It was red meat day on Capitol Hill Wednesday. And the entree was American International Group chief Edward Liddy.
In a matter of days — and with the awarding of $165 million in bonuses to AIG employees — Liddy has become the focus of taxpayer rage over Wall Street bailouts.
But moments after Liddy had settled in for what would be a harsh grilling at the hands of salivating House finance subcommittee members, he was accorded a moment of empathy.
Looking down from his elevated perch, Rep. Paul Kanjorski acknowledged danger in the growing furor over how ailing AIG spent billions it received in government bailout money. The insurance giant is the largest beneficiary of the banking bailout; it has received $182 billion so far.
"I'm sure you and your family have been subjected to a lot of abuse," said Kanjorski, the Pennsylvania Democrat who chaired the hearing, with a tone of regret.
Liddy, 63, a former insurance executive wooed out of retirement for $1 a year to help the government salvage what's left of AIG, reddened and nodded slowly.
Indeed, he and other AIG employees have received death threats. The company, which has 116,000 employees, has posted armed guards at its headquarters in Manhattan — now for sale — and ordered special protection for some workers.
Public outrage over the bonuses has also managed to push to the sidelines pressing congressional work. The downside to red meat and scapegoating is real.
But what has happened over the past few days since Liddy's bonus payment approval was revealed is much more than a political distraction. It is a major economic and political wake-up call, and it will most likely prove good and necessary in the long run.
There has been a great and often intentional ignorance about the recent ways of Wall Street, about risk and regulation, about paper and accounting tricks, about big business, and, specifically, about AIG and other companies where billions of taxpayer bailout money has been funneled.
Americans didn't understand or weren't watching — often numbed by their own financial distress, or discouraged by the mysteries and obfuscation of Wall Street workings.
Regulators and ratings agencies, it turns out, were miscalculating risk and robustness, and Washington pols — except for a few — never raised red flags.
Now, in the midst of finger-pointing and big bonus shock, feigned and otherwise — the Obama administration and some members of Congress are said to have known since December that the bonuses would be distributed; Liddy testified that the Federal Reserve has since last fall participated in AIG board meetings — a curtain has been lifted off the whole mess.
Who Knew What, When?
Massachusetts Rep. Barney Frank, the Democratic chairman of the House Financial Services Committee, wants the government to assert its ownership rights over AIG. Republicans want to look into stimulus bill language signed off on by top Democrats that currently allows AIG-type bonus payments. Others are calling for the bonuses to be taxed at 90 percent and for the prosecution of former AIG executives who signed off on contracts containing the controversial bonuses.
And on both sides of the aisle, there are those clamoring for ways to end the practice of using questionable performance and retention bonuses to bolster executive compensation.
Well, at least everybody's paying attention.
"We had gotten zero information on AIG until recent weeks," fumed Stephen Lynch. "We had six months of silence." Zero information? Six months of silence? Lynch is a congressman from Massachusetts and a member of the finance committee overseeing AIG.
Everybody seems to care a whole lot more now about asking questions. Indeed, before Liddy sat down for his woodshed moment, House members unscrambled many of the mysteries of AIG with just a couple hours of straightforward questions posed to regulators and insurance experts.
The once-mighty insurance giant was brought to its knees not by its core insurance business — still a going concern — but by its foray into risky and unregulated credit default swaps, contracts that acted like insurance against losses in the event of default.
As Rep. Gary Ackerman, a Democrat from New York, succinctly said: AIG "figured out how to package smoke, and sell it on the open market."
The Long Unraveling
The collapse of the real estate and mortgage markets plunged AIG's Financial Products division, which sold all those risky derivatives, into a $440 billion mess. But contracts had been written essentially guaranteeing employees' bonuses whether the division made money or lost it.
Liddy, pilloried though he may be for authorizing contracted bonus payments that even he said he found distasteful, says the company's outlook — and thus, its prospects for paying back taxpayer bailout money — are improving, though still dire.
But key to AIG's survival is its ability to wind down the troubled credit default swap division, which is why people were paid retention bonuses to stay and help, Liddy said. The company is trying to sell off subsidiaries that are in better shape, though the troubled market and now the bonus taint have made that process difficult.
Kanjorski said he wanted Wednesday's hearing to "focus on the big picture." But unraveling what went wrong and why is in the details. And it does make a difference who knew what when, and what kind of needed action was left untaken.
The day closed with Republicans agitating for Treasury Secretary Timothy Geithner to resign. Some have called on Liddy, who said he will refuse to name bonus recipients unless legally forced to do so, to step down, too.
"Six months ago I came out of retirement to help my country," Liddy told the congressional panel.
As he faced the withering barrage, and the prospect of going back to work Thursday morning to continue digging AIG out of debt and disrepute, the stolid white-haired executive may have been wondering — as were many taxpayers — just what he was thinking.