Robert Reich on the real scandal of AIG.

And Jon Taplin has more about how one lucky hedge fund that got bailed out by the AIG bailout.

Like you, I’ve been watching this AIG bonus story unfold over the weekend. And though I did not see it at first, I think it may prove to be a turning point, both for AIG and the government.

I don’t believe the bonuses themselves are the heart of the matter, nor the fact that they’re going to the

very executives who caused AIG’s implosion or even the galling reality that, since all money is fungible, they’re being paid with taxpayer dollars. What’s really driving this forward — and what makes it such a dangerous moment for the White House — is the jarring image of the administration’s impotence.

Secretary Geithner found out about the bonuses. He told AIG CEO Edward Liddy it wouldn’t fly. And Liddy, in a curiously imperial letter, tells Geithner that much as he is pained by the situation — to blow it out his ass. Which he apparently proceeded to do.

There’s really no other way to describe it. From the Journal …

Chief Executive Edward Liddy told Treasury Secretary Timothy Geithner in a letter dated Saturday that the next payments to employees of the financial products unit — whose woes caused massive losses at the giant insurer — are due on Sunday, and added “quite frankly, AIG’s hands are tied.”

…

Mr. Liddy wrote in the letter to Mr. Geithner that it followed a conversation between the two men on Wednesday about “compensation arrangements” at the financial products unit and AIG in general. “I admit that the conversation was a difficult one for me,” Mr. Liddy wrote.

In the letter, Mr. Liddy wrote that “outside counsel” had advised that the previously agreed to payments to employees at the financial products unit are “legal, binding obligations of AIG.” He wrote that there are “serious legal, as well as business, consequences for not paying.”

“I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them,” Mr. Liddy wrote, but added, “Honoring contractual commitments is at the heart of what we do in the insurance business.”

Few exchanges have so captured the disconnect that makes this situation so politically explosive. We’re collectively taking our country’s future in our hands, spending vast sums of money to keep these companies from suffering the consequences of their own folly and (in many cases) criminality. And in return we’re receiving cavalier dictates about pay-outs and bonuses from executives who by any reasonable measure work for us — dictates we promptly accede to. There’s a beggars can’t be choosers problem there. And the disconnect is so mighty that it fuels the impression that the whole enterprise is not what it seems, not what we’ve been told, that in addition to picking up the tab we’re being played for fools.

DH makes a decent point …

As Liddy surely knows, when a company wants to get out of a contract that is questionable or troubling, it can generally find some legal theory to justify disavowing the contract. Here, given what has happened at AIG, it would be shocking if there were not a plausible argument that the AIGFP ******* breached whatever contracts allegedly entitle them to bonuses. Assume that AIG refuses the bonuses, and the ****bags sue to collect them. AIG gets a jury trial. What jury in the USA would award bonuses? It’s damn near inconceivable. Liddy is paying the bonuses because he wants to pay them and could give a **** about honor, decency, taxpayers, responsibility, whatever.

I was going to write this up tonight; hopefully I’ll be able to tomorrow. But the real issue for these people at AIGFP is criminal jeopardy. As noted earlier, a lot of the stuff these folks were doing looks like fraud. It would be helpful to make that clear. It might lead to more constructive decisions on stuff like these bonuses.

Obama set to tap his campaign’s ginormous email list to mobilize support for his budget. That and the day’s other political news in the TPMDC Morning Roundup.

National Economic Council Director Larry Summers, White House Council of Economic Advisers Chair Christina Romer, and Representative Barney Frank (D-MA) all feel the same anger and outrage over the fact that insurance giant AIG has payed out hundreds of millions in employee bonuses after receiving some $170 billion in taxpayer bailout money. But can the government actually do anything about it? We find out in today’s Sunday Show Roundup …

Full-size video at TPMtv.com.

Not feeling angry enough today? Want a jolt of rage? For you, we have highlights of Dick Cheney’s CNN interview yesterday:

More at CNN.com.

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Whatever else you can say about AIG CEO Edward Libby, he ain’t much for irony. In his letter to Secretary Geithner he said that AIG “cannot attract and retain the best and brightest talent … if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.”

As noted yesterday, the bonuses are overwhelmingly weighted toward AIG’s Financial Products division (AIGFP), the relatively small division responsible for the company’s de facto bankruptcy and no little part of the world financial crisis.

With respect to AIGFP, there’s no little snarking to be had about whether these folks are really the “best and the brightest.” But it actually goes beyond that. It’s not just the people. The whole division is

toxic and should be shut down, probably the building should be razed and the ground salted. AIG is a ward of the federal government. Our only financial interest in it is in chopping it up and getting the best prices for the valuable parts of it. I don’t think AIGFP is going to have a lot of takers. And as a matter of policy I think we probably want to close it down.

More generally, the idea that there are a lot of jobs on offer at the moment for credit default swap writers strikes me as dubious.

The other argument — real, as far as it goes — is that what we’re trying to do is untangle a massive ball of twine these guys created. And as much as we might revile these characters we can’t do without their help trying to get it unwound. Again, true as far as it goes. The problem, though, is that we’re even entertaining the question on the retention/compensation front. The government has more options.

As noted previously, the scale and nature of a lot of the losses at AIGFP go well beyond reckless and folly. A lot of it looks like fraud. And go-go operations like AIGFP don’t tend to fare too well in general when subjected to searching legal scrutiny. The government should be making it clear that criminal investigators are reviewing the entire matter. Contracts don’t easily withstand credible allegations of illegal behavior. And the executives in question need to have their attention focused on the calculus of levels of cooperation and legal vulnerability rather than compensation packages.

President Obama just delivered remarks on the AIG bonus fiasco. We’ll have the vid for you shortly. Meanwhile, top Obama economic adviser Austin Goolsbee is saying the Administration will do everything in its power to get those bonuses back and reiterating their outrage:

See more at MSNBC.com.

I guess their outrage is a little hard for me to swallow at this stage of the game. They just got schooled by AIG. Their initial outrage should have been about the bonuses, but their outrage now ought to be about AIG’s fundamental misapprehension of what the post-bailout relationship between the company and Treasury is all about. AIG doesn’t seem to get it — and I’m not convinced yet that the Administration gets it either.

Late Update: The President himself addresses AIG:

We’ve referred several times to the letter AIG CEO Edward Liddy sent over the weekend to Secretary Geithner — in which he tells Geithner, with great courtesy and heaviness of heart, to go screw himself. Here’s the letter itself for reading pleasure, or displeasure, as the case may be.