President Barack Obama had largely avoided being politically shackled to the government's massive bailout of the U.S. financial system.
Rightly or wrongly, he now owns the hugely unpopular necessity to save the system — at a cost that may climb to $2.5 trillion and beyond. Worse yet, the new administration could now be thwarted if it needs to return to Congress for even more bailout money. Obama has said that was likely.
The White House had little choice after a political storm, one of the biggest in recent years, blew across Washington and the United States when word leaked last week that American International Group Inc., the giant insurance and investment firm already at least $170 billion in hock to U.S. taxpayers, was paying out $165 million in bonuses.
Salt in the wound: The payments went to those who worked in the AIG Financial Products unit that had brought the company to the brink of collapse.
Until then, Obama and Treasury Secretary Timothy Geithner had managed to float on the periphery of the bailout program, shunting American anger onto the former Bush administration under which the $700 billion in rescue spending began.
Geithner had acknowledged that far greater spending could become necessary, but cloaked his message in vague plans that would, in theory, use already available federal money as a guarantee to entice, or leverage, massive private spending to resuscitate the financial system.
Some financial experts and Obama critics grumbled that Geithner was not sufficiently clear about his plans, but seemed prepared to hold fire until things clarified.
A deep hole
In the meantime, however, Americans became increasingly angry about the use of their taxes to prop up big financial interests. The pressure was becoming intense on members of Congress. The AIG bonuses became an escape valve and the cauldron of built-up political bile spewed across AIG chief Edward Liddy, Geithner and, by association, Obama.
"Nobody here drafted those (bonus) contracts," Obama said Wednesday. "Nobody here was responsible for supervising AIG and allowing themselves to put the economy at risk by some of the outrageous behavior that they were engaged in. We are responsible, though. The buck stops with me."
While Liddy said he was working, with some success, to get the bonus money back, Obama could not escape the fact that Geithner had allowed the payments to go forward, citing contracts AIG had signed during the Bush administration.
The president and aides quickly flooded media outlets with assurance that they were outraged about the bonus payments and would insist they be given back. But the political damage was done.
They are left with the task of trying to dig out of a deep hole that could have been avoided had only Geithner asked the right questions earlier this month.
That's when Geithner approved $30 billion more for the AIG rescue without knowing or asking about the bonus time bomb. And the problem fell squarely on the White House. And there are calls from some Republicans in Congress for Geithner's resignation. Obama, so far, is standing firmly behind his treasury secretary.
Polls show Obama's approval rating with Americans remains high, but it has slipped some in recent days. The explosion over AIG and Obama's need to take responsibility may foreshadow a further decline. Men and women worried about paying their bills and keeping their jobs in the deepening recession are rising up politically against seeing more of their tax dollars paying the bonuses of financiers.