WSJ Editorial: Obama's AIG Panic

The editorial board raises some very good points.

http://online.wsj.com/article/SB123742023932678335.html

Highlights:

Senator Chris Dodd, down in the 2010 election polls after his sweetheart Countrywide mortgages, is busy rewriting the TARP compensation limits he only recently stuck in the stimulus bill. His last-minute measure explicitly exempted from compensation limits bonuses agreed to prior to the passage of the stimulus bill: "The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009 . . ." So Senator Hedge Fund is suddenly morphing into Huey Long to save his career.

This is all too much even for Rep. Charlie Rangel, the House's chief tax writer, who says the tax code shouldn't be deployed as a "political weapon." He's right. AIG's managers may be this week's political target of choice, but the message to every banker in America, indeed every business in America, is that you could be next. At least we haven't yet seen the resolution that was proposed in the English parliament, in 1720 in the aftermath of the South Sea bubble, that bankers be tied in sacks filled with snakes and tipped into the Thames. But it's still early days.

...

The Beltway's banker baiting seems to increase in direct proportion to the government's incompetence in nurturing a financial recovery. Anger rises when Americans learn after three bailout revisions that they haven't been told the truth that the AIG nationalization was a conduit to save counterparties, and even hedge funds, that gambled on housing. Only two weeks ago, Federal Reserve Vice Chairman Donald Kohn told Congress he couldn't disclose who AIG's counterparties were. Americans also wonder why taxpayer guarantees should be provided to Citigroup, a three-time loser, but with little accountability for the board and managers who brought the company low.

Reviving a financial system is a long process that requires a combination of capital support, workout ability and discipline for mistakes. The public has to believe the end result will be a better, sturdier system in return for taxpayer support, while at the same time being assured that gamblers aren't saved from their own mistakes.

If this balance is beyond the ability of Mr. Obama's current economic team, he needs a better team. The worst mistake he can make is to deflect attention away from government's mistakes by joining the attack on the very bankers he needs to lead an economic recovery. That's how a deep recession becomes a Depression.