The Curious Capitalist: The government's dilemma is that the people at AIG responsible for this mess really do deserve to be tarred and feathered, or maybe drawn and quartered. There's ample reason to be punitive. But once they made the decision that AIG was too systematically important to fail--and I'm not saying that was the wrong decision--the Fed and Treasury needed to structure their bailout in a way that allowed AIG to survive, at least until the financial situation improved dramatically. They didn't do that the first time around, which is why they had to restructure the deal on Sunday.
One other thing: There remains a widespread misperception (a misperception I used to share), that the U.S. government has no oversight responsibility over AIG, because insurance companies are regulated by the states. AIG's main insurance subsidiaries are in fact regulated by New York State Insurance Commissioner Eric Dinallo. But the regulator responsible for monitoring the parent company's overall safety and soundness was and is ... the federal Office of Thrift Supervision. The OTS, a branch of the Treasury Department, regulates all federally chartered and most state-chartered savings institutions and their holding companies. AIG has a subsidiary called AIG Federal Savings Bank, so OTS regulates AIG. OTS examiners regularly reviewed the accounts of AIG Financial Products. So AIG was subject to closer federal scrutiny than Bear Stearns or Lehman Brothers. Not very effective federal scrutiny, mind you. But the feds had a hand in the company's fate even before they stepped in to save it.
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