Extortion – An American Tradition

A CBS News telephone poll of almost 900 adults taken between March 12^th and 15^th produced the following less-than-surprising results:

1. Only 37% of those polled believe that giving money to banks/insurance companies is a solution to our current financial crisis.
2. 48% (i) resent pouring money into financial institutions, which they see as a reward to greedy, incompetent and failed managers and (ii) believe that the economy would recover without that governmental infusion of capital.
3. 41% perceive that this financial aid is a necessary precondition to ending the recession.
4. 30% worry about someone in their household losing their job (down from 44% in February).
5. 40% believe that government assistance may actually get the banks to start lending again.

With the U.S. being a 79.9% owner of insurance giant, AIG, it is hard to understand why the senior management actually paid out the $165 billion in the infamous bonuses, many to traders in off-shore offices, despite public and governmental outrage. The worst they risk they faced in not paying was forcing employees to go to court, a process that would undoubtedly consume time and force many settlements at vastly reduced payment levels. It seems that over $1 million in bonus compensation was paid to each of at least 73 employees, including 11 who no longer work there! But has this ship sailed for the taxpayers?

And yet: Getting these malevolent traders to quit in a huff was actually at the top of many American’s wish list! A structuring of AIG itself into two units (the same concept as what is proposed in the banking industry: the old bad bank – with toxic assets, and a good bank – with a solid balance sheet), and tying the traders to that segment of the two halves where they actually performed services, would have been another solution. You could always have bankrupted the “bad AIG” and let the traders duke it out with the bankruptcy courts.

The President was none too pleased: "I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?" Iowa Republican Sen. Charles Grassley propounded this rather harsh comment about those receiving the bonus payments: “Obviously, maybe they ought to be removed… But I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide.” Connecticut ’s Democratic Senator, Chris Dodd, who chaired a panel of a banking committee hearing on regulating the insurance industry added: “One way or another, we're going to try to figure out how to get these resources back.”

New York Attorney General Andrew Cuomo got a bit more aggressive; he issued subpoenas for the names of AIG employees given bonuses despite their possible roles in its near-collapse. Cuomo’s information suggests that AIG had much more compensation flexibility that they were claiming. The Associated Press on March 17^th: “Cuomo said that despite their contracts, Financial Products employees agreed to take 2009 salaries of $1 in exchange for receiving their retention bonus packages. He said the fact AIG could negotiate the terms of the payments ‘flies in the face of AIG's assertion’ that it had no choice but to make the contractual bonus payments.”

But can AIG pull actually the bonuses back, is the cost of suing all those employees to get the money back is prohibitive, and are we just screwed? Amid pressures for the newly appointed Treasury Secretary, Timothy Geithner, to resign (did he know of this bonus plan earlier and simply fail to act?), Congressional leaders are considering legislation to require a repayment of most of that AIG bonus money. Would such an “after-the-fact” targeted law be upheld? One suggestion would apply a 35% federal “excise tax” (literally an “extra tax”) on both companies that pay such excessive bonuses (but don’t the taxpayers effectively own AIG anyway?) and the individuals who get the money.

Bottom lines: (i) Of course the U.S. economy could recover without any government stimulus of any kind. It just might take a decade or more. (ii) There is no way, in the short term, for America’s banking system to bring normal credit back on line anytime soon without the government’s severe investigation of what shape our banks are really in, removing a large portion of “toxic” assets from their balance sheets, restoring inter-bank lending and providing a capital infusion of significance to re-prime the credit pump.

Confidence and credibility are at the heart of why this meltdown will continue unabated without clear and distinct action. Further, if AIG were really allowed to collapse, how many Americans would find that their insurance company was in fact itself reinsured by AIG? More than you can imagine!

The AIG scandal has seriously wounded President Obama’s rescue plan, and this debacle could add months if not years to the real recovery as outraged taxpayers try and stop all of these programs. I feel like a mountain climber descending a rocky cliff, hanging on to a rope as I rappel my way to the bottom, as people cry to recall the rope itself because somebody gouged me by selling it to me at ten times its real value. It’s just not very pretty being an extortion victim, but please don’t take that rope away just yet!

I’m Peter Dekom, and I am hangin’ on!