Audit Criticizes Federal Reserve Bank of New York for Handling of AIG Bailout

The New York Times reports that a government investigation faults the Federal Reserve Bank of New York for failing to use its "considerable leverage" when it decided to pay AIG's banking creditors the full value of their insured risk. AIG "insured" risky financial transactions of its investment banking clients, like Goldman Sachs. AIG, however, failed to maintain enough reserve assets to cover to extent of the financial risk it insured. When the investments soured, the investment banks came to collect from AIG, which sent the company into financial ruin.

Federal regulators at the Federal Reserve Bank of New York, the Federal Reserve, and the Treasury Department, however, stepped in to provide assistance to AIG, which ultimately meant covering its obligations to creditors. A prior blog entry on Dissenting Justice discusses the connections that many of the federal regulators had to Goldman Sachs, which received nearly $13 billion from AIG after the federal government rescued the company. Here is a quote from that essay:

Henry Paulson, Secretary of Treasury during the Bush administration, is a former Chairman of Goldman Sachs. Paulson was responsible for administering TARP, and he had a large role in structuring the legislation.

Robert Rubin, Secretary of Treasury during the Clinton administration, was a Co-Chairman of Goldman (along with Stephen Friedman -- see below) before he earned a Cabinet post. Although Rubin does not have a formal position in the Obama administration, he has served as an informal economic advisor to the President. Also, current Secretary of Treasury Tim Geithner worked as an assistant to Rubin (and later to Lawrence Summers -- former Secretary of Treasury and current head of Obama's National Economic Council) when he headed the agency. Paulson was also a partner at Goldman when Rubin was Co-Chairman.

Mark Patterson, Geithner's Chief of Staff, is a former lobbyist for Goldman. Obama waived his anti-lobbying rules in order to secure the job for Patterson.

Tim Geithner, current Secretary of Treasury, served as the President of the Federal Reserve Bank of New York until his current position. In that capacity, he helped to structure the federal bailout of AIG. Geithner, unlike many of the other individuals listed in this article, never worked at Goldman, but he worked for Rubin during the Clinton administration and for Summers, who replaced Rubin. Summers heads Obama's National Economic Council.

Stephen Friedman, the current Chairman of the Federal Reserve Bank of New York, was the Co-Chairman of Goldman with Rubin, and he has held several other executive positions at the company. In his current position, Friedman presumably will have a significant role in the ongoing federal bailout of AIG. Friedman also sits on the board of directors of Goldman.

According to the New York Times, federal auditors challenged Goldman Sachs, which argues that it should not have been forced to collect from AIG in a bankruptcy proceeding. Earlier reports (including an entry on Dissenting Justice) argued that the federal government should have forced AIG, like the auto industry, to go into bankruptcy, and that Goldman Sachs likely would not have collected nearly as much money from the troubled insurer. The auditors confirm the position taken in these previous reports.

Goldman Sachs, however, continues to deny that it received preferential treatment; Geithner also says that Goldman Sachs did not benefit from a backroom deal. But as the auditors' report states, regardless of the parties' intent, "[t]ens of billions of dollars of government money was funneled inexorably and directly to A.I.G.’s counterparties." This story will likely continue to unfold.

False Profits?

Suddenly, everything is coming up rosy for Goldman Sachs. After converting to a "bank holding company" last year and receiving $10 billion dollars in TARP assistance from the federal government, Goldman, formerly known as the nation's largest "investment bank," has shocked observers by posting a "profit." The company also sponsored a stock offering in order to raise funds to repay its debt to the government and to free itself from TARP.

Bye Bye December
Financial market analysts have approached Goldman's purported profits with skepticism. First, Goldman's earnings report excludes the entire month of December 2008. Floyd Norris, financial reporter for the New York Times, explains that Goldman converted to "calendar year," rather than quarterly reporting after it elected to become a bank holding company. Consequently:

Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s earnings statement, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ended in February.

The orphan month featured — surprise — lots of write-offs. The pretax loss was $1.3 billion, and the after-tax loss was $780 million.

In response to Norris' arguments, Goldman says that banking law requires the change in its reporting schedule. This change, however, does not undo the reality that under the old schedule, Goldman may not have earned a profit. According to Norris, Goldman has declined to disclose whether it would have earned a profit under its traditional reporting schedule.

The Goldman-AIG Connection
Another area of skepticism concerns the controversial $12.9 billion payment Goldman received from AIG -- the troubled insurance company that has received over $100 billion in TARP assistance. AIG "insured" Goldman's investments in risky mortgage-related assets. Even though the market has effectively deemed these assets "toxic" (i.e., worthless), Goldman recovered much more than the market value of its investment after AIG used TARP assistance to cover Goldman's risk.

