WASHINGTON – Treasury Secretary Timothy Geithner foresees a lengthy involvement with American International Group and is not ruling out more aid to the insurance conglomerate.

Testifying before the Senate Banking committee, Geithner said Wednesday that untangling AIG’s finances has proven to be more difficult than originally envisioned.

The government holds about 80 percent of AIG’s assets and has injected $70 billion into the company from the $700 billion Troubled Asset Relief Program.

Senators criticized the government for letting AIG pay off its top creditors the full value of their debt. Geithner said the government lacked the authority to negotiate a reduction.

Said Banking Committee Chairman Christopher Dodd, D-Conn.: “There should be a better answer to this.”

As this week progressed, the likelihood of Congress imposing a 90-percent tax on huge bonuses for executives at companies receiving federal bailouts slipped farther and farther from reality.

By A. Barton Hinkle
(Richmond Times-Dispatch, 03-20-09)

If Americans can be said to approach unity about anything these days, then the $165 million in bonuses paid to executives at AIG — recipient of $170 billion and counting in taxpayer bailout money — must rank near the top of the list. The Obama administration says AIG must pay back a portion of the bailout money equivalent to the bonuses handed out, but that does not cancel the bonuses themselves.

The argument has been made that while the bonuses might be deplorable, they are inevitable as a matter of law and imperative as a matter of fact. On the latter point, The Washington Post recently expounded — in an editorial that summoned memories of an ominous warning. More on that momentarily.
According to The Post:

“AIG Financial Products still retains tremendous potential to damage the world economy. The firm’s remaining $1.6 trillion derivatives portfolio is like one of those delicate, world-destroying time bombs that James Bond used to have to disarm in the movies; the difference here is that the only people who appear to be knowledgeable enough to dismantle the bomb are the ones who built it. Or as the firm’s management put it in a recent document, its books ‘contain a number of complex . . . transactions that are difficult to understand and manage. This is one reason replacing key traders and risk managers would not be practical on a large scale.’ Translation: Give them the bonuses, or they’ll walk out and let Treasury Secretary Timothy F. Geithner try to figure out this mess.

“Like most of the people writing about AIG, we have no idea whether this threat is empty. We note, though, that the man closest to the situation, chief executive Edward M. Liddy . . .believes that the danger is real and that the potential additional losses from a mismanaged wind-down of Financial Products could run into the many billions of dollars.”

That passage called to mind an essay that Bill Joy, the founder of Sun Microsystems, wrote for Wired magazine a decade ago on “Why the Future Doesn’t Need Us.” In it he quotes a passage from The Age of Spiritual Machines, by Ray Kurzweil:

“FIRST LET us postulate that the computer scientists succeed in developing intelligent machines that can do all things better than human beings can do them. In that case presumably all work will be done by vast, highly organized systems of machines and no human effort will be necessary. Either of two cases might occur. The machines might be permitted to make all of their own decisions without human oversight, or else human control over the machines might be retained.

“If the machines are permitted to make all their own decisions, we can’t make any conjectures as to the results, because it is impossible to guess how such machines might behave. We only point out that the fate of the human race would be at the mercy of the machines. It might be argued that the human race would never be foolish enough to hand over all the power to the machines. But we are suggesting neither that the human race would voluntarily turn power over to the machines nor that the machines would willfully seize power. What we do suggest is that the human race might easily permit itself to drift into a position of such dependence on the machines that it would have no practical choice but to accept all of the machines’ decisions. As society and the problems that face it become more and more complex and machines become more and more intelligent, people will let machines make more of their decisions for them, simply because machine-made decisions will bring better results than man-made ones. Eventually a stage may be reached at which the decisions necessary to keep the system running will be so complex that human beings will be incapable of making them intelligently. At that stage the machines will be in effective control. People won’t be able to just turn the machines off, because they will be so dependent on them that turning them off would amount to suicide.

“On the other hand it is possible that human control over the machines may be retained. In that case the average man may have control over certain private machines of his own, such as his car or his personal computer, but control over large systems of machines will be in the hands of a tiny elite. . . .”

