AIG Bonuses: 'Distasteful' . . . And Dangerous

AIG's Edward M. Liddy says he finds AIG's $165 million bonus payout to executive level employees "distasteful." He's right, and now Congress could try and take the money back after placing Liddy's head on a figurative pike today.

Too bad it won't matter if they succeed or not.

Bonuses are simply a sideshow. Anger surrounding the payouts may be legitimate, but it is also a dangerous distraction at a time when there is still simply too much at stake to spend valuable time bashing even the most egregious pay abuses by AIG. That's because the audience Congress needs to be impressing right now isn't the American public. It's actually the people drawing a good bit of all this populist scorn: Big investors.

Here's why: This Thursday, applications for the government's Term Asset-Backed Loan Facility, or the TALF are due. That's the $1 trillion government plan to team up with investors to get lending flowing again.

If those investors look at the AIG scandal and see a partner (the government) that looks both unfriendly and unreliable, the pool of risk-takers willing to lend to consumers and businesses during a time of economic uncertainty could simply decide participating in the government's public-private partnership is too much of a hassle.

That scenario, while not likely, would be a disaster. Frustration over bonuses or wayward executives may be justified, but it doesn't address the most glaring problem facing this economy. Namely, until plans to stabilize the banking sector to spur new lending succeed (including a plan for pricing bad assets still on bank balance sheets), reviving the economy will remain a nearly impossible task.

The AIG mess already swallowed $170 billion in bailout cash, which went to a variety of counterparties all over the world (if you're looking for a reason to be angry, that should suffice). But focusing on a few million in bonuses only serves to make jittery investors more nervous at a time when the government desperately needs their help to finance a recovery. Reassurances, especially from Tim Geithner, would be welcome.