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AIG: Facts and Fury

Aired March 21, 2009 - 20:00   ET


ALI VELSHI, CNN CORRESPONDENT: Three letters, the source of quite a controversy this week, AIG. Outrage, over $165 million in executive bonuses as the insurance giant receives billions in bailout cash. Anger over the lack of accountability on Capitol Hill and from the White House. But we know the story. We know the players. And tonight, it's about to become crystal clear. It's "AIG Fact and Fury."

Hello, everyone. I'm Ali Velshi. You want answers. We're going to give you AIG answers over the next hour. And we begin with the big mystery. As soon as the bonuses were announced, Congress was lining up to attack the company, even threatened its executives if they didn't pay the money back. But lost in some of the political noise was a little clause that Congress itself approved that paved the way for these bonuses.

In this week's special investigation unit correspondent Drew Griffin got on the trail of who in Congress wrote the AIG loophole and why they weren't fessing up. Drew?

DREW GRIFFIN, CNN CORRESPONDENT: Ali, it's one of those mysteries floated through the halls of Congress, inserted into a bill and approved with a whack of a gavel, yet, somehow no one seems to know it was even there, read it or fess up to writing it.


GRIFFIN (voice-over): What clause? This one. Buried deep in the mega spending bill, attached to an amendment cracking down on bonuses, a loophole that protects "any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009."

In other words, if AIG executives already had it in their contracts to get these bonuses, Congress couldn't touch them. Who wrote that? For two days, CNN pursued that one easy question.

The most obvious author would be Connecticut Senator Chris Dodd. After all, the Democrat heads the Banking Committee. Wrote the amendment the loophole is attached to. And has been getting big bucks in political contributions from AIG executives, a company with a major presence in his state.

But for two days, Senator Dodd was adamantly telling CNN, "Not me."

You're saying you had nothing to do with that?

SEN. CHRIS DODD, (D) CT: Absolutely not.

GRIFFIN: And it was nothing you were doing that was aimed at protecting AIG ...

DODD: No. Not at all, not in the slightest.

GRIFFIN: Which has offices, this particular office in the State of Connecticut.

DODD: It does. But the point is when that language left the Senate that I wrote, that was not included.

GRIFFIN: From the Senate, the bill went to the conference committee, which met on February 11th. So was it one of the 10 members inside the Conference Committee who wrote the loophole? We started calling them, every one of them. The five Conference Committee members from the House all said, not me. The five from the Senate, they were all "not me's" too. Could it have been Senate Majority Leader Harry Reid? No, not me. His staff told us Senator Reid was unaware the clause existed. Back to the House ...

REP. BARNEY FRANK, (D) MA: Extortion. These are not performance bonuses ...

GRIFFIN: We asked the top banking overseer, Congressman Barney Frank. He heads Financial Services and has been railing about the bonus pay. Not me, Frank's spokesperson told us. And pointed us back to the Senate, where sources pointed us right back to Senator Dodd.

We knew somebody sat down at a computer and wrote this loophole into the law. And after two days, Congress knew we were not going to stop reporting until we found out who did it.


GRIFFIN (on camera): Ali, it wasn't long after our last report that congressional correspondent Dana Bash got a call. The author about to confess? Sort of. Ali?

VELSHI: State right there, Drew, because we did get the answer we were looking for, thanks to great journalism on the part of our very own senior congressional correspondent Dana Bash. She's part of the best political team on television. Dana, walk us through what happened after what Drew just described.

DANA BASH, CNN CORRESPONDENT: That's right. What happened was I was actually getting word from Democratic sources here on Capitol Hill that it was the Treasury Department that was responsible for pushing for this change. So I called them up. And I told them that. And they said let me get back to you. A few hours later I got a call from an official at the Obama Treasury Department who said, here is what happened. We did have concerns. We had concerns that the way it was written that would actually ban bonuses retroactively. They were concerned that these companies and the government, actually, would get sued. So they made those concerns known to who? To Senator Chris Dodd's staff. And here's what they said. They said the response they got from Senator Dodd's staff was to change the language, was to actually put that clause in question in here.

Now, remember, we got this information and just a day earlier, here's what Senator Dodd said to our own producer, Ted Barrett.


DODD: When I left the Senate, it was no in there. So when I wrote the language, there was no such language like that. I can't point a finger at someone who offered the change at all.


BASH: So given that, we, armed with this new information, called Senator Dodd's office right away and said, the Treasury Department is saying that Senator Dodd, you did in fact make those changes. And they said, we'll get right back to you. They called us right back and said, Senator Dodd wants to come on and tell you what his side of the story is. He wants to respond and he wants to do it live.

Now, within 20 minutes, he was actually right here, speaking to us. And he gave us a mea culpa.


