Geez. I leave the country for ten days on a European trip and, upon my return, the entire U.S. body politic appears to be going batshit over a couple hundred million dollars of performance bonuses that the now-thoroughly Enronized American International Group paid to its employees.

What on earth is going on here?

Well, Michael Lewis pretty well nails the dynamic in this Bloomberg.com article:

To the political process, all big numbers look alike; above a certain number the money becomes purely symbolic. The general public has no ability to feel the relative weight of 173 billion and 165 million. You can generate as much political action and public anger over millions as you can over billions. Maybe more: the larger the number the more abstract it becomes and, therefore, the easier to ignore.  .   .   .

Of course, the 173 billion that Lewis refers to in the foregoing passage is the amount that the federal government funneled through AIG to Goldman Sachs and various other big AIG creditors.

Meanwhile, Goldman is feeling some of the shrapnel from the AIG-bonus explosion and has disclosed publicly for the first time the details of why it would not have really been damaged all that much by an AIG bankruptcy.

When the U.S. Treasury started throwing money at AIG in September, Goldman had already gathered from AIG $7.5 billion of collateral against insurance that AIG had written on a $20 billion portfolio of debt securities.

Moreover, Goldman arranged $2.5 billion in primarily credit derivative hedges on AIG because Goldman was betting that the value of the securities portfolio was substantially lower than AIG’s was betting.

Finally, Goldman received another $2.5 billion of collateral from AIG between September and the end of last year and the Fed transferred another $5.6 billion to Goldman to purchase the AIG-insured securities for the Maiden Lane III bail-out entity.

Meanwhile, Goldman continues to extract additional collateral on about $6 billion of securities that did not qualify for Maiden Lane III.

None of the foregoing is particularly surprising. Goldman is one of the world’s largest trading entitles and AIG is one of the world’s largest insurers, so it is inevitable that their affairs are going to be intertwined.

When the federal government caved to fears of a global financial calamity and bailed AIG out, Goldman secured its position in regard to AIG in a manner that was consistent with Goldman’s best interests. As Joe Weisenthal points out, it really doesn’t make any sense to get angry at Goldman for taking advantage of the federal government’s bad financial decisions.

So, let’s lay off the AIG bonuses — in the big scheme of things, they are innocuous. Similarly, let’s not hyperventilate over Goldman and various other AIG creditors taking advantage of the federal government’s dubious investment in AIG. If we are honest, then most of us would admit that we would have done the same thing had we been in the creditors’ position.

But let’s do start insisting that our representatives get out of the way and allow the market to force these creditors to endure the true cost of the risk that they took in entering into contractual relationships with AIG.

Until that risk of loss is properly allocated, investment capital is going to remain on the sidelines, particularly while the government continues to make ill-advised investments that postpones and distorts such allocation.

It’s already been an expensive lesson, but one that might well be worth the cost if the counterproductive nature of the governmental actions in regard to AIG comes to be better understood.