Economic Outlook: 'Sensible choices'

The U.S. Treasury is preparing to draw a line in the sand on two issues that could draw political heat and naturally have financial ramifications.

Treasury consultant Kenneth Fienberg is contemplating how much compensation bailed out insurance giant American Insurance Group can pay about 28,000 employees. The company has asked permission to pay out a total of $235 million, a figure that divides evenly to $600,000 per employee.

In reality some of the checks, if the total sum is approved, will be more headline-grabbing than others and part of Feinberg's task will be to anticipate what headlines might say, especially after AIG's previous attempt to pay $165 million in bonuses provoked a firestorm in Washington.

As the recipient of $180 billion in taxpayer funds, AIG's previous attempt to hand out bonuses was met with quickly written bills in Congress demanding a return of bonuses through punitive tax laws. The bills were shelved after some AIG executives returned their bonus checks voluntarily.

Companies are prepared to argue they have the right to pay competitive wages to recruit and retain top talent. Some of AIG's competitors have not been bailed out, and some are overseas.

In the back of his mind will be a New York Times report Wednesday that former General Motors Corp. Chief Executive Officer Rick Wagoner is set to receive a retirement package worth $8.5 million over the next five years, plus and additional $74,000 a year for the rest of his life -- in spite of the company's plunge into bankruptcy.

The Treasury is also concerned what firms might be "too small to fail."

The previous litmus test on the issue may have been Lehman Brothers with more than $600 billion in assets, which went bankrupt last fall, sending repercussions throughout the financial system.

The new test might be CIT Group, a lender to thousands of small businesses that is dwarfed in size by Wall Street behemoths, but plays a critical in keeping many businesses afloat.

CIT has already received $2.35 billion in federal aid but with $75 billion in assets it sits on the cusp of a debate in Washington over how small a company the Treasury might decide is best to left to the vagaries of the marketplace.

But, the political fallout could be acute.

"You'd have an issue of the first firm that they would make an example out of by allowing to fail is one that fills a niche and helps the little guy out," Vincent Reinhart at the American Enterprise Institute told the Times.

U.S. Treasury Secretary Timothy Geithner said Monday in London that he was "pretty confident in that context we have the authority and the ability to make sensible choices."

In Asian markets Wednesday, the Nikkei index rose 0.08 percent, while the Hang Seng index in Hong Kong rose 2.08 percent. The Singapore Straits Times rose 3.41 percent, while the S&P/ASX rose 1.48 percent.

In midday trading in Europe, the FTSE 100 in London rose 1.7 percent, while the DAX 30 in Frankfurt rose 1.84 percent. The CAC 40 in Paris rose 1.76 percent, while the broader DJStoxx 600 rose 1.68 percent.