Scrutiny of AIG aid broadens
The firestorm over American International Group is spreading beyond executive bonuses, with lawmakers and policy experts now questioning virtually all aspects of the taxpayer-financed rescue package for the insurance giant.
Among other issues, critics are asking why AIG was allowed to use federal bailout money to repay $13 billion in debt obligations to Wall Street powerhouse Goldman Sachs, as well as debts to foreign banks.
Prominent Republicans, joined by some Democrats, suggested that the answer could be found in longtime ties linking Washington to Wall Street.
Former Treasury Secretary Henry M. Paulson was once chief executive of Goldman Sachs, for example, while AIG’s chief executive, Edward M. Liddy, was a member of Goldman’s board. The Treasury official who is in charge of the bailout, Neel Kashkari, is a former Goldman executive.
“Look at where the money went: Goldman Sachs, Paulson’s firm, foreign banks,” Sen. Jim Webb (D-Va.) said Wednesday. “AIG gave more money to foreign banks than we gave in loans to the auto industry.”
“The real outrage over the AIG bailout isn’t executive bonuses, it’s that billions in taxpayer funds intended for AIG have been passed through to benefit foreign banks and Wall Street behemoths like Goldman Sachs,” former House Speaker Newt Gingrich wrote in an e-mail letter to conservatives Wednesday morning.
Gingrich and Republicans on Capitol Hill unleashed their anger on the current Treasury Secretary, Timothy F. Geithner, saying he bore responsibility for being overly generous in providing aid to failed companies like AIG.
Two outspoken House Republicans -- Darrell Issa of California and Connie Mack of Florida -- called for Geithner’s resignation, saying the AIG bonus controversy on top of existing doubts about the bailout made such a move necessary.
Other Republicans, including the ranking member of the Senate Banking Committee, Alabama’s Richard C. Shelby, offered caustic criticism of Geithner but stopped short of calling for his resignation.
In his weekly e-mail, Gingrich accused Geithner of being disingenuous in saying he inherited the current mess.
“The truth is that Secretary Geithner didn’t inherit the policy of throwing billions of taxpayer dollars at failing companies -- he helped create it,” Gingrich wrote. “Even before he was Treasury secretary -- when he was still head of the New York Federal Reserve -- Geithner was so deeply involved in the government’s bailout of Bear Stearns, its takeover of Fannie Mae and Freddie Mac, and its bailout of AIG.”
Democrats, meanwhile, heaped the blame on decisions made during the Bush administration. With Geithner at his side Wednesday, before boarding his Marine One helicopter to start a trip to California, President Obama told reporters at the White House, “I have complete confidence in Tim Geithner and my entire economic team. . . . You know, he is making the right moves in terms of playing a bad hand.”
Still, some critics on the left -- including organized labor officials and prominent House Democrats -- suggested that bailout decision-making to date had been sullied by a Wall Street bias afflicting both the current Treasury secretary and his predecessor.
“AIG was too well-connected to fail,” said Rep. Brad Sherman (D-Sherman Oaks) during a contentious House hearing in which AIG’s Liddy was grilled by lawmakers.
Goldman Sachs became the subject of controversy this week when AIG revealed that it had given the company $13 billion in taxpayer bailout money to repay its collateralized debt obligations.
Goldman spokesman Michael DuVally says that figure is too high and that the correct number is closer to $8 billion. He dismissed suggestions that Goldman played a role in designing the bailout terms, or its bonus provisions.
While Goldman is healthy and has said it does not need bailout funds, it did accept taxpayer-funded payments from AIG.
“The government made a policy decision to support AIG as a way to contain systemic risk,” DuVally said. “We were entitled to additional collateral under the trading agreements that we had with AIG.”
Since the bailout for AIG was authorized in September, the once-successful insurance giant has passed along about 30% of the $170 billion it received from taxpayers to Goldman, Deutsche Bank, Merrill Lynch and other entities, including municipalities.
One of the largest amounts -- $11 billion -- went to the Societe Generale Group, a Paris banking and financial services company. The funds paid to those firms were released to make whole the buyers of AIG credit insurance.
The decision to make the across-the-board payments at 100% of the original value has drawn criticism since Sunday, when AIG reluctantly released the list of companies that had received taxpayer aid.
One prominent economist said he thought the Wall Street pedigree of decision makers in the Bush and Obama administration had hampered their judgment.
“They were far too sympathetic to the needs of the bankers and in the process have not accomplished the cleanup that needed to be effected,” said Peter Morici, an economist at the University of Maryland who is an outspoken critic of the bailout. “That is why we are in the mess that we are in.”
Morici suggested that the taxpayer obligations to AIG could have been limited had the Treasury split off the company’s poorly performing units from those parts of the insurance conglomerate that were profitable, selling the profitable divisions and providing taxpayer support to the problem parts of the firm.
On Capitol Hill, lawmakers talked boundlessly Wednesday about the bonuses and the outrage they created. But some were beginning to look beyond the controversy over bonuses to broader questions about the AIG bailout and how it got structured.
“It’s not just about the bonuses,” said Sen. John Ensign (R-Nev.). “It’s that so much money went overseas. Why did money go out the door without a haircut?”
“The bonuses are just a tiny percentage of the money. It’s the easiest things to get people outraged about.”
Republicans made a point of bashing Geithner and his role, including meetings that he had with AIG and Goldman before he was Treasury secretary. Democrats laid responsibility on Paulson, President Bush’s Treasury secretary.
The furor over the AIG bonus payments -- including questions about why Geithner didn’t know about them earlier -- could create trouble for the Treasury secretary as he prepares for the rollout in the next week or so of an ambitious public-private partnership to buy $1 trillion of toxic assets from banks.
Asked where he thought Geithner would be a year from now, Webb declined to comment. But he did say that the Obama administration’s hands were not entirely clean. “They have to accept some responsibility,” Webb said.
Sen. John Cornyn (R-Texas) said it was hard to judge the motives of the architects of the AIG deal because the proceedings and decision making were cloaked in secrecy.
“It could be self dealing of the good-old-boy system,” Cornyn said. “It may have been on the up-and-up. But we don’t know because it wasn’t transparent.”
Times staff writer Ralph Vartabedian contributed to this report.