They Got the Wrong Guy

The appearance by AIG CEO Edward Liddy before Congress on Wednesday was billed as an epic confrontation between the angry tribunes of a furious public and an arrogant Wall Street. Chris Matthews hyped it on MSNBC as "Watergate Redux." But the actual hearing—Liddy's appearance and questioning lasted barely longer than the two-hour preliminaries—was disappointing and misguided.

Roasting Liddy for AIG's manifold and expensive failures would be like putting Gerald Ford on trial for the crimes of Watergate. Edward Liddy isn't G. Gordon Liddy. Yes, he could have handled this issue much better. But he's not the villain. He's a genuine dollar-a-year man who isn't looking to make a quick buck on the bailout. (It's OK, he made gazillions when he ran Allstate.)

The proximate cause of the hearings was the revelation that AIG had paid $165 million in "retention bonuses" to executives at AIG's Financial Products division, the tiny unit whose reckless bets and issuance of insurance on financial products blew up the whole company. Liddy acknowledged that it was "distasteful to have to make these payments" and explained that they were made not to people who sold credit-default swaps but to employees who were winding down other components of the business, some of which were profitable. He had asked employees of the division who received at least $100,000 to return at least half of their bonuses, he said, and some had offered to return all of it.

Aside from revealing congressional ignorance of all things financial, the hearing showed Liddy to be the wrong man at the wrong place—and it was yet another example of misplaced anger. There's no denying the horrific symbolism of these bonuses. But it would be nice if members of Congress—Republican and Democratic alike—displayed as much attention and outrage over the $80 billion-plus wound that AIG's implosion has already inflicted on the American taxpayers instead of grandstanding over a mere (irony intended) $165 million.

The failure of leadership at AIG was immense and catastrophic. But Liddy wasn't leading AIG when it blew up. He didn't get paid to make the disastrous trades, or to oversee the disastrous traders, or to oversee the people who oversaw the disastrous traders, or even to oversee the people who oversaw the people who oversaw the disastrous traders. It wasn't his idea for AIG Financial Products to insure billions of dollars in mortgage bonds, or to engage in "regulatory capital trades" or "balance-sheet rental"—insuring assets of European banks to allow them to move assets off their balance sheets. Liddy noted that at its height, AIG had between $350 billion and $370 billion of "balance sheet rental" insurance in force. (The figure is down to a mere $230 billion.)

The relevant story behind AIG isn't the bonuses. It is how a single unit of a huge company managed to threaten to blow up the entire financial system, and how the bailout is keeping all sorts of large financial institutions afloat. But Liddy isn't the person to ask about that. I'd like to hear from Maurice "Hank" Greenberg, who built AIG into an international empire and claims the whole thing fell apart after he left. I'd like to hear from Martin Sullivan, CEO from 2005 until June 2008, who got a $47 million severance package, and who, in congressional testimony, blamed AIG's demise on mark-to-market accounting. I'd really like to hear from the many savvy worthies who were on the board of directors: people like Martin Feldstein, the Harvard economist and father of Reaganomics, who has served on the board since 1987 and has collected millions of dollars in fees (the proxy shows that in 2007 alone he received $236,635), and diplomat Richard Holbrooke (2007 fees: $232,865), and Michael Sutton, a former chief accountant of the Securities and Exchange Commission. Did any of them ever raise any questions as to what AIG was doing and the risks it was assuming? And if not, what were they getting paid for?

Congress should have subpoenaed Joseph Cassano, who hauled down a few hundred million dollars while running AIG Financial Products and was the executive with the most direct responsibility (and likely the most legal liability) for the debacle. Or the economist who concocted the models upon which AIG-FP relied. And, for old time's sake, why not recall Alan Greenspan, who assured the public that credit-default swaps and shadow banks like AIG didn't need to be regulated.

Oh, and Congress should also hear from the many AIG counterparties who together have received billions of dollars of taxpayer funds so far through AIG. These folks bought insurance from or did business with a company that was unable, as it turned out, to make good on its financial commitments. And yet because the government didn't let AIG file for Chapter 11 bankruptcy protection, these counterparties have been made whole. I'd like to hear Goldman Sachs CEO Lloyd Blankfein tell Congress why it was appropriate for taxpayers to make a payment to Goldman of $5.6 billion in credit-default swaps, and why Goldman shouldn't eat at least a portion of the losses it would have suffered had the taxpayers let AIG fail. It would be nice to hear from the half-dozen German banks, including the state-owned Landesbank Baden-Wuerttemberg, who have benefited from one of the biggest transfers of taxpayer wealth to Europe since the Marshall Plan. Or from executives at Citadel, the beleaguered hedge fund that received $200 million in payments from AIG's securities-lending business. They should be duly sworn in and forced to explain why taxpayers should pay these claims just because their firms bought insurance without determining whether the insurer could pay the claims.

Or maybe Congress can call in CNBC's Rick Santelli and force him to explain why subsidizing these losers is somehow different than subsidizing losers who are behind in their mortgages. Now that, at least, would be good theater.