March 24 (Bloomberg) -- Do the math: $165 million (the size of the headline-grabbing bonuses paid to some American International Group Inc. employees) is what percent of $183 billion (the amount of government bailout money that has gone to AIG)? It comes out to 0.09016 percent.

Immaterial. Trifling.

Yet the uproar from the White House to the streets of Manhattan and Connecticut suggests the payments will be the ruin of America. Congress is even considering a possibly illegal bill to tax the bonuses after the fact.

People rightly object to the AIG bonuses on principle. But there’s an overriding principle here: Keeping the world credit system from collapsing and causing global depression.

President Barack Obama and U.S. lawmakers should be working full-time to assure the success of government programs to shore up the banks, quarantine the toxic securities that hang over the markets and help out honest homeowners. Treasury Secretary Timothy Geithner, who testifies today before the House Financial Services Committee, will call for expanded government powers to deal with failing non-bank financial institutions such as AIG, an administration official said.

The AIG bonuses, like the $3.6 billion paid to Merrill Lynch & Co. employees before the company’s takeover by Bank of America Corp., show a lack of respect for fair play by financial executives that equals their greed. What else is new?

Common-Sense Bankers

A case is made that AIG needed to pay bonuses to keep people who were familiar with its market-destroying credit default swaps in order to unwind them. Do we want the geniuses who couldn’t -- or wouldn’t -- see the flaws in their securities schemes cleaning up the mess? Common-sense bankers from Akron and Albuquerque might do a better job.

Clawing back the AIG bonuses might lead to months of further distraction. Do we really want the issue to climb to the Supreme Court? Douglas Poling, the AIG executive who got the biggest bonus, $6.4 million, is giving the money back. New York Attorney General Andrew Cuomo said yesterday that AIG employees had paid back a total of $50 million of the bonuses. Maybe the furor will now die down.

Another distraction: Moaning about bailout money for AIG going to the likes of Goldman Sachs Group Inc. that were trading partners of the U.S. insurance company. Goldman Sachs now says it barely would have noticed if AIG had failed.

Massive Failures

The overriding principle to save the system still applies. If AIG didn’t pay trading partners what it owed, that might have triggered massive failures to pay by those same partners. Certainly some of those so-called counterparties were more able to stand the damage than others. The others might have failed if the government delayed payments until it could figure out which could stand what.

What’s more, Goldman Sachs seems a bit too nonchalant about its AIG exposure. The Wall Street firm wasn’t too smug to take government bailout money and convert to a commercial bank, assuming the aura of safety.

Both of these great distractions also raise the matter of disclosure. AIG Chief Executive Officer Edward Liddy, the $1-a- year guy brought in by the government to save the insurer, says bonus recipients there have received death threats. And on Wall Street, executives object to naming the recipients of AIG bailout funds as a matter of privacy.

Wrong-Headedness

If the death threats are real, people deserve protection. Yet disclosure of such wrong-headedness may be the only way to prevent its repetition. To argue against the overriding interest of the taxpayers in where their bailout money went is ridiculous anywhere outside the boardroom. Businesses have traditionally overplayed the value of secrets.

Distractions begone. Wall Street reform has to be as much a part of the government effort to shore up the financial system as any stimulus package.

Banks must have sufficient capital. There has to be less short-term borrowing, which can dry up overnight and bring firms down. Bank executive pay has to be curbed to prevent the excessive risk-taking that has laid the system low.

The uptick rule, which allows short sales of stock only after the stock has gone up, needs to be restored to head off headlong declines in shares. We need an exchange for credit default swaps to establish order and transparency in that market.

There’s real work to do. Get on with it.

(David Pauly is a columnist for Bloomberg. Opinions expressed are his.)

To contact the writer of this column: David Pauly in Fort Myers, Florida, at dpauly@bloomberg.net

Last Updated: March 24, 2009 06:11 EDT