05/14/2010 05:12 am ET | Updated May 25, 2011

AIG and the End of Trust

In our house it's known as the morning of the shriek. It was Sunday a year ago when my wife picked up the New York Times, hand shaking--and exploded. "They're what, they're what, they're giving them a bonus. A bonus for wrecking the world. Tell me this is wrong." But it wasn't.

The headline, "AIG Planning Huge Bonuses After $170 Billion Bailout" said the fix was in. And Erin, the world's least political spouse, was boiling.

It didn't matter that we had five AIG friends in our suburban Connecticut neighborhood -- that only one of them worked at AIG's Financial Planning Group, the shop in Wilton, Ct. that wrote all the high risk insurance, and that he hadn't even been in that group. In our small village there was outrage.

It didn't matter that as the days unfolded everyone in the Obama Administration "hated it," that Edward Liddy, who was running the company, wasn't taking a salary, that some congressmen demanded clawbacks and threatened to publish the names of those who took the money or that the President said he would ask Timothy Geithner's Treasury Department to get the money back. It was a coverup. It was too late. Washington wasn't going to protect the people. The bad guys would get rewarded. The damage was done.

You could pick other moments last year that depicted a Washington-Wall Street axis as hard to ignore. There was Matt Taibi's seminal Rolling Stone story in June that elevated Goldman Sachs into a shadowy fifth branch of the government. There was the disclosure that Goldman, as early as March 2009, was on track to pay near record bonuses, followed by later news that most of those bailed out would have close to record bonus years.

But I'd date the end of trust from March 14. That's because every key player in Washington involved with the bailouts knew the AIG bonuses were coming down the pike but none dared tell the public. Congressional hearings prompted by the national uproar soon revealed that the Treasury, the Fed, both New York and Washington, the White House and key members of Congress such as Barney Frank had known about and approved the payments. Senate Banking Committee Chairman Christopher Dodd had even jiggled some language in bailout legislation to insure they got done. New York Attorney General Andrew Cuomo, outraged enough to demand the names of the bonus recipients after the disclosures, knew about the deal in October.

Two days after the news, the White House disclosed that the President had known too. His statement on March 16 that, "I've asked Secretary Geithner to use that leverage and pursue every legal avenue to block these bonuses and make the American taxpayers whole" rang hollow. The White House affirmed that the President did know about the payments before they were made.

In the heat of an ongoing financial crisis, the bonus payments may have seemed like a sideshow to the Administration. But for millions of voters, it was the first real, tangible evidence of how removed government was from their concerns. For Washington, it was the first inkling that the people could get mad. But it was early. There wasn't a Tea Party, Sarah Palin was a defeated Alaskan and populist, pitchfork and militia just didn't make news.

After March 14, it all started to change. The impression left was that Wall Street didn't just get saved, it was back in control. Washington could do nothing but vent. As the year unfolded, the Street -- led by Goldman -- did rack up near record bonuses, took public heat, and paid them. Nobody at the top got indicted and the banking lobby went into full battle dress to defeat financial reform legislation. Trust kept declining. CNN poll on February 25 showed only 26% of Americans trust Washington, a near all time low.

So what if the President had confronted the AIG payments in advance? Instead of living with a weekend leak -- they were first reported by Bloomberg -- the President had given a speech on money like the one he'd given on race. Not a "fat cat banker" speech, but something with purpose. Suppose he'd said we have a very difficult situation. The law requires me to authorize payments of $170 million to the people that we bailed out even though the government now runs their company. It's a terrible situation but one I promise you I will rectify. That's why I'm personally leading a reform of Wall Street and here is my timetable for it. When you see the details, you'll know this is real and that it starts today.

Instead, he bet the ranch on health care. Maybe that will still turn out to be the right call. But I'd argue the price he paid for letting Wall Street off the hook wasn't banking reform, it was trust. The trust that flew out of our kitchen window a year ago likely started departing with shrieks from homes across Main Street America that Sunday. It's awfully hard to get back.