The firestorm over the AIG bonuses is burning brighter than ever. In fact it’s so hot now that the administration is doing an about face.

President Obama has ordered Tim Geithner to do everything humanly possible to stop the payment of $165 million to the employees of the financial products sector of the firm.

This is a corporation that finds itself in financial distress due to recklessness and greed,” Mr. Obama was scheduled to say ahead of announcing a plan to rescue small businesses through a raft of new lending options, according to prepared remarks released by the White House. “Under these circumstances, it’s hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?” 

“This isn’t just a matter of dollars and cents. It’s about our fundamental values,” he added.

Greg Mankiw has an interesting take on the entire affair. He notes that the administration in the persona of Larry Summers was yesterday promoting the need to honor the sanctity of the contractual obligation to pay the AIG employees yet supports altering the terms of mortgage contracts by allowing cram-downs.

Mr. Obama is correct to suggest that we need to support fundamental values. In so doing the first step should be to define those values. Hopefully, included in that definition would be a respect for the rule of law.  

more: here (WSJ) and here (Mankiw)