Why AIG Outrage Rings Hollow

President Barack Obama and everyone else in Washington is in a sprint for the microphones to express outrage at the big bonuses for the knuckleheads who screwed up American International Group and threaten to do the same to the rest of the economy.

Obama wants to take every legal step possible to kill the bonuses. Sen. Chuck Grassley (R-Iowa) wants the AIG executives to consider killing not just the bonuses but themselves, too.

Here’s something neither Obama nor Grassley answered in their bellicose remarks Monday: Why did it take so long for the president and senior lawmakers to get so worked up? More troubling, why did it take so long for them to discover AIG planned to give huge bonuses in the first place?

Watching the coverage the past 24 hours, it would seem AIG just made public its plans to give top employees big bonuses. Wrong.

AIG disclosed its retention-bonus program more than a year ago, including bonuses directed to those handling the exotic derivatives that got the company and the country into this mess. 

The bonuses were essentially a nonissue when AIG got its initial bailout money, almost $150 billion under President Bush in the two months surrounding the presidential election. Joe Biden, then the vice presidential nominee, came out strongly against the bailout. Obama did not.

Timothy Geithner, then at the New York branch of the Federal Reserve, was a huge proponent and architect of the AIG bailout. So if Obama had strong private opposition to the idea it did not affect his pick for the person who would oversee all bailouts.

The bonuses were again a nonissue when Obama himself increased the bailout to $173 billion last month.

It’s not like Republicans were any quicker to stop this impending “outrage.” Grassley might want AIG employees to seriously think about suicide now but the Iowa senator, who has been the senior Republican on the Senate Finance Committee for nearly a decade, was seemingly unaware of AIG’s publicly announced plans.

If this were just a usual case of politicians acting like phonies people could roll their eyes and move on. But this time the competition among politicians to outdo each other in the outrage derby will soon put the White House, Congress and the country in a very tough spot.

The Obama administration and most leading Republicans seem in agreement that AIG’s collapse would be potentially devastating to the overall economy and specifically to certain states and insurance companies intertwined with the company’s operations.

AIG officials are circulating a doomsday report on what would happen to the nation if it fails. Lawrence Summers and others have reportedly read it, according to this New York Times piece, which is well worth a read.

Obviously, AIG has a huge self-interest in putting the fear of God into the people they are asking for billions. Who knows if their 21-page doomsday report is accurate? But the case AIG makes sounds very familiar to the one Geithner and others make when contending the company is too big and important to let fail.

This puts Washington in danger zone. You have a woefully understaffed Treasury Department, headed by one of the architects of the original AIG bailout deciding the company’s fate. You have a company that needs government backing to survive privately and publicly arguing that if the company is allowed to collapse, the entire economy will follow. And you have reporters, this one included, who at best have a surface understanding of the complexity of the AIG debacle trying to explain it all.

This much is clear: Washington could face two very difficult decisions in the months ahead if, as expected, AIG pleads for even more money.

It could say, “Hell, no” and risk the doomsday scenario coming true.

Or it could be forced to risk the wrath of an angry public and pump even more money into an uncertain bet to save AIG.

Obama prides himself on being Wasington’s grown-up, who does not let political rear-covering get in the way of telling Americans hard truths. But he proved Tuesday that he knows something about rear-covering as well.

The hard truths part is harder.