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, breakingviews.com
March 2, 2009: 11:05 AM ET

(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. To top of page


Company Price Change % Change
Yahoo! Inc 40.93 -1.16 -2.74%
Microsoft Corp 47.52 0.84 1.80%
Bank of America Corp... 16.95 -0.09 -0.53%
Oracle Corp 39.80 -1.75 -4.21%
Facebook Inc 77.91 0.91 1.18%
Data as of Sep 19
Index Last Change % Change
Dow 17,279.74 13.75 0.08%
Nasdaq 4,579.79 -13.64 -0.30%
S&P 500 2,010.40 -0.96 -0.05%
Treasuries 2.59 -0.04 -1.60%
Data as of 2:21am ET
More Galleries
2015 Mustang's asphalt-peeling power goes modern The new Ford Mustang has been upgraded and updated to compete globally - but never fear, it's still a monster. More
15 top executives with $1 salaries Some CEOs and founders agree to salaries of just $1 a year. But once goodies like bonuses and stock options are added in, some of those executives end up taking home many millions of dollars a year. More
Mercedes SL65 AMG: 621 horses of topless power Turn heads as you blow by traffic in this roadster convertible from Mercedes. More
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.