There is one thing that I have learned about politics: when the political ruling class is in a big lather about something and screaming loudly for retribution and action, that means the real action is taking place elsewhere, in secret, and that all the fuss is to distract attention from the real scandal. This rule of thumb has never failed me, although sometimes it takes a while to find out what the true story is.

This instinct immediately kicked in when all the ballyhoo began about the $165 million in bonuses being paid to some AIG executives. This is just 0.1% of the money paid out (so far) to AIG and when I saw all the politicians getting into fits of righteous indignation, holding Congressional hearings, calling these executives all kinds of names, demanding the bonus money back, and threatening to use subpoenas and punitive laws to do so, I felt at once that it was all a smokescreen although I did not know what the smoke was covering. But I knew that soon enough, more knowledgeable people would reveal the truth, even though it would not get major coverage in the mainstream media, because the latter is a necessary part of the smoke-generating machine, and dutifully play their role by giving extensive coverage to all the grandstanding, while not investigating the real news.

Some new articles reveal what is actually going on. To understand what they say, you need to know that the term ‘counterparties’ refers to those firms that owned assets of dubious value that AIG had ‘insured’ against loss from their face value. (Note: I have explained before that this was not technically insurance, which is a highly regulated industry, but was essentially an unregulated scheme of private bets.) The taxpayer bailout money to AIG was used to pay off those obligations. But despite using public money and despite the government now owning nearly 80% of its shares, AIG had the nerve to refuse to reveal to the public the names of the companies that it had paid out money to and for what, leading to suspicions that, rather than protecting taxpayer interests, they had deliberately overvalued those assets in order to bail those companies out from their bad decisions. They finally revealed at least the names on Sunday night, a time when companies and governments release bad news hoping the public is not paying attention.

After months of stonewalling, government-controlled American International Group (AIG) finally revealed the names of the counterparties that were funneled $108 billion in taxpayer funds. The largest recipients of AIG bailout funds were European banks, Wall Street firms and, to a lesser degree, municipal governments.
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The fundamental concern is that favored firms may have been overpaid for assets using a large chunk of AIG’s $170 billion bailout package. Though it is now known who the counterparties are, AIG refused to itemize what exactly it is each of them brought to the table. As a result, it’s impossible to know if some firms got better deals than others, or if taxpayers got a raw deal all together.

Eliot Spitzer explains in Slate what is going on:

Everybody is rushing to condemn AIG’s bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG’s counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?

For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman’s collapse, they feared a systemic failure could be triggered by AIG’s inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG’s trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already. (my italics)
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The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

Spitzer then goes on to ask some very pertinent questions about all the cozy insider dealing between AIG, Goldman Sachs, Paulson, Geithner (who has replaced Paulson as Treasury Secretary), and Benanke. He says that those questions should be asked under oath.

Economist Michael Hudson sheds more light on the deal:

Here’s the problem with all the hoopla over the $135 million in AIG bonuses: This sum is only less than 0.1 per cent – one thousandth – of the $183 BILLION that the U.S. Treasury gave to AIG as a “pass-through” to its counterparties. This sum, over a thousand times the magnitude of the bonuses on which public attention is conveniently being focused by Wall Street promoters, did not stay with AIG. For over six months, the public media and Congressmen have been trying to find out just where this money DID go. Bloomberg brought a lawsuit to find out. Only to be met with a wall of silence.

Until finally, on Sunday night, March 15, the government finally released the details. They were indeed highly embarrassing. The largest recipient turned out to be just what earlier financial reports had rumored: Paulson’s own firm, Goldman Sachs, headed the list. It was owed $13 billion in counterparty claims. Here’s the picture that’s emerging. Last September, Treasury Secretary Paulson, from Goldman Sachs, drew up a terse 3-page memo outlining his bailout proposal. The plan specified that whatever he and other Treasury officials did (thus including his subordinates, also from Goldman Sachs), could not be challenged legally or undone, much less prosecuted. This condition enraged Congress, which rejected the bailout in its first incarnation.

It now looks as if Paulson had good reason to put in a fatal legal clause blocking any clawback of funds given by the Treasury to AIG’s counterparties. This is where public outrage should be focused.

Instead, the leading Congressional shepherds of the bailout legislation – along with Obama, who came out in his final, Friday night presidential debate with McCain strongly in favor of the bailout in Paulson’s awful “short” version – have been highlighting the AIG executives receiving bonuses, not the company’s counterparties.
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[What do] Sen. Schumer, Rep. Frank, Pres. Obama and other Wall Street sponsors gain from this public outcry? For starters, it depicts them as hard taskmasters of the banking and financial sector, not its lobbyists scurrying to execute one giveaway after another. So the AIG kerfuffle has muddied the water about where their political loyalties really lie. It enables them to strike a misleading pose – and hence to pose as “honest brokers” next time they dishonestly give away the next few trillion dollars to their major sponsors and campaign contributors.
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The uproar about AIG bonuses has effectively distracted attention from the AIG counterparties who received the $183 billion in Treasury giveaways. The “final” sum to be given to its counterparties has been rumored to be $250 billion, do Sen. Schumer, Rep. Frank and Pres. Obama still have a lot more work to do for Wall Street in the coming year or so.

To succeed in this work – while mitigating the public outrage already rising against the bad bailouts – they need to strike precisely the pose that they’re striking now. It is an exercise in deception.

The moral should be: The larger the crocodile tears shed over giving bonuses to AIG individuals (who seem to be largely on the healthy, bona fide insurance side of AIG’s business, not its hedge-fund Ponzi-scheme racket), the more they will distract public attention from the $180 billion giveaway, and the better they can position themselves to give away yet more government money (Treasury bonds and Federal Reserve deposits) to their favorite financial charities.
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The money can be recovered. And that’s just what Mr. Schumer, Mr. Frank and others don’t want to see the public discussing. That’s why they’ve diverted attention onto this trivia. It’s the time-honored way to get people not to talk about the big picture and what’s really important.

Barack Obama, Barney Frank, Charles Schumer, and other leaders of both parties are busy grandstanding about the bonuses to hide the fact that they are complete shills for the finance industry and that they have colluded in the outrageous giveaway of huge sums of taxpayer money to the big financial firms, using AIG as the conduit. It is basically a money laundering scheme, to hide the real beneficiaries, the big financial interests that both parties serve.

Our pro-business, one-party government at work, serving the needs of the people they really care about.

POST SCRIPT: Monkey business

Researchers find that some monkeys seem to teach their young children how to floss their teeth. This is remarkable because the ability to consciously teach others how to use tools properly is thought to be a capability that only the human species possesses.