Now, that’s cost efficiency. It took a mere $165 million to discredit the entire $11.6 trillion edifice of bailouts, capital infusions and guarantees that have accompanied the financial meltdown.

The bonuses AIG wants to pay its employees are a pittance compared with the $170 billion it has received in government bailouts, a trifling .097 percent. But nothing so angers the gods of populism as the word “bonus” (surely some genius is formulating a suitable euphemism even as we speak). President Barack Obama wants to try to block the bonuses, and other administration officials talk of making AIG pay back the government for the amount of the bonuses. Fine, but where do we go to get the other $169.835 billion back?

AIG has been the bailout from hell, dysfunctional and opaque. The government has had to restructure its rescue over and over, throwing billions more into its maw. Only now have we learned the identity of the true recipients of the bailout, the so-called counterparties to AIG’s credit default swaps, financial firms strewn around Wall Street and the globe, from Goldman Sachs to Deutsche Bank and France’s Societe Generale.

AIG first got bailed in the days after Lehman Brothers’ bankruptcy put the financial system on the brink and policymakers didn’t have the nerve to let another financial giant go down. It was the right call at the time, but the lesson of the AIG fiasco is obvious: Government needs to disentangle itself from the financial sector as rapidly as it responsibly can.

There is nothing about bonuses that’s inherently blameworthy. Wall Street has a compensation system that tends to pay lower salaries and higher bonuses – so what? But that doesn’t account for political sensitivities, inflamed by the association of bonuses with Wall Street excess. Those sensitivities become paramount as soon as a firm accepts a dime from taxpayers, and AIG – after making “all kinds of unconscionable bets,” in the words of Fed Chairman Ben Bernanke – vacuumed up 1.7 trillion of them.

AIG’s top seven executives are forgoing bonuses this year, a nice gesture but an insufficient one when $165 million is going to employees in the financial products unit whose recklessness brought AIG, otherwise a profitable insurance company, to its knees. The political provocation would only be worse if AIG decided to spend $165 million to take executives of its German and French counterparties on a lavish golf junket in a fleet of Gulfstream jets.

AIG says it is contractually obligated to the payouts, although troubled firms find creative ways to pay their employees less than promised all the time, and nothing is stopping more AIG employees from forgoing bonuses. The bottom line is that the bonuses fail the outrage test. Every CEO of a bailed-out firm has to first ask whether a given act will prompt scandalized headlines and cable chatter before he does anything. It’s a childish way to run an economy – and the norm until the private sector is truly private again.

AIG is caught in a public-private nether world. The government owns nearly 80 percent of it, and government officials handpicked the current CEO, Edward Liddy. The government nonetheless dares not directly run the company, since dealing with complex financial instruments is beyond government’s core competence (and apparently beyond even the core competence of many Wall Street firms). Treasury Secretary Timothy Geithner is hard-pressed just to run his Cabinet department.

Republicans and Democrats are now stumbling over one another to give AIG a good populist beat-down, and no one should pity AIG. But what everyone in Washington wants to ignore is that the banking system, festooned with $1 trillion or $2 trillion worth of bad assets, may still need more government attention rather than less. Obama has been taking a pass on cleaning up the banks in favor of passing Great Society II because the issue of the banks is too politically difficult.

Guess what? It just got harder.

Rich Lowry is a syndicated columnist. He can be reached via e-mail at: [email protected]

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