The Political Fallout of AIG's Bonus Loophole; How to Start Building a Secure Financial Future
CHRISTINE ROMANS, CNN HOST: Hello and welcome to YOUR MONEY. I'm Christine Romans.</s>ALI VELSHI, CNN HOST: I'm Ali Velshi. Coming up this hour, the business news you need to know to protect your financial security. First, he has got one of the toughest jobs around and he is under fire. I'm talking about treasury secretary Timothy Geithner. I sat down with him for an exclusive interview, and I talked to him about his role in the AIG bonus controversy and how he plans to get our economy back to track.</s>ROMANS: You don't want to miss that. It's a very good interview. Also ahead, how to start building a secure, financial future right now. Personal finance expert Jean Chatzky is here and she's got steps that you can take to achieve financial stability especially if you're living paycheck to paycheck. You want to move that scale, she is going to tell you how to do it.</s>VELSHI: She's written a great book and she has done a lot of research on it. So that is really interesting. Taking the blame. The nation is outraged over lawmakers' loopholes that allow bonus payments of $165 million to be paid out to executives of insurance giant AIG. We'll check into the political fallout of that.</s>ROMANS: This story just does not go away. This is a story everyone is talking about this week is the AIG bonus loophole. How did this happen? There was this back and forth trying to figure out how these bonuses were paid up. Let's look at these bonuses. Who got the bonuses? $165 million. Look at the number of people who got all of this money, $6.4 million bonus went to somebody. Look at these folks who got $4 million bonuses. Look at the number of people who got $2 million dollar bonuses and 73 people became millionaires working for the division of AIG that brought down the entire company.</s>VELSHI: I think that's a really key point. This isn't just people at AIG. This is the AIG Financial Products division which was right in the center of it. AIG was an otherwise healthy company until this division messed everything up.</s>ROMANS: Big, big stable insurance company with basically hedge fund sitting on top that took the whole thing down and it was those people in this hedge fund that were essentially given these retention bonuses. You see them there.</s>VELSHI: That's the bonus to prevent you from leaving the company.</s>ROMANS: This is the ugly way that the compensation works on Wall Street but then it collides with the ugly way that Washington works Ali, doesn't it?</s>VELSHI: This was a real mess. Listen to AIG's CEO. This AIG's new CEO. He's been on the job since September. The bad stuff didn't happen on his watch and he is stuck defending this bonus situation. He was before Congress this week.</s>EDWARD LIDDY, CHAIRMAN & CEO, AIG: This morning I asked the employees of AIG Financial Products to step up and do the right thing. Specifically, I've asked those who received retention payments in excess of $100,000 or more to return at least half of those payments.</s>ROMANS: They might have not to return them or if they do it might be something they'll be taxed on because the House is really pushing through a bill quickly to tax those bonuses. The irony here is Congress in the first place allowed a loophole to go through that allowed the AIG bonuses to be paid and Congress on the back end is trying to amend -- basically use the tax code to get that money back.</s>VELSHI: Very interesting changes that they're proposing to the tax code, by the way. Highly specific, it speaks to any company that has taken more than $5 billion in TARP money. TARP is the bailout. Remember that's the $7 million bailout and employees there made more than $250,000 they would then face a 90 percent bonus, a 90 percent tax on the bonus.</s>ROMANS: People are talking about whether it's even legal. They're talking about what the consequences could be. You could have people working in the human resources department of saying Merrill Lynch who is doing a really great job trying to help people keep their jobs and find new jobs and then suddenly find themselves having to be taxed on a bonus that has nothing to do with the problems in the economy. And another thing they think is important to point out here, there's been a lot of anger, populist anger this week and a lot of the way Wall Street works is that one-third of your compensation is your salary. Two-thirds is a bonus. So what Congress is trying to do now in the back end to tax the bonuses could affect a lot more people than Scoff laws who got us into this trouble.</s>VELSHI: I've always said that maybe they should change the bonus. You did a fantastic job and you get your share. I sat down with the treasury secretary, Tim Geithner just this week to talk to him about this and other things about how he plans to get this economy back on track. Now, unfortunately, he was, you know he was brought into the whole discussion of the bonuses because Senator Chris Dodd said to him that there was a change to the stimulus that allowed these bonuses to be paid and that somebody at Treasury was actually influential in making that change.</s>ROMANS: Because of all that, you've got folks, some folks who are saying maybe they don't have confidence in Timothy Geithner and his Treasury Department if in fact the Treasury Department is helping Congress, where is the balance of power there?</s>VELSHI: Right.</s>ROMANS: Some people have called for his resignation and he responded to that to Ali.</s>VELSHI (voice over): What about the calls for you to resign?</s>TIMOTHY GEITHNER, TREASURY SECRETARY: I, again, this just comes with the job. If this was not challenging, it wouldn't be consequential, I feel there's deep sense of responsibility and obligation and really opportunity to work with the president and this Congress to try to make this economy stronger, to make sure the financial system never goes through this again. People will disagree with some of the choices we make, but we have to act. We have no choice, but to move.</s>ROMANS: We have a lot more of that interview throughout the hour and there are some fascinating things that he said about what the Treasury and the Fed and your government are trying to do to help the economy. In fact, this $165 million in bonus controversy overshadowed some the much bigger numbers that we were talking about.</s>VELSHI: Huge. First of all, it overshadows the bigger number of AIG which has already received $170 billion, going to receive another $30 billion and maybe even more some say, but even that pales in comparison to more than $1 trillion that was injected into the economy this week to try and make lending a little easier or a little cheaper for you.</s>ROMANS: Ka-ching. The Fed's latest move, buying back Treasury securities, mortgage-backed securities and agency debt and what happened immediately, immediately by this flood of liquidity into the system essentially, mortgage rates fell.</s>VELSHI: Within a couple of hours. The average mortgage rate was above 5 percent. Let me just tell you what this means. The Treasury went out bought back debt and bought back bonds which means it gave people more money and gave these investors who held the bonds money to spend and invest. Agency debt is Fannie Mae, Freddie Mac and things like that and mortgage-backed securities and same thing, $750 billion. So it gave Freddie and Fannie more money to buy mortgages from your bank. The bank becomes more able to lend you money. So the goals were to lower mortgage rates and lower treasury rates which we saw. We don't want to call it increased inflation, but get the economy to grow a little bit more.</s>ROMANS: To reflate the economy. And the potential risks, what else can the Fed do? They've been talking about this for months, frankly. There could be the long-term inflation consequences and people are saying look, the Fed is just printing money and we're going to have inflation down the line, but the bottom line here is in the very, very near-term, this is their attempt in the near-term to goose the economy right here.</s>VELSHI: I just talked to somebody here who said they locked into a 4.5 percent 30-year fixed mortgage and that is the effect of these changes from the Treasury.</s>ROMANS: Of all of the news this week, I will say that is the one piece of news that more people responded to me about that it would affect them immediately. The AIG story, people wanted to scream about it, but I'm telling you, the thing that affects their money is what the Fed did this week.</s>VELSHI: But the AIG story and bonuses still are getting people -- they're getting people angry. Massive bailouts followed by massive bonuses. I asked the treasury secretary, Timothy Geithner exactly what he knew about the AIG bonus loopholes in my exclusive interview with him.