Washington, DC - As nationwide populist anger boils after the news that hundreds of millions of taxpayer dollars may be given to employees of the insurance-giant-turned-government-liability American International Group (A.I.G.), President Obama promised to try to block what he described as an "outrage" Monday, but a group of former regulators said the administration must get even tougher with A.I.G.

    "[A.I.G.] is a corporation that finds itself in financial distress due to recklessness and greed. Under these circumstances, it's hard to understand how derivative traders at A.I.G. warranted any bonuses, much less $165 million in extra pay. I mean, how do they justify this outrage to the taxpayers who are keeping the company afloat?" Obama said, adding, "I've asked [Treasury] Secretary Geithner to use that leverage and pursue every single legal avenue to block these bonuses and make the American taxpayers whole."

    $165 million is set to be paid to executives of A.I.G.'s financial products division, the same people who made unregulated bets against the failure of major financial institutions and other companies. Losses on these bets are a major reason the company is failing, reporting a record-setting $60 billion loss last quarter.

    Economics and law Professor William K. Black, a famous figure in the savings and loan crisis of the 1980s for his role as a senior regulator who fingered the then speaker of the House and "The Keating Five" for doing favors for bankers, has been a vocal critic of the bailout programs, which began during the Bush administration.

    In an interview with Truthout, Professor Black said that A.I.G. is using a "suicide strategy" to hold the government hostage and keep the bailout funds flowing.

    "A.I.G. is holding a gun to their own heads, saying 'unless you help us continue to have this incredible life in terms of bonuses, we're going to die and the taxpayers will be faced with a catastrophe,'" Professor Black said, adding "It's too bad Marxists don't believe in god. Otherwise they'd be thanking him for having sent A.I.G. down to earth to destroy capitalism."

    Earlier on Monday, Professor Black joined three other notable analysts with deep industry, regulatory and academic experience in issuing a punishing statement calling for decisive action on A.I.G. and the ongoing bailout.

    "A.I.G.'s decision to pay out at least $165 million in bonuses takes the bank bailout program's abuse of the public trust to a whole new level. This act simply cannot be allowed to stand. The only question is how to stop it," the statement said.

    The plan to stop the bonuses would require bold action by government officials overseeing A.I.G., which is now 80 percent owned by the government after being given 173 billion taxpayer dollars to bail the company out.

    The statement called on the Obama administration to reassert its leverage in the A.I.G. matter by ordering the US officials overseeing the company to stop bonus payments. Then, the government could split off A.I.G.'s derivatives unit - the riskiest part of the company, which brought about A.I.G.'s collapse - and threaten to allow it to go into bankruptcy if the executives don't clean up their act.

    In other words, the statement advised the Obama administration to call A.I.G.'s bluff and see if they'll really pull the trigger.

    In their defense, A.I.G. said that they are contractually obligated to pay the bonuses in question. Not paying these bonuses, the company said, would cause their executives to leave the company and could trigger a collapse at A.I.G., which could set off a collapse around the world.

    Credit Default Swaps

    The derivatives unit at A.I.G. trafficked heavily in financial products called credit-default swaps (CDSs). Originally devised as a type of insurance, CDSs morphed into an unregulated form of gambling akin to being able to take out fire insurance on a house you don't own and getting paid if the house burns. Because major financial institutions were betting on billion-dollar companies, and betting with each other on each other, their fates are bound together by these bets. If one company goes into bankruptcy, it could set off a string of default swaps and could fold the whole system in on itself.

    Documents released by A.I.G. on Sunday show that $43 billion in taxpayers' money has been spent by A.I.G. to pay off financial bets to both US and international banks with a whopping $13 billion going to the politically connected Wall Street giant Goldman Sachs.

    The documents directly contradict a statement made during a conference call with stock market analysts by Goldman Sachs chief financial officer David Viniar, who said that Goldman was only immaterially at risk if A.I.G. failed.

    The CDS market has an approximate value of 50 trillion dollars worldwide. Critics charge that this massive, complicated and extremely murky market continues to hover over the heads of the global financial system like the blade of a guillotine with the banks holding the executioners rope, daring the government to stop funding their bailouts.

    CEO Resignation?

    In their statement, the former insiders called for the resignation of A.I.G.'s new CEO Edward Liddy for not anticipating and alerting the Treasury Department of the bonuses which started this firestorm.

    "Right now, press reports suggest that the firm's top management waited until the last minute to inform the government of what was happening. A.I.G. CEO Edward Liddy, accordingly, should be asked to resign at once, for the sake of public confidence and to send a clear signal that gaming the system is unacceptable," the statement said.

    Liddy is a former member of the Goldman Sachs board of directors.

    Obama seemed to defend Liddy in his remarks. "[Secretary Geithner is] working to resolve this matter with the new CEO, Edward Liddy - who, by the way, everybody needs to understand came on board after the contracts that led to these bonuses were agreed to last year." Obama said.

    Obama added a warning to Liddy and others on Wall Street: "But I think Mr. Liddy and certainly everybody involved needs to understand this is not just a matter of dollars and cents. It's about our fundamental values. All across the country, there are people who are working hard and meeting their responsibilities every day, without the benefit of government bailouts or multi-million dollar bonuses ... All they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules. And that is an ethic that we have to demand."

    Investigations

    The statement called for an "investigation of the validity of A.I.G.'s past accounting and securities disclosures and its executive compensation program by the Office of Thrift Supervision, the Securities and Exchange Commission, and the FBI."

    "I think that A.I.G. is simply one of the most obvious examples where their accounting was false. Fraudulent accounting at a publicly traded company is securities fraud and that's a felony," Professor Black told Truthout.

    Professor Black is confident that a thorough investigation of A.I.G.'s books would reveal misdeeds. "Even though we effectively own the place, we have left it in the hands of the people who have every incentive to hide the past losses and to hide all the past accounting fraud that justified all their past bonuses. These people aren't at risk of simply losing their calendar year 2008 bonus. If this place were torn apart properly, they'd lose all their prior years bonuses as well."

    Previous investigations of top management and accounting practices at A.I.G. have been swept under the rug with no criminal penalties.

    In February 2005, A.I.G. agreed to pay $1.64 billion to resolve a lawsuit alleging the company used deceptive Enron-style accounting practices in order to mislead investors and government regulators.

    Mark J. Novitsky, a corporate whistleblower and independent researcher, blames the Securities and Exchange Commission (SEC) for failing to enforce the Sarbanes-Oxley law, passed in the wake of the Enron and Worldcom accounting scandals, which was supposed to hold executives accountable for fraudulent accounting practices.

    "What progress has been made since the enactment of Sarbanes-Oxley in 2002 that would leave people to believe the SEC is capable of detecting and preventing fraud and is willing to prosecute those who commit financial fraud?" Novitsky asked, adding, "It is obvious in hindsight, after the SEC failed to uncover massive fraud in cases like Bernie Madoff, Stanford Financial, Bear Sterns, Fannie Mae and A.I.G., the public was misled into believing that Sarbanes-Oxley was some kind of an answer. No question my personal experiences leads me to believe that the fox has most certainly been guarding the hen house."