Moral outrage in the age of AIG

Ever peel back an onion to find it rotten at the core? Both the protecting outer layers and the rot are offenders. For Americans, that is much the same experience as they learn more about AIG. Once the largest risk-taker in US home prices, AIG is now Wall Street's largest recipient of bailout money – and it just paid bonuses to its most culpable workers.

Congress plans a public flogging Wednesday of Edward Liddy, CEO of American International Group. It may not matter that he took the job only last fall at the government's request to prevent a corporate collapse that, at the time, Congress and others thought would bring down the financial system.

At the least, this moral venting might help reveal the truth behind AIG's risky actions and the regulators who were supposedly watching the exotic insurance schemes that AIG sold to expand the sale of mortgage-backed securities. But such hearings should also help reset the moral bearings of all those who ate of the forbidden fruit that was the nationwide betting on an ever-rising housing market and on the government enablers for those bets.

Almost every moral dilemma in this economic crisis is wrapped up in the still-unpeeling story of AIG. Yet Americans simply want someone to blame – someone to fall on their sword – for having caused all the financial excess, the home foreclosures, the shrunken nest eggs, and now rising unemployment.

So when it came out this week that AIG traders and executives who were at the center of the trading in mortgages received bonuses, well, now that's an easy target.

Never mind that the bonuses were negotiated long before AIG became 80 percent owned by the Federal Reserve and US Treasury and are legally binding contracts.

Never mind that the bonuses were promised in early 2008 to keep those same risk-takers within AIG's tent to fix the mess and not go to competitors to help bet against AIG's demise – thus reducing the chance of taxpayers getting their money back.

And never mind that Presidents Bush and Obama both gave bailouts to AIG without first demanding some way to "claw back" some of those bonuses.

AIG is a lightning rod for outrage simply because it was the biggest careless player in a complex system set up in part by Congress to push cheap mortgages on people who couldn't afford them or who could easily lie about their income.

Yes, anger is understandable for AIG's "unconscionable bets," as Fed chief Ben Bernanke calls them. And Mr. Obama needs to appear angry to maintain political capital for tougher financial regulations and to spend more on further bailouts. And yes, it would be best if those AIG traders did return the bonuses, knowing now their jobs were rescued by fellow Americans. And no, it's not fair that AIG paid off its debts in full to banks and other investors for losses on their mortgage securities – even though those mortgages aren't worth much.

But what really matters is that Congress and Obama use AIG as a mirror for reflection in redesigning a system that overpromised and over-enabled the American dream of home ownership, often to the most trusting and vulnerable in society. As Obama says, "In a time of crisis, we cannot afford to govern out of anger." There are many layers to this onion.