AIG’s announcement that it would honor its contracts and award $450 million in bonuses, including to employees in its financial products unit, dominated the headlines and Sunday talk shows yesterday, sparking outrage and an exchange of letters between AIG CEO Ed Liddy and Treasury Secretary Geithner. In response to Geithner’s outright disgust at the bonuses – a $165 million of which were awarded yesterday -- Liddy said he was bound by the law and that the bonuses must be made if he is to retain the talent he needs to save the company. Liddy was able to promise to scale back bonuses and compensation for some of its top-earning employees.

Meanwhile, The Wall Street Journal reports that Secretary Geithner will soon outline proposed changes in financial regulation. They are expected to include: an enhanced role for the Federal Reserve to monitor and address broad economic risks; changes to the way banks are overseen to prevent lenders from shopping among regulators for the easiest supervision; more transparency and stricter rules for the way money flows between banks; tougher capital requirements for big banks; and consolidation of consumer-protection enforcement. A few elements remain unclear, including if state attorneys general will be allowed to prosecute national banks and whether further restrictions will be placed on compensation of bank executives. Almost all of those changes will require congressional approval.

On "60 Minutes" last night, Fed chief Ben Bernanke said the economy will stabilize later this year and start growing again in 2010. He said he thought policy makers had averted another depression and reiterated his belief that solving the banking crisis was key to recovery. Said Bernanke: "I've never been on Wall Street. And I care about Wall Street for one reason and one reason only -- because what happens on Wall Street matters to Main Street."

The Chamber’s Giovanni Coratolo praised the Obama administration’s plan to increase lending to small businesses, calling it "a huge step in the right direction." The plan – to be announced today -- includes $730 million from the stimulus plan that will immediately reduce small-business lending fees and increase the government guarantee on some SBA loans to 90%.

Meanwhile, the administration is backing away from a key element of its budget plan, eliminating tax deductions on the wealthy and raising their health care premiums to pay for universal coverage. Obama aides now say they are open taxing some employee health benefits. The proposal is politically problematic for President Obama since it is similar to one he denounced in the presidential campaign as "the largest middle-class tax increase in history." The Chamber’s James Gelfand said we oppose eliminating the exclusion on health benefits, but have not taken a position on limiting it.