[Peace-discuss] Obama is dancing on the edge of a volcano...

[C. G. Estabrook]

"...Obama and his administration ... 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."

	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/