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AIG Bailout: Breaking Up Is Hard to Do

One industry observer, who has sat on the opposite side of the bargaining table from AIG, says buyers would be more interested if the government offered incentives, like guarantees on the firm's assets -- similar to deals structured for JPMorgan Chase's acquisition of Bear Stearns and Washington Mutual or Bank of America's (BAC) buyout of Merrill Lynch.

Otherwise, says the consultant, who spoke on condition of anonymity, AIG will have to offer its most attractive assets in the core P&C business to attract buyers. That course of action is problematic, however, because it would imply liquidation of the entire firm.

Steuber also notes that while AIG is now shopping around prized assets, a big portion of the operations it needs to shed relate to financial services and asset management -- not attractive operations in the current recession. Furthermore, it may be unclear to buyers what lies beneath even a healthy-looking AIG business, as troubles have spread from residential mortgage-backed securities and credit default swaps to commercial real estate.

Even AIG's "toxic" residential mortgage-backed securities portfolio now managed by the New York Fed was stuck within a business called "Life Insurance Companies," which was found within AIG's financial services arm.

"They're trying to get rid of their dogs," says Steuber. "There aren't that many people out there who are in the market for big expenditures out there, nor is there anyone who's in the market for a dog."

This dynamic lays out a few options for taxpayers, none of them incredibly favorable.

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