No one could quite get to the crash victim, and now it seems certain AIG (AIG) will not make it out of the wreck.

After staging a rally during the day, AIG’s shares closed down 21% at $3.75. After hours the stock fell another 49% to $1.95.

AIG’s fate hinged on the chance that the government would put a single dime into a rescue effort. Hank Greenburg, AIG’s former CEO and an 83-year-old gentleman who was pushed out the door, said he might make an offer. It was never more than a rant, a little bit of revenge to point out that he was right. If the company had kept him on, none of this would have happened. Old School irony.

The Fed and Treasury brought in investment banks, including Goldman Sachs (GS), in an attempt to put together a $70 billion bridge loan for the insurance company. AIG’s plan was to sell its aircraft leasing unit, car insurance and annuity divisions to pay much of the money back. In a market where assets are being devalued by the hour, no one could be found who thought that they were worth even close to the value of the proposed loan.

It has not mattered how many late-night meetings the government has had with the private sector. At this point everyone from Warren Buffett to all the big foreign banks and sovereign funds has looked at owning AIG. Its market cap is only $5 billion. It was almost 40 times that a little over a year ago.

While the government may be playing a hard game it has finally decided to allow the gamblers who made all of the money at financial firms lose it. Unfortunately, there will be a lot of extra casualties. The combined market values of Lehman (LEH), Freddie Mac (FRE), Fannie Mae (FNM), AIG (AIG), and the five other largest banks and brokerages has dropped by over $500 billion in twelve months.

The government’s decision has the marks of self-interest. The fear that the budget deficit will get out of hand is fair. The tax base is likely to be eroded by falling personal and corporate income. Entitlements still make the expense of running the federal government almost impossible to reduce. What the government has committed to already for Fannie Mae and Freddie Mac could run into the tens of billions of dollars. The FDIC will need additional funds to cover future bank failures.

Henry Paulson may turn out to be the hero of the present crisis. If he does, it is because he was willing to be an anarchist. He was willing to let the thousands of things that effect the life of the stock market and the economy collide with one another unrestrained and largely unsupervised. Ben Bernanke has joined him in that philosophy. The Fed did nothing with rates and made no signal that it is about to.

In a socialist society, Paulson would be considered rabid, mangy, and unfit.

If things turn out badly over the next few weeks, he may have to seek refuge in Switzerland.

Douglas A. McIntyre

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