Rick: How can you close me up? On what grounds?
Captain Renault: I'm shocked, shocked to find that gambling is going on in here!
Croupier: Your winnings, sir.
Captain Renault: Oh, thank you very much.
The dialog from "Casablana" is apt for today's outcry over the $165 million in AIG bonuses. The bonus payments are contractually legal and the recipients didn't break any laws that we know of...yet.
But that doesn't mean that the bonus payment weren't unsavory. They were just playing the financial industry game — gambling at high risk with other people's money — which has been going on for centuries.
The various expressions of shock and awe are in response to the public expression of horror that a company receiving billions in bailout funds for a failing company should be paying bonuses to employees who helped sink the ship.
The public wasn't fully aware that gambling was going on, but the Federal Reserve, Treasury Department and Congress were aware of risky game being played. They just erroneously thought that housing prices would never drop.
The bonus payments have been public information months, and it appears the U.S. government assumed that AIG was obligated contractually to make the payments.
Now the president and all his men, as well as Congress, are talking about punitive actions. Treasury Secretary Timothy Geithner, trying to recover from a bad week in the press, said AIG must reimburse the U.S. government for the $165 million the insurer paid to employees.
The Treasury Department would also force AIG to make a kind of penalty payment, deducting $165 million from a $30 billion bailout payment. In other words, instead of $30 billion, AIG would get only $29,835,000,000.
4874255Testifying before Congress today, AIG CEO Edward Liddy said he will ask executives to give back 100 percent of their bonus and others 50 percent. But, he is concerned that the employees, who he said are critical to stabilizing the company, will return the money but resign.
The AIG bonuses are really a symptom of what's wrong with the financial industry, and potentially a tipping point for more rapidly reforming the industry. Speaking today, President Obama gave an indication of the kind of reforms and regulation he is planning, after a grand period of deregulation.
"And what we are working on is a resolution authority that would be similar, not identical but similar, to the powers that the FDIC currently has over banks," Mr. Obama said. "What they're able to do is to, at the same time protect creditors, depositors, and consumers, while also exercising greater power proactively over institutions like AIG which is not a bank which is an insurance company with a hedge fund on top of it.
"It would allow us proactively to get out in front, make sure that we're separating out bad assets from good, dealing with contracts that may be inappropriate, and preventing the kinds of systemic risks that we've seen taking place with AIG," he added.
The Obama team has consistently focused on systemic issues, getting at the root of financial industry problems. Passing effective legislation and changing the way Wall Street does business will take years, however, and at this time investors and an angry public are running out of patience.
Daniel Farber is editor-in-chief of CBSNews.com.