Look who's getting the goodies

Angry about the AIG bonuses? Here's what should really disturb you.

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By Allan Sloan, senior editor at large

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NEW YORK (Fortune) -- To understand what Washington is actually up to, you have to watch what it does, not what it says. That's especially true when it comes to Washington's role in the ongoing bailout of Wall Street, part of its "let's hope this works" plan to revive the U.S. economy.

While Washington is setting the populist mob on the individual American International Group (AIG, Fortune 500) employees who got a total of $165 million in bonuses this year, far larger amounts of money are being quietly handed to Wall Street through programs that generate barely a peep of protest.

Let me count the ways - or at least some of them.

We'll start with the proposed public-private investment program for toxic assets. It depends heavily on a massive subsidy from the Federal Deposit Insurance Corp., which would insure the borrowings of the program's investors. The borrowings would be up to six-sevenths of the total invested; the Treasury and Wall Street (which I define as the nation's big financial institutions and money managers) would each put up half of the initial seventh.

I'm glad that taxpayers stand to get half the profits and fees because the Treasury's in the game. But the Treasury and the FDIC (whose guarantees for such huge sums are credible only because they're backed by the Treasury) run much more risk than the private investors, whose loss is limited to their investment.

The subsidy, by my back-of-the-envelope math, could be worth $18 billion a year to the Wall Street investors. That assumes that the program raises $75 billion from Wall Street and that the guarantees lower interest costs by 4% on the Street's $450 billion share of the borrowings. That's more than 100 times the AIG bonuses.

We also have the Federal Reserve Board's programs to revive the economy by offering cheap money under a dozen plans invented since the credit crunch began in earnest in the summer of 2007. They total around $1.1 trillion by my count, so a three-point saving - a very conservative number - is more than $30 billion a year.

Meanwhile, the Fed's decision to buy Treasury paper and assorted U.S. mortgage-backed securities isn't helping troubled home-owners. Rather, these purchases, designed to lower mortgage rates, benefit well-off homeowners, who can refinance at new, cheaper rates. It also boosts the market value of the tons of Treasuries and mortgage-backed securities held by Wall Street. Marginal or distressed homeowners don't qualify for cheap mortgages because lenders have toughened their credit standards.

I'm not saying, by the way, that any of these programs are necessarily bad. We have to get out of this horrible financial mess somehow, and the feds are throwing everything they have against the wall to see what sticks. But if you want to yell about taxpayer money subsidizing Wall Street, you should look at those programs, not waste time with AIG bonuses, which are symbolically important but economically meaningless.

Yes, AIG has received vast amounts of bailout money from the government. But that doesn't mean that every bonus-receiving employee is some sort of troll or incompetent who deserves to be threatened with a 90% tax or with having his address made public so that people can picket his house.

I won't even mention that this uproar in the name of preserving taxpayer money has cost taxpayers bigtime. We own 79.9% of AIG's stock and have committed $180 billion in loans and investments to it. This uproar has eviscerated our investment by destroying AIG's reputation and shredding the value of its businesses. Good luck on getting anything like our $180 billion back.

Finally, if you want a real bonus outrage, consider this: The operation getting the biggest taxpayer subsidy of all - the federal government - pays bonuses to its employees too. This year it plans to hand out about $1.6 billion of bonuses, despite running more than $1 trillion in the red.

So there you have it. While the public is focused on AIG small fry, Wall Street's big fish are getting the bulk of Washington's goodies. As always, follow the money. Not the noise.

Allan Sloan invites you to post your questions to him about Wall Street, dealmaking and the state of the financial crisis in a Fortune Talkback forum. He'll choose several questions to answer in a future online installment of his column, The Deal. To top of page

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