Had AIG entered into bankruptcy like other banks and, presumably, as the automobile industry will soon do, it is unclear whether (and probably unlikely that) Goldman would have received far more than market value for the unsecured insurance policies. Accordingly, the bailout of AIG represented a major financial gain for Goldman.

After stating that the public's interest in Goldman's relationship with AIG has "mystified" him, Goldman CFO David Viniar dismissed speculation that Goldman's receipt of controversial payments from AIG allowed the company to realize a quarterly profit. Viniar said that most of the transfers from AIG occurred last year, and that the transfers from January to March 2009 "rounded to zero."

Viniar also stated that December 2008 transfers from AIG were "insignificant," but he does not provide any numbers. As Norris argues, however, Goldman has doctored its reporting by excluding December from its quarterly numbers altogether. Norris also questions whether Goldman's December losses would have been even larger absent the AIG transfers.

Goldman's "Fuzzy Math" Excludes $28 Billion In Government-Secured Loans
Goldman has only announced a plan to pay back $10 billion in federal loans that it received by participating in TARP. Goldman, however, borrowed an additional $28 billion on the open market, but the government acted as a guarantor on those loans. According to Norris, Goldman has no concrete plans to repay those loans, but the federal guarantee undoubtedly conferred value to Goldman.

Goldman's Competitors Are No Longer Around
The Bush administration decided to save AIG, which has undoubtedly benefited Goldman. Bush officials, however, refused to bail out Lehman Brothers -- which was Goldman's biggest competitor. Many of Goldman's other competitors (e.g., Morgan Stanley) were folded into other companies in distress sales.

Goldman's recent "profits" likely result in part from the elimination of other leading financial institutions as serious sources of competition. Because many former and current Goldman staff participated in the government's decision to bail out AIG and allow Lehman Bros. to collapse, AIG's survival and payment of billions of dollars to AIG has provoked a substantial amount of scrutiny and controversy.

Is the "Market" Skeptical Too?
How has the market reacted to Goldman's "good" news? Today, just one day after Goldman announced its profits and generated 1/2 of the money needed to repay its debt to the government, the company's stock fell 12 percent.

Professor Balkin Defends Constitutionality of Bonus Tax

Professor Jack Balkin has summarily rejected most of the prevailing constitutional arguments against the House of Representatives measure that would tax bonuses received by AIG executives and other TARP participants. The five most prevalent arguments include that the tax would violate the: 1. Due Process Clause of the Fifth Amendment; 2. Takings Clause; 3. Ex Post Facto Clause; 4. Contracts Clause; and 5. Bill of Attainder Clause. I agree with Balkin that 2, 3, and 4 are not relevant, but his due process and bill of attainder analysis is too swift.

Due Process
With respect to the due process argument, I agree with Balkin that a reviewing court would likely consider whether the measure is "rationally related to a legitimate government interest." Balkin argues that Congress can legitimately seek to avoid "extraordinary rents" to TARP participants and their employees and to curb "improper incentives and moral hazard in subsidized companies and their employees."

Assuming that these interests are indeed legitimate, the due process problem arises because in February, Congress explicitly exempted AIG's bonus payments from legislation that regulates compensation and bonus practices of TARP recipients. Although the measure would have effectively banned the controversial bonus payments, Congress gave the provision prospective, rather than retroactive application.

I would normally agree with Balkin that courts should not second-guess Congress under ordinary rational basis review. But AIG acted with explicit legal authority when it paid the bonuses. Neither the original version of TARP nor the regulations promulgated by the Treasury Department in the Bush and Obama administrations bans the bonuses. Congress recently enacted a measure that would have banned the bonuses, but it does not apply to AIG. Apparently, the Treasury Department requested that the restrictions not apply retroactively, and Congress agreed.

Now, Congress is trying to direct the Treasury Department to change course and subject the bonuses it only recently voted to exempt from regulation to an almost 100% tax. Even if these facts do not lead 5 or more Supreme Court Justices to conclude that the law violates the Due Process Clause, the issue strikes me as being a bit more complicated than Balkin's analysis suggests.

Bill of Attainder
Balkin's analysis of the bill of attainder issue is too abstracted and divorced from the factual context in which the tax proposal arises. Balkin dismisses the bill of attainder argument because the law does not "single out" individuals and it applies retrospectively and prospectively:

First, the tax defines the class to which it applies to an abstractly defined group rather than naming particular individuals. It applies to persons working for enterprises that have received emergency government subsidy; it is not aimed at particular companies or specific employees. Second, the tax is for a regulatory purpose, as described above, and not for a punitive purpose. Preventing misuse of government funds, limiting bad incentives, and avoiding moral hazard are regulatory purposes, not punitive purposes. The fact that isolated members of Congress may have expressed an impermissible punitive or retributive purpose does not mean that the tax violates the Constitution if the text of the bill on its face has an overtly regulatory purpose. Third, the tax is both prospective and retrospective in its targets, which is consistent with a regulatory as opposed to a punitive purpose.

