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Can US let AIG fail?

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Last week, anger was rising, not waning. In an AIG-related hearing on Capitol Hill, lawmakers voiced the frustration of their constituents, and not just about some $165 million or more in employee bonuses. It was also about the full cost of rescuing AIG, with more than $170 billion in public funds now on the line there.

“There remains a possibility that AIG will come back for additional [federal] funds associated with the $1.6 trillion in your derivatives portfolio,” Rep. William Lacy Clay (D) of Missouri told AIG chief Edward Liddy. “Can you convincingly illustrate to us why this is not an exercise in staving off the obvious collapse or prolonging the agony?”

Another Democrat, Joe Donnelly (D) of Indiana, said it was “incredibly distasteful” that the bailout so far used public funds so that AIG can pay off customers on products that Donnelly likened to casino bets.

The products, credit-default swaps, are so-called derivative products that are part investment, part insurance contract. Buyers can use the products to protect against the default of a bond they own, or as a bet on the possible default of bonds they don’t own.

Republican lawmakers, meanwhile, are calling for an exit strategy from corporate bailouts.

So far, large chunks of the AIG money – about $20 billion – have passed through AIG to pay off on those derivatives to financial firms including Goldman Sachs, and a host of European banks.

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