Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 3/16) 

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics. 

What a spectacle! Congress has spent the better part of a week attacking those paying-out bonuses at stricken insurance giant AIG. Led by some of that body’s most ethically challenged members (Charles Rangel and Chris Dodd come to mind), Congress wants to prove that, in spite of mountains of evidence to the contrary, they really are good stewards of taxpayer money. This grandstanding might be amusing were it not very, very damaging.

Among other casualties from this most recent hysteria may be Treasury Secretary Tim Geithner, who appears to have lurched ever closer to losing his job. What is really going on here?

First, members of Congress on both sides of the aisle are all too aware that voters are furious about the trillions of dollars that have been spent shoring up the nation’s financial institutions and then attempting to jumpstart the economy. Since the majority voted for the rescue funds last year or for the stimulus bill, most are on the defensive, afraid they will be accused of bailing out Wall Street Fat Cats. The numerous stories that have surfaced about egregious pay (John Thain) or tone-deaf arrogance (John Thain) have cemented voters’ suspicions that those who turned the canyons of Wall Street into valleys of despair continue to make out like bandits while millions of Americans lose their jobs and nest eggs.

AIG represents the sorest of sore points. The company has received $182.5 billion from the government, which consequently now owns 80% of the firm. Most Americans have no idea what a credit default swap is, or why we need such things, or how any one company could have possibly lost so much money creating these products. Nor has it been easy for the government to explain why it is so vital that AIG not founder.

Since taking charge of AIG, the government put Edward Liddy, former head of insurer Allstate, in as CEO to help right the sinking ship. This decent fellow came out of retirement to work for $1 a year in public service, only to find himself on the griddle this week defending compensation plans that he, Tim Geithner and Henry Paulson deemed essential to saving AIG. The $165 million in question does not constitute bonuses for performance. Instead, the pay was to keep certain employees who were viewed as key to the winding down of AIG’s huge swaps portfolio.

Who cares about credit default swaps? We all care. These complicated contracts that guaranteed all kinds of debt obligations went sour over the past year, posing a threat to the integrity of many of our large banks. As President Obama has rightly said, priority No. 1 is to stabilize the banking system. For each AIG contract there is a counterparty, normally a bank, on the other end of the agreement. What Liddy was trying to do was to keep in place those employees who had the knowledge and capacity to reduce the portfolio. Yes – some of these people were responsible for creating this disaster; and yes – they are the ones who can make it go away.

Poor Liddy, who has received death threats from irate and presumably insane taxpayers, said in his testimony before Congress that the portfolio has shrunk from $3 trillion to around $1.7. That’s an improvement, but not good enough. AIG and its counterparties are still vulnerable to further shocks in fixed-income markets.

None of this is good news for taxpayers. However, ranting and raving about bonuses is not going to help. On the contrary, the continued bloviating damages voter confidence in the numerous programs being spun out by the Fed and the Treasury that are meant to build faith in the economy. It is also keeping investors from participating in some much-needed government programs. It is time for Congress to tone down the outrage and to partner with the new administration in trying to solve our economic problems.