One of the wonders of the modern world is the separation of ownership from the operation and control of a company:  management controls the company but the shareholders (and in a sense, creditors)  own it.  When our government decided to buy  rights in AIG rather than nationalize it, the control of the company was left to the management.  Under most nationalization schemes the government takes over management of the company as well.  The shareholders can ultimately change the management of a company and thus its policies but the process is indirect, convoluted and lengthy.  If the government had nationalized AIG the bonuses could have been dealt with directly.

Having essentially bought AIG  the government was bound by AIG's prior contracts.  It is not surprising that when Chris Dodd attempted to limit the bonuses the staff from Geithner et al informed Dodd's staff that it was not legally tenable to limit the bonuses because of hte pre-existing contracts and the provision was dropped.This is probably correct: the best the government could have done using this method would be to make accepting the ban on bonuses a condition of receiving the bailout and leave AIG management to see if they could find a way to break the contracts.Further, providing a substantial portion of expected remuneration through bonuses was business as usual in that part of the financial world and unremarkable.

Part of the political problem is that the public thinks of bonuses as rewards for producing good results and the AIG masters of the universe had done anything but.  But actually these particular payments were ostensibly negotiated so that these employees would commit to remain with a sinking ship.

There was also a lot of gaming of the system going on: how do I set my take so the government can't change it?   How do I get a piece of the government pie?  The separation of managment from control had grown so extreme and the incentives in place -- bonuses for 'production' -- regardless of the risk to the welfare of the coporation (not to mention the world economy)  that essentially managment had upped its share of the take to rip off levels which inchoate power of the shareholders had been totally ineffective in reining in.

The use of the tax system to retrieve the bonus money is totally appropriate: the windfall bonus tax is akin to the windfall profits taxes of war time.  A segment of the population which is held to have been unjustly enriched is denied that outcome.

That said, what AIG really needed to do, based on past results, was to find some way to pay really high dollar to the Financial Products division to go work for the competition.