BASH: You did agree to modify this, to put that clause in?

DODD: The alternative was losing, in my view, the entire section on executive excessive compensation. Given the choice, this is not an uncommon occurrence here. I agreed to a modification in the legislation, reluctantly. I wasn't negotiating with myself here. I wasn't changing my own amendment. I was changing the amendment because others were insisting upon it.

BASH: You were very adamant yesterday, very adamant that you didn't know how this change got in there. And now you are saying that your staff did work with the administration.

DODD: Going back and looking -- obviously, I apologize.


BASH: That unfolded live right here on CNN. Ali, I'll give you a little behind the scenes tidbit. When his office agreed for him to come on and actually offered for him to come on, we didn't know how he was going to respond. It wasn't until he was live on CNN that he was going to admit he was wrong and he told us something that was basically factually incorrect.

VELSHI: And Dana, I then spoke with Treasury Secretary Tim Geithner, who did confirm that Treasury had been in discussions with the Banking Committee about a concern about the clause. What I don't understand is when Senator Dodd said the option was either to have that clause in there or to lose the amendment, what do you think he meant by that?

BASH: What he meant was, look, this was part of, as Drew described, a big -- the big stimulus bill, $787 billion. That was where everybody's focus was on the spending bill. What Senator Dodd was trying to do was get this issue into it. And he -- what his feeling is, is that because there was pushback from the Treasury Department, he said that the only way to keep this provision, at least some of the provision in here, was to make that change. And that's the point that he was trying to make. At least that's his argument.

VELSHI: All right, Dana, I'm going to bring back Drew Griffin and another CNN correspondent keeping close tabs on the AIG story, my YOUR MONEY co-host Christine Romans. Christine, what do you make of all of this?

CHRISTINE ROMANS, CNN CORRESPONDENT: I make of this that the American people are outraged and that caught a lot of people in Washington, frankly, by surprise. The American people in this entire incident have seen kind of how it works. And they see that there's this huge spending bill pushed through that clearly not everyone had read. Congress passed something and they didn't know what exactly precisely was in there. And there's a little bit of concern now that Congress is now going around the other direction and trying to legislate back those bonuses even after it was Congress in the first place who allowed them to go through.

So we're seeing again and again, Ali, that the American people don't like what they're seeing and this $165 million bonus debacle, quite frankly, has just added to their distaste for all of the chaos we've seen over the past six or seven months with the bailouts, interventions and guarantees from this government to the economy.

VELSHI: OK. So for our viewers, we have three things now to be concerned about. One is the state of AIG and the situation that's gotten us into. Number two are these bonuses that are being paid out to people, particularly in the very unit of AIG, the Financial Products unit, which is what really got AIG into this mess and largely collapsed the company. And, three, Drew, the thing you got on to in the first place.

And that is why are we not able to get a straight story out of Congress as to what is going on. I don't know which one of these three things to worry more about.

GRIFFIN: And we're still not seeing it really. Ali, I've heard of a couple of reasons. One, they wanted the bonuses to retain the top talent. No. We wanted these bonuses in there so that Justice or Treasury wouldn't get sued. The fact of the matter is, the amendment - and I'm sure Dana would agree with this -- I don't know what Senator Christopher Dodd is talking about. No one read the entire bill and he's talking about losing this one amendment in this bill which even Harry Reid told us he didn't read. I'm not getting the bottom here.

VELSHI: I asked the treasury secretary what the rationale was from the Treasury Department in talking to Senator Dodd and the Banking Committee. Here's what he told me. (BEGIN VIDEO CLIP)

TIMOTHY GEITHNER, TREASURY SECRETARY: We expressed concern about this specific provision because we wanted to make sure it was strong enough to survive legal challenge but we also worked with him to strengthen the overall framework. And his bill has this very important provision we're relying on now to go back and see if we can recoup payments that were made that there was no legal ability to block.


VELSHI: Dana, you have a lot of experience in Congress. Tell me how this works. When a bill is being made, if the Treasury Department tells a senior senator that they have a concern about a bill, who gets the last word? Who -- where does the buck stop on this?

BASH: That is such a great question because he's not just a senator. He's the banking chairman. And it's very interesting. At the end of the week he was saying, well, I had no idea this kind of clause, this kind of last-minute thing was going to make this kind of wave and that we were going to have this issue where we're going to be looking back and saying, oops, this allowed AIG to give its bonuses.

But to answer your question, we all know and have seen on so many issues, if a member of Congress really has an issue and really is adamant about something, they can stop the trains just by standing up and screaming about it. And Senator Dodd didn't do it. And no other senator did it. And I think the other thing that this really exposes with regard to what you heard from Secretary Geithner, Ali, is that it's not -- it wasn't just the Bush administration that was really reluctant to ban these bonuses. It had also in the past month and a half been very much the Obama administration. Not just with Senator Dodd but other Democratic senators, Democratic senators who have been telling us other stories like this over the past couple days.