THEN COMES the kicker: The author of that vision is not Kurzweil, but Theodore Kaczynski — the Unabomber. Kaczynski was a terrorist and a madman. But as G.K. Chesterton observed in Orthodoxy, “madmen are commonly great reasoners.” The fact that Kaczynski perpetrated horrific acts does not answer the problem he poses in the passage above.

The particulars of Kaczynski’s vision of a world run by machines differ from the particulars of the current financial difficulty. But the analogy should be obvious: The complexity of AIG’s financial derivatives is of such an intricate nature that perhaps the only people who can control the technology are the ones who made it. It might be, as some aver, that we have no practical choice but to accept their decisions — at least not without facing even greater economic risk.

Another possibility would be to let the judgment of the market stand — to let AIG fail, and allow the capital bottled up in the company to move to higher and more productive uses. But who, or what, will judge what qualifies as the highest and most productive uses?

Either way, it may be that we have arrived at a moment when at least one part of Kaczynski’s vision has come true: the point at which the decisions necessary to keep the system running are so complex that human beings are incapable of making them intelligently.

My thoughts do not aim for your assent — just place them alongside your own reflections for a while.

Contact A. Barton Hinkle at (804) 649-6627 or bhinkle@timesdispatch.com.

Fallout from anger over AIG’s bonuses is following Sen. Chris Dodd from Washington back home to Connecticut, CNN reports.

House to vote on bill today

WASHINGTON – U.S. Rep. Bob Etheridge, the only N.C. member of the House Ways and Means Committee, introduced legislation last night to recover federal funds used for bonuses of top executives at financial firms receiving federal aid.  Etheridge is an original cosponsor of the legislation, sponsored by Ways and Means Chairman Charles Rangel.  The House will vote on the bill today.

“Traders on Wall Street should not be able to get rich at the expense of folks on Main Street who are struggling,” said Etheridge.  “Taxpayer funds should not be used to pay bonuses to the very individuals whose excessive risk-taking caused the financial crisis that has harmed thousands of North Carolina families.  When AIG has repaid taxpayers and is footing the bill, it is entitled to award compensation as it sees fit.  However, I cannot allow the company to use taxpayer dollars for its executives greed.”

H.R. 1586, the TARP Bonus Tax Bill, would tax the bonuses of highly paid individuals at a rate of 90 percent if their employer received more than $5 billion in federal assistance through the Troubled Asset Relief Program (TARP).  The legislation only applies to individuals whose total family income exceeds $250,000 per year (adjusted gross income).  It affects bonuses received after January 1, 2009.

The legislation follows American International Group’s decision to award more than $168 million in bonus payments to its top employees.  AIG has received more than $170 billion in emergency federal aid. The company claims that it is contractually bound to pay the bonuses because they were agreed to before Congress passed legislation to limit executive pay for firms receiving federal aid.

Etheridge sent a letter to Treasury Secretary Geithner on Tuesday expressing his outrage and disbelief at AIG’s plans to award the bonuses, asking him to “immediately intervene to suspend the payments.”

WASHINGTON  – President Barack Obama says he wants Congress to pass legislation giving the government greater regulatory authority over financial institutions like American International Group.

Standing on the White House lawn as he prepared to go to California, Obama again assailed the company for its business practices and the executive bonuses that it has authorized.

Obama said, “The buck stops with me.” And he disclosed that he and members of his economic council have commenced discussions with leading congressional players on legislation that would create another regulatory entity – along the lines of the Federal Deposit Insurance Corporation – to give the government more authority over financial institutions like AIG.

WASHINGTON – Congressional Democrats vowed Tuesday to all but strip AIG executives of their $165 million in bonuses as expressions of outrage swelled in Congress over eye-catching extra income for employees of a firm that has received billions in taxpayer bailout funds.

“Recipients of these bonuses will not be able to keep all of their money,” declared Senate Majority Leader Harry Reid, in an unusually strong threat delivered on the Senate floor.

“If you don’t return it on your own we will do it for you,” said Chuck Schumer of New York.

The bonuses were paid legally, part of a program that had been disclosed in advance in filings that American International Group Inc. made with the government.

House and Senate Democrats were crafting separate bills to tax up to 100 percent of generous bonuses awarded by companies rescued by taxpayer money. Republicans said President Barack Obama’s administration should have done more to stop the bonuses.

