For the second time since the inauguration, the Obama White House faces a real populist revolt directed at the apparatus of government it now controls. How quickly they can quell the controversy will determine whether its effects are lasting.
In February, when ethics questions arose over former Sen. Tom Daschle's nomination to be Secretary of Health and Human Services, President Obama lanced the boil immediately, withdrawing Daschle's nomination and admitting to a moment of hubris in presuming that Daschle ought to be held to a different standard. It won't be so easy to move on this time.
The outrage over the AIG bonuses, though just one tenth of one percent of the money given to the company by the government, track back to the reason why Americans elected Mr. Obama in the first place: to bring real change to Washington, to equal opportunities for all and to calm a public buffeted by eight years of scandal and war.
Selling the wisdom of government bailouts has been next to impossible, and most Americans oppose them. But they've given Mr. Obama leeway to do what he thinks necessary to save the economy.
This crisis threatens to close the gap between what Americans think about the government and about banks and businesses, and what Americans think about Mr. Obama.
Getting the timeline right - who knew what, and when - is distracting to the White House, but they know they've got to get it right.
Private polling conducted for Mr. Obama's political team confirms that a large tranche of Americans just don't understand what happened. They don't know what AIG is, did, or does. They don't know why Congress (seemed to have) protected the bonuses.
This mass confusion is one reason why the White House wants to peg the AIG mess as a symptom of the larger economic malaise. This effort may be stymied by the timeline that's emerging.
Obama aides believe that the public is more concerned with whether the system was rigged to allow AIG executives to profit off of their pain than they are with whether the Treasury Department knew about the bonuses in advance.
First, White House officials tried to blame Democratic Sen. Chris Dodd for inserting language about the sanctity of employment contracts in the stimulus bill, telling reporters that the administration's hands were tied because Dodd, a longtime ally of AIG's and the banking industry, insisted that it be written in. But that didn't jibe with the legislative record. If Dodd had wanted to carve out an exception, he would have proposed it as part of the amendment that originally passed the Senate.
Then, the White House acknowledged that they did not attempt to block its insertion but put the onus of responsibility on Dodd's insistence that it be there. Now, they're claiming that their only intervention was to point out that any attempt to block bonuses derived from previously signed contracts could violate federal law.
That explanation does track with what Dodd's been saying since Monday: that the provision was added after the Treasury Department put it on the table. This abbreviated tick-tock raises a very important question: why did the Treasury notice this omission in the first place? Didn't they have to have been aware of the existence of the contracts before acting in a way to preserve them?
Neither Dodd nor the White House has yet acknowledged the functional reason for preserving the integrity of contracts: the worry about brain drain and the balance between the need to attract private capital and regulate the bailouts. But that explanation no longer fits comfortably with politics these days.
As the end of the week approaches, I can envision four paths into which politics can turn, and all are plausible:
Path 1: The public (and most importantly Congress) will oppose future bailouts and the granting of any additional "help" to corporations. And not just oppose them (because as I said the public already opposes bailouts) -- but convince Democrats in Congress to oppose them as well.
Path 2: The administration can dictate the terms of future bailouts far more easily than they could before.
Path 3: Regulatory reform will be much easier to pass.
Path 4: This administration's Teflon boils off, and the public refuses to let the matter go until a scapegoat is thrown off the mountain.
By Marc Ambinder