VELSHI: All right. Dana, Drew, Christine, stay with us. We're going to continue on this story. You know the name AIG but you might not know just how huge this company really is and how much it affects you. Plus, what could have been done to prevent this whole mess in the first place?


VELSHI: You're watching "AIG Fact and Fury" here on CNN. Why does AIG matter so much? Well, before it started to crumble, it was one of the world's biggest insurance companies. Seventy four million policies around the world. How around the world? One hundred thirty different countries. But it's not just what you think. It's not just the personal policies that you would think of. AIG was really and still is the insurer to the world. It's not just personal policies like household policies or automobile or travel or life. It's much bigger than that. AIG even insures the stock market. It insures 401(k)s and mutual funds and the S&P 500, even the Dow Jones Industrial Average. And even more than that, business doesn't exist if there isn't somewhere that they can hedge their risks. So major banks are insured with AIG. Airlines are insured against crashes with AIG. Hollywood movies are insured against something happening to one of their movie stars. Rigs in the Gulf of Mexico are insured against hurricanes. Without major insurance companies, those risks couldn't be taken. And without AIG, some people are uncertain as to exactly where all that risk would go.

Now, it may have been the biggest story this week, but the AIG story has been building up for months. We at CNN have been following the latest details every day. CNN correspondent Mary Snow takes you through the twists and turns of this story.


MARY SNOW, CNN CORRESPONDENT (voice-over): Outrage at AIG may now have hit a boiling point. But as the chairman of the House Financial Services subcommittee points out, AIG's controversial bonuses have been on the radar for nearly two months.

REP. PAUL KANJORSKI, (D) PA: When the press first reported but the AIG Financial Products retention bonuses in late January, I called Mr. Liddy to express my concerns.

SNOW: On January 28th, CNN and other news organizations reported that AIG was planning on paying out $450 million of retention bonuses to the very unit that brought the company near the brink of collapse, the Financial Products unit. AIG now says $55 million was paid out in December and the rest was to be paid out over two years. In January, we spoke with Congressman Elijah Cummings, a senior member of the House Committee on Oversight and Government Reform, who has been a vocal critic of AIG.

REP. ELIJAH CUMMINGS, (D) MD: I don't know of any job or any employer in the world where, when you mess up and basically do things that literally destroy the company that not only do you get -- not only do you get to keep your job, but you get a bonus.

SNOW: At the time, AIG had taken $152 billion in bailout money, $30 billion more has been committed to the insurance giant. By March 2nd, AIG's CEO Edward Liddy still defended the bonuses, telling CNN's Ali Velshi the company needed to retain employees of the troubled unit.

EDWARD LIDDY, AIG CEO: We need skillful people who understand that business and understand those products to wind it down.

SNOW: The Treasury Department says Secretary Timothy Geithner first learned of the details of the retention payments on March 10th. But this video suggests otherwise at a House Ways and Means Committee hearing on March 3rd as Congressman Joseph Crowley of New York specifically references the bonuses to Secretary Geithner.

REP. JOSEPH CROWLEY, (D) NY: Just last month AIG paid 343 employees of AIGFP, their Financial Products division that created the financial hole that AIG is in and, in turn, a multibillion dollar bill for American taxpayers of $56 million in bonuses and are slated to pay an additional $162 million in bonuses to 393 participants in the coming weeks. GEITHNER: It's very important that we make sure we're providing exceptional assistance to these firms, that that assistance is going, again, to achieve the objectives of these programs, not to reward the kind of executives that got us into this mess.

SNOW: In a letter dated March 14th, AIG's CEO wrote Geithner telling him the bonus payments were legal, binding obligations and that $165 million in payments were due the following day. We spoke again today to Congressman Cummings and asked him whether the treasury secretary should have known about the controversial bonuses before last week.

CUMMING: To be frank with you, I couldn't -- I can't say what is reasonable for Mr. Geithner to know or not. And the reason why I say that is because, of course, he's got a lot of balls he's juggling.


SNOW (on camera): This week, the president defended his treasury secretary saying Geithner is making all the right moves in terms of playing a bad hand. But to be clear, the $165 million in bonuses to AIG's Financial Products unit that sparked the uproar is week is just part of that larger pool of $450 million of bonuses we first reported in January. Another round of bonuses, about $230 million was originally slated to be paid out in 2009. AIG has said that amount was being cut back, but the uproar this week was about just one portion of a larger pool of controversial bonuses. Ali?