If the factors Balkin lists are the only ones a court would consider in a bill of attainder analysis, I would argue that they could weigh against the tax, and not necessarily for it. Balkin's argument that the tax does not target AIG recipients and that it applies to an "abstractly defined group" requires us to suspend reality. Even though the House measure is written in general terms, the motivation behind the measure is very clear: The House seeks to "punish" AIG and its executives by recouping almost 100% of the bonus payments.

Balkin's argument would legitimize the type of formalistic arguments that litigants often make when they want to avoid the impact of and impulse for their actions. Formalism has been invoked to justify gross violations of due process and equality (such as segregation and unequal application of the criminal law). Balkin's abstracted analysis of the bill of attainder provision comes dangerously close to legitimizing the very type of formalistic arguments that routinely mask and excuse injurious and unfair governmental action.

Clearly, Dodd Has Made Enemies: New Article "Strains" to Link Dodd to "AIG-Controlled" Company

Today's "most shocking yet misleading article title" award goes to Kevin Rennie, a Republican writer for the Hartford Courant and former Connecticut State Senator. Rennie's article, "Dodd's Wife a Former Director of Bermuda-Based IPC Holdings, an AIG Controlled Company" implies that Dodd may have had secret motivations for protecting AIG from the stringent bonus requirements he drafted and offered as an amendment to the stimulus package.

Neither TARP, which Bush and Paulson introduced, nor the related regulations promulgated by the Bush and Obama administrations ban executive bonuses -- i.e., they do not prohibit AIG's payment of the bonuses. Conservatives and other anti-Dodd commentators, however, have falsely argued that Dodd created a loophole to permit AIG's payment of the controversial bonuses. Although Factcheck.Org and several bloggers have described the actual events surrounding Dodd's amendment, distorted accounts continue to emerge.

In a nutshell, the original law and subsequent regulations do not prohibit bonus payments by AIG. Dodd proposed and the Senate passed an amendment that would have banned most bonus payments by TARP recipients; the measure would have applied retroactively to AIG. The Obama administration pressured Dodd to make his amendment prospective rather than retroactive; Dodd capitulated to the administration's demands, and Congress passed the modified version of Dodd's amendment.

Instead of blaming Obama, Bush, and Congress, commentators point the finger at Dodd, even though his amendment is the only legal provision that seriously regulates compensation and bonuses for TARP recipients. It is also worth mentioning that Dodd alone cannot legislate a loophole for AIG; only Congress can! But this elementary civics issue escapes Dodd's critics.

Rennie's Misleading Article
Rennie's article suggests many levels of potentially sinister behavior by Dodd. The title declares that Dodd's wife was the director of an "AIG-controlled" company. Based on this fact alone, Rennie concludes that "Dodd is likely more familiar with the complicated workings of AIG than he was letting on last week." Rennie's "analysis" is just as bogus as the silly House measure that imposes retroactive civil liability upon AIG executives who have already received the controversial bonus payments.

First, Rennie uses the loaded term "controlled" to describe the relationship between AIG and the firm for which Dodd's wife served as an "outside" director (she was not a principal of the company). But closer scrutiny simply reveals that AIG held a 20% stake in the company. This minority stake does not give AIG control, and the article does not even state whether the shares carried voting privileges or not.

Also, Rennie's article states that AIG sold its stake in the company in 2006. Thus, the weak factual basis for Rennie's suggestion of a relationship between Senator Dodd -- via his wife -- and AIG no longer exists. Rennie states that a "subsidiary" of AIG "managed" the company, but that is all he provides about the relationship. Assuming Rennie's version of the "facts," Dodd's wife served as an "outside" director of a company from 2001-2004, and AIG had a 20% stake in the company from 2001-2006, a maximum overlap of 4 years, which ended 5 years ago. That's a pretty thin reed for implying an improper relationship. Rennie cannot contain his partisanship.

PS: I have no particular fondness for Dodd, but I lived in Connecticut for 3 years (during law school). Perhaps, I have a close connection to him as well.

Surprise, Surprise: Potential Participants in Toxic Assets Plan Ask Government to Stay Away From Executive Compensation

Today, Treasury Secretary Tim Geithner will begin marketing his plan to encourage private investors to partner with the government and purchase nearly $1 trillion in "troubled" mortgage-backed assets from financial institutions. The government's plan rests on the assumption that the troubled assets actually have value, but because the market cannot accurately measure their value, the assets are causing a credit collapse. After the assets are removed from companies' balance sheets, credit will flow once again. Also, once the market realizes the value of the assets, the government (i.e., taxpayers) and private investors will enjoy profits from their investments.

The New York Times reports that some potential investors fear that the government will regulate the compensation of executives who participate in the plan. Given the outrage over AIG, their concern is legitimate:

[S]ome executives at private equity firms and hedge funds, who were briefed on the plan Sunday afternoon, are anxious about the recent uproar over millions of dollars in bonus payments made to executives of the American International Group.

