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A.I.G. on Hot Seat

POSTED: March 18, 2009, 6:00 am

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Every good scandal needs a villain and in this economic downturn American International Group (A.I.G.) fits the bill. The giant insurer was one of the first financial firms to cry “broke” and pony up to the federal government for a rescue. At the time the rationale for federal aid was that the company’s failure would cause a ripple in the economy and cause a larger meltdown.

It is rare when both political parties find common ground but the recent revelation that A.I.G. had issued bonuses to the very unit that precipitated the company’s downfall. President Obama, who has been faced with several embarrassments from corporate excess in his short tenure, pounced on the company during a news conference two days ago. He made clear that he was incensed over the bonuses and announced that he had directed Treasury Secretary Timothy Geithner to “pursue every single legal avenue to block these bonuses and make the American taxpayers whole.” Mr. Obama would also contrast the behavior of A.I.G. with the common struggles of average Americans, stating, “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.”

As it turned out, the President was not the only elected official who was simmering over the revelation that A.I.G. had issued bonuses. New York’s Attorney General, Andrew Cuomo, demanded a list of every A.I.G. employee who was the recipient of a bonus and made clear he was ready to subpoena the company if it did not comply with his request. Back on Capitol Hill Democrats and Republicans were sharpening their knives to go after the insurance giant. Rep. Barney Frank (D-MA), who serves as chair of the House Financial Services Committee, suggested that the federal government should exercise its rights as the majority owner of A.I.G., a condition that resulted from the company’s receipt of federal aid, and rescind the bonuses. Senate Democrats sent a letter to A.I.G.’s CEO, Edward Liddy, and demanded that the bonuses be returned and threatened to seek repayment through the imposition of new taxes on the company.

Republicans on the Hill also vented their anger at A.I.G. and Democrats, who they blamed for loaning the company an additional $30 billion two weeks ago. In many ways, A.I.G.’s behavior buttresses an argument advanced by some GOP lawmakers weeks ago that the government should simply let some of the troubled financial firms to fail. It was an idea advanced by Senator Richard Shelby (R-AL) a couple of weeks ago on the Sunday talk show circuit. Even some Democrats were skeptical of loaning the company additional funds. Since the initial bank bailout there have been several incidents in which companies that were the recipient of federal aid, or making moves to request aid, were caught living the high life, as the economy collapsed, investors panicked, and average Americans seeing the value of their retirement accounts shrink.

While official Washington seethes, it has been average Americans who have been driven to anger by the conduct of A.I.G. It can be felt when reading the letters in newspapers’ editorial pages, the rants on talk radio, and the chatter over the Internet. For some time now there was speculation over the boiling point for common citizens in the current round of scandals. After all, this one hit home in a way that other incidents of corporate misbehavior did not. Previous instances, such as the Savings and Loan debacle of the Reagan-Bush era and Enron of the Bush II era, did not have the same impact as we are witnessing with the fallout over the A.I.G. bonuses. With so many Americans losing their jobs, at risk of losing their homes and watching their savings melt away, the idea of well-paid executives being rewarded for their misdeeds has hit a raw nerve. This time it’s personal. The American public has little patience for firms that appear to game the system, only to take government aid and further enrich employees that were behind the company’s free fall and the economy’s collapse.

Whether he is successful at reclaiming the bonuses, and it appears there may be little legal recourse, President Obama is now faced with a major predicament. A newly released poll shows his approval rating slipping and the public may be growing weary of what they perceive as lax regulation of the financial sector. Though he has spoken forcefully on the need to hold firms accountable, the repeated incidents of corporate excess – corporate jets, resort destinations, bonuses – on his watch is beginning to give Republicans fodder to criticize the administration’s economic recovery strategy. As nervous investors look for any glimmer that the recession is slowing and the bottom is near, consumers continue to express a lack of confidence in the economy, and voters begin to look warily upon the administration and Congress. President Obama, despite his best efforts to reassure the public and his continued wide appeal, is ultimately held responsible when companies such as A.I.G. engage in practices that resemble a reverse Robin Hood scenario.

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