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AIG CEO Faces Congress; Madoff Accountant Arrested

Aired March 18, 2009 - 18:00   ET


WOLF BLITZER, CNN ANCHOR: And, to our viewers, you're in THE SITUATION ROOM.

Happening now: President Obama is about to touch down in a state ravaged by the recession. And he may face some angry questions. We're standing by to carry the presidential town meeting live right here in THE SITUATION ROOM.

And a symbol of corporate arrogance asks some executives to give their bonuses back. AIG's chairman tries to calm the anger in Congress and across the nation.

And the feds arrest the man who counted Bernard Madoff's money. What might he reveal from the billions of dollars swindled from investors?

We want to welcome our viewers in the United States and around the world. I'm Wolf Blitzer. You're in THE SITUATION ROOM.

But, first, the breaking news, a mystery surrounding some outrageous corporate bonuses, that mystery has now been resolved. And it happened right here in THE SITUATION ROOM -- at issue, more than $165 million in bonuses to bailed-out insurance giant AIG.

Until only a few moments ago, everyone was trying to figure out who purposely left open a huge loophole in the stimulus bill that allowed those bonuses to go forward.

Let's bring in our senior congressional correspondent, Dana Bash. She broke this story just a short while ago here in THE SITUATION ROOM.

Excellent reporting, Dana. Update our viewers on what we know right now.

DANA BASH, CNN SENIOR CONGRESSIONAL CORRESPONDENT: Well, you see a picture there on the wall of Senator Chris Dodd, the chairman of The Banking Committee. He -- it is his legislation and his provision that is really at the crux of this.

And the question has been and had been whether or not he was the one who changed his own measure to actually put a clause in there that made it so that companies like AIG and others, that they would have to give their bonuses. They wouldn't -- they weren't prohibited from giving their executives bonuses.

Yesterday, our congressional producer, Ted Barrett, asked Senator Dodd if in fact he was the one who put the clause in there, and he said he wasn't. Let's listen to that first.


TED BARRETT, CNN PRODUCER: That there's the suggestion today being made that you received more money from AIG than any other senator and that you were responsible for the February 11, 2009, date. So, I just -- again, I just want to get at the...



BARRETT: You're saying you had nothing to do with that date...

DODD: Absolutely not.

BARRETT: ... and there was nothing you were doing that was aimed at...

DODD: No, no.

BARRETT: ... protecting AIG...


DODD: Not at all, not in the slightest, absolutely.

BARRETT: ... which is in your -- which has offices, this particular office, in the state of Connecticut.

DODD: Well, it does, but there are offices all over.

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


BASH: When that language left the Senate, that was not included, absolutely not. He did not know anything about it.

But here's what happened, Wolf. Throughout the day, we have all been trying to dig on what actually happened. I spoke to an official at the Treasury Department who spoke to me with the understanding -- actually, the promise, that we would not talk on the record, but he was authorized to do this, to tell me that actually what happened was, the Treasury Department, the Obama administration, they were the ones who basically said that they thought that they were concerned about this language, because they said that, if this went through, if there wasn't that clause in there, that they thought that there would be lawsuits and other problems for the administration, specifically the Treasury Department in dealing with all of these companies that are getting federal bailout money.

So, they said they talked to Senator Dodd's office and that they actually did engage on this, and I was told that Senator Dodd and his staff actually did agree to change the language, despite what Senator Dodd said yesterday.

What happened was, I called Senator Dodd, asked him for a response. He decided he wanted to come on here in THE SITUATION ROOM and respond live and admit it, that he was wrong.

Listen to what he said.


DODD: We wrote the language in the bill to deal with bonuses, golden parachutes, excessive compensation, executive compensation. That was adopted unanimously by the United States Senate in the stimulus bill.

That is what I would have liked to have said -- seen maintained in the bill. But for that language, there would have been no language in the bill to deal with any of this at all, including language that allowed them to reach back.

The administration, it's been widely reported, had problems with that amendment, as others did as well. And they came and said, we would like to modify that amendment. The alternative, frankly, was to have happened to my amendment what happened to the Wyden-Snowe amendment. And that is it be dropped altogether.

I was vehemently opposed to that. I was not a conferee. I didn't have a vote or a voice in that conference. And so, we agreed to the modification.

However, the date is modified by saying the secretary, if there are any provisions dealing with bonuses that are inconsistent with the TARP, or contrary to public interest, they ought to be allowed to reach back. It's on that clause that the administration is now reaching back.

So, the modification occurred. It was at their suggestion. We wrote it together, at the time, obviously, a month-and-a-half ago. But, again, I want to make the point, there were many who were highly critical of the Dodd amendment on executive compensation, excessive compensation.

I find it ironic that the very people who were critical of me putting that bill in a month-and-a-half ago are now being critical, saying, we went too far.