Some of them have told administration officials that they would participate only if the government guaranteed that it would not set compensation limits on the firms, according to people briefed on the conversations. The executives also expressed worries about whether disclosure and governance rules could be added retroactively to the program by Congress, these people said.

Obama administration officials tried to allay those fears on the Sunday news circuit:

Administration officials took to the airwaves Sunday to reassure investors that the public would distinguish between companies like A.I.G., which are taking government bailout money, and private investment groups that, under this latest plan, would be helping the government take troubled assets off the books of some of the country’s biggest banks.

“What we’re talking about now are private firms that are kind of doing us a favor, right, coming into this market to help us buy these toxic assets off banks’ balance sheets,” Christina D. Romer, the White House’s chief economist, said in an interview on “Fox News Sunday.”

“I think they understand that the president realizes they’re in a different category,” she said, adding, “They are firms that are being the good guys here.”

Nice try, but . . .
The "good guys" language undermines the government's position that the bailout is policy - not handouts to wrongdoers. It also conflicts with the government's previous opposition to meaningful limits on executive compensation. If the new investors are "good guys," while TARP participants are "bad guys," then the government has a good reason to regulate compensation for the latter.

Finally, I suspect that many of the "good guys" will come from the "bad guys'" industry. The world of sophisticated financial investors is tiny. The people with knowledge, resources, and professional credentials to manage and organize the proposed purchase of troubled assets will undoubtedly have worked in institutions that hold these same assets; they could even have work experience designing and marketing the very securities that have spread so much risk across the market. For this reason, some type of disclosure process seems relevant.

Also on Dissenting Justice:

Tangled Webs: Goldman Sachs, AIG and the Feds

Professor Balkin Defends Constitutionality of Bonus Tax

Richard Bernstein of Bank of America-Merrill Lynch Says: Sell Financial Stocks

A Sound Position: President Obama Questions the Constitutionality of the AIG Bonus Tax

During his interview on 60 Minutes, President Obama questioned the legality of the AIG bonus tax that recently passed in the House of Representatives. Earlier, several members of his administration publicly opposed the measure, which strongly suggested that the President would not endorse it as well.

Although President Obama has strongly voiced his disagreement with Wall Street excess -- including the bonuses -- he has not matched these words with actions. The President declined to include provisions that prohibit bonus payments by TARP participants in the regulations that he and Geithner promoted in February. Furthermore, it has become abundantly clear that the Obama administration pressured Senator Chris Dodd to delete language in his amendment to the stimulus package that prohibits the payment of bonuses by TARP participants, which would have given the measure retroactive application.

Prohibiting Bonuses by TARP Participants
I have argued here and elsewhere that the House tax measure conflicts with fundamental principles of our legal system. The tax singles out a group of individuals and imposes a penalty upon them for already completed activity that was and which remains legal. The bonus tax is also one of the clearest examples of legislation that derives from anger and rage -- rather than calm deliberation. Congressional shenanigans are not the answer to corporate shenanigans.

If the public wants the government to prevent TARP participants from paying bonuses, then that discussion should take place openly. If the President believes that this is not a good idea, he should use his famed communication skills to educate the public -- rather than joining the circus of feigned outrage.

In the corporate sector, bonuses are merely an extension of one's salary; they operate as deferred compensation. Many lay people, however, view them as "perks" or mere handouts. This view probably explains much of the populist fervor.

Legislation Under Fire
The public has every right to demand limits on the use of tax revenue, and it would be perfectly legal to prohibit bonus payments by TARP participants before the actual payments take place. The House measure, however, is a blatant example of opportunistic, emotion-driven, and likely unlawful legislation. It is cut from the same cloth as the dreadful Terri Schiavo statute that shamelessly attempted to undo nearly a decade of litigation in Florida which allowed Schiavo to refuse medical treatment and die with dignity -- a basic constitutional right.

When lawmakers ignore the law and side with the passions of the moment, they often produce unsound and illegal legislation. President Obama has taken the correct position on the legality of the bonus tax. Nevertheless, in an effort to maintain his populist credentials, Obama has done a poor job educating the public about his perspective on bonus payments. Hopefully, he will start discussing that matter soon, so that any legislative response to the subject will rest on solid policy, rather than artificial outrage.

Tangled Webs: Goldman Sachs, AIG and the Feds

Goldman Sachs Chief Financial Officer David Viniar held a conference call with journalists yesterday in an effort to calm a growing storm over the company's relationship with AIG. Goldman, like other investment banks, invested in and marketed "mortgage-backed securities," which AIG "insured" with "credit-default swaps."

The implosion in mortgage-related financial instruments, however, caused AIG to suffer enormous losses. The company ultimately required a massive governmental bailout because it lacked the resources to cover other companies' investment risk.