VELSHI: And Mary, just to be clear, you reported in January about that $450 million, so that has been out there. There have been other reports on it. So that's part of the mystery the White House is focusing on this $165 million because that information about the whole pool has been out there. I want to bring in Shawn Tully who covers this every day for "Fortune" and Bethany McLean, she is joining us from Chicago. She is a writer and co-author of "The Smartest Guys in the Room." She worked on the book on the Enron scandal, and she's a contributing editor for "Vanity Fair."

Shawn, let's be clear what happened at AIG. It was mostly and largely a well run healthy company. There was this very profitable unit, the AIG Financial Products unit. This is the unit that came undone. They made some very bad bets and really brought AIG down. But this is the unit where these bonuses are going. What's wrong with this picture?

SHAWN TULLY, "FORTUNE": Well, actually, the history of these bonuses is very interesting, because they were established by the board in early 2008. At $450 million as Mary has reported.

And the idea was to tag these bonuses to precisely the same bonuses that these employees, several hundred employees, about 400, received in 2007, which was an excellent year for financial services, until the very end of the year at least. OK. So it was just a typical Wall Street, shall we say scam, to grandfather in bonuses that were excessive and to guarantee them for the year. So the bonus plan was extremely poorly conceived from the beginning.

The government comes in in September and essentially nationalizes AIG. At that point they had tremendous leverage to change this bonus plan, to pay the people who are needed to unwind the trades and to fix the Financial Products unit but not to pay people who are being way overpaid for essentially destroying, in some cases, a great company. So some of them have to be paid. Most of them did not.

Eliot Spitzer has been out of the limelight for a long time. He's given his first interview after having sort of emerged from being silent for a year to Fareed Zakaria on CNN GPS. And he was saying there's much more to investigate when it comes to AIG. Listen to what he told Fareed.


FAREED ZAKARIA, CNN HOST: So do you think that the problems that AIG got into later on stem from some of the same practices that you were trying to get at?

ELIOT SPITZER, FORMER NEW YORK GOVERNOR: They stemmed from an effort from the very top to gin up returns whenever, wherever possible and to push the boundaries in a way that would garner returns almost regardless of risk. Back then, I said to people, AIG is at the center of the web. The financial tentacles of this company stretched to every major investment bank. The web between AIG and Goldman Sachs is something that should be pursued. And as I have written ...

ZAKARIA: Meaning what? Meaning that a lot of the money that we, the taxpayers gave AIG has ended up being paid to Goldman Sachs?

SPITZER: Precisely.


VELSHI: Bethany McLean, one of my concerns is that in talking so much about the bonus situation, we are actually not even getting to the fact that there's a whole very complicated part of AIG's relationships to what we call their counterparties. Goldman Sachs is one of them. What do you think of Eliot Spitzer's comments? You were examining Enron at a time when everybody thought Enron was a fantastically healthy company and you knew you smelled a rat. What do you think about Eliot Spitzer's comments about AIG?

BETHANY MCLEAN, CONTRIBUTING EDITOR, "VANITY FAIR": Well, I think that there's a fine line between ethical wrongdoing and criminal behavior, and you can look at situations that just strike you as horribly wrong. And a great deal of Enron was just incredibly offensive on a common sense level, but it wasn't criminally illegal.

And I worry that whipping people into a frenzy of we're going to get these people, we're going to prosecute them, there must be criminal acts here, there must be a way to get them, I worry that that's creating unrealistic expectations and sort of a mob attitude of persecution.

VELSHI: All right, Bethany McLean, thank you very much for joining us. Bethany McLean is a contributing editor with "Vanity Fair" and the co- author of "The Smartest Guys in the Room." Shawn Tully, thank you for being with us. And as always, Mary Snow who has been on this case from the very beginning and apparently knew more about it than the administration did.

If you're looking for someone to blame, well you might have forgotten a very powerful group of people who could be most responsible for the large bonuses.


VELSHI: There was a not so quiet anger that spread across the country this week about the AIG story. Whether you believe it was justified or not. Let's check in with where some of you let us know how you really felt.


JIM MORRISON, IREPORTER: Can somebody tell me why they aren't handing out pitchforks right now and we are not charging AIG headquarters en masse? Seventy three of these executives received $1 million or more. And that includes 11 of them who left AIG. So I guess that flushes the argument that they need these bonuses to retain the best and the brightest.

MANNY DORADO, IREPORTER: They failed their contract. They failed to fire those people you're going to give a bonus and hire people some people who are going to get you out of the dump.


VELSHI: Well, with all of the focus on AIG executives and their million dollar bonuses, no one seems to pay much attention to a group of independent professionals most responsible for overseeing the insurance giant. We're talking about AIG's 11-member board of directors. CNN special investigations unit correspondent Abbie Boudreau is here with us live now. Abbie what exactly is the role of this board of directors and what have they been doing.