AIG would not be the only firm named by either Democratic bill, but there was no question whose executives inspired the legislation.

“They’re not going to get the financial benefit of those bonuses,” said Senate Finance Committee Chairman Max Baucus, D-Mont.

In the House, Reps. Steve Israel, D-N.Y., and Tim Ryan, D-Ohio, introduced a bill that would that would tax at 100 percent bonuses above $100,000 paid by companies that have received federal bailout money.

“We will use any means necessary,” said Ryan. “It boggles my mind how these executives can be so unaware of what the American people are going through.”

The Internal Revenue Service currently withholds 25 percent from bonuses less than $1 million and 35 percent for bonuses more than $1 million.

As lawmakers stampeded to the microphones over the American International Group Inc. bonuses, the Obama administration said it was trying to put strict limits on how future government bailout dollars could be used. But sharp questions have been raised about what the administration knew about the bonuses – and when.

Sen. Richard Shelby, the ranking Republican on the Senate Banking Committee, chastised the administration, saying Treasury Secretary Timothy Geithner should have blocked the payouts.

“I don’t know if he should resign over this,” the Alabama senator said. “He works for the president of the United States. But I can tell you, this is just another example of where he seems to be out of the loop. Treasury should have let the American people know about this.”

AIG also was raked over the coals at a banking committee hearing on regulating the insurance industry.

“One way or another, we’re going to try to figure out how to get these resources back,” said Christopher Dodd, D-Conn., the panel’s chairman.

“This is ridiculous,” exclaimed Sen. Jon Tester, D-Mont. He said AIG executives “need to understand that the only reason they even have a job is because of the taxpayers.”

Edward Liddy, the CEO of American International Group Inc., is to testify Thursday before a House subcommittee.

On Monday, Obama lambasted the insurance giant for “recklessness and greed” and pledged to try to block payment of the bonuses. Obama said he had directed Geithner to determine whether there was any way to retrieve or stop the bonus money.

The financial bailout program remains politically unpopular and has been a drag on Obama’s new presidency, even though the plan began under his predecessor, President George W. Bush. The White House is aware of the nation’s bailout fatigue; hundreds of billions of taxpayer dollars have gone to prop up financial institutions that made poor decisions, while many others who have done no wrong have paid the price.

Sen. Charles Grassley suggested in an Iowa City radio interview on Monday that AIG executives should take a Japanese approach toward accepting responsibility by resigning or killing themselves.

“Obviously, maybe they ought to be removed,” the Iowa Republican said. “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.”

Grassley spokesman Casey Mills said the senator wasn’t calling for AIG executives to kill themselves, but said those who accept tax dollars and spend them on travel and bonuses do so irresponsibly.

New York Attorney General Andrew Cuomo said he has issued subpoenas for the names of AIG employees given bonuses despite their possible roles in its near-collapse. Cuomo said his office will investigate whether the bonus payments are fraudulent under state law because they were promised when the company knew it wouldn’t have the money to cover them. AIG reported this month that it lost $61.7 billion in the fourth quarter of last year, the largest corporate loss in history, and it has benefited from more than $170 billion in a federal rescue.

WASHINGTON – President Barack Obama declared Monday that insurance giant American International Group is in financial straits because of “recklessness and greed” and said he intends to stop it from paying out millions in executive bonuses.

“It’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay,” Obama said at the outset of an appearance to announce help for small businesses hurt by the deep recession.

“How do they justify this outrage to the taxpayers who are keeping the company afloat,” the president said.

Obama spoke out in the wake of reports that surfaced over the weekend saying that financially strapped American International Group Inc. was paying substantial bonuses to executives.

Noting that AIG has “received substantial sums” of federal aid from the federal government, Obama said he has asked Treasury Secretary Timothy Geithner “to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole.”

Said Obama: “All across the country, there are people who work hard and meet their responsibilities every day, without the benefit of government bailouts or multimillion-dollar bonuses. And all they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules.”

“This isn’t just a matter of dollars and cents,” he added. “It’s about our fundamental values.”

The $165 million was payable to executives by Sunday and was part of a larger total payout reportedly valued at $450 million. The company has benefited from more than $170 billion in a federal rescue.

