(Major Update 3/18) Huge Bonuses at AIG (but Not for the specific individuals that created the CDS disaster!)

A rare moment has arrived.

The New York Times reports:

The American International Group, which has received more than $170 billion in taxpayer bailout money from the and Federal Reserve, plans to pay about $165 million in bonuses by Sunday to executives in the same business unit that brought the company to the brink of collapse last year.

Executives of the unit that made the huge derivative bets that A.I.G. could never cover if the housing market went south (but, see update 3-18 below) -- those are the people getting the big money, here. Since these were bets A.I.G. could not cover, the implicit situation from the beginning was that the U.S. taxpayer -- you and I -- would be on the hook to cover their greedy bets if things went too badly.

I seriously doubt the intelligent, knowledgeable reporters of the Times and other national media understand how explosive this is.

They reasonably report the rationales in the article -- contractual obligations made in early 2008 that "cannot" be broken.

I don't think most people in D.C. or in much of the national media really know what is going on in the middle class.

The median wage in the U.S. is about $41,000.

National reporters and members of Congress and lobbyists bring in quite a lot more than that. They simply don't have a direct experience of being in the middle class recently, and don't know what most people will think once they learn of this.

So they won't be able to fully anticipate the fallout from this is instance of corruption.

The contracts should have been broken. If necessary, the Chairman of the Board should have been immediately dismissed if he would not do so, no matter how competent and excellent a chairman he is otherwise. He should be immediately dismissed if he would not carry out the will of the majority stockholders -- you and me.

The U.S. would then have likely had to go to court, and defend this abrogation. The correct course of action would be to defend an abrogation, regardless of outcome, all the way to the U.S. Supreme Court. It would not be important to win. It's vastly important to fight for what is right.

That might have been enough to prevent most of the coming fallout.

Even now, correct action would be dramatic -- to seize the bonus money or freeze the deposits that have been transferred, pending an outcome.

The coming fallout is unpredictable, but it will happen, whether it is dramatic and soon, or more subtle and lasting like the aftermath of a neutron bomb, where little damage is readily apparent at first.

Congress and the Administration have a few days in which to do something.

Saying they are "outraged" is not enough. It is worse than nothing.

The Obama administration should consider whether they are willing to lose as much as 5 or 10 points (and possibly more) of their national approval rating in a week or two.

What could be done now?

"I am directing [The Department of Justice] to temporarily freeze these bonus funds and already deposited amounts pending further legal review as to whether we should challenge these contracts [in a court of law] due to the exceptional circumstances of contradiction here between performance and reward."

Update 3-17 (good news):

Link to CNN story here:

WASHINGTON (CNN) -- President Barack Obama said Monday he will attempt to block bonuses to executives at ailing insurance giant AIG, payments he described as an "outrage."

President Obama says AGI "finds itself in financial distress due to recklessness and greed."

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"This is a corporation that finds itself in financial distress due to recklessness and greed," Obama told politicians and reporters in the Roosevelt Room of the White House, where he and Treasury Secretary Tim Geithner were unveiling a package to aid the nation's small businesses.

The president expressed dismay and anger over the bonuses to executives at AIG, which has received $173 billion in U.S. government bailouts over the past six months.

"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?"

...

But he said the impropriety of the bonuses goes beyond economics. "It's about our fundamental values," he said.

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Update 3-18 (Liddy finally tells us)

I heard this bit on NPR this evening:

Liddy: "The people who were primarily responsible for Credit Default Swaps (CDS) that brought us to our knees -- they're gone. The people who were responsible for regulatory capital trades that have some exposure -- they're gone. But the people who still operate a $1.6 trillion trading book of business -- we aren't loosing the kind of dollars on that that we've lost on Credit Default Swaps. They are still there, and they're the ones that are winding that book of business down." [They got the retention bonuses?] Yes, they did."

Barney Frank: "So you're telling me the only bonuses that were paid recently are the retention bonuses?"

Liddy: "Yes."

Frank: "There were no other bonuses paid?"

Liddy: "Not at AIG FP. No, I don't think so."

So....we are left to wonder why this wasn't pointed out 2 days earlier. Did Liddy simply not understand the significance of this? I think he did not actually.

Even now, this new revelation that these bonuses were not for the CDS traders that most destroyed AIG isn't making the splash it should. This is because in the bigger picture, regardless that these bonuses aren't being paid to many of the worst offenders of the AIG of 2008 (or 2006, etc.), people still are aghast that there are such large bonuses at AIG, of any kind, to anyone.

The picture is still that just moderately clever folks doing trading and "winding down trades" are supposed to be worth millions, while a teacher or a plumber earns under $100,000 or under $50,000. This is justified on the basis that these traders are needed to prevent counterparties from taking advantage of taxpayer-owned AIG now.

And this is the essence of the larger problem. That trading (gambling) caused the problem, and now we are paying other traders to help mitigate it, and paying them millions.

That traders are worth millions each year, but scientists, teachers, engineers -- people who actually produce real gains for society -- are not.