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Just as outsized rescue packages and swathes of red ink had seemingly lost their capacity to shock: enter AIG. The insurance group on Monday revealed a net loss of very close to $100bn for 2008. True, $64bn in fourth-quarter charges related to restructuring and so-called “market disruption”, for example, played a large part. Fundamentally, though, AIG’s core insurance operations are buried by losses spewing from the troubled parts of the business.

The US authorities, alas, appear determined to perpetuate the fiction that AIG remains (in some form) a viable entity. Another complex recasting of the government’s support includes tweaking the government’s preferred shares to make them more junior, a $30bn equity capital facility, lowering interest payments on the Federal Reserve’s credit line and reducing that facility by swapping debt for stakes in two life assurance businesses. That the latter remain even nominally under AIG’s control is astonishing. A cleaner separation would help decontaminate them from association with their parent, and ease the process by which they will eventually be sold at a decent price.

AIG’s miserable demise has further to run. The Treasury on Monday acknowledged that more government support might be required in managing the company’s overhaul. Furthermore, the emphasis placed on AIG’s role as a significant counterparty, plus the complexity of a business spread across 130 countries with 400 regulators, indicates that the government is committed to keeping AIG on taxpayer-funded life support, while protecting its counterparties (the large banks) from losses.

AIG demonstrates that apparently dramatic government action, taking 80 per cent of the company last year at a stroke, does little to avoid other tough choices. AIG’s financial products group still has $300bn in net notional exposure that must be resolved. That lesson may prove valuable in dealing with other failing institutions. Even government-owned zombies remain decidedly unpleasant.

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