Bill Manzi.com

The announcement of bonuses at AIG has triggered a firestorm of protest, and brought a strong condemnation from President Obama. From the Wall Street Journal;

“This is a corporation that finds itself in financial distress due to recklessness and greed,” Mr. Obama said Monday, his voice rising in anger. “Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay.”

Despite the President’s anger his Administration has sent mixed signals on this issue, with Larry Summers over the weekend telling us that the sanctity of a contract prevented any government move to block the bonuses. I believe Larry Summers is a brilliant guy, but the line of nonsense he put out Sunday was appalling. When you drop the billions in that the U.S. government has dropped in you can do anything in this area that you need to, including telling the company that those contractual obligations must go as part of the bailout.

And despite the Administrations position these bonuses will be paid, with the government now saying that it will recoup bonus money in the future by leveraging additional bailout money.

Instead, the administration said it will use a $30 billion installment of bailout funds approved March 2, to bring some pressure to bear on AIG. The official said before AIG can draw down funds from the $30 billion, new rules would be written into AIG’s contract to ensure no government money goes toward paying financial-products division bonuses. The cost of bonuses already paid would be recouped for the taxpayer.

Both sides of the aisle expressed opposition to the bonus payments.

The Senate Banking Committee’s top Republican, Richard Shelby, said the government’s handling of AIG is compounding the negative sentiment toward more rescue money. “There’s been no accountability, no transparency to speak of,” he said in an interview. “Whatever we’ve gotten…we’ve had to extract it piece by piece, little by little. There’s too much secrecy.”

House Democrats also responded.

On Monday, nearly 80 House Democrats wrote Mr. Obama to say they were pleased that he intended to block the bonuses, and hinted that a failure to do so would have consequences. “For the sake of the President’s ability to continue to take the steps that may be necessary to rebuild our economy, there must be a stronger response than simply decrying this development,” the lawmakers wrote.

The Administration is clearly worried about a brain drain, but just does not want to say that because of the outrage over these bonuses.

But administration officials also worry that taking too hard a line with AIG and other companies could discourage top financial experts and institutions from joining the government efforts to fix the financial system. That’s one argument that AIG itself has used to justify the bonus payments: that if certain executives leave at this point, their departures would complicate efforts to wind down the financial-products division.

The unit’s books contain many transactions that are “difficult to understand and manage,” according to an AIG document explaining the retention plan the company submitted with the Saturday letter to Mr. Geithner. “This is one reason replacing key traders and risk managers would not be practical on a large scale,” the document continued.

There is some validity to that concern, but it still does not justify these bonuses. Once again a tin ear to public concerns over taxpayer monies being used inappropriately has come back to bite. Tim Geithner better sharpen his game.