The controversy in recent weeks has centered not on the money that went to AIG, but the money that went through AIG to some of the other Wall Street giants to which AIG owed cash. In the process, AIG paid those firms, including Goldman Sachs, 100 cents on the dollar — an arrangement that some Fed officials lobbied (unsuccessfully) to conceal from the public. Geithner on Wednesday reiterated his earlier statement that although he was head of the New York Fed at the time, he took no part in the decisions surrounding disclosure of those payments. He also defended the decision to allow AIG to pay back Goldman and the others on par, arguing that the only legal way to ask those firms to accept less would be to allow AIG to default — a scenario, he said, that would have devastated the financial sector and the economy as a whole.

The counterparties held insurance entitling them to full or par value of the contract. We could not credibly threaten not to pay. That meant putting AIG into bankruptcy. At the time, we were working desperately to rebuild confidence in the financial system. Any suggestion that we might let AIG fail would have worked against that vital aim. We could not risk a protracted negotiation.

Lawmakers, for their part, were having none of it. Rep. Marcy Kaptur (D-Ohio) implied that finance officials put the interests of Goldman above those of taxpayers. Rep. Dan Burton (R-Ind.) said “it stretches credibility” that Geithner, as head of the New York Fed, wouldn’t have been involved in the disclosure discussions. Rep. Stephan Lynch (D-Mass.) wondered why officials “scalped” the shareholders of Bear Stearns, but made sure to pay off Goldman in full. Rep. John Mica (R-Fla.) simply asked Geithner to resign.

The hearing, called by Democrats, highlights the pickle facing the White House in a tough election year. In short, the Obama team chose Geithner because, as a friendly face to Wall Street, he could step into the Treasury spot without scaring the hell out of the banks. (Indeed, the markets soared when the country learned of Obama’s choice.) But he hardly fits the populist image that the administration is hoping to resurrect after the special Senate election in Massachusetts last week — a wake-up call to Democratic leaders who are scrambling to reframe their message before November.

Two questions for the White House: (1) Can you keep Geithner in place and still create the impression among disgruntled voters that you’re serious about taking on Wall Street? And (2) if you choose to replace Geithner, who could fill the office and be the face of populism without causing the markets to tank?

First, the banks the president would tax are repaying their TARP money with interest to the Treasury. Though not all of the TARP money given to the banks has yet to come back, the government will get it all back with a significant profit because the government was paid such generous interest under the terms of the TARP.

Second, the president misused the TARP money by investing in GM and Chrysler, and GMAC, and that is where the government will lose money.

If anything should be taxed, Morici continues, “it should be cars” — a proposal that would surely inspire screams of protest from a key Democratic constituency: the autoworkers union. So in the name of taking on industry, Morici argues, the White House is really just coddling it.

The proposed bank tax is meaninglessly small, serves no purpose toward reforming the banks, and is merely an attempt by the president to appear on the side of the auto industry and against the banks, when he is really on the side of union organizers and the bankers.

Morici may not have reason to worry. In this political environment, in which even the seat of the late Sen. Edward Kennedy (D-Mass.) is up for grabs, the Democrats might just lose their appetite for taking on the finance industry before the mid-terms. Indeed, there are already signs that that’s the case.

Cantwell ripped into the financial reforms put forth by Geithner and the Obama administration as “appalling” for including alleged loopholes and exemptions for large financial institutions in legislation overhauling the regulatory framework for the nation’s top firms.

“I’m not sure,” Cantwell said during an appearance on MSNBC this morning when asked by host Dylan Ratigan why Geithner still has a job.

And yesterday on NBC’s “Meet the Press:”

“What the Treasury secretary basically said was that, yes, banks should take more risks and we should continue the loopholes,” she said. “And that’s really appalling because right now, we know that lack of transparency has caused this problem with the U.S. economy, and Wall Street is continuing, one year later, with the same loopholes.”

It won’t be easy for the Obama administration to push through legislation if it can’t even convince its own party to support it.

“In order to restore our financial system, we’ve got to restore trust,” Obama said. “And in order to restore trust, we’ve got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street.”

And while the rules certainly go further than the Bush administration ever attempted, several loopholes stand out:

First, the $500,000 pay limit doesn’t apply to each executive — only to “senior executives.” And those senior executives will remain eligible for unlimited stock options as long as they don’t cash in while the company still owes the government money, or “after a specified period according to conditions that consider among other factors the degree a company has satisfied repayment obligations, protected taxpayer interests or met lending and stability standards.”

Second, the cap won’t apply to all companies bailed out by taxpayers. Instead, the Treasury will distinguish between firms benefiting under the “standard” TARP program and those receiving “exceptional assistance.” Only the latter group is subject to the cap.

Third, the ban on golden parachutes doesn’t apply to each executive — only to the 10 highest paid executives. Again, only companies getting exceptional assistance are subject.

Fourth, the new limits apply only to companies accepting TARP funds in the future. That is, an untold portion of the $350 billion or so that’s already out the door might still wind up in the pockets of the same executives who ran the companies into failure.

Fifth, a “claw back” rule requiring executives to return bonuses and other compensation-based pay that was based on deceptively erroneous financial statements applies only to the top 20 executives of the company. So the 21st guy on the list who knowingly gave inaccurate figures, and was paid a bonus for the fib, gets to keep that bonus.