BASH: There you see Senator Chris Dodd, after denying that he had anything to do with that clause, admitting that he did put that in, effectively making it impossible for the administration to make sure that companies like AIG that had preexisting contracts didn't pay bonuses using federal money, Wolf.

BLITZER: Dana Bash, resolving the mystery for us and for all of our viewers. Dana, thanks very much. And we're standing by. The president of the United States, you see Air Force One, has just arrived in California. He's going to be heading from that plane over to a town hall meeting. You're going to see that live. No doubt he's going to be questioned. There's a lot of anger out there about these huge bonuses to these AIG executives.

Let's go to our White House correspondent, Dan Lothian. Dan, any reaction yet to what Dana is reporting and what we have now heard from Senator Chris Dodd, that it was the Treasury -- officials at the Treasury Department asked Senator Dodd to insert that loophole legislation -- language, in effect, allowing the $165 million in bonuses to go forward?


In fact, I have reached out to a couple of senior administration officials here to ask them just that question and this breaking news we saw earlier here on CNN. And so far we have not gotten any response to this. We continue trying, though, to see if they will respond -- Wolf.

BLITZER: And, Dan, earlier in the day -- we see him now arriving in California -- just before he left the South Lawn of the White House, aboard Marine one to take him to Andrews Air Force Base, he spoke with reporters, and he was pretty angry.

LOTHIAN: He was, Wolf.

And, in fact, I had a chance to ask the president a question about this entire scandal with AIG. This White House obviously is trying to keep the focus on the economy and on the budget. But this -- this controversy just keeps rearing its ugly head. The president saying that he takes full responsibility for this, and this scandal simply just not going away, Wolf.


LOTHIAN (voice-over): Trying to put out the AIG wildfire, President Obama said ultimately this is his mess.


LOTHIAN: So why wasn't the president informed about the bonuses a lot sooner? His treasury secretary, Timothy Geithner, found out last Tuesday, and perhaps even earlier than that, according to testimony from AIG CEO Edward Liddy. But the White House says the president was not informed until two days later.

When pressed on this timelines, Mr. Obama took a pass.

OBAMA: Well, look, rather than going into sort of the details of finding it out, ultimately, I'm responsible, I'm the president of the United States.

LOTHIAN: Pressure is building on this administration. One lawmaker has even called on Secretary Geithner to resign. But on the White House lawn, before flying off to California, the president vigorously defended his treasury secretary, who was standing by his side.

OBAMA: Nobody's working harder than this guy. You know, he is making all the right moves in terms of playing a bad hand. I have complete confidence in Tim Geithner and my entire economic team.

LOTHIAN: President Obama lashed out at a culture of greed, excess and risk-taking that undermined the giant insurance company. The administration is now working with key lawmakers to fast-track legislation creating an oversight agency, aiming to prevent some of these problems down the road.

OBAMA: It would allow us proactively to get out in front, make sure that we are separating out bad assets from good, dealing with contracts that may be inappropriate.


LOTHIAN: Now, this administration really trying to move forward. But there are a lot of questions that remain. For example, why did it take the president until Monday to come out and have this public outrage, when he knew about these bonuses last week? -- Wolf.

BLITZER: And he was also asked at that sort of news conference, Dan, about the $100,000 his presidential campaign received from AIG executives and PACs during the course of that race for the White House. What did he say about that?

LOTHIAN: He was asked that question. And just like that other question that I asked that you saw in my piece, he passed on the question. It was -- a reporter asked him two different questions. He answered the first one, did not answer that question.

Clearly, this is a really tricky question for the president. He did not want to deal with it, a hot-button issue, so he didn't answer it -- Wolf.

BLITZER: All right, you're looking, by the way, at this live picture of Air Force One. It has now landed in California, the president getting ready for a town hall meeting in Orange County that you will see live here on CNN.

Here comes the president of the United States, his first trip to California since becoming president of the United States. That town hall meeting will be seen in its entirety here in THE SITUATION ROOM. Once he gets there, no doubt there's going to be a lot of questions about what's going on with the bailout of AIG and some of these other huge financial institutions.

There is enormous anger out there, especially in California, a state that has been so hard-hit by this recession, unemployment now over 10 percent in California, one of the highest foreclosure rates in the country. There goes the president in Marine One right now to take him to his town hall meeting that you will see live here in THE SITUATION ROOM.

Meanwhile, another tug of war over bonuses, this one in court, a judge today demanding information about bonuses given to employees of Merrill Lynch just before it was bought out by Bank of America. New York's attorney general, Andrew Cuomo, has been sparring with Bank of America to get that information.

Cuomo is investigating whether the two companies failed to give shareholders the appropriate information about the bonuses. Today's ruling reverses an order to keep individual bonus information private.

