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Can US let AIG fail?

Public outrage could force the Treasury Department to reconsider which financial giants pose a ‘systemic risk’ to the economy.

PUBLIC ANGER: Protesters assembled outside Goldman Sachs in New York Thursday.

Eric Thayer/Reuters

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Outrage about employee bonuses at AIG has put new focus on a larger question: whether saving the economy also means saving all the largest financial firms.

Economically, the financial crisis may have moved into a phase where the risk of a total meltdown, should a major financial corporation go through something like a government-managed bankruptcy, is not as great as it was last fall.

Yet it remains a sensitive moment. Treasury Secretary Timothy Geithner is expected to announce this week a strategy to deploy more dollars to purchase bad loans from banks. It’s part of a plan to keep troubled firms afloat without taking them under federal control. But anger at AIG has begun to ripple outward into a wider reluctance to rescue tottering financial giants.

“The political reality has changed,” says Simon Johnson, a former chief economist at the International Monetary Fund who is now at the Massachusetts Institute of Technology.

The new bailout climate is troubling, Mr. Johnson says. It could make it difficult for the Obama team to sell its plan. Moreover, it could also thwart a key fallback option: putting troubled firms into government receivership and spending money to clean them up so that they can be privatized again.

Without significant new public spending on banks, he says, the recession could go on longer and a recovery will be slower.

Governing out of anger?

President Obama is scrambling to keep his options open. He’s been aligning himself with public opinion – declaring his own outrage at the AIG bonuses – while also trying to redirect it. He warns that it would not be responsible to “govern out of anger.”


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