AIG bonuses threaten to sully Obama’s reputation

Since last September, Barack Obama has been trying to pull off the tricky shot of backing bail-out schemes at taxpayers' expense for the Wall Street shysters who have brought the economy to its knees, while simultaneously presenting himself as a populist crusader battling for economic justice and the regular folks on Main Street.

Right now, for the first time since he was elected president, he's perilously close to plummeting from this high-wire act and ending up publicly derided as Mr Facing-Both-Ways, a toxic label for a man whose moral keynote has always been that he'll play it straight with the American people.

On the boil these past days have been the travails of American International Group (AIG), a vast insurance company which in the recent go-go years, now merely a fragrant memory, decided to ramp up its business by issuing coverage in the form of various intricate financial instruments to high rollers - Societe Generale, Deutsche Bank, Goldman Sachs, Merrill - without setting aside solid contingency funds in case all the high rollers - technically known as the counterparties - turned out to have bet the wrong way, which of course they did.

Barack Obama risks being derided as Mr Facing-Both-Ways on AIG

AIG's first rescue instalment came in September 2008. Republican Treasury Secretary Hank Paulson successfully promoted a bail-out plan, supported by candidate Obama, in which a $150bn package went to AIG, a substantial tranche of which then went straight to Paulson's previous employer, Goldman Sachs.

The AIG bail-out decision involved Paulson, Goldman Sachs CEO Lloyd Blankfein, Fed Chairman Ben Bernanke, and Timothy Geithner, former New York Federal Reserve president and now Obama's Treasury Secretary. When AIG recorded an ensuing $61bn loss in the fourth quarter of 2008, the Treasury pumped in another $30bn.

The rationale for dishing out these colossal sums was that if AIG defaults on its insurance contracts, covering the losses of the 'counterparties', the whole show would go down the tubes. Further bail-out duly followed, with AIG effectively becoming 80 per cent owned by the US government.

Amid the bail-out negotiations an obvious hot potato was the issue of bonuses to AIG employees. All parties to the negotiations - Paulson, Geithner (still at the New York Fed), Obama, senior Democrats and Republicans in Congress - were well aware that public indignation at the total $800bn bail-out for AIG and the big banks was at boiling point. Millions in bonuses to bankrupt gamblers bailed out by Uncle Sam is an impossible sell.

This week all the major players swore, hand on heart, they never, ever knew that $165m in bonuses had been assigned to AIG personnel. Out in Los Angeles President Obama told Jay Leno as much last night. Treasury Secretary Geithner claims he only found out last week. Senator Chris Dodd, chairman of the Senate Banking Committee, swore day after day that he too never knew.

The bonuses were not secret. These so-called 'retention payments' for 130 people at AIG were approved two days after the September 16 bail-out, disclosed in a September 26 federal filing. They soon became a focus of extreme interest to politicians such as New York attorney general Andrew Cuomo, well aware of the smoldering public mood.

In December, Bloomberg News quoted Representative Elijah Cummings of the House Committee on Oversight and Government