Goldman, AIG and TARP
After refusing to do so for many months, AIG recently released the names of companies it paid using TARP assistance. According to the disclosure, AIG has paid Goldman $12.9 billion.

Seeking to mute speculation that the federal government bailed out AIG in order to funnel billions of dollars in TARP assistance to Goldman, Viniar insists that even if AIG had entered into bankruptcy, Goldman would not have suffered financially. Viniar says that Goldman hedged its market exposure through agreements with third parties and had already received $7.5 billion in collateral from AIG prior to the company's insolvency.

But Viniar's comments raise other concerns. First, even though Goldman hedged its risks using third parties and had received collateral from AIG, it is possible that it would have received less money in a bankruptcy proceeding. Second, the close relationship between financial regulators and Goldman will undoubtedly create a wall of suspicion around the company, regardless of whether it benefited from the bailout. This suspicion will only grow deeper if it turns out that the government's decision to keep AIG alive helped Goldman, just as its decision to let Lehman Bros. implode necessarily helped Goldman because it removed one of the company's chief competitors from the market.

Bankruptcy versus Bailout
AIG avoided bankruptcy because of the federal bailout. If AIG had entered into bankruptcy, it is unclear whether Goldman would have recovered the same amount of money. For example, the government financed AIG's purchase of $5.6 billion in securities related to its agreements with Goldman. At the time of the purchase, however, the market value of the securities was 1/2 less than the contract price. Had AIG been in bankruptcy, it is highly unlikely that a judge would have allowed AIG to pay Goldman a price that greatly exceeded market value.

Also, a bankruptcy judge could invalidate (as a "voidable preference") the transfer of collateral or money from AIG to Goldman if the transfer took place within 90 days of the filing of the bankruptcy petition. Bankruptcy law disfavors payments to creditors on the eve of bankruptcy because they tend to benefit more powerful creditors and frustrate the underlying policies of bankruptcy law, which include the distribution of the debtor's assets to all creditors in proportion to the debt owed them. Early payments to an individual creditor could drain the debtor's resources and make them unavailable for a proportional distribution. It is unclear whether Goldman could have recovered from third-parties the same amount of money it obtained from AIG, but it is definitely debatable whether it could have extracted the same amount from AIG had the company entered into bankruptcy.

Tangled Web
Viniar's conference call will likely lead to greater scrutiny of Goldman's relationship to AIG because many influential politicians and banking industry executives have connections to Goldman and to the Treasury Department -- the federal agency that administers TARP.

Henry Paulson, Secretary of Treasury during the Bush administration, is a former Chairman of Goldman Sachs. Paulson was responsible for administering TARP, and he had a large role in structuring the legislation.

Robert Rubin, Secretary of Treasury during the Clinton administration, was a Co-Chairman of Goldman (along with Stephen Friedman -- see below) before he earned a Cabinet post. Although Rubin does not have a formal position in the Obama administration, he has served as an informal economic advisor to the President. Also, current Secretary of Treasury Tim Geithner worked as an assistant to Rubin (and later to Lawrence Summers -- former Secretary of Treasury and current head of Obama's National Economic Council) when he headed the agency. Paulson was also a partner at Goldman when Rubin was Co-Chairman.

Mark Patterson, Geithner's Chief of Staff, is a former lobbyist for Goldman. Obama waived his anti-lobbying rules in order to secure the job for Patterson.

Tim Geithner, current Secretary of Treasury, served as the President of the Federal Reserve Bank of New York until his current position. In that capacity, he helped to structure the federal bailout of AIG. Geithner, unlike many of the other individuals listed in this article, never worked at Goldman, but he worked for Rubin during the Clinton administration and for Summers, who replaced Rubin. Summers heads Obama's National Economic Council.

Stephen Friedman, the current Chairman of the Federal Reserve Bank of New York, was the Co-Chairman of Goldman with Rubin, and he has held several other executive positions at the company. In his current position, Friedman presumably will have a significant role in the ongoing federal bailout of AIG. Friedman also sits on the board of directors of Goldman.

Update: After discussing this issue with a friend of mine, I have an additional comment. Assume that the AIG bailout was a wise policy decision that coincidentally benefited Goldman. This still does not explain the differential treatment of Lehman Bros.

Although I mention the disparate treatment of Lehman Bros. in the original essay, I primarily discuss why bailing out AIG helps Goldman. But allowing Lehman Bros. to collapse helped Goldman tremendously, because it eliminated one of its main competitors. The deeper story may lurk behind this issue.

President Obama Is Not Rushing Behind Bonus Tax Plan

This New York Times story is consistent with Senator Dodd's portrayal of the White House's reticent position on the regulation of bonuses:

The White House stopped short on Friday of endorsing legislation to severely tax bonuses paid to executives of companies that accepted taxpayer bailout funds.

