updated 3/19/2009 5:52:08 PM ET 2009-03-19T21:52:08

The case of the missing AIG bonus limits has become a tale of political intrigue and Democratic infighting that could threaten the re-election chances of a top senator and the credibility — if not the career — of one of President Obama's top advisers.

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As the House passed new legislation Thursday to crack down on the outrage-inspiring bonuses, Sen. Chris Dodd of Connecticut, the Banking Committee chairman, and Treasury Secretary Timothy Geithner engaged in finger-pointing about who was responsible for Congress' failure to prevent them in the first place.

Dodd, a five-term senator, was already facing a tough re-election contest in 2010. He says the Obama administration insisted he modify his proposal to rein in bonuses at companies getting billions of dollars in financial bailouts so that it would only apply to payments agreed to in the future — thus clearing the way for the AIG payouts.

It was that or have his executive pay limits dropped altogether from the $787 billion stimulus measure that passed last month, Dodd says.

He agreed to the changes "in order to preserve the amendment," Dodd told reporters Thursday. "They sought it; I didn't. They asked for the changes ... and so we agreed to those changes."

Geithner said Thursday that his staff merely pointed out that without the change, the government risked being sued by executives in line to get big bonuses from bailout recipients.

"What we did is just express concern about the vulnerability of a specific part of this provision, the legal challenge, as you would expect us to do. That's part of the legislative process," he told CNN.

The treasury chief also appeared to back away from the administration's previous assertion that Geithner first learned of the bonuses last week. Interviewed on CNN, Geithner said only that he "learned of the full scale and scope of these specific" bonus payments at that point.

Both men had positive things to say about each other despite the dispute over who watered down the bill.

"He has the president's support and backing and he has mine at this point," Dodd said of Geithner.

Geithner told CNN that Dodd "has played an enormously important leadership role in this, and he's doing the right thing."

The situation has Dodd on the defensive even as party strategists tag him as the most politically vulnerable sitting Democratic senator.

"He was in trouble before this controversy, and this just makes his problems worse," said Douglas Schwartz, director of the Hamden, Conn.-based Quinnipiac University Poll. Dodd was essentially tied in a hypothetical matchup with much lesser-known former GOP Rep. Rob Simmons, according to a survey Schwartz released last week.

It also poses a steep challenge for Geithner at a time when he badly needs credibility and cooperation from Congress to navigate a deep recession, stabilize the troubled financial system and implement new rules aimed at preventing another meltdown.

"The president has been blunt, forthright, strong on a lot of these key issues, particularly the question of making sure you rein in these outrageous bonuses, but I think that there hasn't been adequate follow-up in terms of his economic team," said Sen. Ron Wyden, D-Ore.

Asked for an assessment of Geithner's performance so far, Wyden would only say, "I want them to get their act together. I want the economic team to have a coordinated message that carries through with what the president has told the American people are his priorities."

Republicans went much further. Several of them called Thursday for the Treasury chief's resignation, and in a somewhat odd twist, ended up essentially taking Dodd's side in the intramural fight by blaming Geithner for weakening the Democratic senator's executive pay proposal.

As former chairman of the Federal Reserve Bank of New York, Geithner worked closely with AIG, leading some lawmakers to question how he could have failed to know that the company had a bonus program that would be affected by the language Congress approved last month.

"You're talking about the administration. Individuals either did know or should have known," said Rep. Michael N. Castle, R-Del.

The public blame-game obscures a truism of behind-the-scenes haggling on Capitol Hill.

Video: Bonus blame game In final, late-night, closed-door negotiations on major legislation, the administration and congressional leaders — often through their aides — cut scores of deals on a wide variety of issues in a mad rush to get the bill ready for a vote. As they trade legislative drafts, lawmakers routinely agree to changes large and small requested by the administration, all in the name of sealing a final deal.

In the case of the bonus language, the Obama administration asked to confine the executive pay restrictions to contracts made after Feb. 11, 2009, fearing lawsuits if they tried to reach back further.

They also argued, as President George W. Bush's team had before them, that enacting strict compensation limits could hamper companies' ability to attract and retain vital talent at in tough financial times, according to aides who spoke privately about the internal talks.

"But for Sen. Dodd, there would be nothing in this legislation" on the issue, Sen. Harry Reid, D-Nev., told reporters. "I think we did the very best we could."

The episode darkens an already cloudy political outlook for Dodd.

Dodd initially said he had nothing to do with watering down executive pay proposal and then acknowledged Wednesday night that he had agreed to do so. Now Dodd says he had meant to deny that he was knowingly creating a loophole for AIG bonus payments.

"This is obviously a matter that should have been dealt with differently, but we are where we are," Dodd said.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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