level of outrage it is getting, in the context of the original bail-out negoiations under another administration, by another Treasury Secretary. Amendments to the original bail-out did take place and the administration, according to The Hill had knowledge of provisions to restrict executive bonuses,

Administration officials fear that the congressional provision will still allow multi-million dollar paychecks, as long as they aren’t called bonuses, because it has no limit on base pay.

But most of the administration’s concern stems from the Dodd’s move to trump Obama’s compensation provisions by seeking more aggressive restrictions.

Dodd is not backing down. In an interview with the AP, Dodd said his provisions are needed, especially if Obama asks Congress for more money to bolster the financial sector.

“It will never happen as long as the public perceives that there are people getting rich,” Dodd told AP. “Save their pay or save capitalism.”
Despite the White House misgivings about the compensation limits, they appear to be getting something much of the rest of the bill lacks — bipartisan support.

Republican Sens. Richard Shelby of Alabama and Lindsey Graham of South Carolina both voiced support for the provision during Sunday morning television appearances.

“We should protect the taxpayers here. And I believe this provision in the stimulus bill is going in the right direction, as far as protecting the taxpayers,” Shelby said on CBS’s Face the Nation.

Dodd has said the administration wanted to loosen restrictions on executive bonuses and on that he appears to be correct. Though he hasn’t helped his own ppolitical future by hedging back and forth on details. After the last week this column from WaPO does seem funny in context, The Costs of Bailout Rage

Could we put down the pitchforks for just a moment and have a reasonable discussion about the bonuses at American International Group?

No, I didn’t think so. Here goes anyway.

I get the outrage. It’s galling to pay $165 million to a bunch of wealthy traders to clean up a mess that they, or at least their company, made.

Another point being lost in the is that some of these executives that received bonuses are there to wade through the mess left for the last two years plus. Many AIG financial services exces have left the company.

“This is a corporation that finds itself in financial distress due to recklessness and greed,” the president said on Monday. “Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?”

Well, because in the short run, hammering the AIG employees to give back their bonuses risks costing the government more than honoring the contracts would. The worst malefactors at AIG are gone. The new top management isn’t taking bonuses. Those in the bonus pool are making sums that for most of us would be astronomical but that are significantly less than what they used to make. Driving away the very people who understand how to fix this complicated mess may make everyone else feel better, but it isn’t particularly cost-effective.

It is all “galling”, but the mistakes that the new administration has made seem to be more appearances and slow response then of actual substance, AIG Bonus Scandal—Bernanke and Fed Signed Off

Testifying before a House Financial Services subcommittee [2], Liddy said all AIG’s decisions have been made in conjunction with the Federal Reserve and agreed that Bernanke had signed off on the bonuses.

Subcommittee members expressed surprise at the acknowledgment. Rep. Paul E. Kanjorski (D-PA) [3] in particular showed his frustration [4] (PDF), referring to his efforts over a two-month period to work with AIG to address the bonus issue.

Oops, in the who knew what when game this Congressmen knew and so would all the Republicans and Democrats on his sub-committee. That doesn’t reflect badly on them as much as reflects how the bonuses have taken on a life of their own, a bonus octopus in which  people are actually arguing over 12 days and agreements that have changed over the course of a year. Also worth mentioning is that letting AIG go down the tubes would hurt some of the working class that many on every side say they care about,

The government’s ongoing willingness to stand behind AIG’s debts is critical to the health of the insurance companies, according to rating agencies AM Best and Standard & Poor’s.

We wrote earlier [5] that, without the government’s backing, those companies are at risk of further rating downgrades, which could, in an extreme case, compromise the businesses.

AIG’s insurance subsidiaries cover 38 million life and retirement policies for Americans, are the second-largest holders of municipal bonds, and insure 21,000 medical providers, according to company documents.

MyDD has a post up defending Secretary Geithner and President Obama, well worth reading the whole post, In Geithner We Trust

As the New York Times finds Secretary Geithner is “shouldering more crises on his slight frame than most Treasury secretaries ever have.” And I think it relevant to note that he is doing so without the usual complement of Treasury assistants because of Administration delays in vetting potential nominees and due to candidates who have withdrawn. In short, Mr. Geithner is not just the quarterback right now but the wide receiver, the running back and the offensive line doing the blocking and tackling.

Let’s also be cognizant of the task at hand and difficulty of the moment. As the President noted in his defense of the Secretary on the White House lawn before setting out for California, “there has never been a secretary of the treasury, except maybe Alexander Hamilton, right after the Revolutionary War, who’s had to deal with the multiplicity of issues that Secretary Geithner is having to deal with — all at the same time.”

As Charles Lemos points out letting Geithner go would undermine an already shakey financial sector. Then who are you going to get that, guaranteed, will have to shoulder their share of monthly outrages. “The Secretary and the President deserve the benefit of the doubt and the gift of time,” It is not Geithner’s job or President Obama’s job to just fix this crisis, it is their enormous task to fix the decades of bone headed econmic policy that got us where we are. The WSJ published some economists views on where we’re headed and they see the light,

Economists and others weigh in on the Federal Reserves decisions to buy Treasurys and increase purchases of other securities.

* This is a huge step forward, which we have thought inevitable for some time but did not expect to see in the statement today ……Ian Shepherdson, High Frequency Economics

* The largest benefit may come in the form of lower mortgage rates,….Nomura Global Economics

* …This could represent a powerful source of stimulus for the household sector of the economy. In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year. –David Greenlaw, Morgan Stanley

This is some serious worry, given Fed’s actions, that they could acclerate inflation, but only one seems to think we’re on the completely wrong track.

More context for those $160 million in AIG bonuses, Cuomo Wins Ruling to Name Merrill Bonus Recipients Merrill employees recieved over $3 billion in bonuses and lets not forget what Iraq cost.

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