Let's get to another source of huge outrage across the country, indeed, around the world. Authorities are going after people who helped Bernard Madoff orchestrate a massive, massive scam. Now one person's been busted.

Our senior correspondent, Allan Chernoff, is joining us live with details on what happened today.

This is the second -- second arrest since Bernard Madoff; is that right?

ALLAN CHERNOFF, CNN SENIOR CORRESPONDENT: This is the first right after Bernard Madoff. Bernard Madoff's accountant was arrested this morning for allegedly rubber-stamping the finances of Mr. Madoff's investment firm, essentially telling investors that Madoff's numbers were all legitimate, when, in fact, they were pure fiction.

After a court appearance today, accountant David Friehling is out on $2.5 million bail. But he faces criminal charges, including securities fraud, that potentially could land him in prison for as much as 105 years. Mr. Friehling's attorney refused comment.

For 18 years, David Friehling, a certified public accountant with the tiny firm Friehling & Horowitz was paid to audit financial statements of Bernard L. Madoff Investment Securities. And this part of the story is almost comical.

Friehling apparently was also one of Madoff's victims, holding an account statement saying he had more than half-a-million dollars invested at the firm. His alleged lack of due diligence didn't prevent him from piling in with other victims who were unaware the auditor allegedly wasn't doing his job.

As I said, Friehling is the first person tied to Madoff to be arrested. It is unlikely he's going to be the last, as federal prosecutors expand their investigation. Mr. Madoff is in jail after pleading guilty last week to running history's biggest investment fraud, taking billions from his victims.

Tomorrow, Madoff's attorney plans to argue that Mr. Madoff should be allowed out on bail until his sentencing in June. Legal analysts say the odds of success are equivalent to a snowball's chance in hell, which is exactly where some Madoff's victims say he really should be doing time -- Wolf.

BLITZER: This is the second arrests and, as you say, a lot of people think there are going to be a whole, whole lot more.

CHERNOFF: A long investigation, Wolf.


BLITZER: Yes, no doubt about that. Allan, thank you.

Let's go to Jack Cafferty. He has "The Cafferty File" -- Jack.

JACK CAFFERTY, CNN ANCHOR: Well, eventually he will be doing time in hell. He's just not there yet.

It is time, it is past time for the Catholic Church to enter the 21st century, or at least try to drag itself out of the 13th century. On his first trip to Africa, Pope Benedict XVI says condoms are not a solution to the AIDS epidemic, but, rather, make it worse. It was the pope's first public comments on condom use, telling reporters that AIDS -- quote -- "is a tragedy that cannot be overcome by money alone and that cannot be overcome through the distribution of condoms, which even aggravates the problem" -- unquote.

Huh? Since becoming pope four years ago, Benedict has stressed that the church is on the front lines of the battle against AIDS, with the Vatican encouraging sexual abstinence as the way to stop the disease from spreading. Obviously, the message has not delivered the desired results in Africa, 22 million people in Africa infected with HIV.

Not to mention right here in our nation's capital, a new report shows that three percent of Washington, D.C.'s residents have HIV or AIDS. That translates to almost 3,000 people for every 100,000 population, and is a figure that represents what health officials call a severe epidemic.

One official says Washington rates are higher than parts of West Africa and on par with Uganda and some parts of Kenya.

Well, here's the question: The pope says condoms aren't the solution to AIDS; they make it worse. Is he right?

Go to and post a comment on my blog. Just -- it's just breathtaking.

BLITZER: Jack Cafferty, thank you. Thank you very much.

For some of you, it's your chance to question the president of the United States. Just a short while from now, President Obama will participate in a town hall meeting in California. We're going there live. You will see it right here in THE SITUATION ROOM.

And do you think the president is doing too much? You're going to find out what many voters think in a brand-new poll. And is President Obama saying, who needs Republicans? The administration is said to be considering something that would essentially blow off Republicans from some huge items affecting you.

Stay with us. You're in THE SITUATION ROOM.


ANNOUNCER: This is CNN breaking news.

BROWN: We're following a new development involving AIG.

And our Ali Velshi is here in THE SITUATION ROOM.

What are you hearing now, Ali?

ALI VELSHI, CNN CHIEF BUSINESS CORRESPONDENT: Well, these are remarkable developments. The idea is, did someone insert language into the TARP, the bailout bill, that has now caused AIG to have to pay these retention bonus that we have all been talking about for the last few days?

And as you brought it to us here on this show, Senator Chris Dodd is saying that he was approached by the treasury in order to put this in. Now, the story becomes who approached him and what was the reasoning for this.

The issue here is that AIG paid out a lot of bonuses in 2008, $1.2 billion. But $450 million of those bonuses were retention bonuses to keep people in that very unit that had been in the heart of the destruction of AIG. Now, one wonders why we would have to keep them around. AIG's CEO has been on the record as saying that division is so complicated, virtually nobody in AIG and possibly not many people in the financial word understood it.

