AIG Outrage and Misconceptions

The payment by American International Group (AIG) of $165 million in bonuses to employees of AIG Financial Products, the unit of the company that sold credit-default swaps, the risky contracts that caused massive losses, has given rise not only to public outrage but also to misconceptions about the role of President Obama and Treasury Secretary Tim Geithner in AIG’s bailout. One hears a chorus from Republican attack-dog legislators, and from that rattling cacophony of empty heads, the right-wing media, claiming that Secretary Geithner should resign and that the public is becoming disenchanted with President Obama. Let us begin by clearing-up some misunderstandings.

It was not the Obama Administration that gave the bailouts to AIG. That bailout money was paid in 2008 by the Federal Reserve and the Bush Administration.
On September 16, 2008, before President Obama took office or was even elected, the Federal Reserve Bank created an $85 billion second secured asset credit facility (a sort of line of credit) to enable AIG to meet cash obligations. This was done after AIG suffered heavy losses and was facing bankruptcy. In return for the money, AIG issued a stock warrant to the Federal Reserve Bank for 79.9% of its equity stock. That, in effect, made the Federal Government the owner of AIG. On October 9, 2008, AIG borrowed an additional $37.8 billion from the Federal Reserve Bank. In November, 2008, the government revised its loan package to AIG, increasing the total amount to $152 billion.

When the Federal Reserve and the Bush Administration gave the money to AIG, they failed to attach any conditions as to bonuses. The Obama Administration is stuck with that.

Those persistent right-wing critics are lying when they say that the President and Treasury Secretary Geithner knew about the bonuses months before they were handed out. President Obama and Secretary Geithner did not learn about the bonuses until a couple of days before they were paid. Secretary Geithner promptly called the CEO of AIG, Edward Liddy, and demanded that the bonuses be cancelled. Liddy, who had been put in the job by the federal government, said that the company was bound by contract to pay them. The President and Secretary Geithner are taking steps to recoup the money.

Another blatant lie being circulated by the conservative media is that a clause inserted in the stimulus bill by Senator Chris Dodd (D-CT), and allegedly approved by President Obama and Secretary Geithner, guaranteed that contracts for bonuses at companies receiving bailout funds would stay in place. In fact, the opposite is true. The economic recovery bill did not require that compensation contracts entered into by companies like AIG "had to stay in place," nor did the bill require AIG to give the bonuses. Rather, the relevant provision in the recovery bill, which was based on an amendment by Sen. Dodd, actually restricted the ability of companies receiving funds under the act to award bonuses in the future.

There will have to be more bailout money paid to AIG, but that is just the federal government paying money to itself. Why is this important? Well, AIG is not only the largest insurance company in the world, it is the insurer of most to the United States financial sector. If AIG is allowed to fail, so will many of the large banks and other financial institutions in America. This is why U.S. officials believe that it's a necessary evil. If there was no bailout of AIG, and the primary banks and financial institutions in America failed, we would be faced with an unimaginable economic catastrophe.

So stop complaining about government bailouts! They are essential for the economic recovery of our country. And stop complaining about President Obama and Secretary Geithner. They did not create this problem and they are doing everything they can to solve it. And stop listening to the lies and distortions of right-wing prevaricators.