I’ll leave to others the question of who knew or should have known that the bonus firestorm was coming; but it’s part of a pattern. At every stage, Geithner et al have made it clear that they still have faith in the people who created the financial crisis — that they believe that all we have is a liquidity crisis that can be undone with a bit of financial engineering, that “governments do a bad job of running banks” (as opposed, presumably, to the wonderful job the private bankers have done), that financial bailouts and guarantees should come with no strings attached.
This was bad analysis, bad policy, and terrible politics.
The AIG bonuses are not a big deal themselves, but are rather symbolic of the non-accountability of the bailout plan. In a column complaining about the outrage over the bonuses, Michael Lewis begins:
Last September, the U.S. government began to dole out the first of $173 billion to American International Group. A big chunk of it passed right through to banks that had bought insurance from AIG against mortgage and corporate defaults -- foreign banks such as Deutsche Bank and Societe Generale but also some domestic ones, such as Goldman Sachs and Bank of America.
U.S. government officials then went to great lengths to disguise from the public exactly what they had done, and why, going so far as to declare the ultimate list of recipients of taxpayer funds off limits to the taxpayer. To its immense credit, the media -- or, rather, a handful of diligent reporters, the New York Times’ Gretchen Morgenson chief among them -- prevented the public officials from getting their way.
This incredible act triggered hardly any political backlash. In effect, the U.S. taxpayer had paid off AIG’s gambling debts. The end recipient of the money was not AIG, but Goldman Sachs, Deutsche Bank and the others.
This is a good point. The problem isn't the bonuses themselves, it was the way the bailout was structured that allowed things like the bonuses to occur. Lewis is wrong though, to claim that there was no populist backlash at the time, I remember the backlash occurring. However, push was so strong at the time to do something about the crisis populist wouldn't truly coalesce until later.
The Obama administration isn't at fault for the Paulson plan, it was the Bush administration and congress that wrote it (the original plan was worse than the plan after congress rewrote it), but the Obama administration seems to be just fine with the plan, and Timothy Geithner worked with Paulson on the AIG bailout. The approach of the current administration is disappointing and represents little change from the approach of the previous administration.