ABBIE BOUDREAU, CNN CORRESPONDENT: Well, Ali, the board of directors is supposed to be the shareholders' last line of defense. They are supposed to make sure there aren't serious problems and if they are the board should recommend changes so the company would not fail. But if the board didn't take care of the company they did take care of themselves.


BOUDREAU (voice-over): When it came to what they were earning, members of the AIG board of directors made sure they were getting paid some hefty fees. And why not, considering they're the ones who determine their own compensation.

HANK GREENBERG, FORMER AIG CEO: I think the chairman then was going to get $400,000-odd a year and most of the directors, $240,000, $250,000 and some $300,000 a year.

BOUDREAU: Hank Greenberg should know what he's talking about. He was the CEO of AIG until 2005, when he was forced out of the company because of an accounting scandal unrelated to this crisis. He remains the company's largest individual shareholder.

GREENBERG: They were saying they were all working harder, doing more things, more committees were established. So where was the oversight?

BOUDREAU: Seven of the 11 current board members have been in place since at least 2006. So how did AIG's board do in overseeing the once mighty insurance giant's fortunes? May 2007, the stock was worth more than $70 a share. May 2008, it was worth half that. And the day before the government stepped in, the stock was in the tank, trading under $5.

(on camera): And if the board of directors were supposed to be overseeing AIG, who was overseeing the board? Well, AIG's own governance rules state the board oversees itself.

(voice-over): According to the executive pay watchdog group, the Corporate Library, AIG's board met for nine days of committee and board meetings in 2007. A new report by the Corporate Library reveals the board paid itself nearly $4 million that year. If you do the math, that means an average paycheck of about $30,000 for each member for each day's work.

PETER MORICI, ECONOMIST: The board of directors of an insurance company should have been asking what are the risks, what are the assets that you have to back up the risks that you're taking and so forth. Clearly, they were absent without leave. They weren't doing their jobs. And they're culpable.

BOUDREAU: According to the company's filings with the Securities and Exchange Commission, the board knew AIG had a big problem back in late 2007. And one of the ways they tried to fix it has become explosive.

In early 2008, according to the company's most recent filing, the board of directors approved a staggering $1 billion in so-called retention payments to executives because it was worried AIG, quote, "may be unable to retain key employees." Some of the same employees responsible for bringing down AIG.

GREENBERG: I never thought it's possible a company as strong as AIG would have this kind of an ending.


BOUDREAU (on camera): CNN tried to reach every single one of the 11 current AIG board members. None would speak to us and instead referred us to a corporate public relations spokesman. That spokesman said there would be no comment. Of course, we also reached out to AIG about all of this. A spokesperson there said they do not comment on the board of directors or the board's compensation.

We'll know a whole lot more, Ali, in April when the company's 2009 proxy statement is released. From those records we'll find out how much the board members paid themselves after the company received billions of dollars from the bailout.

VELSHI: All right. Abbie, thank you. I want to bring in a woman who might have had some thoughts on this story. FDIC Chairwoman Sheila Bair joining us now from Phoenix. Sheila Bair, thank you for joining us.


VELSHI: Let's talk a little about AIG. You are in charge of what happens to banks, big banks when they fail. AIG doesn't fall into that category. But what are your views on how we could have been protected from this -- from being in this mess in the first place?

BAIR: Right. Well, we've said for some time that there really needs to be a legal framework for the government to be able to close a systemically important financial organization and take control and extinguish contracts and pick and choose what employees you want to keep and which ones you want to go and in an orderly way unwind the institution. We have those types of authorities regarding FDIC- insured banks, just the bank. But nobody really has it for these very large financial organizations.

VELSHI: But you mean to say -- you have had occasion to be there when a bank is closed. If you close a bank or take over a bank and there are retention bonuses, you can deal with that?

BAIR: Well, we can extinguish all the employment contracts. Sometimes it's appropriate to pay retention bonuses when you come in. You want to pick and choose which employees are good employees and will help keep value at the institution as you try to sell it. You generally get rid of the employees who have been the source of the problems. But I think for some employees it's important to pay retention bonuses but again that should be part of the process the government makes in terms of those who preserve value for the institutions and help sell the institution for a good price and protect taxpayers. But we can extinguish all employment contracts. That's part of our legal authorities and it's a very important part.

VELSHI: And that legal authority comes to you by virtue of the way the FDIC is set up?

BAIR: Yes. It's part of our statutory authorization. Yes, we've had that authority for many years.

VELSHI: So why can't we have a system like that for all financial institutions?

BAIR: I think we do. I think this is a prime example of why we need to have a broader legal structure for these very large financial organizations. Clearly -- and I think part of the problem here is that folks have tried -- the Treasury and the Fed have had no playbook, no legal framework to deal with this type of situation at AIG. So they've had to construct it on somewhat of an ad hoc basis and you run into problems like these because of that. VELSHI: Sheila Bair, thank you for joining us.

