Washington, DC - As nationwide populist anger boils after the news that hundreds
of millions of taxpayer dollars may be given to employees of the insurance-giant-turned-government-liability
American International Group (A.I.G.), President Obama promised to try to block
what he described as an "outrage" Monday, but a group of former regulators
said the administration must get even tougher with A.I.G.
"[A.I.G.] is a corporation that finds itself in financial distress due
to recklessness and greed. Under these circumstances, it's hard to understand
how derivative traders at A.I.G. warranted any bonuses, much less $165 million
in extra pay. I mean, how do they justify this outrage to the taxpayers who
are keeping the company afloat?" Obama said, adding, "I've asked [Treasury]
Secretary Geithner to use that leverage and pursue every single legal avenue
to block these bonuses and make the American taxpayers whole."
$165 million is set to be paid to executives of A.I.G.'s financial products
division, the same people who made unregulated bets against the failure of major
financial institutions and other companies. Losses on these bets are a major
reason the company is failing, reporting a record-setting $60 billion loss last
Economics and law Professor William K. Black, a famous figure in the savings
and loan crisis of the 1980s for his role as a senior regulator who fingered
the then speaker of the House and "The Keating Five" for doing favors
for bankers, has been a vocal critic of the bailout programs, which began during
the Bush administration.
In an interview with Truthout, Professor Black said that A.I.G. is using a
"suicide strategy" to hold the government hostage and keep the bailout
"A.I.G. is holding a gun to their own heads, saying 'unless you help us
continue to have this incredible life in terms of bonuses, we're going to die
and the taxpayers will be faced with a catastrophe,'" Professor Black said,
adding "It's too bad Marxists don't believe in god. Otherwise they'd be
thanking him for having sent A.I.G. down to earth to destroy capitalism."
Earlier on Monday, Professor Black joined three other notable analysts with
deep industry, regulatory and academic experience in issuing a punishing statement
calling for decisive action on A.I.G. and the ongoing bailout.
"A.I.G.'s decision to pay out at least $165 million in bonuses takes the
bank bailout program's abuse of the public trust to a whole new level. This
act simply cannot be allowed to stand. The only question is how to stop it,"
the statement said.
The plan to stop the bonuses would require bold action by government officials
overseeing A.I.G., which is now 80 percent owned by the government after being
given 173 billion taxpayer dollars to bail the company out.
The statement called on the Obama administration to reassert its leverage in
the A.I.G. matter by ordering the US officials overseeing the company to stop
bonus payments. Then, the government could split off A.I.G.'s derivatives unit
- the riskiest part of the company, which brought about A.I.G.'s collapse -
and threaten to allow it to go into bankruptcy if the executives don't clean
up their act.
In other words, the statement advised the Obama administration to call A.I.G.'s
bluff and see if they'll really pull the trigger.
In their defense, A.I.G. said that they are contractually obligated to pay
the bonuses in question. Not paying these bonuses, the company said, would cause
their executives to leave the company and could trigger a collapse at A.I.G.,
which could set off a collapse around the world.
Credit Default Swaps
The derivatives unit at A.I.G. trafficked heavily in financial products called
credit-default swaps (CDSs). Originally devised as a type of insurance, CDSs
morphed into an unregulated form of gambling akin to being able to take out
fire insurance on a house you don't own and getting paid if the house burns.
Because major financial institutions were betting on billion-dollar companies,
and betting with each other on each other, their fates are bound together by
these bets. If one company goes into bankruptcy, it could set off a string of
default swaps and could fold the whole system in on itself.
Documents released by A.I.G. on Sunday show that $43 billion in taxpayers'
money has been spent by A.I.G. to pay off financial bets to both US and international
banks with a whopping $13 billion going to the politically connected Wall Street
giant Goldman Sachs.
The documents directly contradict a statement
made during a conference call with stock market analysts by Goldman Sachs chief
financial officer David Viniar, who said that Goldman was only immaterially
at risk if A.I.G. failed.
The CDS market has an approximate value of 50 trillion dollars worldwide. Critics
charge that this massive, complicated and extremely murky market continues to
hover over the heads of the global financial system like the blade of a guillotine
with the banks holding the executioners rope, daring the government to stop
funding their bailouts.
In their statement, the former insiders called for the resignation of A.I.G.'s
new CEO Edward Liddy for not anticipating and alerting the Treasury Department
of the bonuses which started this firestorm.
"Right now, press reports suggest that the firm's top management waited
until the last minute to inform the government of what was happening. A.I.G.
CEO Edward Liddy, accordingly, should be asked to resign at once, for the sake
of public confidence and to send a clear signal that gaming the system is unacceptable,"
the statement said.
Liddy is a former member of the Goldman Sachs board of directors.
Obama seemed to defend Liddy in his remarks. "[Secretary Geithner is]
working to resolve this matter with the new CEO, Edward Liddy - who, by the
way, everybody needs to understand came on board after the contracts that led
to these bonuses were agreed to last year." Obama said.
Obama added a warning to Liddy and others on Wall Street: "But I think
Mr. Liddy and certainly everybody involved needs to understand this is not just
a matter of dollars and cents. It's about our fundamental values. All across
the country, there are people who are working hard and meeting their responsibilities
every day, without the benefit of government bailouts or multi-million dollar
bonuses ... All they ask is that everyone, from Main Street to Wall Street
to Washington, play by the same rules. And that is an ethic that we have to
The statement called for an "investigation of the validity of A.I.G.'s
past accounting and securities disclosures and its executive compensation program
by the Office of Thrift Supervision, the Securities and Exchange Commission,
and the FBI."
"I think that A.I.G. is simply one of the most obvious examples where
their accounting was false. Fraudulent accounting at a publicly traded company
is securities fraud and that's a felony," Professor Black told Truthout.
Professor Black is confident that a thorough investigation of A.I.G.'s books
would reveal misdeeds. "Even though we effectively own the place, we have
left it in the hands of the people who have every incentive to hide the past losses and
to hide all the past accounting fraud that justified all their past bonuses.
These people aren't at risk of simply losing their calendar year 2008 bonus.
If this place were torn apart properly, they'd lose all their prior years bonuses
Previous investigations of top management and accounting practices at A.I.G.
have been swept under the rug with no criminal penalties.
In February 2005, A.I.G. agreed to pay $1.64 billion to resolve a lawsuit alleging
the company used deceptive Enron-style accounting practices in order to mislead
investors and government regulators.
Mark J. Novitsky, a corporate whistleblower and independent researcher, blames
the Securities and Exchange Commission (SEC) for failing to enforce the Sarbanes-Oxley
law, passed in the wake of the Enron and Worldcom accounting scandals, which
was supposed to hold executives accountable for fraudulent accounting practices.
"What progress has been made since the enactment of Sarbanes-Oxley in
2002 that would leave people to believe the SEC is capable of detecting and
preventing fraud and is willing to prosecute those who commit financial fraud?"
Novitsky asked, adding, "It is obvious in hindsight, after the SEC failed
to uncover massive fraud in cases like Bernie Madoff, Stanford Financial, Bear
Sterns, Fannie Mae and A.I.G., the public was misled into believing that Sarbanes-Oxley
was some kind of an answer. No question my personal experiences leads me to
believe that the fox has most certainly been guarding the hen house."