Monday, March 23, 2009

Rage Over AIG

By: Bovemsa Cheung

Many Americans were angry over the $165 million in bonuses paid to members of the financial-products division that brought down American International Group (AIG). It doesn’t seem fair that taxpayers own nearly 80% of AIG. The government has used $173 billion to bail out AIG.

The Obama administrations handling of financial excess are also facing conflict. They decided whether they had the authority to meddle with employment contracts. In the recently passed stimulus bill, the Treasury made a clause allowing retrieving payments deemed contrary to the public interest. Tim Geithner, the treasury secretary, said the money would be recouped by deducting some of it from the next $30 billion portion of aid for the company.

This is still unfair because employees are still keeping the bonuses while AIG is not getting the funds that are supposed to keep it in operation. The Federal Reserve has lent a lot of money to AIG and even knew about the bonuses several weeks ago. Because of the government, the credibility of the Federal Reserve has been damaged.

Some people suggest that the bonuses should be having taxes of up to 100%. The firm’s chief executive, Edward Liddy asked people who received more than $100,000 to give back at least half. Some people who received death threats and unwelcomed attention of the paparazzi offered to return the full amount. However Mr. Liddy is also worried that they would leave AIG, making it harder to manage the failing financial-products business.

AIG has made payments, credit-default swaps and securities lending to counterparties of Goldman Sachs, Société Générale, Deutsche Bank, Barclays, Merrill Lynch, Bank of America, UBS and BNP Paribas. Since AIG bailed out these trading partners, the government deemed it necessary to bailout AIG.

The new administration faces a lot of problems. It makes it hard to pin responsibility for failed financial rescues on the Bush team. It makes Mr. Obama seem as though he doesn’t know if he supports the outrage of the public or if he wants more rescue funds. The government approximates that another $750 billion may be needed. Insurers are asking for funds as well. The hearing’s chairman, Paul Kanjorski, suggested that the AIG mess could force Congress to reconsider any future assistance. Rep. Barney Frank, the Massachusetts Democrat who heads the powerful banking committee, supported the legislation but suggests that Washing should consider more steps, including suing AIG to recoup the money.

Two ways to regain Mr. Geithner’s credibility is to successfully boost consumer lenging by reviving securitization and to remove toxic assets from banks. The government needs to make the terms attractive enough to bring in private buyers but not to invite more political controversy.

Banks are responding to new executive-bonus limits by increasing salaries—this promotes the fact that pay is performance-related.

Mr. Obama said that the government should be focusing on how to prevent this from recurring. Mr. Liddy will be urged to make money by disposing of AIG’s assets and cutting the group’s vast debt to the taxpayers.

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