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In AIG flap, it's not just about bonuses anymore

Scrutiny of bailout terms expands as critics question federal officials' longtime ties to aid recipients.

March 19, 2009|Tom Hamburger and Janet Hook

WASHINGTON — The firestorm over American International Group is spreading beyond executive bonuses, with lawmakers and policy experts now questioning virtually all aspects of the taxpayer-financed rescue package for the insurance giant.

Among other issues, critics are asking why AIG was allowed to use federal bailout money to repay $13 billion in debt obligations to Wall Street powerhouse Goldman Sachs, as well as debts to foreign banks.

Prominent Republicans, joined by some Democrats, suggested that the answer could be found in longtime ties linking Washington to Wall Street.

Former Treasury Secretary Henry M. Paulson was once chief executive of Goldman Sachs, for example, while AIG's chief executive, Edward M. Liddy, was a member of Goldman's board. The Treasury official who is in charge of the bailout, Neel Kashkari, is a former Goldman executive.

"Look at where the money went: Goldman Sachs, Paulson's firm, foreign banks," Sen. Jim Webb (D-Va.) said Wednesday. "AIG gave more money to foreign banks than we gave in loans to the auto industry."

"The real outrage over the AIG bailout isn't executive bonuses, it's that billions in taxpayer funds intended for AIG have been passed through to benefit foreign banks and Wall Street behemoths like Goldman Sachs," former House Speaker Newt Gingrich wrote in an e-mail letter to conservatives Wednesday morning.

Gingrich and Republicans on Capitol Hill unleashed their anger on the current Treasury Secretary, Timothy F. Geithner, saying he bore responsibility for being overly generous in providing aid to failed companies like AIG.

Two outspoken House Republicans -- Darrell Issa of California and Connie Mack of Florida -- called for Geithner's resignation, saying the AIG bonus controversy on top of existing doubts about the bailout made such a move necessary.

Other Republicans, including the ranking member of the Senate Banking Committee, Alabama's Richard C. Shelby, offered caustic criticism of Geithner but stopped short of calling for his resignation.

In his weekly e-mail, Gingrich accused Geithner of being disingenuous in saying he inherited the current mess.

"The truth is that Secretary Geithner didn't inherit the policy of throwing billions of taxpayer dollars at failing companies -- he helped create it," Gingrich wrote. "Even before he was Treasury secretary -- when he was still head of the New York Federal Reserve -- Geithner was so deeply involved in the government's bailout of Bear Stearns, its takeover of Fannie Mae and Freddie Mac, and its bailout of AIG."

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Too connected?

Democrats, meanwhile, heaped the blame on decisions made during the Bush administration. With Geithner at his side Wednesday, before boarding his Marine One helicopter to start a trip to California, President Obama told reporters at the White House, "I have complete confidence in Tim Geithner and my entire economic team. . . . You know, he is making the right moves in terms of playing a bad hand."

Still, some critics on the left -- including organized labor officials and prominent House Democrats -- suggested that bailout decision-making to date had been sullied by a Wall Street bias afflicting both the current Treasury secretary and his predecessor.

"AIG was too well-connected to fail," said Rep. Brad Sherman (D-Sherman Oaks) during a contentious House hearing in which AIG's Liddy was grilled by lawmakers.

Goldman Sachs became the subject of controversy this week when AIG revealed that it had given the company $13 billion in taxpayer bailout money to repay its collateralized debt obligations.

Goldman spokesman Michael DuVally says that figure is too high and that the correct number is closer to $8 billion. He dismissed suggestions that Goldman played a role in designing the bailout terms, or its bonus provisions.

While Goldman is healthy and has said it does not need bailout funds, it did accept taxpayer-funded payments from AIG.

"The government made a policy decision to support AIG as a way to contain systemic risk," DuVally said. "We were entitled to additional collateral under the trading agreements that we had with AIG."

Since the bailout for AIG was authorized in September, the once-successful insurance giant has passed along about 30% of the $170 billion it received from taxpayers to Goldman, Deutsche Bank, Merrill Lynch and other entities, including municipalities.

One of the largest amounts -- $11 billion -- went to the Societe Generale Group, a Paris banking and financial services company. The funds paid to those firms were released to make whole the buyers of AIG credit insurance.

The decision to make the across-the-board payments at 100% of the original value has drawn criticism since Sunday, when AIG reluctantly released the list of companies that had received taxpayer aid.

One prominent economist said he thought the Wall Street pedigree of decision makers in the Bush and Obama administration had hampered their judgment.

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