Too Bad Mel Brooks Can't Write Ending to AIG Mess

It defies logic that executives of American International Group Inc. who are responsible for running the company into the ground would get $165 million in bonuses.

And it’s understandable that Americans want someone to blame.

They just might be leveling that blame at the wrong people.

What’s being overlooked is that if there were no such thing as a federal bank bailout, AIG would have still gotten an $85 billion cash infusion courtesy of U.S. taxpayers, because the company got its money from the Federal Reserve, not the Treasury Department.

In fact, the Republican-appointed Federal Reserve Chairman Ben Bernanke had already bought an 80 percent stake in AIG by the time Congress passed the federal bailout (PL 110-343) in October.

“People need to understand that the AIG guys would have still gotten their money regardless as to what Congress did or didn’t do because they never went to Congress in the first place. AIG went straight to Bernanke,” says Kathryn C. Lavelle, a political economy professor at Case Western University and fellow at the Woodrow Wilson Center in Washington, DC

The Fed, as it is commonly called, is responsible for protecting the country’s money supply. It prints money, sets interest rates and ensures there is enough cash and credit in the market. And unlike the treasury, the Fed doesn’t have to ask Congress for money or get members’ permission or guidance on how to use money under its control; much like it did when it bought $85 billion worth of AIG stock last September.

It’s another one of those quasi-government agencies like Fannie Mae or Freddie Mac, but with technocrats who have a higher level of expertise.

Congress created the Federal Reserve in 1913 as a neutral entity so that it wouldn’t be subject to political pressure. At the time, the banks and government each wanted to control it; nobody wanted a politician in control of the country’s cash supply. The Fed’s current quasi-governmental structure was decided on as a compromise.

Members of Congress don’t typically involve themselves in the day-to-day dealings with the Fed, but it is a creature of Congress. In fact, Congress has the power to get rid of the Fed. That said, most members of Congress don’t even know who to call at the Fed or what kinds of questions to ask when problems like AIG arise.

Who’s to blame?

The outrage surrounding AIG reminds me of a funny scene from the 1974 Mel Brooks movie Blazing Saddles.

A new sheriff arrives and the town of Rockbridge is ecstatic until they see who he is. The men-folk pull guns on the man sworn to serve and protect them. Then the sheriff pulls his own gun and puts it to his head. “Hold it, the next man that makes a move, the (black man) gets it,” said the sheriff, threatening to kill himself, while also refusing help from the townspeople who had now become his rescuers.

Last fall, President Bush’s Treasury Secretary, Henry Paulson, called congressional leaders and told them, in no uncertain terms, that Congress would have to rescue Wall Street with $750 billion in taxpayer money – more than twice the country’s discretionary spending, minus entitlement programs.

The money was needed, Paulson said, to save the country’s financial sector and national economy, both bordering near collapse. Worried Democrats demanded that Paulson take out language in the federal bailout concerning bonuses for the very bank executives Americans were now being asked to save.

The banking industry was replaying the scene that Cleavon Little had in that movie, essentially grabbing a gun and holding it to its own head.

The banks, Paulson insisted, would not help save themselves if Congress took away their bonuses.

Congress believed that, and here we are.

But that was the big banks, not AIG, which got its money from the Bernanke-controlled Fed, not Paulson’s Treasury.

That’s why Bernanke went on 60 Minutes, granting the rarest of interviews; he has to do damage control.

But he’s not the only one. Because the Fed is structured to largely be shielded from politics, it’s difficult for an enraged public to direct its fury there. Congress is a an easier-to-find target.

“That is also what makes this situation so volatile,” Lavelle says. “This is very serious for the upcoming midterm congressional election; those members are more vulnerable than President Obama right now. That’s why you see the immediate outcry from the Senators and Representatives.”

Indeed, you’ll see a move on the House floor today to tax away some of the bonuses.

But to be fair, the root of the AIG problem occurred during the Bush Administration under a deal negotiated by Republican appointees.

Moreover, it wasn’t until Democrats came to power in 2006 that Congress even started looking at issues in the country’s financial services sector. They held hearings on executive compensation, hedge funds and high mortgage default rates.

That said, Obama is president now, not Bush.

“This is my mess,” Obama announced during a town hall meeting in California.

His mess, he’s got to fix it.

Obama needs to come up with a serious plan to solve the financial and economic crisis, especially since he’ll likely have to come back to ask taxpayers for more money. After AIG, he’ll have a hard time getting it.

Secondly, says Lavelle, Obama will need to “restructure the financial system in a way that will fundamentally change the way we lend and borrow money in this country.”

In Blazing Saddles, the new sheriff finesses his way out of harm’s way by using reverse psychology. Safe and behind closed doors, he hugs himself and says, “Oh baby, you’re so talented, and they’re so dumb.”

But the American public isn’t dumb, and they want heads to roll.

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