AIG Bonuses A Red Herring to Hide a Power Grab

There aren't many obvious ways to make the bank bailout fiasco worse, but the most idiotic would be to give even more power to big bank apologists/protectors Tim Geithner and Larry Summers.

So guess what's really behind the AIG bonus hysteria?

As frustration with Sen. Chris Dodd (D-CT) reaches a fever pitch, both on the Hill and among his home-state voters, it's worth taking a step back and asking why some fellow Democrats left him to flail this week while they scrambled for cover from AIG anger.

Here's one potential answer, gleaned from months of watching the still-evolving debate over broader financial regulatory reform: depleting Dodd's political capital positions the Federal Reserve for a major increase in power by next year -- handing a plum position to Larry Summers, who has long been tipped as the next Fed chairman.

Assigning Summers and Geithner to fix the global financial catastrophe isn't letting the fox guard the henhouse; it's handing every chicken on earth over to people who slaughter chickens for a living.

As The Nation explains, the bonus fiasco comes as no surprise to anyone who paid attention to the arguments against Geithner's confirmation.

The truth is that Geithner's been a horrible player from the start. Democratic Senators Robert Byrd of West Virginia, Russ Feingold of Wisconsin and Tom Harkin of Iowa, and Vermont Independent Bernie Sanders, were right to vote against confirming him as Treasury Secretary. While Republican opponents of the Geithner nomination may be accused -- fairly or not -- of having simply been playing politics, Byrd, Feingold, Harkin and Sanders raised profound and appropriate concerns.

Sanders said: "Mr. Geithner was at the Fed and the Treasury Department when the deregulatory fervor that got us into this mess ran rampant. He was part of the problem."

Added Harkin: "(Geithner) made serious errors in his job as chief regulator of the financial institutions at the heart of the current financial crisis."

Feingold said he based his "no" vote on concerns about Geithner's failure to pay taxes. But, the senator added, "I am troubled by Mr. Geithner's track record on some of the issues that have contributed to the credit market crisis..."

Savvy senators were unwilling to place their faith in Geithner.
But Dodd was not a savvy senator.

So Geithner demanded Dodd drop his amendment controlling executive compensation like the bonuses, and now Dodd's taking the blame, his credibility shot. TPM again:

But why would kneecapping Dodd help those in D.C. who want regulatory power consolidated at the Fed?

Because as Congress debates where to situate a new "systemic risk regulator" (that's Capitol-speak for "long-term protector of the financial system"), Dodd is openly questioning whether the Fed should have the job.

Current Fed chair Ben Bernanke has not done a horrible job trying to prevent complete economic meltdown, but his hands are full and the AIG fiasco got away from him. Larry Summers would be another Alan Greenspan, sacrificing Main Street to feed the greed of Wall Street.

Chief among the Fed's mistakes, in the eyes of its critics, was its mishandling of the original government takeover of AIG. Dodd went on to say yesterday, as he has on several recent occasions, that the Federal Deposit Insurance Corporation (FDIC) is a better choice to become the "systemic risk regulator" because it has a more solid track record on consumer protection.

SNIP

It's not clear whether Geithner and Summers agree that the Fed should become "America's regulator-in-chief," as the Economist puts it today.
But given Geithner's history at the central bank, and Summers' apparent vying for the chairmanship, it's reasonable to suspect that they'd much prefer the Fed to the FDIC, where chief Sheila Bair has openly clashed with the new Treasury Secretary over remedies for the financial meltdown.

It may be a long time before we know for certain who did what wrong and who committed what crimes in the Great Collapse of 2008, but in the meantime, I'll suggest this rule of thumb:

In seeking solutions to problems caused by people on Wall Street, put not your trust in people from Wall Street.

Or in other words, whatever Tim Geithner and Larry Summer suggest, do the opposite.

Cross-posted at They Gave Us A Republic ....