BAIR: Sure, my pleasure.

VELSHI: For those up there who say this AIG mess should never have happened, what Washington could have or should have done to avoid the mess.


VELSHI: You're watching "AIG: Facts and Fury." Whenever you have a controversy in Washington like AIG, everybody wants to point fingers, to play the blame game. In other words, to say the situation should have been handled differently. Here's our national political correspondent Jessica Yellin.


JESSICA YELLIN, CNN CORRESPONDENT (voice-over): President Obama is mad as heck, and he wants it known his team didn't create this mess.

BARACK OBAMA, U.S. PRESIDENT: We've got a big mess that we're having to clean up. Nobody here drafted those contracts.

YELLIN: But the lawyer in charge of the congressional panel overseeing the financial bailout plan says the government could have intervened.

ELIZABETH WARREN, CHAIRMAN, CONGRESSIONAL OVERSIGHT PANEL: I don't understand the notion that everyone sat back and said, well, you know, if there's a contract, one must pay. There's plenty of room for the American government on behalf of the American taxpayer to say, time- out, we want to take a much closer look at that.

YELLIN: Restructuring experts say first AIG could have asked employees to renegotiate.

MORICI: When General Motors got its bailout, the federal government required General Motors to renegotiate its labor contracts with the union.

YELLIN: If they refused, AIG could have refused to pay. A number of lawyers told us the company would have a good case if this ever got to course. Lee Wolosky is an attorney for a former AIG CEO.

LEE WOLOSKY, ATTORNEY FOR FORMER AIG CEO: The court may or may not have ruled under these extraordinary circumstances that these payments or a portion of these payments would have had to be made.

YELLIN: Now because of the public outcry over the bonuses, the president could be in danger of losing support for future bailout plans. But professor warren sees a silver ling.

WARREN: Outrage can be a very positive thing. It has a way of concentrating the minds of those who are in charge of this process.


YELLIN (on camera): Her point, Ali, is that this public outrage should force the Treasury Department to at least now announce a coherent long-term plan to fix the financial system, which many people think is basically holding the whole economy hostage. But the big question lots of critics are asking is this Treasury Department simply being too cautious in the face of this crisis. After this AIG debacle the answer for many people is yes. Ali?

VELSHI: Jessica, thanks very much.

Well, some on Capitol Hill might have a thing or two to say about how everything should have been handled including members of the House Financial Services Committee. We're joined right now by Massachusetts Congressman Barney Frank. He's the chairman of that committee. Also on the committee, Thaddeus McCotter of Michigan. And he's a Republican. Gentlemen, thank you for being with us.

Representative Frank, let's start with you. Tell me about this clause, this business about a clause making it into a bill maybe because somebody at Treasury told Senator Dodd. What do you know about this and what do you think about it?

REP. BARNEY FRANK, (D) MA: Well, I think we ought to repeal it. I was not party to these conversations. The Financial Services Committee was not involved in the -- in the recovery bill except we had some things to say about housing, and we also made it easier for banks to pay the money back under the TARP program, which I thought was very important, so they can't now complain that we're forcing things on them that they don't like.

But this was not something that we had gotten into. But I think the best way to deal with it now is to repeal it. And so since this would now be within the jurisdiction of the committee, it's my intention to simply undo that particular exemption and put it back to where we would have been without it.

VELSHI: Congressman McCotter, would you support that?

REP. THADDEUS MCCOTTER, (R) MI: Oh, absolutely. I think the chairman hit the nail on the head. This was an amendment that was done in the dead of the night. He didn't do this. Members of our committee didn't do this, and I think none of us would have supported it. And now the call to repeal by Chairman Frank and others, I think you'll have strong bipartisan report. But it still leaves hanging out there who made the decision not to allow the Wyden-Snowe amendment to stay in the stimulus bill.

VELSHI: That was an amendment, the Wyden-Snowe Amendment would have actually very explicitly not allowed bonuses like this to be paid.

MCCOTTER: Absolutely. And I think again, it goes back to who made that determination. It clearly wasn't Chairman Frank, it wasn't members of our committee.

VELSHI: Who do you think, Chairman Frank, who made that decision? FRANK: I don't know -- I'm glad you clarified because some of the viewers might think the Wyden-Snowe Amendment might have had to do with ski trails. We should be clear that is not what it was.