So, early in 2008, when that started to come unraveled, AIG offered to keep these people around. They got rid of the senior executives in that division and they offered to keep -- they needed to keep about 400 people around to unwind it.

And somehow language got into the stimulus bill -- Drew Griffin was reporting on this earlier today -- language which has now tied AIG's hands supposedly and the administration's hands into paying these bonuses which have everybody outraged.

Now, if that language was introduced by the Treasury and then brought to Senator Dodd to have his committee include in the bill, that's going to have serious repercussions. In other words, we actually changed the stimulus bill so that these people could get their bailouts. That's pretty serious.

BLITZER: And you're learning some other breaking news involving AIG, that this huge company is about to be broken up into various different parts.

VELSHI: Yes. Look, AIG has been in such serious financial trouble, they are so insolvent by virtue of how much money's been put in, there has got to be some way to get that money out. Now, while people keep on saying AIG is too big to fail, in fact, it's not too big to fail. It's just too big to fail suddenly.

So, AIG CEO Ed Liddy has said that, within four years, AIG will be broken up into various parts. They have already started to look into selling those parts of it off. A couple of divisions will be given over to the Treasury Department to settle some of the debt that the government has already put into AIG.

But AIG is likely to be a very small company, if a company that exists at all in a few years. The idea is that Ed Liddy was brought in after all of this confusion to try and wind it down or make it smaller in an orderly fashion, and he has now said it will be broken up into various parts.

BLITZER: Because, as he testified today under oath, some parts of AIG, the traditional insurance parts, whether the property insurance...

VELSHI: They are very healthy companies.

BLITZER: ... are very healthy and very profitable. So they're going to take that and break that healthy part off and presumably get some money for it...



BLITZER: ... that will reimburse the taxpayers.

VELSHI: It is a -- it was an entirely healthy company, but for this unit that was so profitable selling these derivatives. That's the unit that got the company into trouble and it dragged the entire thing down with it.

Now they have got to sell off those pieces that are profitable just to pay the government and the U.S. taxpayers back. In the end, it will be a very sad story. What will be more sad if there's a disorderly undoing of AIG, because the economy may not be able to withstand that.

BLITZER: Tell us why you're in Washington.

VELSHI: I'm in here because I will be speaking with Treasury Secretary Tim Geithner tomorrow about his plan, about what he knows about AIG, why it's important to keep it afloat and everything else about fixing this economy and getting us back on track.

BLITZER: You're going to have some good questions for him, no doubt about that.

Ali, thanks very much. President Obama may use a new tactic to try to push health reform, emission, energy reform through Congress without, repeat, without Republican votes. It's actually a tactic that's been used by other presidents.

Let's go to Brian Todd.

Brian, what's going on here?

BRIAN TODD, CNN CORRESPONDENT: Wolf, this is a very controversial tactic that always gets the minority party upset. But the president may feel he's got to play hardball here to get his major reform bills passed.


TODD (voice-over): Just this week President Obama spoke of solving the nation's biggest problems with input from Republicans.

OBAMA: What we need in Washington are not more political tactics. We need more good ideas.

TODD: But there are new indications the president might scrap bipartisanship to get his health care and energy reform bills passed. An administration official tells CNN one idea on the table is a short cut called budget reconciliation. Essentially it would mean attaching health care and energy reform to bills that don't need 60-vote majorities to avoid endless delaying tactics in the Senate.

There are 58 Democrats in the Senate now. If Republicans and some moderate Democrats are against Mr. Obama's plans and want to delay them, this move could go right around those senators and get the measures passed with slim majorities.

The administration official tells CNN the Obama team is trying to avoid doing this. The story was first reported in "The Washington Post," which quotes Republican Senator Judd Gregg saying, "It would be the Chicago approach to governing, strong-arm it through."

But Gregg himself has voted for bills with this tactic, and a left-leaning watchdog group points out:

ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, CENTER ON BUDGET AND POLICY PRIORITIES: Budget reconciliation is an established process. It's been used countless times over the last 30 years.

TODD: Used by Republican and Democratic presidents, but often for things like budget and tax cuts, not major reform bills.

THOMAS MANN, SENIOR FELLOW IN GOVERNANCE STUDIES, BROOKINGS INSTITUTION: Is it wise to pass major transforming legislation with only a simple majority? The House obviously can do it. Is it smarter or not smart to do that in the Senate?

(END VIDEOTAPE) TODD: Meaning, if this is done and Mr. Obama needs Senate Republicans on his side in the future, he may not get them. But Thomas Mann also points out, the Obama team could be floating this idea out there to let Republicans know something on health care and energy has to pass, and it's in their interest to negotiate and not just try to block his agenda -- Wolf.

