Forum Post: How timothy geithner's bailout plan created the AIG bonus scandal

Larry summers, alan greenspan also have a have in this

How Timothy Geithner's Bailout Plan Created the AIG Bonus Scandal In order to protect its bailout plan, the Obama administration protected the bonuses.

Back in January and February, there were some votes to try and block excessive employee compensation at financial institutions receiving bailout money. In the Senate, this took the form of the Snowe amendment, which was supported by all 58 Democrats, and also by three Republicans. In the House, it took the form of the TARP Reform Act, which was favored by 242 Democrats and 18 Republicans. Overall, across the House and the Senate, only 10 Democrats, compared to 193 Republicans, voted against legislation that might have stopped the bonuses.

Unfortunately, despite overwhelming Democratic support for limiting executive compensation, in order to save their public-private partnership bailout plan, the Obama administration worked against these limits:

As word spread Friday about the new and retroactive limit --inserted by Democratic Sen. Christopher Dodd of Connecticut -- so did consternation on Wall Street and in the Obama administration, which opposed it.(...) The administration is concerned the rules will prompt a wave of banks to return the government's money and forgo future assistance, undermining the aid program's effectiveness. Both Treasury Secretary Timothy Geithner and Lawrence Summers, who heads the National Economic Council, had called Sen. Dodd and asked him to reconsider, these people said.

This story is widespread now: Dodd weakened the language at the urging of Treasury officials. It has leaped from the blogosphere to places like CNN.

Tim Geithner's public private partnership plan caused the AIG bonus scandal. This is because Geithner's plan needs voluntary private participation and, as many of those private investors and institutions have made clear, they won't join in if their compensation packages are threatened:

Officials at the Federal Reserve and the Treasury Department are increasingly worried that the controversy could discourage investors from joining a new government effort to revive consumer lending as well as a separate plan that relies on private money to buy toxic assets from banks, sources familiar with the matter said.(...) A senior executive at one of the nation's largest banks said he had heard from several hedge funds that they would not partner with the government for fear that lawmakers would impose retroactive conditions on their participation, such as limits on compensation or disclosure requirements.

As such, on behalf of the Obama administration, Tim Geithner and Larry Summers joined with congressional Republicans to block legislation that would have retroactively blocked the bonuses. This was done in the hope of securing more private participation in the administration's public-private partnership bailout plan.

This scandal is the direct outcome of Geithner's bailout plan. Because the Obama administration is pursuing a public-private partnership bailout strategy, and because Wall Street wouldn't participate in this plan if their bonuses were threatened, the Obama administration blocked legislation that would have blocked Wall Street bonuses. They really should have pursued temporary nationalization instead.

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