As explained in Sold Out, our economy is in the toilet today because Wall Street invested $5 billion in Washington and got a gambling license in return. But now Wall Street has burned Washington: the AIG fiasco ignited a public firestorm of outrage over the weekend. What should Washington do? Here are a few suggestions:
• Seize control. Americans own AIG – but, apparently in order not to offend Wall Street, we do not control the company. This charade has got to stop. The federal government should take control over AIG, through the exercise of the government’s power of eminent domain, if necessary.
• Cancel the employment contracts. No one knows the terms of the compensation contracts between the company and its executives, including the speculators who now demand to be paid $165 million in bonuses, apparently part of a $600 million “retention pay” program. However, it is highly unlikely that there are no conditions to these contracts. (Would AIG employees who stole from the company or committed arson still be guaranteed payment?) The government should abrogate all such compensation contracts of AIG executives and speculators, not just the bonus deals. If necessary, the government can negotiate new contracts with employees who are truly essential. Let the rest sue the United States for the money and let a jury decide whether despite their catastrophic mistakes they deserve compensation.
• Suspend payments for credit default swaps. So far, the Treasury has committed $170 billion of public money to AIG, without disclosing to the public what AIG is doing with it. Thanks to AIG’s hasty move over the weekend to deflect attention from the bonuses, we now know that former Treasury Secretary Paulson’s investment firm got over $10 billion from AIG, but it is not clear whether the information AIG has disclosed so far constitutes the complete list of recipients. So we have no way to judge whether taxpayers must continue to bail out AIG in order to avoid a collapse of the entire system, as now Treasury Secretary Geithner has contended since he helped arrange the first AIG bailout last year. Once in control of AIG, the federal government should publish the complete list of “counter-parties” – the “insurance” buyers on the other end of AIG’s swaps. The “systemic risk” can then be assessed accurately and honestly. Threats from Wall Street that taxpayers must continue to bail out AIG and (many other financial firms) in perpetuity are economic extortion. The cost of this fiasco to the American people has grown so large that it’s time to determine what will hurt our economy more: tens of trillions of taxpayer dollars going into the vaults of a few firms and their executives, or the bankruptcy of those firms?