BLITZER: All right, Brian, thanks very much.

Checking out the administration's energy plan firsthand, CNN's John King travels with the energy secretary to an oil platform on the Louisiana coast. Stand by for that.

And President Obama says people are right to be angry about the entire financial mess. He tells how he wants to use that anger constructively.


BLITZER: He's laying out one of the most ambitious presidential agendas in modern times. Some critics say it's simply too ambitious. Now the public is weighing in on President Obama's sweeping plans for the country.

Our senior political analyst, Bill Schneider, is joining us now live.

Bill, is the public overly concerned that the president is trying to do too much?

WILLIAM SCHNEIDER, CNN SENIOR POLITICAL ANALYST: Well, they're concerned, even though they support just about everything he wants to do.


SCHNEIDER (voice-over): Talk about big agendas.

OBAMA: Now is the time to jump-start job creation, restart lending, and invest in areas like energy, health care and education that will grow our economy.

SCHNEIDER: Those are among 10 major initiatives that are on his agenda, including mortgage assistance for homeowners, a rescue plan for the automobile industry, more troops in Afghanistan. Taxes are on the list.

OBAMA: Ninety-five percent of all working families will receive a tax cut.

SCHNEIDER: And perhaps boldest of all:

OBAMA: It includes $2 trillion in deficit reductions over the next decade.

SCHNEIDER: Does the public support all those things? More than 60 percent approve of President Obama's handling of Afghanistan, education, unemployment, energy, and taxes. Slightly smaller majorities like what he's doing on health care, mortgages and the deficit.

In fact, there are only two policies where the president gets less than majority support, his plans to rescue the banks and the automobile industry. Those sound like bailouts. And taxpayers are already enraged over where they see that money going.

OBAMA: People are right to be angry. I'm angry.

SCHNEIDER: That outrage has repercussions. Most Americans believe President Obama is trying to do too much. Even his own party is divided over whether his agenda is too big. The president's response?

OBAMA: The American people don't have the luxury of just focusing on Wall Street. They don't have the luxury of choosing to pay either their mortgage or their medical bills. They have to confront all these problems, and as a consequence, so do we.


SCHNEIDER: Public outrage over the misuse of taxpayer money could undermine support for public spending. And that threatens President Obama's agenda, even though the public likes most of the specific things he wants to do -- Wolf.

BLITZER: Bill Schneider, thanks very much.

Let's get back to the breaking news right now, a bonus backlash sparking some angry words.

Let's get much more on our top story right now. President Obama says he's responsible when asked if he would like to have known about those huge bonuses sooner.


OBAMA: Well, look, rather than going sort of the details of finding it out, ultimately, I'm responsible. I'm the president of the United States. We've got a big mess that we're having to clean up. Nobody here drafted those contracts. Nobody here was responsible for supervising AIG and allowing themselves to put the economy at risk by some of the outrageous behavior that they were engaged in.

We are responsible, though. The buck stops with me. And my goal is to make sure that we never put ourselves in this kind of position again.


BLITZER: He's angry, the president. And he says Americans should be, as well.

(BEGIN VIDEO CLIP) OBAMA: I don't want to quell anger. I think people are right to be angry.

I'm angry. What I want us to do, though, is channel our anger in a constructive way. And the most important thing we can do right now is stabilize the financial system, get flowing -- credit flowing again to businesses and consumers and make sure that we change how these businesses operate so that they don't put us in a situation in which, when things go bad, the taxpayers have to foot the bill and when things go good, folks are getting not just $6 million bonuses, but $30 million or $40 million bonuses.

Now, keep in mind, I think it's very important to remind ourselves that there are a whole bunch of folks now who are feigning outrage about these bonuses that a year ago or two years ago or three years ago said well, we should never meddle in these compensation plans. These are the best and the brightest. They know what they're doing. That's part of the market. And now suddenly they're outraged.

The point that I've been trying to make consistently has been that we believe in the free market. We believe in capitalism. We believe in people getting rich. But we believe in people getting rich based on performance and what they add in terms of value and products and services that they create. And it's appropriate for us to have some regulatory mechanisms in place to ensure that we never have a situation where the government has to step in or you've got taxpayers who are having to foot the bill for other people's mistakes.

That requires some regulatory framework. And my hope is that one of the lessons we learn here is, is that putting smart regulations in place -- oversight transparency, accountability -- those things are not anti-market, they're pro-market.

When last year Barney Frank and I worked to allow shareholders to at least cast a non-binding vote on compensation packages, there were some people who attacked it saying government has no business doing that. Well, look, all we're trying to say is you've got to be accountable to somebody. And it's that measure of accountability that I think is part of what has made America strong. And we have to get back to those kinds of values.


