Too Big to Fail

Posted March 15, 2009, at 9:01 p.m.

American International Group Inc., aka AIG, the sickened giant insurance company, already has received $180 billion in U.S. taxpayers’ cash and pledges and probably will demand more. In the latest go-round, it has continued to panic government officials into believing that it is too big to fail.

It probably is. So says Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., another insurance conglomerate, which has learned to steer clear of the risky derivatives that brought down AIG. He told CNBC recently that the government had no choice but to intervene to save AIG. But he added that the company was “a huge risk to the system” and that corrective legislation might be needed to deal with such large quasi-banks.

The massive bailout began last September when the Bush administration advanced it $40 billion to restructure itself “in an orderly manner.” That turned out to be far from enough to help it untangle its $440 billion in credit default swaps. So the Bush team pledged a total of $150 billion.

That still wasn’t enough. AIG demanded another $30 billion from the U.S. Treasury. And, as Bloomberg News disclosed, it backed up its request with a scary 21-page argument warning that it needed further emergency help to prevent a “catastrophic” collapse that would be worse than the demise of Lehman Bros. The document was circulated privately among federal and state regulators.

Judging from its near-hysterical tone, it is easy to see why neither the government nor the company wanted the presentation published. Bloomberg quoted the paper as saying, “What happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means.”

The document was said to have gone on to warn that without further help, AIG “will not be able to pay its obligations” and that the cash previously provided by the government could be lost. And it said a collapse would ripple through the 140 countries where AIG does business and threaten the failure of their insurance industries.

So AIG has us over a barrel. Taxpayers, who are on the hook for its survival, should at least know more about what they and their children and grandchildren are going to pay for. The company’s chief executive, Edward M. Liddy, has testified that “the vast majority” of taxpayer funds “have passed through AIG to other financial institutions.” But neither he nor the government will identify those recipients or tell how much they received.

Besides rescuing these huge companies, the government should see to it that they can never again bring down the national economy. Teddy Roosevelt’s trust-busting is looking better and better. If these monsters are too big to fail, maybe they also are just too big.

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