One of the main reasons the federal government had to intervene and use billions of taxpayer dollars to prop up the nation’s financial institutions is that they were considered to be “too big to fail.” In other words, these companies had become so massive that their collapse would send shockwaves throughout the U.S. and global economies. No company has come to symbolize this problem more than insurance giant AIG, in which taxpayers now have an 80 percent stake after the federal government committed $170 billion to rescue it from bankruptcy. “Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high,” wrote the Treasury and Federal Reserve in a joint statement on March 2. As New York Times columnist Paul Krugman has explained, “AIG is in trouble because it wrote many credit default swaps, in effect guaranteeing others against losses it lacked the resources to cover. We, the taxpayers, are now covering those losses. … But this means that US taxpayers have now assumed the downside risks for all of AIG’s counterparties.” AIG has proved to be in no rush to repay this favor, highlighting the risk in the government’s current strategy.

From The Progress Report