Too Big to Fail [288]
Behind the scenes, Ken Lewis threatened to withdraw from the deal, but Paulson and Bernanke pressed him to complete it or risk losing his job.
As details of the drama leaked out John Thain became a quick casualty, with Ken Lewis firing him in his own office. He was soon recast from the hero who had saved Merrill into the source of its troubles, despite indications that Bank of America was aware of the firm’s problems and chose not to disclose them. Additional criticism was leveled at Thain when it emerged that he had asked the outgoing Merrill board for as much as a $40 million bonus. “That’s ludicrous!” shouted John Finnegan, the Merrill director who was on its compensation committee, when a human resources representative made the request. Thain has said that he knew nothing about it, and by the time a discussion about his compensation reached the full board, he had withdrawn any request for a bonus.
Nowhere was the public backlash more severe, however, than it was against American International Group. AIG had become an even greater burden than anyone expected, as its initial $85 billion lifeline from taxpayers eventually grew to include more than $180 billion in government aid. Geithner’s original loan to AIG, which he had said was fully collateralized, quickly looked to be no sounder an investment than a mortgage lender’s loan to a family with bad credit and no ability to ever pay it back.
Now that taxpayers were owners of AIG, lawmakers complained loudly about a $440,000 retreat for their independent insurance agents at the St. Regis Monarch Beach resort in Dana Point, California, and an $86,000 partridge-hunting trip in the English countryside. But the greatest ire was reserved for reports of millions of dollars in bonuses being awarded to AIG executives, as protesters swarmed its headquarters and its officials’ homes. President Obama asked, “How do they justify this outrage to the taxpayers who are keeping the company afloat?” while on his television program Jim Cramer ranted, “We should hound them in the supermarket, we should hound them in the ballpark, we should hound them everywhere they are.”
The widespread criticism gave rise to considerations about how to continue operating the business: Should decisions about how the company spent its money be made in reaction to popular opinion or with the goal of achieving profits? Edward Liddy, AIG’s new CEO, so frustrated with trying to serve two masters, left the company within eleven months of joining it.
There was also the issue of exactly how the AIG bailout money was used. More than a quarter of the bailout funds left AIG immediately and went directly into the accounts of global financial institutions like Goldman Sachs, Merrill Lynch, and Deutsche Bank, which were owed the money under the credit default swaps that AIG had sold them and through their participation in its securities lending program. To some extent this disbursement only bolstered the argument of critics who decried Paulson’s rescue as a bailout by Wall Street for Wall Street. (It didn’t help that foreign banks received some of the indirect aid, even though foreign governments hadn’t contributed to the rescue plan.)
Because Goldman Sachs was the largest single recipient of the AIG payments, receiving $12.9 billion, much of the anger quickly settled on it, as theories proliferated about what strings the firm might have pulled behind the scenes given its ties to Paulson and Treasury’s cast of Goldman alumni. In particular, the Goldman connection to AIG suggested to some that it was the reason that Treasury—or what people had started calling “Government Sachs”—had chosen to rescue the insurance giant, and not Lehman. Goldman disputed claims that it benefited from the AIG rescue, contending that it had been “always