Video: Obama outrageously outraged by AIG outrage; Update: Treasury to reduce AIG's bailout funds?

In which The One attempts to douse a populist brushfire with a little heat of his own. Two issues here: Can the feds legally force AIG to break their contracts with their traders and deny the bonuses, and if so, should they? Ambinder advises ignoring the first question and focusing on the second. How likely is it, he wonders, that AIG’s traders would sue to recover them given the Madoff-ian public opporobrium they’d receive for doing so? Pretty likely, counters Tom Maguire, who agrees that the second question is the more important — and likely to cause further headaches if the bonuses are denied:

First of all, as I wasted my breath explaining, AIG [Financial Products division] is active in many businesses, not all of which are focused on credfit derivatives. Secondly, Joe Cassano, who led the unit until he was pushed out in March 2008, had enemies inside and ouside AIG FP, some of whom may have agreed to emerge from internal exile and attempt to clean up after him. Thirdly, insurance companies which don’t honor their contracts don’t last long; it is possible that failure to honor this obligation would represent the sort of default whch would ordinarily trigger a bankruptcy or reorganization, which so far the Feds have labored mightily to avoid. Fourth, if the new concept of selective default is that AIG won’t pay people or firms the public doesn’t like, how confident will, for example, Goldman Sachs be that AIG will honor its obligations to them? (Ok, why are we honoring the AIG obligations to Goldman – surely the Goldman execs could take it out of their bonus pool, yes? Instead, my tax dollars went to AIG, from there to Goldman, and from there to some trader’s estate in the Hamptons. Troubling, I would think.)

And FWIW, as the letters to Geithner explained, AIG wil have to pay double bonuses after they lose this suit, which they will.

What about a one-time tax on bonuses paid to employees of TARP recipients? That would sidestep the legal issue of breach of contract, although you’d still have the problem of scaring away talented managers from troubled firms. Then again, you’ve got that problem anyway: The more public anger grows, the likelier it is that people who work for TARP companies will be targeted in the future. While you mull a solution, enjoy the sublime irony in the second clip below of one of the chief culprits in the subprime implosion railing about profiting from incompetence.

Update: Forgot the link to Bill Kristol’s piece in WaPo today begging the GOP to figure out that two can play at the populist game before Obama claims it for himself.

Can capitalism survive the behavior of some capitalists? It’s always been an open question. But if capitalism is to survive, shouldn’t the Republican party, the party that defends democratic capitalism, be particularly vehement in denouncing its excesses? Isn’t this a pretty spectacular one? And isn’t this a moment for the GOP to separate itself from the Bush administration as well as the Obama administration, who together have been responsible for an incompetent and improvident bailout? Figuring out the right policy going forward with respect to toxic assets and the rest is, of course, a major intellectual task. But being on the side of a healthy populist reaction to the AIG situation is at least a good political start.

Update: More good news from Geraghty: Not only have the checks already gone out, but many of the recipients aren’t even U.S. citizens. Ambinder claims Treasury is scrambling to punish the firm somehow, possibly by knocking the cost of the bonuses off of their bailout package. How does that make sense, though? If the point of the funds is to keep the company afloat, reducing the package only reduces the likelihood of that while not taking the money out of the traders’ pockets. Which I guess explains this:

Speaking of punishing AIG: Rep. Gary Peters (D-MI) plans to introduce a bill to tax AIG bonuses at a high rate this year. A spokesman for Peters says that details are still being worked out. Targeting legislation at one company is tantamount to the Congress’s passing a bill of attainder against AIG. But these are extraordinary times.