Administration officials said instead that President Obama would assess the potential effect of the bill that emerged from Congress on efforts to stabilize the financial system.

At the same time, as Wall Street executives anxiously pondered the ramifications of the measure quickly passed by the House this week, some Senate Republicans began to voice opposition to the legislation, saying it was hasty and abusive.

For the record, I have deep legal concerns with the bonus tax. The retroactive application after AIG has made the payments, the clear targeting of AIG executives, the absolute hysteria over the issue, and resistance by Congress and the President to measures that would have prevented the bonus payments make this law highly suspicious from a legal standpoint.

After I wrote this blog entry, the Wall Street Journal published a similar report.

Senator Dodd Continues to Suffer Fallout For Something He Did Not Do

There are many reasons to criticize Senator Dodd's relationship with the banking industry. But criticizing him for creating a loophole that permits the payment of AIG's bonuses is utterly misguided.

The Associated Press reports that Dodd is battling the appearance of impropriety with respect to AIG's payment of bonuses to its executives. Many commentators have wrongfully argued that Dodd sponsored an amendment to the stimulus package that created a loophole for AIG to award the bonuses, which many people believe are excessive. This argument, however, is a falsehood.

Neither the original TARP legislation -- which passed during the Bush administration -- or the subsequent Treasury Department regulations prohibit AIG from paying the bonuses. Therefore, federal law authorized payment of the bonuses with or without Dodd's alleged assistance.

The controversy over Dodd results because several misleading reports blame Dodd -- rather than Congress and the Treasury Department -- for failing to prohibit the bonuses. Many bloggers and media sources (myself included) have attempted to portray the facts surrounding Dodd's amendment to the stimulus package. Now FactCheck.Org has joined the fray.

For those of you who remain confused, please check out the analysis on FactCheck. It demonstrates (citing many links) that:

* Dodd proposed an amendment to the stimulus package that would have prohibited payment of bonuses by TARP participants and that would have applied retroactively to companies like AIG;

* The pre-existing statute and relevant regulations do not prohibit the bonuses;

* Dodd's amendment passed in the Senate;

* Officials in the Treasury Department pressured Dodd to delete language giving his amendment retroactive application, and they, along with White House Senior Advisor David Axelrod, publicly expressed their disagreement with the provision;

* The retroactivity clause was deleted from the final version of the amendment because Dodd conceded to pressure from the Executive Branch.

See also:

Senator Dodd Fights Back: Says Obama Administration Pressured Him to Change a Provision He Sponsored That Would Have Banned AIG's Bonus Payments

'Blame Dodd' Attacks Ignore Facts

Senator Dodd Fights Back: Says Obama Administration Pressured Him to Change a Provision He Sponsored That Would Have Banned AIG's Bonus Payments

Yesterday, a few bloggers reported that Senator Christopher Dodd inserted an amendment to the bailout that strengthened the constraints on executive compensation for companies that receive TARP assistance, but which did not apply retroactively. That story -- as other bloggers and the media suggested earlier today -- is not completely true.

Dodd has set the record straight on the issue, and his account parallels media descriptions of the proposed amendment that were first published in February. Dodd certainly introduced an amendment to the stimulus package which would have toughened restrictions on executive pay, but the measure would have applied retroactively.

After Dodd proposed his amendment, White House and Treasury Department officials publicly stated their disagreement with the measure. The Treasury Department had previously issued a weaker regulation that was made even weaker because it only applied prospectively to companies that had not received any TARP assistance.

Dodd's amendment, however, passed in the Senate. But when the final bill emerged from the conference committee, the language making Dodd's amendment retroactive had vanished.

Dodd now confirms that the Obama administration pressured him to delete the retroactivity clause while negotiators worked on the final version. Dodd says that he feared losing the executive compensation provision altogether, and this made him compromise with the Treasury Department (which undoubtedly spoke for the President).

The Huffington Post has the full story. Here is a clip:

The Treasury Department demanded that Sen. Chris Dodd insert exemptions into the stimulus bill that allowed bailout recipients to receive bonuses, the Connecticut Democrat said on Wednesday.

According to Dodd, officials at Treasury expressed concern that if the government were to prohibit payouts, it risked being sued by companies like AIG, which had contracts stipulating that bonuses were to be paid.

At the urging of Treasury officials, Dodd modified a clause he had previously inserted into the stimulus that prohibited bonuses from being issued by bailed-out companies. An exemption was added to allow bonuses that applied to in-place contracts.

Fascinating.

Feds Converts Value of AIG Bonuses Into a Short-Term Loan: Geithner Says He Will Deduct $165 Million from AIG's Next TARP Installment

Treasury Secretary Tim Geithner has announced that the government will deduct the amount of the controversial bonuses AIG has paid its executives from the company's next TARP installment -- a sum of $30 billion. That deducted amount only represents approximately .55% of the money AIG is slated to receive from the government.

