AIG bonuses leave Obama in a tough spot

As outrage boils over the bonuses promised to executives at AIG, the ailing insurance giant that has received a massive federal bailout, President Obama finds himself in a precarious political position.

If the public, and their elected representatives in Washington, conclude that Mr. Obama and his administration did not do everything in their power to halt the bonuses, that could hinder the government’s ability to gain congressional approval for future measures aiming at righting the struggling economy. Obama’s entire agenda could be at risk, some analysts have suggested.

But the president is unlikely to deplete his political capital completely. Obama has shown, during both his campaign and the opening weeks of his presidency, a responsiveness to criticism and a willingness to change course that could, once again, keep him on track. Over the weekend, the message from various Obama administration officials was, essentially: “There’s nothing we can do about the AIG bonuses. A contract is a contract.”

Come Monday, Obama demonstrated that there was something to be done: Try to shame AIG execs into turning down their “retention payments.” Instead of allowing himself to be engulfed by populist outrage, Obama joined the chorus. He ordered his Treasury secretary, Timothy Geithner, to try again to find a legal way to block the $165 million in bonuses. And even though that still seemed impossible by day’s end, administration officials were saying that the Treasury Department was working on recouping the cash by retooling the terms of the latest infusion of federal cash, $30 billion, granted to AIG.

“If Obama had stuck with his original position ... that would have been highly problematic,” says Darrell West, director of Governance Studies at the Brookings Institution. “But now they seem to be shifting to a more aggressive stance ... by employing the shame strategy.”

The administration is “hoping that there’s enough public pressure and late-night comedy pressure to force voluntary action from AIG,” Mr. West adds. “The longer this stays in the news, the greater the chance that effort will be successful. A company is ready to take one day of bad news, but when it gets to be two, three, four days, they capitulate.”

At this point, facts seem to be less important than public perceptions. And in fact, AIG has already stated that it is seeking ways to repay the American people for what it calls “retention payments” to employees. In a letter to Treasury secretary Geithner, AIG chairman Edward Liddy laid out ways the company is reducing compensation to employees, especially those in the Financial Products division that engaged in the risky behaviors.

But for AIG, the damage is already done. It has become the face of corporate greed, and Obama is doing all he can to convince Americans that he’s as outraged as they are. On Thursday, he will appear on “The Tonight Show with Jay Leno” to talk about the economy, and it’s a safe bet that AIG will come up. Obama gets plenty of face time in the political media, and on cable TV, but by setting a new precedent – he will be the first sitting president to appear on late-night TV – he is going beyond the usual audience of political junkies and policy wonks and reaching out to “real America.”

Obama may also get some help from New York State’s attorney general, Andrew Cuomo, who has launched an investigation into the bonuses and threatened a subpoena to AIG to get a list of the names of bonus recipients. If Mr. Cuomo is able to get the names and they are publicized, the shame tactic could reach a new level.

In the meantime, members of Congress and interest groups are also joining the populist wave. One House member, Rep. Gary Peters (D) of Michigan, has introduced legislation that would recover the full value of the bonuses through a surtax.

One of the nation’s largest labor unions, the Service Employees International Union, announced protests to take place Thursday at financial institutions around the country. The union and other organizers say 10,000 Americans will take part in more than 100 protests in more than 30 states. The protests will call for banking reform and universal healthcare, and also show support for a controversial measure now before Congress called the Employee Free Choice Act, aimed at making it easier to form unions at businesses.

On Tuesday, House Republican leader John Boehner of Ohio expressed outrage over AIG at a press conference.

“Two weeks ago, the president’s spokesman said that they were confident that they knew how every dime was being spent at AIG,” said Mr. Boehner. “Well clearly, they didn’t know what they were talking about.”

In the past, Boehner has blamed both the Obama administration and the administration of George W. Bush for not putting forth an “exit strategy” that would put an end to government bailouts of private business.

Obama himself has repeatedly made clear that he inherited the bailout of financial institutions from Bush. But with each passing day, Obama takes on political ownership of the nation’s financial crisis.

“The initial steps to take over AIG happened on Bush’s watch, and to me, that’s the finest line of all – putting some of the blame where it belongs without looking like you’re shirking responsibility,” says Jennifer Duffy, a political analyst at the Cook Political Report. “I think that’s a line they have walked on the economy from Day 1.”