Having long flattered themselves as “masters of the universe,” the creative financiers of Wall Street and London are today exposed as grifters rather than geniuses. Their proud claim that society cannot prosper without them — voiced so often whenever anyone raised subjects such as taxation or regulation — would now provoke bitter laughter instead of credulous nodding.

But they are not humbled.

Instead the old arrogance remains intact, at least on the premises of American International Group, where the flow of hundreds of millions of taxpayer dollars into bonuses continues, unimpeded so far by public outrage. These payments, made to many of the same individuals whose freebooting misconduct ruined their firm and laid waste to world markets, symbolize a system of rewards gone mad.

It should be obvious by now that the AIG traders, along with many others like them, deserved to be fired and perhaps prosecuted rather than enriched. The “too big to fail” argument for saving their firm and their sorry behinds always amounted to a kind of blackmail. The threat was stated explicitly in the remarkable letter sent last weekend by AIG chief Edward Liddy to Treasury Secretary Timothy Geithner that sought to justify the latest bonuses.

According to Liddy, the bonuses cannot be withheld because “these are legal binding obligations of AIG and there are serious legal as well as business consequences for not paying,” or so the company’s outside counsel has told him. “Given the trillion-dollar portfolio at AIG Financial Products” — the division that wrote all the toxic paper — “retaining key traders and risk managers is critical to our goal of repayment.” Attached to the letter was a “white paper” arguing that failing to pay the bonuses would touch off a chain of defaults that might sink AIG permanently and cost the taxpayers additional hundreds of billions of dollars and further damage the markets.

In other words, pay up or we’ll hurt you.

President Barack Obama has expressed fury over the bonuses and ordered Geithner to claw them back, but his advisers seem to take the extortion threat quite seriously. It is far from clear that the president will use the full weight of the government’s ownership of AIG to stop these abuses.

Actually, the argument that withholding bonuses to certain employees would constitute a breach of contract seems strained. Would any judge really entertain those claims? Would any company really want to make such claims in court?

As for those “key traders and risk managers” at AIG, perhaps the time has come to call their bluff. For many years these expensive suits have told us that they are indispensable; that if we don’t pay them extraordinary sums and guarantee their losses, no matter the moral hazard, our economy will collapse. Now it has collapsed, owing to their dishonest machinations and obtuse blundering — and they still claim that we have to pay them or else.

Or else what? The Liddy letter, which referred to the affected AIG employees as “the best and the brightest,” suggested they will seek employment elsewhere “if their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.” A résumé that begins with a recent stint at AIG Financial Products might not be all that attractive to employers in an industry that is shedding thousands of jobs.

Disgruntled AIG employees may not just quit; they may sue us if we don’t pay their bonuses. But let’s see what happens in five years or so, as their lawsuit moves through the courts. Let’s see how many of these executives really want to answer hard questions in a deposition about their dubious activities at AIG. And let’s see how many of them suddenly realize that they may have criminal liability — like their old boss, Joseph Cassano, the former head of AIG Financial Products, who has hired a top defense attorney.

Meanwhile, New York State Attorney General Andrew Cuomo is dealing with this problem ably and forthrightly. He has subpoenaed the names and contracts of all the AIG employees whose bonuses are at stake in the current controversy. He should publish their names and let them demand their money in public. Let them explain to the world — including friends, neighbors and family — why taxpayers should pay their bonuses while autoworkers give up pensions and health care.

Even their own mothers may stop talking to them.

Joe Conason writes for The New York Observer.

© 2009 Creators Syndicate Inc.

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