Geithner's decision looks more like a "short-term" loan than a solution to the controversy. AIG has borrowed and will continue to borrow TARP funds. The government has decided to take back the dollar value of the bonuses at the time of the next installment -- which is the same thing as a decision to accelerate AIG's "loan" repayment schedule in the amount of $165 million.

My Guess: The President wants this thing to go away -- NOW. This decision could help put the matter to rest, but nothing is certain with this story.

More Outrage: Obama Administration Knew About the Bonuses Months Ago

In addition to blocking legislation that would have prevented AIG's bonus payments, the Obama administration actually knew about the pending bonuses months ago from SEC filings and letters from lawmakers demanding action. Great.

Here is the latest, courtesy of the Associated Press (via Yahoo News):

For months, the Obama administration and members of Congress have known that insurance giant AIG was getting ready to pay huge bonuses while living off government bailouts. It wasn't until the money was flowing and news was trickling out to the public that official Washington rose up in anger and vowed to yank the money back.

Why the sudden furor, just weeks after Barack Obama's team paid out $30 billion in additional aid to the company? So far, the administration has been unable to match its actions to Obama's tough rhetoric on executive compensation. And Congress has been unable or unwilling to restrict bonuses for bailout recipients, despite some lawmakers' repeated efforts to do so.

The situation has the White House and Treasury Secretary Timothy Geithner on the defensive. The administration was caught off guard Tuesday trying to explain why Geithner had waited until last Wednesday to call AIG chief executive Edward M. Liddy and demand that the bonus payments be restructured.

Publicly, the White House expressed confidence in Geithner — but still made it clear he was the one responsible for how the matter was handled.

Is Geithner going under the bus? For the record, I think that AIG is not "guilty" of anything -- except for spending money that the government gave it. The government's decision to hand the company a blank check is more blameworthy.

See also:

Misdirected Outrage: Public Should Bash the Feds for Giving AIG a "Blank Check"

Sincere or False Outrage? The Obama Administration Smacks Down AIG

Misdirected Outrage: Public Should Bash the Feds for Giving AIG a "Blank Check"

The moralistic grandstanding from all sides of the political spectrum over AIG is nauseating to say the least. After hearing members of Congress propose some very questionable "legal" measures to recoup the $160 million in bonuses AIG paid some of its executives, I am convinced that AIG is the new Saddam Hussein. It is the leader of a financial "axis of evil." As with Iraq, the U.S. needs a smokescreen to mask its own bad decisions and complicity surrounding AIG and other financial institutions and to justify improper remedies for those mistakes. Get ready for a new round of "shock and awe."

Saddam Hussein, Iraq and the U.S.
Long before Bush I's Iraq War, the U.S. covertly (and perhaps illegally) supplied Hussein with weapons and intelligence data -- not because he was such a good guy, but because the government wanted to sponsor his eight-year bloody war against U.S. nemesis (and former regional buddy) Iran. Later, Hussein's own corruption and destabilizing behavior created an excuse for the U.S. to turn against its friend and to engage in imperialistic military action.

The "weapons of mass destruction" mantra became the rallying cry of the war machine. Absent from the political discourse, however, was any sustained conversation about the shady role the U.S. played in empowering Hussein, including tacitly supporting his prior use of banned chemical weapons. The construction of Hussein as an evil dictator with horrible weapons (presumably directed at the U.S.) allowed the government to conceal its own role in making him a supposedly dangerous individual.

Outrage Over Bonuses Masks Government's Role As AIG's Enabler
The Government Failed to Enact Reasonable Regulations to Protect the Investing Public. The U.S. propped up AIG long before the bailout. During the housing boom, AIG made billions of dollars insuring companies' investment risks with instruments known as "credit default swaps." The government, however, failed to regulate these instruments as "insurance," but instead treated them as securities.

Federal law requires insurance companies (and commercial banks) to maintain a certain level of "reserves" proportional to their outstanding risk portfolio. These reserve requirements protect the companies and the public by making sure that the companies can actually cover the risks they insure. These requirements, however, do not apply to investment instruments -- even if the investment instruments effectively operate as insurance and are issued by insurance companies.

AIG made enormous profits during the housing boom because mortgage-related financial instruments proved valuable as housing prices soared, home lending was robust and easy, and home values were skyrocketing. But AIG insured many extremely risky mortgage-backed securities that were formed by bundling subprime and other risky mortgage instruments. When the housing/lending party ended and homeowners started defaulting on their loans, AIG had to cover the losses of those companies with investments it insured.

AIG began losing billions of dollars, but it did not have the reserves to cover its outstanding risk portfolio. To save AIG -- and companies with investments it insured -- the government stepped in to salvage it. To date, AIG has received $170 billion in bailout assistance.

