Obama Looks for Calm in a Firestorm

By Michael D. Shear and Paul Kane
Washington Post Staff Writers
Sunday, March 22, 2009

It was the kind of statement that Barack Obama is famous for -- at once empathetic, stern and measured. In remarks to a group of small-business owners, the president lashed out at American International Group, said he felt the outrage of average workers and pledged to turn his anger into action.

"Under these circumstances, it's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay," Obama said. "I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?"

But the president's comments Monday did little to contain a political wildfire that presents his White House with an early test of the crisis management strategy used with success during the 2008 campaign -- confront, accept responsibility and move on. For an administration still in its infancy, the stakes are high, because the compensation controversy, at a minimum, is a diversion from its broader efforts to fix the economy and re-order budget priorities, and it could undermine them.

When Congress returns tomorrow, it will continue work on legislation to stop bonuses at the insurance giant and other financial institutions receiving federal bailout assistance. The House vote Thursday to impose a 90 percent tax on bonuses was an opening ante in Congress's battle with Treasury Department officials over executive compensation limits.

In a sign of the anger moving beyond AIG, Rep. Barney Frank (D-Mass.) sent a letter Friday to the overseer of government-run mortgage giants Fannie Mae and Freddie Mac, demanding an end to bonuses there. "The public . . . rightfully insists that large bonuses such as these awarded by institutions receiving public funds at a time of a serious economic downturn cannot continue," wrote Frank, chairman of the Financial Services Committee.

At the same time, bankers and other financial leaders are warning that the legislation pending in Congress could doom Obama's efforts to resuscitate lending by causing banks to reject government help. In a letter to his employees, Citigroup chief executive Vikram Pandit wrote that the bailout would be "significantly set back" by the congressional move to heavily tax bonuses.

Pandit said he takes "exception" to a "tide of negative sentiment rising in Washington D.C."

In an effort to contain that anger, the White House indicated this weekend that it wants to see more measured attempts to curb bonuses that will not threaten the efforts to revive the banking system. White House Chief of Staff Rahm Emanuel said he expects the president will not be asked to sign a bill exactly like the one that passed the House last week.

Emanuel said that although the anger of the public and Congress is understandable, "everybody woke up the next day, took a deep breath and realized, let's not govern out of frustration."

Emanuel added that a solution will be found that changes the banks' compensation system without harming the goal of achieving financial stability.

Senior White House aides concede that the AIG scandal made it difficult for them to communicate their message last week. They said the media failed to take note of the 30 percent increase in home refinancing and paid relatively little attention to the president's small-business proposal, his diplomatic opening with Iran and his legislative agenda.

Instead, they said with more than a hint of frustration, the cable news programs and major newspapers returned day after day to the bonus story. "It got in the way for Wall Street," Emanuel said in an interview yesterday. "It got in the way for Washington. It got in the way for the media. It got in the way for everybody."

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