Bear Stearns was too big to fail. Fannie Mae and Freddie Mac were too big to fail. Now AIG is too big to fail--and apparently, the Fed is going to lend $85 billion in return for an 80% stake in the nation's largest insurer. Do I hear cries of "Socialism?" No, because it's only socialism if it's for the working class; it's justifiable intervention if it saves the hides of the rich folks.
To put the AIG rescue in perspective, it's about 9 months worth of the Bush administration's spending in Iraq. In other words, an immense amount of money.
And don't forget that by acting as midwife to Bank of America's purchase of Merrill Lynch, the Fed and Treasury have created another institution that is too big to fail.
In the short term, the rescues of Bear Stearns, Fannie and Freddie and AIG are justifiable. But in the longer view, a large part of the financial crisis we now face is attributable to a climate that has permitted--nay, encouraged--the creation of institutions that are too big to fail. Their existence threatens the financial health of the nation and undermines democracy, because they remove discretion from government policy (which is a nice way of saying that they hold the taxpayers hostage) and freedom of action from governmental agencies.
So, along with regulatory reform, the next administration should undertake to assure that there are no private or quasi-corporations that are too big to fail. And yes, that means breaking up Bank of America, and AIG (if it is not broken up as part of the rescue), and reducing the size and influence of Fannie and Freddie.
Update: As more has come out about the AIG rescue, the structure has become clearer. The government is lending up to $85 billion over two years; in return it is getting collateral for the loan (will the collateral actually be worth the amount lent? In these times, who knows?). The government is also taking 80% of the equity in AIG. The company is paying a high interest rate--8.5% over the inter-bank lending rate (that's in the credit-card interest range). Apparently, the plan is to split the company up and sell or split off the parts of its business that have value. So, in sum, the deal looks businesslike and there is some possibility--maybe a strong one--that the taxpayers will come out whole and maybe even ahead on the deal.