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AIG: Time to Go Gentle Into That Good Night?


Insurance company looking more and more like a money pit.


Wall Street's new mantra: We broke it; the taxpayers own it.

Perhaps it's time for taxpayers to get back to basics and tell bankrupt companies: You broke it; bye-bye.

The world didn't end when Lehman Brothers died. Would American International Group (AIG) be any different?

The Financial Times reports that AIG and Uncle Sam are deep into skull sessions to restructure the failed insurer into at least 3 government-controlled divisions in an effort to keep the increasingly cadaverous company alive. Plans could be announced as soon as March 2.

In return, the Federal government would ease, or cancel, a big chunk of a $60 billion, 5-year loan to AIG and convert $40 billion in preferred stock into common shares in an effort to reduce cash-flow pressure. That could help. The company pays a 10% dividend on preferred shares, but nothing on common stock, so the plan would stop what's become a slow-bleed.

AIG quickly made itself easy to hate. First, the company spent $440,000 entertaining top executives after pocketing an $85 billion bailout from the Federal Reserve. This was quickly followed by an $86,000 hunting trip to England shortly after the company received an additional $37.8 billion in loans funded by tax money.

But AIG isn't an ordinary company, public-relation gaffes aside. It typically sells credit default swaps, promising to insure other companies against default.

AIG operates in about 100 countries and originated, insured and invested in home loans.

It's a good business when defaults are low, but the company lost $10 billion in 2007 and may report a $60 billion fourth-quarter loss next week. If so, it would be the company's fifth straight quarterly loss.

At times, it seems that AIG was kept alive because no one knew the consequences of letting it fail - and the consequences may be unthinkable.

"Its collapse would be close to an extinction-level event as the financial markets have seen since the Great Depression," money manager Michael Lewitt wrote last September in the New York Times. "AIG does business with virtually every financial institution in the world…If AIG collapsed, its hundreds of billions of dollars of mortgage-related assets would be added to those being sold by other financial institutions. This would just depress values further."

It short, AIG is "too big to fail" - just like Chrysler, General Motors (GM), Fannie Mae (FNM), Freddie Mac (FRE) and [fill in the blank] companies to be named later.

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No positions in stocks mentioned.
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