The key moment is the point that what AIG did was legal.
The key takeaway is that the AIG is keeping Europe afloat. Without the direct repayments to European banks — and who knows how much of the money that went to Goldman and other counter-parties was actually protecting European investors — the European banking system goes under.
The AIG "insurance" enabled European banks to do what they would otherwise be prevented from doing. Things are bad enough over there as it is, with Germany refusing to stimulate its economy and thus that of the continent, with Putin making constant threats about gas supplies, and French workers going on strike to put a "buy French" clause into that country's stim.
Add AIG losses and it all goes pear-shaped.
It doesn't matter to Europe that the Bush Administration got them into this and the Obama Administration is bailing them out. What matters is that America got them into it and America is bailing them out.
Seen through that prism, the quiet re-building of Europe's banking with American assets is not only moral but essential to our national interest. Who else you want them to go to for new capital? China? Russia? Saudi Arabia? Those are your only other choices.
You wipe out European banks, and European investors, you refuse to make them whole, and European voters force European governments to go to the "other side." Wherever that other side happens to be. You lose everything we spent the 20th century sacrificing for, in one fell swoop.
A great nation must be responsible for what its governments encourage other governments to do. Once it stops doing that — oh you did that under Bush but Obama is in charge now — it ceases to be a great nation and becomes a banana republic.
You know what makes me mad? The President can't admit this out loud. To state the obvious is to give away the game, to make an economic payment into a political and diplomatic issue. The costs of doing this would put the whole enterprise at risk, as surely as the Bush Administration cajoling Europe into thinking this phony "insurance" was real put everything at risk.
Be glad I'm just a stupid blogger and not a public official. If I were the President I'd have to keep my mouth shut. And I'm not very good at that.
The ideas of Paul Krugman and others, that we take AIG bankrupt and make everyone take a haircut, are economically sound but diplomatically fatal. For the same reason. Hungary can't afford a haircut on its meager foreign exchange. This would throw it directly onto Russia's mercies.
Given all that, yes, the President is right to back his Treasury Secretary. Yes it sucks.
But losing Europe sucks more.