Business Times - 20 Mar 2009
Populist backlash may wreck Wall St rescue
By LEON HADAR
TRADITIONALLY, Americans have admired the rich too much to resent them. But public anger at the way that Washington has handled the bailout of insurance giant American International Group (AIG) now threatens to smash the ambitious and expensive strategy of the Obama administration to revitalise the ailing financial system.
Bonuses of about US$165 million paid out to executives of AIG, which already received more than US$170 billion in emergency federal aid, have seen lawmakers lining up to score populist points.
'We will take this money back by taxing virtually all of it,' said New York Democratic Senator Charles Schumer who took to the floor on Tuesday. 'So let the recipients of these large and unseemly bonuses be warned: If you don't return it on your own, we'll do it for you.'
And Iowa Republican Senator Charles Grassley who proposed on Monday that AIG executives who accept lavish bonuses should 'commit suicide,' added on Tuesday that it was 'irresponsible for corporations to give bonuses at this time when they're sucking the tit of the taxpayer.'
But Mr Grassley together with other Republican lawmakers blamed Treasury Secretary Timothy Geithner for failing to discipline AIG. 'It was Mr Geithner in late February who said that they had a plan to break up AIG, to sell off the parts, and to solve this problem,' recalled Representative John Boehner, a Republican from Ohio.
'But after they reported a US$61 billion loss, it was Mr Geithner who shipped US$30 billion more into AIG, and not one word has been said about solving the problem. It's time for the administration to present an exit strategy so that these types of abuses can't happen.'
In a way, Treasury Secretary Geithner and his management of the financial rescue plan seems to be serving in the same role that former defence secretary Donald Rumsfeld and his policies had played during the Iraq War - as a symbol of government misconduct. Mr Rumsfeld's resistance to acknowledging the mistakes he was making in handling the war ignited a backlash against the military operation.
From that perspective, unless President Barack Obama and Secretary Geithner take immediate steps not only to get back AIG's bonus money but to also persuade Congress and the American people that their rescue plan for Wall Street is cost-effective and is working, there is a danger that the populist backlash could make it very difficult for the White House and Congress to get the financial system out of the mess it is in.
Most Americans are running out of patience when it comes to what they see as the arrogant behaviour of Wall Street. A New York Times/CBS News Poll in February suggested that more than 80 per cent of Americans wanted Washington to cap the amount of compensation earned by executives of companies that were getting federal aid.
And here comes Edward Liddy, the CEO of AIG, a company that is 80 per cent owned by the US Treasury - and by extension the American taxpayer - stating that he would not be able to 'attract and retain the best and brightest talent to lead and staff the company if employees believe their compensation is subject to continued review by the US Treasury.'
Ironically, much of the bonus money went to a division in London that took huge losses linked to risky mortgages.
Economist Robert Kuttner said in a television discussion that far from being rewarded, the 300 people from this unit should be sharing a cell with Bernie Madoff. 'And if the Obama administration doesn't realise that the average American feels that way, then he's going to get on the wrong side of a populist backlash,' Mr Kuttner stressed. 'And the Republicans, who are ordinarily a lot closer to Wall Street, are going to eat his lunch.'
A Pew Research Center poll issued before the reports on the AIG bonuses, found that 87 per cent of Americans were sceptical about the bank bailout. The Pew poll also put Mr Obama's support at 59 per cent, down from 64 per cent last month. According to a CNN poll, support for Mr Obama fell 12 points from early February.
The concern among Mr Obama's supporters is that the president's elitist demeanour and cool persona are proving to be a liability as he tries to contain the populist backlash. On Monday, after describing the AIG bonuses as an 'outrage to the taxpayers who are keeping the company afloat,' Mr Obama cleared his throat and explained that he was 'chocked up with anger here.' But the problem is that the American people want to see him get really, really angry, very angry.
But here is his dilemma: If he tries to ride the momentum of this populist wave, Mr Obama could become a short-term political winner - but could end-up losing the more critical campaign to save the economy.
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