BLITZER: Should the Treasury secretary, Timothy Geithner, bear some of the blame in this controversy?

The president stands by his man, saying the secretary is effectively playing a bad hand.


OBAMA: I have complete confidence in Tim Geithner and my entire economic team. Understand, as I said, before, Tim Geithner didn't draft these contracts with AIG. There has never been a secretary of the Treasury, except maybe Alexander Hamilton right after the Revolutionary War, who's had to deal with the multiplicity of issues that Secretary Geithner's having to deal with all at the same time.

And, you know, he is doing so with intelligence and diligence. Nobody's working harder than this guy. You know, he is making all the right moves in terms of playing a bad hand. And what we need to be doing is making sure that we are providing him the support that he needs in order to work through all these problems so that we're able to deal with them more effectively in the future.


BLITZER: New moves by the Federal Reserve today making an impression on the stock market.

We're going to tell you what the Fed did and why.

And President Obama says he didn't create the AIG mess.

But did he miss an opportunity to prevent it?

We're investigating what could have been done.

And our roundtable -- the best political team on television on President Obama, as he vents his anger about AIG and holds himself accountable.

Stay with us.



BLITZER: Coming up, don't forget the presidential town hall meeting in California. We're going there live. The president of the United States will be answering questions, presumably about the AIG scandal, among other subjects. You'll see it live here on CNN.

The White House says it's not to blame for the AIG bonus controversy.

But could the Obama administration have done more?

We asked our national political correspondent, Jessica Yellin, to take a closer look.

What did you come up -- Jessica?

JESSICA YELLIN, CNN NATIONAL POLITICAL CORRESPONDENT: Well, Wolf, I've talked with a number of senior administration officials who insist their hands were tied. They tell me, look, they couldn't deny these bonuses. They couldn't let AIG break the contracts because that was too great a risk.

But experts in contract law and business management say, give me a break.

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

OBAMA: 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, CONGRESSIONAL OVERSIGHT PANEL: I don't understand the notion that -- 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.

PROF. PETER MORICI, UNIVERSITY OF MARYLAND: 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 court.

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 have been 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 lining.

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: And her point is that now Treasury must do what the Bush administration failed to do -- that is, develop a coherent long-term plan for dealing with AIG and the nation's financial system -- Wolf, she says it's not too late to act, but they have to stop this now.

BLITZER: Thanks, Jessica.

Jessica Yellin reporting.

We're going to show you some live pictures from out in California -- Costa Mesa, California. The crowd has already been assembled. The president of the United States about to walk into that room. A presidential town hall meeting. AIG bonus outrage potentially could boil over. We're going to have special coverage for you right here in THE SITUATION ROOM.

Plus, the road to rescue -- cutting through New Orleans this hour. Our own John King is there with the Interior secretary to see the Obama energy plan in action. We'll go there, right after this.


BLITZER: We're only moments away from the president of the United States walking into a town hall meeting in Costa Mesa, California. He's going to be answering Californians' questions about what's going on -- presumably questions, among other things, about the AIG bonus money.

Let's talk about what's going on. A very dramatic day here in Washington.

Joining us, our senior political analyst, Gloria Borger; our CNN political contributor, Steve Hayes, of "The Weekly Standard;" and Roland Martin, our CNN senior political analyst.

You know, the Chris Dodd admission today, coming forward, Gloria -- and it was live here in THE SITUATION ROOM, 24 hours after he professing he didn't know anything about that mysterious loophole language that was inserted to protect, in effect, the bonuses for the AIG executives, now coming forward and confirming. He says, well, the Treasury department -- certain officials at the Treasury department -- unnamed -- asked him and his staff to do it and he did do it under those circumstances.

What's the political fallout?

GLORIA BORGER, CNN SENIOR POLITICAL ANALYST: Well, I think the Treasury Department has some explaining to do, Wolf. Don't forget, you know, this is a situation in which you had Hank Paulson, Treasury secretary, who start all the bailouts, and then Tim Geithner, another product of Wall Street. There seemed to be a sense going into this whole crisis that you couldn't upset the way folks were compensated on Wall Street. And then, of course, we saw the economy fall apart before our very eyes.

And so I think we're in a different situation now than we were, perhaps, when they asked Chris Dodd to change his provision.

However, I think the question we have to ask is who specifically asked him -- I know we're trying to find that out -- and how high up did that go?

BLITZER: And we're showing pictures at the bottom of the screen, Steve, of the president. He's now arrived in Costa Mesa, California. They're getting ready for this town hall meeting. There he is right now.

I don't know if he's going to start speaking earlier than expected, but he's waving.

Let me ask you, quickly, to weigh in on this Chris Dodd admission.

