Too little, too late for AIG

(breakingviews.com) -- American International Group has set a doleful record. The insurer has reported a $61.7 billion quarterly loss, the largest ever. The swelling of its woes also makes U.S. taxpayers even bigger losers.

Now the group is subject to yet another government rescue. The basic idea seems to be that the insurer pays less to get more. The interest rate on AIG's credit line from the government is to be lowered closer to Libor, from three percentage points over Libor.

The package also includes $30 billion of preferred shares, which will not pay a coupon in the first instance. Meanwhile, AIG's interest bill on its existing prefs will fall by $4 billion.

Regulators can't see any realistic alternative to having taxpayers throw good money after bad. The authorities may not be completely sure that an AIG (AIG, Fortune 500) failure would cause market mayhem. But after the chaos ignited by the Lehman Brothers' bankruptcy, they cannot take the chance.

Still, six months after the initial bailout of AIG, it is disappointing that so little had been done to reduce the risk of failure. The government, which after all effectively controls AIG, could have spent the time aggressively unwinding AIG's positions and reducing its exposures. A separation of the insurer into good and bad - now on the agenda - could have been completed by now.

It ought not to have been too late for some of the pain to be shared. Minority shareholders' continuing stake is a fig leaf to cover over the shame - and government liabilities - which would come with outright nationalization. That's lame politics, and costly for taxpayers.

AIG's creditors could also have taken a haircut. Of course, that would amount to a default, with troublesome implications of its own. But the U.S. government should be rethinking its assumption, shown most recently with Citigroup (C, Fortune 500), that taxpayers must be ready to bail out sacrosanct creditors.

Of course, the law provides no easy path for rescuing this huge, failing financial institution. But taxpayers have been let down in recent months by inadequate efforts to keep the black hole of AIG from expanding at their expense.