As I said, I was engaged on the -- with regard to the recovery plan. One of the things that they said -- and there's a distinction. When the Federal Reserve told us, didn't ask us, that this were giving a loan to AIG back in September, we had no involvement. A couple days later when they asked us to pass the legislation -- the Treasury did -- to create the TARP program, we immediately raised the question constraints on compensation. They weren't always done right. But I wouldn't stretch that distinction. The Federal Reserve on its own lent the money under a statute that dates from 1932. When we got into the TARP program we immediately got in a discussion with, frankly, the secretary of the treasury, Mr. Paulson was reluctant but ran into bipartisan arguments that this had to be done.

So what we then did was in the TARP program remove any argument from the recipients that they couldn't give the money back and we had that. I was not involved in these conversations, so I can't tell you who did it.

VELSHI: Representative McCotter, what do you think of this business of repeal of a tax on these bonuses?

MCCOTTER: Well, I think, unfortunately, we're acting in a crisis situation. I think there are better ways to do it. But, again, in fairness to the people who did vote for it, the people who voted for the stimulus did not know that that provision was in there to allow the AIG bonuses. All of a sudden ...

VELSHI: How does that happen? I know it's a big bill and I know these things go quickly. But don't you have staff that says, hey, something's in here that wasn't in here yesterday?

MCCOTTER: Well, again, as a Republican, we had begged the majority to allow time to read the bill. Because it's a disadvantage not only to the minority but to the members of the majority who want to know what's in the bill. And so what happened, Ali, as it comes down the pike, they voted for something that they never would have voted for if they knew it was in it, they would have had it taken out. Chairman Frank has made that clear. What happens is they try to respond as quickly as they can to show that they did not want to vote for that. Sometimes I think they go the wrong route to try to undo damage.

FRANK: Can I make two points? One, I continue to believe the best way to deal with these bonuses that were very unjustifiably given to AIG. Retention bonuses, as they are being described are a form of extortion. What we're told these are people that worked at the company, had specific knowledge about things that the company had done that needed to be undone and they had to be bribed not to leave, in effect, with the combination to the safe or the antidote to the poison. And I have no hesitation in trying to cancel that out. But I think a better way to do it would be for us, as in effect the owner -- because of what the Federal Reserve began in September, the federal government now owns about 80 percent of the company. The best way to do this so you're not setting precedence about interfering with other contracts or making people nervous about the tax system, is simply to assert our rights as the owner of the company to go to court and say, yes, there was a contract but you performed so badly and it is such an extortionate contract that we want it canceled.

And I am still pressing the administration to do that. I think that has the best chance of winning, of getting the bonuses canceled and not setting any bad precedents.

VELSHI: All right. Gentlemen, thank you very much for your time. An interesting bipartisan discussion. The same approach by both of you at least to deal with this one particular issue.

Well, could someone end up paying a big political price for the AIG controversy? If so, who? The president? A senator? Or the CEO?


VELSHI: Well, one of the reasons we're doing this is because so many of you out there feel so passionately one way or the other. Let's check back in with


DAVID WHITE, IREPORTER: Stop the AIG bonus payments. If you're feeling anything like me right now, you're pretty livid about these $165 million in bonus payments. Rewarding failure to AIG's top executive employees. That I find to be unconscionable.


VELSHI: One thing is very likely in the AIG controversy and that's political fallout. Who pays the price? The president? The treasury secretary? Senator Dodd or someone else? Well we're joined again by national political correspondent Jessica Yellin, CNN correspondent Joe Johns and CNN senior political analyst Gloria Borger. Thank you for joining us. Gloria, let's start with you. Is there political fallout from this?

GLORIA BORGER, CNN POLITICAL ANALYST: Well, sure. Obviously, Tim Geithner finds himself in a position where he has to rehabilitate himself before he's even unpacked the boxes in his office. And he needs to have the confidence not only of the American people, but also of Wall Street and also of the Congress as he heads into a very important phase right now. And that's the bank bailout plan that we're going to get in the next couple of weeks.

And, clearly, this whole AIG bonus situation has really complicated that for him.

VELSHI: Joe, what happens when you put this bonus situation in perspective? It's got the -- it's inflamed the passions of the nation, but the bottom line is it's less than a percent of what we have already put into AIG and a miniscule percent of what we've invested in so many other financial institutions. JOE JOHNS, CNN CORRESPONDENT: There's absolutely a question of proportionality here. And a lot of people are not looking at the big picture. The big picture is that the Congress has a whole lot more accountability to do with all the money that has actually gone out the door and not just this $165 million or a little bit less, I must say, because some of these people have decided to give some of this money back.

So, yeah, the Congress has a much larger problem. And you mentioned Dodd. Even if you look at Dodd, I mean, he was like the third break in the link. First there should have been conditions on this money when it went out the door. They could have at some point renegotiated the contract for the bonuses and then Dodd sort of becomes the third strike. So big picture, everybody kind of screwed up here.