STEPHEN HAYES, SENIOR WRITER "THE WEEKLY STANDARD": Well, I think it's a very big deal. I mean you have Chris Dodd, who's the chairman of the Senate Banking Committee, in effect, putting the blame on Treasury for inserting this provision that has caused all of these political problems.

That, I think, in and of itself, is problematic. Then you add to that, that Representative Paul Kanjorski today, on the House side, an important chairman in Financial Services, also is saying that he's sick and tired of hearing I don't know from the Treasury Department.

BLITZER: All right, Steve...

HAYES: So you have both of them challenging it.

BLITZER: Hold on a second.

I want to listen in to the president.

He's at this town hall meeting in Costa Mesa, California.

OBAMA: First of all, let me thank Jerome for the wonderful introduction. Give him a big round of applause.


OBAMA: We've got a number of elected officials who are here and who I want to acknowledge. We've got the lieutenant governor, John Garamendi. Give the lieutenant governor a big round of applause.


OBAMA: We've got the secretary of Labor, Hilda Solis, who is here.


OBAMA: We've got an outstanding member of Congress, Representative Loretta Sanchez.


OBAMA: This is not Loretta's district. This is actually Dana Rohrabacher's district.


OBAMA: No, no, no. And...


OBAMA: You know, we actually -- our office screwed up and I think didn't get the invitation to him on time so he's not here.

(LAUGHTER) OBAMA: No, it was a screw up on our part. So I wanted to let him know we're sorry about that. And I want everybody to give him a big round of applause. It's his district.


OBAMA: Secretary of State Deborah Bowen is here.


OBAMA: State Comptroller John Chiang is here.


OBAMA: Superintendent of Public Instruction Jack O'Connell is here.


OBAMA: And I've got a couple of others. We've got the mayor of Santa Ana, Miguel Pulido who's here.


OBAMA: We've got -- let's see, who else?

We have State Senator Jose Correa is here.



OBAMA: We have State Representative Jose Solorio here.


OBAMA: We have the state Democratic Party chair, Art Torres, is here.


OBAMA: And a great friend and supporter, Steve Wesley is here. Give everybody a round of applause.


OBAMA: I hope I did not miss anybody.

Now -- and all of you are here. Give yourselves a big round of applause.


OBAMA: All right. Now, now, let me just say this. For those of you who have chairs, go ahead and sit down so folks behind you can see. All right?

Make sure to sit down if you've got a chair. We'll have time to shake hands afterwards.

Now, it is always good to get out of Washington for a little while.


OBAMA: And come to places like Costa Mesa.


OBAMA: You know, the climate is a lot nicer and so is the conversation. So I am looking forward to taking your questions in a few minutes and talking to you about your concerns.

But before I do, I want to say a few words at the top. And I'm going to start off just by talking about these AIG bonuses you've been hearing about.


OBAMA: Now, I know a lot of you are outraged about this. Rightfully so. I'm outraged, too. It's hard to understand that a company that's relying on extraordinary assistance from taxpayers to keep its doors open would be paying anybody lavish bonuses. It goes against our most basic sense of what's fair and what's right. It offends our values.

But these bonuses, outrageous as they are, are a symptom of a much larger problem. And that's the system and culture that made them possible. A culture where people made enormous sums of money taking irresponsible risks that have now put the entire economy at risk.

So we're going to do everything we can to deal with these specific bonuses. And I know Washington's all in a tizzy and everybody's pointing fingers at each other and saying it's their fault, the Democrats' fault, the Republicans' fault.

Listen, I'll take responsibility. I'm the president. So...


OBAMA: We didn't draft these contracts. We've got a lot on our plate. But it is appropriate, when you're in charge, to make sure that stuff doesn't happen like this. So we're going to do everything we can to fix it. So for everybody in Washington who's busy scrambling trying to figure out how to blame somebody else, just go ahead and talk to me because it's my job to make sure that we fix these messes, even if I don't make them. But...


OBAMA: But what's just as important is that we make sure we don't find ourselves in this situation between, where taxpayers are on the hook for losses in bad times and all the wealth generated in good times goes to those who are at the very top of the income ladder. That's the kind of ethic we've had for too long. That's the kind of approach that led us into this mess. That is something we have to change if we're truly going to turn our economy around and move this country forward.

So I'm absolutely committed to ensuring that we have the tools we need to prevent the kinds of abuses that sent AIG spiraling. And we've got to make sure that we've got regulations that don't allow companies to take these huge risks that are so big that they can sort of hold us hostage. We can't let them fail because it would bring the entire banking system down and hurt a lot of innocent people. But on the other hand, they act irresponsibly. We have to make sure we don't put ourselves in that position.

And I'm also committed to ensuring that if we have to intervene again to prevent a bankruptcy that could cause a catastrophe for the whole financial system, that we have some of the tools that a bankruptcy judge has to help renegotiate contracts, to sell off insolvent parts of an institution to protect the healthy parts, to protect depositors and creditors and other consumers.

