House Banking Committee chairman Barney Frank speaks during a hearing about AIG on Capitol Hill
Clarification Appended: March 18, 2009
The word of the day was well established by Tuesday evening, when Treasury Secretary Timothy Geithner wrote a letter to Senate majority leader Harry Reid. "I know," began the embattled Geithner, "that there is considerable outrage in the Senate, as there is throughout the country, about the bonuses." Indeed, outrage was the theme of politician, pundit and President of the United States at each new revelation about the bonuses paid out of federal bailout money to AIG executives. There was so much outrage, in fact, that furious red overtook St. Patrick's green as the color of the day. But in the end, what were the outraged — as well as the hapless Geithner — going to do about it? (See 25 people to blame for the financial crisis.)
A few suggestions managed to emerge from the sea of anger, though it remains to be seen how feasible any of them are. Senator Evan Bayh, an Indiana Democrat, said he'd like AIG to enter some form of bankruptcy, "because when you go into bankruptcy, contracts are abrogated all the time." He was referring to AIG CEO Edward Liddy's claim that the bonuses were contractual and therefore had to be paid under the law. (See the top 10 bankruptcies.)
Senate Banking Committee chairman Chris Dodd suggested one of the more severe solutions: that the government tax 100% of the bonuses, thereby recouping the losses. It may have been overcompensation, so to speak, on Dodd's part. The National Republican Senatorial Committee was quick to point out that Dodd had amended the stimulus plan to make a specific "exception for contractually obligated bonuses agreed on before Feb. 11, 2009." That exception gives cover to the AIG bonuses — though it should be noted, as Dodd's aides do, that the Senator did not know about the AIG bonuses at the time the bill was being drafted. (Dodd is facing a tough re-election battle next year in Connecticut. He was the largest recipient, at $103,100, of AIG political contributions in 2008, according to opensecrets.org. The second largest recipient was President Barack Obama. John McCain and Hillary Clinton also received substantial amounts.)
A slightly less exacting proposal may be formulated. Senate Finance Committee chairman Max Baucus is looking at "principles" on how his committee should proceed, and all indications are that he will take the lead on crafting legislation. Reid announced that Baucus "will propose legislation — this will be in the next 24 hours — to give this money back to the taxpayers by subjecting the bonuses to severe tax penalties, more than 90%."
In the House, Congressman Gary Peters of Michigan was circulating a similarly confiscatory levy. But House Banking Committee chairman Barney Frank was not about to be bothered with such legislative niceties. He pointed out that the U.S. government — after pledging more than $150 billion in aid to the company — owns 79.9% of AIG. He told reporters, "I think the time has come to exercise our ownership rights. We own most of the company. And then say, as owner, 'No, I'm not paying you the bonus. You didn't perform. You didn't live up to this contract.'" (See how financial madness took over Wall Street.)
Judicial options were raised outside the Beltway. As he announced that AIG had paid so-called retention bonuses of $1 million or more to 73 employees, including 11 who no longer work there, New York Attorney General Andrew Cuomo questioned the validity of the contracts that guaranteed those payouts. He said the agreements were made in March 2008 to duplicate employees' 2007 bonuses "despite obvious signs that 2008 performance would be disastrous." (To further fuel the outrage, Cuomo added that the top individual AIG bonus was more than $6.4 million, while the top 10 collected a total of $42 million.)
In any event, any tax-the-bonuses bill is likely to meet powerful opposition. House Ways and Means Committee chairman Charlie Rangel, Congress's top tax writer, told reporters that taxing the bonuses "is a venting type of thing. I would hope and assume we have alternatives to the tax codes ... When you get angry, you don't think as clearly as when you calm down." He added, "It is tough to me to think of the tax code as a political weapon." Rangel would be a huge obstacle to any such bill, no matter who originates it. Others say this type of legislation would raise the ugly face of nationalization and the specter of politicians micromanaging the financial system because the government "owns" it. Representative Elijah Cummings, a senior member of the House Oversight Committee who has been looking into AIG for months, said he doesn't believe it's lawful to tax the bonuses just to get them back. "We're going to have to recoup it from the company, and there's going to have to be some type of investigation," he told TIME. (See 10 ideas changing the world right now.)
Since it will take time to get at AIG and those taxpayer dollars turned bonuses, the most immediate target of outrage (next to Liddy, who's due for a tongue-lashing in congressional testimony on Wednesday) may have to be Geithner. In his letter to Reid, Geithner said the Administration was still looking for legal ways to get the money back (as Obama has loudly demanded). He reiterated his own outrage when he confronted Liddy about the bonuses and declared that the government would force AIG to repay the Treasury from the operations of the company, in addition to deducting the $165 million in bonuses from the $30 billion in Troubled Asset Relief Program assistance that AIG was receiving.
That is unlikely to assuage the outraged. Cummings, for one, says Liddy informed him about the coming bonuses on Jan. 15. So why didn't the Secretary of the Treasury, with all the resources of a government department at his command, know about it until Mar. 10, according to a White House time line? If it was simple ineptitude, it has nevertheless cost his boss, the President, considerable political and popular embarrassment. Geithner's job security may lie in the fact that the White House needs someone — anyone — with the right credentials to run the financial ship amid this storm. But adrift in an angry sea, Geithner is increasingly a troubled asset himself.
— With reporting by Massimo Calabresi, Maya Curry, Mark Halperin, Michael Scherer, Mark Thompson and Adam Zagorin / Washington
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The original version of this story failed to make clear that Senator Chris Dodd knew nothing about the AIG bonuses when the stimulus bill was being drafted.