VELSHI: And that third strike, Jessica, is yet more confusing. We already knew we had a financial crisis, we already knew we had a bonus problem. What we didn't know was that there are things in this stimulus bill that many in Congress know nothing about.

YELLIN: What this all points to, Ali, is real doubt in confidence in Washington, DC's ability to oversee this massive, massive economic turnaround that they're trying to undertake. The problem is; yes, Dodd, yes, Geithner are both the low-hanging fruit here. Eventually, this becomes the president's problem. He keeps saying, I take responsibility for this. But every time he says it, it's followed by a but. But I didn't write these contracts. But the lawyers told us we couldn't do anything. But I didn't create this mess. At some point it becomes the president's problem. And unless he unveils a clear bailout plan going forward, a comprehensive plan soon, it will become his problem very, very quickly.

BORGER: And Ali, you don't know really where the tipping point is here. Because at a certain point the president becomes part of the problem. And we don't know when or if that's going to come. But this is a president who ran on change, who said he was going to change the system in Washington. And he has to be able to prove that he can do that.

VELSHI: All right, Gloria, thank you so much. Joe, good to see you. Jessica Yellin, we'll all be working on this story for some time to come.

And as you said, hopefully we'll have a bank plan to talk about, too, so we can start moving ahead in terms of this economic recovery. But for now there are questions, two questions everyone wants to know. What's next for AIG? And is there another shoe to drop?


VELSHI: OK. Our team is all here, Christine Romans, Mary Snow, Abbie Boudreau, Drew Griffin and Dana Bash. We need to know what is next with AIG because every week it seems to be something new. Christine, what's likely to happen now?

ROMANS: What's next with AIG is they have got to clean this up and move on. There's a lot of work to be done. The Treasury Department has a plan for toxic assets. They're going to unveil this, as Timothy Geithner, the treasury secretary told you, in the next week or two. They have to figure out how to get the toxic assets off the banks' books, how to woo private investors to help them do that and move on from this.

VELSHI: Got to get past this.

ROMANS: They've got to get past this. The populist outrage is understandable. Everyone knows that. We're talking about fixing and saving the financial system. We have just got to move on.

VELSHI: All right. Mary Snow, the problem with moving on of course is that we're really stuck on this outrage.

SNOW: An outrage that does cloud the overall picture obviously. But it also sparked the question of could these bonuses have been prevented. And we found out in Capitol Hill this week, essentially yes.

VELSHI: And are we going to be able to prevent this from happening again? We continue to hear news this might happen at Freddie Mac or at Fannie Mae. Drew, you were on to this early. Do you have a sense there is more to come? Are we going to experience more problems with this?

GRIFFIN: Absolutely. They may need to move on with it. But we don't. I think we need to know the nitty-gritty still. What did Geithner know and when? What did the president know and when? And the bigger picture, Ali, is what does this all expose? It exposes that that same lack of regulation, the same oversight in Washington that kind of got us into this mess years ago apparently is still there in evidence of a $787 billion bill that went out the door with a clause in it no one seems to know about.

VELSHI: Dana, you pointed out earlier we already know we've got no confidence in Wall Street and we've had a problem with confidence in Washington but this really does cloud the Washington side of the picture, the developments you and Drew uncovered this week.

BASH: It does. And what we're going to see next week is Washington trying to correct itself. We saw last week the House of Representatives tried to pass and they did pass a quick fix to tax effectively all of the bonuses by companies that are getting at least $5 billion of taxpayer dollars. The Senate is going to try to do the same thing actually and do it in a much more broad way, try to effectively get rid of those bonuses. So I have a feeling we could be sitting here at the end of next week talking to Christine and everybody else and you, Ali, up there on Wall Street, to try and figure out the kind of effect this will have if they're successful in passing that in the Senate.

VELSHI: There's supposed to be oversight of these things even if it's not regulatory oversight. These companies have boards and those boards are supposed to watching out for the interest of shareholders and workers. Do you think that any lesson has been learned from what you uncovered?

BOUDREAU: At this point we have to keep reminding ourselves we need to keep watch over the overseers. These board of directors have a lot of power and we need to keep track of the kind of power that they have and, also, we need to be asking them the questions, for whatever reason, no one wants to talk to us. And we have to wonder why is that and where's the accountability of the overseers?

VELSHI: Well, we're going to keep that accountability going and draw attention to those who won't speak to us. I do want to reiterate we did invite AIG to participate in this discussion and they did decline. They say they've said everything that they need to say about this for now.

As you can see, we have a big team at CNN covering this story and all of these stories that affect you and the economy of this country. Make sure you stay with CNN for the very latest information and make sure to check out my weekly show with Christine Romans, YOUR MONEY every Saturday at 1:00 Eastern and Sunday at 3:00. Thanks for joining us.