There’s a new sheriff in Dodge, and he’s infuriated.
When President Obama rode into town, he sat high in saddle, white hat and star gleaming in the sunshine. He brought a scattergun of programs, a dead aim and a whole new posse.
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He hit the ground guns a-blazing. He told the townsfolk that he was going to round up the rowdies on Wall Street so that he could bring order back to Main Street.
Now he has burr in his boot the size of Kansas, and it is called “AIG.”
The real scandal of AIG isn’t the $170 billion taxpayer bailout or even the plan to lavish bonuses on its execs. It’s that neither the President nor his Treasury Secretary Tim Geithner knew about the bonus program until after the horse was already out of the barn.
Geithner Should Have Known?
U.S. taxpayers now own 80 percent of AIG. President Obama promised that taxpayer money no longer would be used for Wall Street bonuses. Yet, according to Geithner, he didn’t even know about the plan until last week.
As president of the New York Fed, Geithner sat in the room with Fed Chair Ben Bernanke, and then-Treasury Secretary Hank Paulson, former CEO of Goldman Sachs, when the AIG rescue plan was hatched. Geithner knew that there would be billions of dollars in counter-party payments by AIG for credit swap obligations to several banks, including Goldman Sachs, using taxpayer money.
Shortly after Goldman got its $12.9 billion from AIG, the Wall Street bank paid out $6.5 billion to its execs and sales force. Geithner had to know. Or he should have asked whether AIG would be using any of the taxpayer funds to do likewise for its execs. His failure to get ahead of this controversy has created a PR nightmare for his boss.
With this slipup, the new administration looks more like the Gang That Couldn’t Shoot Straight than the Earps.
What’s a President to Do?
None of this would be nearly as dreadful if the Wall Street bailout were working. But we’re six months into the bailout, and there still are almost no loans are being made to Main Street. This week, the Fed is launching its own program to get loans to consumers financed by private investors, bypassing Wall Street. At this point, the Wall Street bailout is starting to look like the most expensive tax-supported fiasco in history. Unfortunately for the President, the bank bailout is at the heart of his economic recovery program.
Up to now, the public has willing to get behind with one of the largest stimulus packages ever. Unless the President gets a lasso around the problem of executive compensation on Wall Street, the voters won't support a second round of stimulus spending, and let alone another bank bailout. It’s Geithner’s job to keep Wall Street in check. If he can’t do the job, then the President needs to get someone else to watch his back.
If he doesn’t, then the economic recovery will be dead in the water before it ever gets started.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
