THE TAXPAYER-owned insurance giant AIG wants to pay out $165 million in executive bonuses. The Obama administration should force the company to hold back the money - and dare the executives to sue.
Despite the complexity of the federal bailouts of the financial industry, the basic question is simple: how to allocate a huge amount of financial pain. During the real estate bubble, financial firms bet big on ill-advised mortgages. When those assets went sour, taxpayers committed vast amounts of money to save the industry.
And yet bailed-out firms seem to think they should be made whole no matter what.
AIG, which has received more than $170 billion from the public, is planning to pay huge bonuses to executives in its financial products unit - the unit responsible for the credit-default swaps that proved so lethal. AIG officials say the bonuses are an unbreakable obligation. Really? Why would the company agree to terms so ironclad that not even the implosion of the company would alter them?
Meanwhile, the company disclosed over the weekend that much of the bailout money it received has been dispersed to other big banks, both domestic and foreign. While the payments may reduce some uncertainty in the markets, it's not clear that AIG's trading partners paid any price for their role in risky credit-default swaps. Taxpayer dollars have been used to insulate firms from downside risk. But the main problem in the credit markets - how to get toxic mortgage-related assets off of banks' balance sheets - has yet to be solved.
The public was already furious, and AIG's conduct only fuels more resentment. So far, the Obama administration has been gentle with Wall Street. Wall Street has not returned the favor. Time to take a harder line.