Obama should mimic Lincoln on bonuses

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Obama should mimic Lincoln on bonuses

by Frank James

How does a president stop a nation from cutting off its nose to spite its face?

That is the challenge now facing President Barack Obama as he tries to keep the populist rage against Wall Street, in general, and American International Group Inc.'s bonuses, specifically, from derailing his efforts to stabilize the financial system.

The federal government has several programs either under way or planned which require taxpayer and congressional support for infusions of more taxpayer money into the nation's financial institutions.

But the backlash against the $165 million in executive bonuses at AIG threatens to put an end to support of the bailouts which could leave the nation's banks in the same sorry state they're in now, with too little cash on hand to offset the bad loans they continue to carry on their books. That would mean the credit system could remain substantially frozen which in turn could keep the economy in the doldrums for the foreseeable future.

Joe Nocera, the New York Times financial columnist, has a column that should be widely read in which he spells out the very bad consequences if Americans and their leaders continue to allow populist anger at banks -- never far from the surface in America -- to continue to dictate events.

An excerpt:

By week's end, I was more depressed about the financial crisis than I've been since last September. Back then, the issue was the disintegration of the financial system, as the Lehman bankruptcy set off a terrible chain reaction. Now I'm worried that the political response is making the crisis worse. The Obama administration appears to have lost its grip on Congress, while the Treasury Department always seems caught off guard by bad news.

And Congress, with its howls of rage, its chaotic, episodic reaction to the crisis, and its shameless playing to the crowds, is out of control. This week, the body politic ran off the rails.

There are times when anger is cathartic. There are other times when anger makes a bad situation worse. "We need to stop committing economic arson," Bert Ely, a banking consultant, said to me this week. That is what Congress committed: economic arson.

He goes on to write that Congress is well on its way to destroying whatever value is left in AIG, an odd action for an 80 percent owner in the company.

The retaliation against AIG employees is likely to accelerate the exodus of the very people in the company's financial products division who can unwind financial positions at the company while retaining the most value.

And all the anger at AIG is also pummeling the good parts of AIG, the insurance units that also have value. There are reports that some of the best AIG employees on the insurance side of the business that had nothing to do with the kinds of risks the financial-products people were taking are leaving too, again lowering the value of what's left at AIG.

So all the congressional and public outrage, while it feels good, may have the unintended consequence of ensuring that AIG is worth a whole lot less than it needs to be for we taxpayer/shareholders to recoup the upwards of $170 billion of our money that is keeping the company afloat.

David Wessel at The Wall Street Journal also has a piece well worth reading to understand why we're at a scary moment in the financial and economic crises. An excerpt:

Rescuing the economy from the worst financial crisis in 75 years just got harder. Thank those bonuses at American International Group.

The uproar over six- and seven-figure payouts by a company propped up with $173 billion of government cash complicates President Barack Obama's already formidable task: To bolster the political courage of voter-fearing lawmakers to spend unfathomable sums of taxpayer money in order to avoid a decade of stagnation or a repeat of the Great Depression.

Federal Reserve Chairman Ben Bernanke, the nation's most prominent student of the Depression, was asked by a television interviewer the other day: What keeps you up at night? His answer wasn't Citigroup or inflation. "The biggest risk is that we don't have the political will," he said. "That we don't have the commitment to solve this problem, and that we let it just continue. In which case, we can't count on recovery."

His point, though he can't put it so bluntly, is that it's going to take hundreds of billions of dollars more to rebuild the foundations of the banking system and restart the economy. It's going to mean letting some people profit from buying smelly mortgage assets on the cheap and paying others far more than the average office worker to manage huge portfolios that fall into government hands. And, to make the whole system safer, it's going to require changes to regulation of finance in ways that powerful interests will resist.

Yet the public mood toward spending more taxpayer money -- and toward bankers and their government overseers -- appears even more hostile than it did last fall when the House of Representatives initially rejected the Bush administration's $700 billion bailout plea. Back then, voters didn't know what the plan was. Today, they know -- or at least think they do -- and they don't like it.

In December, a CBS News poll found the public split on the wisdom of "providing money to banks and other financial institutions to try to help fix the country's economic problems," with 46% approving and 44% disapproving. Asked the same question between March 12 and March 15, 53% disapproved and 37% approved.

Obama may have made his task more difficult by sending two different messages. On one hand, he expressed his anger with the bonuses earlier this week and tasked his Treasury Department with finding the means to get the bonus money returned.

On the other hand, it was his administration that apparently asked for the language in the economic stimulus legislation that allowed the AIG bonuses to be paid to begin with. And The Wall Street Journal is reporting that the administration wants to weaken the bonus tax legislation in Congress because of continued fears that it will cause a Wall Street brain drain that could make the crisis more difficult to solve.

The only way for the president to meet this challenge may be for him to speak clearly as to the reason why some actions are necessary, even unpopular ones, to save the financial system. If he tries to have it both ways, appealing to populist anger while trying to retain support for the financial bailouts, he may well fail at both.

He may need to borrow once again from President Abraham Lincoln, whose story has clearly been a major influence on Obama. It was Lincoln who famously and beautifully said in his letter to Horace Greeley, the abolitionist newspaper publisher:

I would save the Union. I would save it the shortest way under the Constitution. The sooner the national authority can be restored; the nearer the Union will be "the Union as it was." If there be those who would not save the Union, unless they could at the same time save slavery, I do not agree with them. If there be those who would not save the Union unless they could at the same time destroy slavery, I do not agree with them. My paramount object in this struggle is to save the Union, and is not either to save or to destroy slavery. If I could save the Union without freeing any slave I would do it, and if I could save it by freeing all the slaves I would do it; and if I could save it by freeing some and leaving others alone I would also do that. What I do about slavery, and the colored race, I do because I believe it helps to save the Union; and what I forbear, I forbear because I do not believe it would help to save the Union. I shall do less whenever I shall believe what I am doing hurts the cause, and I shall do more whenever I shall believe doing more will help the cause. I shall try to correct errors when shown to be errors; and I shall adopt new views so fast as they shall appear to be true views.

Obama must do all he can to save the financial system by the "shortest way" possible. If it means defending the payment of bonuses, he should do that. If it means banning all bonuses, he should do that. If it means allowing some bonuses and not others, he should do that.

But the ultimate goal at this stage must be stabilizing the financial system and resuscitating the economy, whatever it takes. It will take a political courage akin to Lincoln's for Obama to keep his eye on the goal and not get distracted by the popular uproar and the demagoguery of politicians. But that appears to be the only way out of the current crisis.

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