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AIG bonuses are a tempest in a crock pot

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By Jim Flynn

In the early days of The Great Depression, Congress passed a number of pieces of regulatory legislation to put a leash on the financial industries, particularly the Glass-Steagall Act of 1933. The primary purposes were to separate traditional banking from investment banking and to control speculation.

The Stock Market Crash of 1929 collapsed a long orgy of speculation. Our current crash of just about everything will replace the Great Depression as the new textbook on total speculative bust – stocks, banks, financial services, brokerages, and insurance companies.

Deregulation began with the airlines in 1978, during the Carter Administration. The success of freeing up of the air travel market was cheap fares and a parade of bankruptcies. If some companies can’t make it, let ‘em go bust. That’s how free-market capitalism is supposed to work.

So during the Reagan Administration, Congress decided to deregulate just about everything in the name of free markets. Telecommunications deregulation was followed by the WorldCom scandal; energy was followed by the Enron rip-off; and financial services by the dot-com bubble.

The death of banking regulation was the Gramm-Leach-Bliley Act of 1999.

The Glass-Steagall Act was laid to rest, and the yahoo financial days of the 1920s were resurrected by consent of Congress. Bells were rung at the stock exchanges.

Last September, the Bush Administration’s Secretary of the Treasury, Henry Paulson, announced the takeover of mortgage giants Fannie Mae and Freddie Mac. Two weeks later the Federal Reserve loaned $85 billion to private insurance company American International Group (AIG), on very questionable authority.

Panic is now the source of authority in Washington. Mayday! Mayday! The deregulation dream boat has sprung leaks fore, aft, and midships. Mayday! Mayday! The U.S. economy needs buckets of bailouts.

Public opinion of government is dropping faster than a deflating soufflé. There’s a pervasive impression that Washington has no idea what it’s doing.

Like the chaotic movie scene in which Indiana Jones is asked “What now, Indie?” He responds: “I don’t know. I’m making this up as I go along.”

Republicans complain, correctly, that social programs create more of the needs they were designed to assist. That’s because government doesn’t know how to run anything.

Washington’s one-size-fits-all solution to problems which don’t go away is to throw more money at them.

Government money-throwing took off fast in the current financial crisis. Auto companies, banks, Freddie Mac and Fannie Mae are already double dipping, and talking about asking for third scoops of the goodies.

Who ate the first two scoops, or did they just melt into business as usual? Congress, the Treasury, and the Federal Reserve say alternately that they don’t have full reports yet, or they don’t think it’s a good idea to open private business matters to public scrutiny. That’s a crock. They’re spending public money! 

Talk-show host frenzies broke out when President Obama added to complaints from both sides of the aisle in Congress that AIG was paying out $165 million in bonuses to employees. Secretary of the Treasury Geithner was “upset.” Congress whined a lot and pleaded not guilty.

The bonuses went to the AIG Financial Products group, the key players in the company’s melt down. They’re the folks who were selling guarantee insurance on toxic assets all over the world.

AIG’s weak excuse was that the bonuses are due under contracts negotiated to retain Financial Products group employees, because they are best qualified to oversee correction of the mess they created.

Now that the U.S. Government owns 80 percent of AIG, Congress and the Treasury knew or should have known that the retention bonus contracts were signed in early 1980.  If not, then they were both on snooze control when they loaned AIG $85 billion in September 2008 and another $80 billion recently.

Had their roles had been reversed, AIG would not have forked over the money until Treasury fired the employees or renegotiated their contracts. It was another display of government not knowing how to make a deal.

The game goes on at AIG and at the other bailed out institutions which couldn’t bring themselves to cancel multi-million dollar events for employees after receiving federal bailout money.

Meanwhile the Obama Administration is in serious disarray. The Congress is feigning anger while stumbling around in the dark looking for earmarks. And suck-up apologists are making excuses for both.

Jim Flynn was formerly a corporate counsel, served in military intelligence during the Korean War and once aspired to be a newspaper columnist.