Implications of AIG furor

The furore over AIG is awkward for the new administration in several ways. First, it makes it harder to pin responsibility for botched financial rescues on the Bush team. The new lot could have nipped the bonus fiasco in the bud. It also leaves Mr Obama walking a fine line between convincing the public that he shares their sense of outrage while also possibly pressing for more rescue funds. The government’s best guess is that another $750 billion could be needed. Insurers are clamouring for funds too. But bail-out fatigue is growing. The hearing’s chairman, Paul Kanjorski, suggested that the AIG mess could force Congress to reconsider any future largesse. It does not help that Mr Geithner’s star is falling. His failure to get ahead of the problems at AIG follows his botched unveiling of a bank-rescue plan. Regaining his credibility will depend on the success of two new schemes: one to boost consumer lending by reviving securitisation, and another to remove toxic assets from banks (details of which are expected any day). Here, too, the government faces a balancing act: it needs to make the terms attractive enough to bring in private buyers, but not so attractive that they invite more political fireworks. Another risk is that restrictions placed on firms that receive public money backfire. Banks are responding to new executive-bonus limits by increasing salaries. This “flies in the face of making pay more performance-related,” says Pearl Meyer of Steven Hall & Partners, a consultancy. Chafing under restrictions on their activities, recipients of funds from the previous government’s Troubled Asset Relief Programme are scrambling to repay them early. This may cheer taxpayers, but the withdrawal of capital may also hurt lending. No wonder Mr Obama is keen to move the debate on. The focus now, he said on March 18th, should be on giving the government the tools to prevent a repeat: resolution authority over non-banks, similar to the power the Federal Deposit Insurance Corporation has to shake up sick banks. Mr Liddy, meanwhile, will be urged to earn his dollar by disposing of AIG’s assets and cutting the group’s vast debt to the taxpayer. Such deals have so far proved elusive. This week’s brouhaha is unlikely to make the task easier.