After spending the last few weeks rabble-rousing over compensation at companies that receive TARP funds, the Obama administration has quietly reversed course.  Now that Barack Obama needs partners in the private sector to unload toxic assets, the White House has begun creating work-arounds for compensation caps passed by Congress in the heat of AIG retention bonus outrage:

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed, according to officials.

The news isn’t all good here.  The White House wants to pick its winners and losers:

Although some experts are questioning the legality of this strategy, the officials said it gives them latitude to determine whether firms should be subject to the congressional restrictions, which would require recipients to turn over ownership stakes to the government, as well as curb executive pay.

This represents quite the sea change from Barack Obama’s “shaking with outrage” position, two days after the AIG bonuses became the focus of the national media.  Instead of focusing on the incompetence of the Treasury to account for the bonuses — which Tim Geithner protected via Chris Dodd in the omnibus spending bill — Obama and his allies stoked populist fervor by demonizing AIG’s execs, most of whom had only come to work at the Financial Products division after the collapse, and whose bonuses kept them from looking at better jobs with more of a future than the soon-to-be shuttered AIG-FP.  Congress pilloried Edward Liddy, who only gets $1 for his efforts to right AIG, and passed a blatantly unconstitutional bill of attainder that taxes all TARP-related company bonuses at 90%, making them effectively worthless.

That certainly got the attention of the very firms that Obama needs to invest in worthless mortgage-backed securities (MBSs) in order to shore up the financial markets.  TARP funds will subsidize those transactions, which means that the new tax will affect all the employees of firms that participate in the program.  If the risk make the TARP MBS program iffy, the new taxes made it untouchable.  Now they want to start punching loopholes in the law, but only to the degree that they get to reward the people they like.

How legal is that?  Analysts are laughing at the prospect:

Legal experts said the Treasury’s plan to bypass the restrictions may be unlawful.

“They are basically trying to launder the money to avoid complying with the plain language of the law,” said David Zaring, a former Justice Department attorney who defended the government from lawsuits involving related legal issues. “They are trying to create a loophole to ignore Congress, and I think the courts will think that it’s ridiculous.”

It will be a toss-up to see which effort the court finds more ridiculous — the bill of attainder passed by Congress with Barack Obama’s explicit endorsement, or Barack Obama’s hypocritical efforts to undermine the law he demanded in the first place.  It’s Keystone Kops at Treasury, Capitol Hill, and the West Wing.