The Government Failed to Place Necessary Constraints on the Use of TARP Funds. During debates over the appropriateness of the bailout, many members of Congress stressed the need for accountability, transparency, and assistance to homeowners. But Congress passed legislation that gave the Treasury Department wide discretion to determine how companies used the money.

In January, some Democrats and Republicans in Congress threatened to block the release of the second $350 billion installment of TARP funds because they wanted more specifics concerning and restraints on the use of the funds. In response, President-Elect Obama marched to Capitol Hill and promised to veto such action. Congress released the funds after the President's veto threat -- an action that would have politically damaged the Democrats.

After his inauguration, President Obama came up with his own plan to create transparency in the use of TARP funds and to prevent wasteful practices among participants in the program. Most industry experts and news media, however, described Obama's regulations as being absolutely toothless. For example, it did not apply retroactively to companies that had already received TARP assistance.

Senator Dodd -- himself a recipient of millions of dollars in campaign donations from the financial sector -- proposed an amendment to the stimulus package that would have done much more than Obama's regulations to constrain the use of TARP funds. Specifically, Dodd's amendment would have severely restrained the ability of TARP recipients to pay executive bonuses, and it would have applied retroactively to companies like AIG that had already received TARP funds.

After the measure passed in the Senate, President Obama, Treasury Secretary Geithner and Economic Policy Advisor Larry Summers expressed disagreement with the provision, which exceeded the constraints in the regulation that Obama and Geithner had already created. At the time, The Hill published an in-depth report on the Obama administration's disagreement with Dodd's effort to constrain use of TARP funds.

Obama's Senior Advior David Axelrod stated that the administration would have a "dialogue" with Dodd in order to "come up with a good approach," an odd position to take given that the measure had already passed in the Senate. Perhaps Axelrod's statement was an indication of things to occur because the bill that emerged from the conference committee did not contain the retroactivity portion of Dodd's amendment and specifically stated that the bonus and salary restrictions did not apply to any employee contract that predated the passage of the statute.

Dodd denies agreeing to the change regarding retroactivity -- even though he voted for the stimulus package. Whether he did or not, it is clear that the Obama administration negotiated limitations on regulations that would have prevented payment of the very bonuses that Obama now finds so outrageous.

Public Will Be Duped Yet Again
The government, including some of its most outraged leaders, failed to regulate credit default swaps, and it resisted efforts to place stronger conditions upon the receipt and use of TARP funds. Now that AIG has become a political embarrassment for its enabler, the enabler is outraged. Regime change -- or at least "sanctions" -- will definitely follow.

Despite the trail of events that show governmental complicity in AIG's profitable-then-costly behavior, the government is skillfully exploiting populist opposition to corporate excess in order to mask its own actions that enabled AIG to transfer money from taxpayers to its executives and to avoid the consequences of its own financial recklessness.

Similarly, the Bush Administration manipulated the country's fear of terrorism and anger over the 9/11 attacks in order to justify waging a war against Hussein whom the U.S. had previously fed arms and other assistance so that Iraq could battle Iran, which had fallen into disfavor with the U.S.

Rather than scrutinizing the government's wrongful conduct, the public is once again falling for the rhetoric and smokescreen. Instead of focusing on AIG, voters should direct their attention to AIG's enabler: the U.S. government. The government essentially gave AIG a blank check. That action should anger the public more than AIG's subsequent use of the money.

Update: Glenn Greenwald is covering the Treasury Department's attempt to blame Dodd when actually the Obama administration demanded that Congress drop the retroactivity clause. Apparently, the New York Times is digging into the matter as well. The administration's "outrage" could potentially become an embarrassment itself.

Sincere or False Outrage? The Obama Administration Smacks Down AIG

The federal government decided to include billions of dollars in earmarks in the recently approved omnibus budget. The federal government decided to give AIG billions of dollars without a sincere effort to regulate executive compensation.

The price of the earmarks dwarfs the value of AIG's bonuses, but the Obama administration told critics of earmarks that the budget was "last year's" business. The banking bailout -- or TARP -- was actually enacted last year, unlike the omnibus budget. As you witness the federal government condemn AIG, consider the source of the outrage.

Prior to his inauguration, President Obama met with Democrats in Congress and threatened to veto any bills that placed tougher restrictions upon the usage of TARP funds. Some Democrats, seeking greater oversight surrounding the distribution and use of TARP assistance, proposed measures that would govern the second distribution of $350 billion in federal funds for the program. Now, the White House worries that voter disenchantment with banks and bailouts will kill public support for the President's other initiatives.

Recently, a Treasury Department official testified before Congress and urged lawmakers not to "micromanage" banks. But now, the Treasury Department is outraged over AIG's bonus structure. Dictating executive compensation probably qualifies as "micromanagement."

Is the federal government's sudden outrage sincere or false?

Update: Obama is trying to negate the bonuses, paid with last year's budget.