AIG (AIG) probably has the wrong management in place. A retired CEO from Allstate may not be the man. The insurance company lost another $24.47 billion billion in the third quarter.

The current plan at the damaged insurance company is "if at first you don’t succeed, try, try again". It is the American character never to give up on something that has be started, no matter how futile the cause. The US government’s financial rescue program has a bit of that spirit in it. Regardless of how bleak a large insurance company or bank’s prospects may be, the Treasury and Fed are prepared to barrel ahead.

One reasons that giving up on troubled financial companies seems to be a bad idea is the lesson of Lehman Brothers. As it fell, it damaged large numbers of firms which held its paper.

AIG and the government are close to a deal which is substantially better than the first rescue which involved a $85 billion loan and the US getting 80% of the firm’s equity. According to The Wall Street Journal, "Under the terms ironed out late Sunday, the government would give AIG more money, including $40 billion from the U.S. Treasury’s $700 billion Troubled Asset Relief Program. It would also receive less interest than on the bulk of the original loan, while freeing AIG from exposure to some of the risky financial instruments that nearly caused it to file for bankruptcy protection."

AIG management does not have to power to solve its problems. Fixing the company involves dumping its credit default swaps and selling off a number of its healthy divisions to pay back government loans. The sales of some of AIG’s units are going slowly because the credit crisis makes it difficult for potential buyers to get financing.

The only answer to the AIG conundrum may be for the government to appoint a receiver who has the power to buy any of the insurance company’s problem assets and auction off many of its business, providing Treasury-supported financing to qualified buyers. Otherwise, AIG could wait the better part of a year while the liquidity climate improves to the point that it can find firms that are willing to acquire many of its more attractive operations.

Loaned money from the government to buyers of AIG assets will almost certainly lead to a faster workout for the insurance company. Financially robust acquirers are more likely to be able to pay back government loans than AIG is. Creditworthy operators will quickly end up with the most valuable parts of the insurance company.

The most significant problem with all of the programs being run by the Fed and Treasury is that they work too slowly. Money that goes into troubled companies does not come out fast enough. In the case of ruined firms like AIG, management no longer has the capacity to repair the broad damage. All it can do is ask for more and more capital as the economic crisis deepens.

AIG needs new management and that will have to be provided by the government.

Douglas A. McIntyre

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