AIG reported this month that it had lost $61.7 billion for the fourth quarter of last year, the largest corporate loss in history. The bulk of the payments at issue cover AIG Financial Products, the unit of the company that sold credit default swaps, the risky contracts that caused massive losses for the insurer.

Rep. Barney Frank, chairman of the House Financial Services Committee, earlier Monday charged that the move to pay bonuses amounted to “rewarding incompetence.”

“These people may have a right to their bonuses. They don’t have a right to their jobs forever,” said Frank, a Massachusetts Democrat.

Frank noted that the Federal Reserve Board, using a Depression-era statute, was the institution that gave AIG its initial government bailout, before Congress passed legislation providing for additional assistance and said that no enough safeguards were built into the deal.

It also was revealed over the weekend that American International Group Inc. used more than $90 billion in federal aid to pay out foreign and domestic banks, some of whom had received their own multibillion-dollar U.S. government bailouts.

Some of the biggest recipients of the AIG money were Goldman Sachs at $12.9 billion, and three European banks – France’s Societe Generale at $11.9 billion, Germany’s Deutsche Bank at $11.8 billion, and Britain’s Barclays PLC at $8.5 billion. Merrill Lynch, which also is undergoing federal scrutiny of its bonus plans, received $6.8 billion as of Dec. 31.

The money went to banks to cover their losses on complex mortgage investments, as well as for collateral needed for other transactions.

“We ought to explore everything that we can through the government to make sure that this money is not wasted,” said Sen. Richard Shelby, R-Ala. “These people brought this on themselves. Now you’re rewarding failure. A lot of these people should be fired, not awarded bonuses. This is horrible. It’s outrageous.”
 
Frank said he was disgusted, asserting that “these bonuses are going to people who screwed this thing up enormously.”

“Maybe it’s time to fire some people,” he said. “We can’t keep them from getting bonuses but we can keep them from having their jobs. … In high school, they wouldn’t have gotten retention (bonuses), they would have gotten detention.”

AIG has agreed to Obama administration requests to restrain future payments. Geithner had pressed the president’s case with AIG’s chairman, Edward Liddy, last week.

“He stepped in and berated them, got them to reduce the bonuses following every legal means he has to do this,” said Austan Goolsbee, staff director of President Barack Obama’s Economic Recovery Advisory Board.

Obama did note in his remarks Monday that Liddy “came on board after the contracts that led to these bonuses were agr3eed to last year.”

In an interview that aired Sunday on CBS’ “60 Minutes,” Federal Reserve Chairman Ben Bernanke did not address the bonuses but expressed his frustration with the AIG intervention.

“It makes me angry. I slammed the phone more than a few times on discussing AIG,” Bernanke said. “It’s – it’s just absolutely – I understand why the American people are angry.”

In a letter to Geithner dated Saturday, Liddy said outside lawyers had informed the company that AIG had contractual obligations to make the bonus payments and could face lawsuits if it did not do so.

WARREN, Ohio – Republican presidential candidate John McCain, a day after flatly rejecting the idea of a taxpayer bailout for American International Group Inc., said Wednesday that the government had been “forced” into proposing an $85 billion loan to the nation’s largest insurer.

McCain appeared to soften his opposition to the bailout proposed by the Treasury Department, treating the plan as a necessary evil to protect ordinary Americans with finanical ties to AIG – and asserting that such a financial collapse should not be allowed to happen again. He also called for an investigation to uncover any wrongdoing.

“The government was forced to commit $85 billion,” McCain said in a statement. “These actions stem from failed regulation, reckless management and a casino culture on Wall Street that has crippled one of the most important companies in America,” McCain said in a statement.

“The focus of any such action should be to protect the millions of Americans who hold insurance policies, retirement plans and other accounts with AIG,” he said. “We must not bail out the management and speculators who created this mess. They had months of warnings following the Bear Stearns debacle, and they failed to act.”

Although he is stepping up criticism of government regulators as he seeks the presidency, McCain has long favored a reduction in corporate regulation. A similar free-market thinker, former Sen. Phil Gramm of Texas, who led the Senate Banking Committee in Congress, has been an adviser to the campaign.