What now?

U.S. taxpayers became major players in the insurance industry Tuesday, thanks to the government’s $85 billion bailout of American International Group.

This follows taxpayers becoming major players in the secondary mortgage industry with the shoring up of Fannie Mae and Freddie Mac last week, and major players in the investment industry through the government-backed sale of Bear Stearns earlier.

Despite these actions, the stock market continued to free-fall Wednesday, the credit crisis worsened and U.S. taxpayers must wonder what business they’ll be asked to bailout next.

As massive as it was, we support the federal involvement in AIG. Unlike Lehman Brothers, the investment firm that federal authorities refused to help over the weekend, AIG’s problems could have an impact on far more than its shareholders. Everyone insured by the company, from large corporations to individuals, could be harmed if the company went bankrupt.

It should be noted that AIG’s insurance operation is still profitable, according to The Wall Street Journal. Its financial problems stem from leveraging its assets to invest in other things.

That’s the problem facing many financial firms today. They moved beyond their primary business, borrowing heavily against their assets, to invest in things like real estate and mortgages that seemed like easy money at the time.

Members of both parties encouraged and even assisted them by easing restrictions on how and where they could invest.

But hindsight is always 20/20. The question is what to do now.

There are calls for creating something like the Resolution Trust Corp. of the 1980s to stabilize the mortgage industry, and that certainly makes sense. So do stricter rules limiting borrowing-to-asset rules for financial institutions.

And authorities must be prepared to let more companies fail. Aiding a company like AIG is an exception.

Taxpayers can’t afford to bail out every firm whose managers made poor decisions.


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