Breaking Views

Too little, too late for AIG

The government can't seem to find an alternative to throwing good taxpayer money after bad.

By Lauren Silva Laughlin,
March 2, 2009: 11:05 AM ET

( -- 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. To top of page

Company Price Change % Change
Bank of America Corp... 15.69 -0.00 -0.02%
General Electric Co 27.20 0.38 1.44%
Freeport-McMoRan Inc... 11.67 0.49 4.38%
Apple Inc 111.09 0.31 0.28%
Micron Technology In... 17.84 0.27 1.51%
Data as of 1:11pm ET
Index Last Change % Change
Dow 16,824.67 48.24 0.29%
Nasdaq 4,748.04 -33.22 -0.69%
S&P 500 1,982.34 -4.71 -0.24%
Treasuries 2.05 -0.00 -0.10%
Data as of 1:26pm ET
More Galleries
Ralph Lauren's many looks A look at his brands and iconic creations More
8 biggest job killing companies of 2015 Whole Foods became the latest corporate giant to lay off workers. Here's a look at the companies that have announced the most jobs cuts this year. More
America's best beer towns Here are the best cities to crack open a cold one and celebrate Oktoberfest, according to Trulia. More