04/19/2009 05:12 am ET Updated May 25, 2011

AIG Lesson Number Two: Get out of the TARP Tar-Pit

The universal handwringing, Congressional hearings, and talk about stringing greedy corporate pigs up with piano strings: There hasn't been this much media outrage about executive excess since Dennis Kozlowski's $6,000 shower curtain.

Back then, after the tickertape of corporate scandals -- Enron, WoldCom, Tyco, Adelphia, etc. -- there was so little debate about structural and regulatory reform (let alone tort reform and the dismantling of other curbs on corporate crime), that Congress managed to pass off Sarbanes-Oxley -- the accounting reform law whose structural restrictions separating auditing from consulting was riddled with loopholes -- as somehow adequate. We can now see how adequate.

And now, everyone seems to be focused once more on the blame game (which, if you're gonna do, you have to also point at least one finger at the Fed): Fire Geithner. Make Congress tax the bonuses.

Okay, do that. Your constituents want you to. But it's already become crystal clear that skapegoating won't prevent the next outrage. In fact, the same thing that could have been done to prevent this one would probably prevent the next one: put AIG into full receivership and break it up.

If the resistance and slow-motion backing into the process of breaking up the insolvent banks and teetering corporations continues, it threatens to mire us for years in a taxpayer-funded tar-pit. Unless, that is, someone with the balls and authority can get out ahead of the sequence of scandals du jour and start pushing for the necessary raft of structural regulatory reforms.

The "Bail-Out and TARP-IT" approach -- where we continuously throw money at the banks and then cloak the details behind an inherently secretive Fed and the Treasury's incompetence or current lack of adequate staff -- can never fix the problem -- especially if the government is unwilling to exercise direct control over the companies. That's lesson one of the AIG bonus debacle.

But AIG has also illustrated a second lesson. They have argued in a now-infamous memo to the Feds that in effect, "you have to keep throwing money at us" and ergo through us to Goldman Sachs and the foreign banks we insured, or you risk a "catastrophic" meltdown."

Who says we have to listen?

So long as they are allowed to call their own shots, and so long as the banking system is not extricated from the banks, we will all eventually get dragged along by this game.

Look at it this way: CNBC reported that after Geithner first fell on his face, Goldman Sachs pulled together a meeting of Wall Street leaders, who "concluded ... that the longer the plan takes to produce, the more difficult the situation becomes. That's because reviving the securitization market is key toward reviving the economy and it's a vicious cycle: The longer it takes to revive securitization, the worse the economy becomes and the securitized products held by the banks lose more value."

Wrong on a number of levels. The problem here is that CNBC (and Congress) don't seem to be willing to say to Wall Street that securitization itself was really the problem. We aren't trying to rescue the banks, but the banking system, which means keeping the speculators off the table when it comes to basic financial services like mortgages and certain kinds of commercial credit.

The idea is to fix the banking system, not the banks. Those who got us into the tar-pit of securitization of course cannot get us out.

Unless he makes some decisive moves soon, the president will be dragged into his own Obamanation, and the rest of his entire agenda will go down with him.

Which means that he probably has to fire Geithner and -- instead of hiring someone who can satisfy Goldman Sachs and their hedge fund/private equity "securitization" complex friends -- hire someone who understands the need to prioritize the big structural reforms.

That someone might be Paul Volcker -- not just because he seems like the only one who has the temperament necessary to stand up to people like Lawrence Summers (who would surely try to get in the way) and make Wall Street swallow this bitter pill, but also because he has actually suggested we need to restore Glass-Stegall, i.e. separate commercial and investment banking.

Which is an indication that he gets it.

Hell, even AIG's dollar-a-year man Mr. Liddy was refreshingly clear on this point. Did members of Congress playing to the C-SPAN audience notice that even Liddy pointed out that we need to scale back and restructure the financial institutions?

Let's hope so. And let's hope the president noticed, too.

Meanwhile, now that members of Congress have passed their bill to tax the bonuses (oh, how courageous!) they need to get more serious. E.g., another way they address the problem is by passing the "Let Wall Street Pay for Wall Street's Bailout Act of 2009" (H.R. 1068).

You want a litmus test of whether your member is willing to step up to the greedy banksters by pulling taxpayers out of the TARP tar-pit?

Ask them not only if they voted for the bail-out bonus tax, but if they're a cosponsor of that bill.