A White House press release attempts an explanation of the laxity, saying the guidelines “seek to strike the correct balance between the need for strict monitoring and accountability on executive pay and the need for financial institutions to fully function and attract the talent pool that will maximize the chances of financial recovery and taxpayers being paid back on their investments.”

One wonders if the public will agree.

Rep. Barney Frank (D-Mass.)

A trusting Congress might be setting itself up to be burned again.

Last week, even as he introduced legislation to bolster Washington oversight of the Wall Street bailout, Rep. Barney Frank (D-Mass.) all but proclaimed his own proposal unnecessary.

Illustration by: Matt Mahurin

“It doesn’t have to be enacted,” Frank, who chairs the House Financial Services Committee, told reporters Friday in the Capitol. “It would be helpful if it was. But if the bill passes the House with a large majority, and we have smart and cooperative people in this [Obama] administration, I’m willing to accept their word that they will act as if it were the law.”

The message was clear: Despite Congress’s many objections to the Bush administration’s handling of the $700 billion Troubled Assets Relief Program (TARP), lawmakers — at least Democrats — are professing their faith that President-elect Barack Obama will spend the money more wisely and transparently than his predecessor. Trust, under this arrangement, has replaced the desire to legislate.

It’s a strategy that’s not finding a friendly reception from consumer advocates and government watchdog groups, who’d prefer that the bailout spending be clarified by force of law.

“I don’t think Congress should take any politician at his word,” said Steve Ellis, vice president of Taxpayers for Common Sense. “Just because the person at the other end of Pennsylvania Avenue is in the same party doesn’t mean you don’t hold him accountable … They [Democrats] absolutely need legislation.”

Graham Steele, legal associate at Public Citizen’s Congress Watch, echoed that message. Despite the natural urge among Obama supporters to give the incoming-president and his team the benefit of the doubt, Steele said, “binding legislation is the best scenario to ensure that they do what they say they’re going to do.”

The comments arrive as President George W. Bush, at Obama’s request, is seeking the release of the second $350 billion of the TARP funding, which requires congressional approval. Obama met with Democrats at the Capitol Tuesday to address their concerns about releasing the money.

Complicating that request, lawmakers on both sides of the aisle have grown more and more impatient with the Bush administration’s implementation of the financial rescue. Congress approved the legislation in October after Treasury Dept. officials vowed to use the money to buy up the toxic, mortgage-backed assets that threatened to topple countless financial institutions. Instead, the White House invested directly in the troubled banks in an effort to thaw frozen credit lines — a change of strategy prompting no absence of congressional criticism.

Lawmakers have also blasted the Bush Treasury for its lack of spending transparency and its failure to use the bailout cash to target the foreclosure crisis that remains at the root of the financial meltdown. Both issues — along with efforts to rein in executive compensation for bailed out banks — are tackled in Frank’s reform bill.

But it’s a proposal not likely to be enacted. Despite a hearing and an expected House vote on Frank’s bill this week, it’s tough to find anyone who thinks the legislation has legs in the Senate. Indeed, Banking Committee Chairman Christopher Dodd (D-Conn.) said this week that he would consider legislation similar to Frank’s, but assurances from the Obama camp would likely be an ample substitute.

Dodd says the problem is not with the TARP bill, but simply with the Bush administration’s implementation of it — a problem the Obama team can fix without new legislation. “They agree,” Dodd said in a statement Monday, “that we need a comprehensive, coherent strategy to replace the current piecemeal approach, and have committed to using additional funds to help Main Street.”

On Monday, Larry Summers, Obama’s top economic adviser, issued a letter to congressional leaders outlining the incoming administration’s strategy for spending the second half of TARP funds, including heightened oversight and a vow to help struggling homeowners avoid foreclosures.

“Confronting this [foreclosure] challenge,” Summers wrote, “is an absolute imperative if we are to restore the health of our housing sector and the financial system as a whole.”

After months of struggling to get the Bush administration to target foreclosures as part of the rescue strategy, some housing advocates are willing to believe that things will change under an Obama White House — even without TARP reform legislation. “This administration, apparently, is getting it,” said David Berenbaum, executive vice president of the National Community Reinvestment Coalition.

Still, Summer’s nonbinding document is just three pages long. Many consumer groups want more assurance that the Obama White House will follow through with its plans.

“The danger is that we get off the rails,” Steele said, “and the next industry comes along, hat in hand, and the money starts going to places it was never intended.”

Linda Sherry, director of national priorities at Consumer Action, a consumer-rights group, said Obama’s promises of spending transparency are great, but they lack the force of law that would guarantee that taxpayers know where the TARP money is going. “It’s very harmful when the public doesn’t have access to this information,” Sherry said. “The companies can’t just get a free lunch here.”

Some good-government advocates are scratching their heads over the alacrity of congressional Democrats’ to trust the White House — even a Democratic White House — after eight years bemoaning the runaway powers of the Bush administration. If lawmakers get burned this time around, they say, they’ll have no one to blame but themselves.

“Fool me once, shame on you,” said Ellis, of Taxpayers for Common Sense. “Fool me twice, shame on me.”

As Calculated Risk noted, the tarp hides all sins.