We also want to do this because it serves the most important goal we have today, which is to rebuild our economy in a way that's consistent with our values, an economy -- and I want to...


OBAMA: I want to describe to you the economy -- the kind of economy that we want to build -- an economy that rewards hard work and responsibility, not high flying financial schemes.


OBAMA: An economy that's built on a strong foundation, but not one that's propelled by overheated housing markets and maxed out credit cards. In other words, we want to build an economy that offers prosperity for the long run.

You remember that ad that they used to have out there that said we earn money the old-fashioned way, we earn it?


OBAMA: Well, we need to get back to that philosophy, because that's what all of you do. You're out there earning a living. And we've got to reward people who are working hard, not the bubble and bust economy we've experienced in recent years.


OBAMA: And we don't -- we don't need these house of cards, these Ponzi schemes -- even when they're legal -- where a relatively few do spectacularly well, while the middle class loses ground. You know what I'm talking about. I don't need to tell you these are challenging times. I don't need to tell you this because you're living it every day. One out of every 10 Californians is out of work right now. You've got one of the highest foreclosure rates in the nation. Budget cuts are threatening the jobs of thousands of teachers across the state. But...


OBAMA: But here's what I know -- here's what I want you to know. We are not only going to make it through this crisis, we are going to come out on the other side a stronger and more prosperous nation.


OBAMA: I can't tell you how long it's going to take or what obstacles we'll face along the way. But I can promise you this, there will be brighter days ahead, here in California and all across America.


OBAMA: But that's only going to happen if we pull together and focus on the big things, focus on the long-term. We've got to get past this petty bickering, the constant trivialization of politics and focus on getting the job done. And we're already -- we're seeing signs of progress.

Because of the Recovery Act that your two outstanding Senators, Senator Feinstein and Senator Boxer...


OBAMA: ...along with Congresswoman Sanchez...


OBAMA: ...along with Congresswoman Sanchez, worked so hard to pass and that I signed into law the other week, a new hospital will be built at Camp Pendleton that will give our servicemen and women the care they deserve.


OBAMA: Over in Inglewood, the police department's planning to expand its staff by 30 people. Orange County is hoping to add a new lane on SR 91, creating about 2,000 jobs...


OBAMA: ...creating about 2,000 jobs and easing congestion in the process. These are just a few of the 396,000 jobs we will create or save in California and the 3.5 million jobs we will create or save across America over the next two years.

(APPLAUSE) OBAMA: We are also taking unprecedented steps to unlock our frozen credit markets so families can get the loans they need to buy a home or a car and businesses can pay for inventory or make payroll. That's why earlier this week we took a sweeping step to free up loans for entrepreneurs -- helping them start and grow the small businesses that employ half of our private sector workers. That's why...


OBAMA: ...that's why we're creating a fund that will help support up to $1 trillion in loans, including auto loans and college loans. That's why...


OBAMA: ...that's why we've launched a housing plan that will help responsible homeowners save money by refinancing their mortgage loans. Now...


OBAMA: ...none of this will make any difference, however, unless we strengthen our economy over the long-term, unless we put our economy on a firmer footing by rebuilding its foundation. And that's exactly the purpose of the budget I'm submitting to Congress. It's a budget that makes hard choices about where to save and where to spend. Because of the massive deficit we inherited and the costs of this financial crisis, we are going through our books line by line so that we can cut our deficit in half by the end of my first term and reduce it by $2 trillion over the next decade.


OBAMA: Now, what we will not cut -- what we will not cut are investments that will lead to real growth and real prosperity, investments that will make a difference in the lives of this generation and future generations.

Let me give you some examples. Because of spiraling health care costs that are crushing our families, dragging down our entire economy and represent one of the fastest growing parts of our federal and state budgets, we've made an historic commitment to health care reform in this budget -- reform that brings us closer to the day when health care is affordable and accessible for every single American.


OBAMA: Because we know that countries that out educate us today will out compete us tomorrow, this budget invests in a complete and competitive education for every American, in early childhood education programs that work, in high standards and accountability in our schools, in finally putting the dream of college degree or technical training within reach for anyone who wants it.

(APPLAUSE) OBAMA: Because we know that enhancing America's competitiveness will also require reducing our dependence on foreign oil and building a clean energy economy, this budget will spark the transformation we need to create green jobs and launch renewable energy companies right here in California. It makes clean energy the profitable kind of energy. It invests in technologies like wind power and solar power, fuel-efficient cars and trucks powered by batteries like the ones I'll be seeing in Rosemead tomorrow -- all of which will also help combat climate change, because the weather's already nice in Orange County. We don't want it to get warmer.