Can Obama crack the whip on Wall Street?

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Emboldened by taxpayers' outrage over the bonuses at American International Group (AIG), the Obama administration is proposing to get tough with Wall Street.

Speaking before the Council on Foreign Relations in New York, Treasury Secretary Timothy Geithner said the administration plans to in the words of Bloomberg News "stamp out practices that helped cause the mortgage-market crisis."

Good luck with that.

Increased regulation will aid the recovery, Geithner said.

"To get through this, we need the private sector to take risk," he is quoted by CNN/Money as saying. "In order to do so, they need confidence about the rules of the game."


Initial media reports indicate that the proposed legislation would give the government sweeping new powers to take over troubled institutions and shut them down. Some officials have argued that if they had this power they would have been able to block the AIG bonuses which have caused a political firestorm.

But the administration needs to make sure that it does not through out the baby with the bathwater. Critics have argued that bankers will leave firms with government bailout funds in favor of those without restrictions on their ability to pay their executives.

AIG has tried to counter the negative publicity surrounding the bonuses. Chief Executive Edward Liddy told Congress that he asked employees at the company's Financial Products divison, which is blamed for the lion's share of the insurer's problems.

Jake Desantis, a vice president at the business, got so frustrated with Liddy that he resigned in protest and provided his letter to the company to the New York Times.

"Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.'s assurances that the contracts would be honored.," he wrote. "They are now angry about having been misled by A.I.G.'s promises and are not inclined to return the money as a favor to you."

The outrage over the bonuses may be reignited. CNBC's David Faber reported that another $230 million in retention bonuses for this year are due to be paid to AIG employees this year.
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