AIG Bailout Rescues the Undeserving

AIG's repeated bailouts have not allowed the insurer to wean itself from public aid and have fueled critics of the massive government intervention.
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The failure of the repeated bailouts of

American International Group's

(AIG) - Get Report

to quickly unwind itself and wean itself from taxpayer aid has fueled critics of the massive government intervention.

Barry Ritholtz, director of research for

Fusion IQ

thinks that the state-regulated insurer that was profitable and had reserves for the policies it wrote -- the good insurer -- should have been spun off. The other side that sold high-risk products to hedge fund managers -- the bad insurer -- should be allowed to go under.

"Barry's entirely right," said Chris Whalen, director of e Institutional Risk Analytics. "This company should be restructured." Whalen's solution is to send the fully regulated insurer to the states to handle and put the rest into restructuring similar to the

Lehman Brothers

situation.

Ritholtz says AIG executives weren't satisfied with the moderate returns and steady earnings of the standard insurance company.

"That doesn't help anybody's stock options, so the Silicon Valley stock option/penis-envy sent all these people off to take what was otherwise a good company and turn it into a high-risk, high-return company for the aggrandizement of the wallets of senior executives," he says.

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He has no sympathy for the investors that bought the risky products and thinks they were dumb to do this business with AIG.

"There's a reason people go to

Allstate

(ALL) - Get Report

or

Geico

for their car insurance as opposed to Fred's Bait and Tackle and auto insurance, 'cause you want to know the payout is there," he says. "The fact that you went to some structured finance division of AIG with no guarantee and no supervision, doesn't mean you're entitled to a payout.

"To me it's unconscionable to ask the taxpayer to make whole hedge fund managers who were speculating on this paper," Ritholtz continues.

The Wall Street Journal

on Friday reported that some financial institutions like

Goldman Sachs

(GS) - Get Report

and

Morgan Stanley

(MS) - Get Report

had received payouts on AIG's bailout, as well as

European banks

. One of the arguments AIG made for the bailout was the threat of the collapse of European banks due to their exposure.

"They were actually arbitraging their regulatory capital threshold by writing risk with Hank Greenberg," Whalen says. "The Europeans have to take responsibility for their mess."

So if the company were restructured, what of the debt holders for AIG?

"Put the bondholders to the sword," Whalen says.