AIG gets another bigger, better bailout

The taxpayer-funded bailout of American International Group (NYSE: AIG) just wasn't rich enough at $123 billion. Oh, and the terms for repayment were just a little bit too tough apparently.

The Wall Street Journal reports (subscription required) that the company has reached a deal with the government to replace that package with a new $150 billion plan. Here's the quick summary: "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."

Wow. The government will not be increasing its stake in the company beyond the 79.9% it acquired in the original deal. The original $85 billion, two-year loan will be replaced with a five-year $60 billion loan -- with an interest rate that's 5.5% lower at LIBOR plus 3 instead of LIBOR plus 5.5.

What is difficult for me to understand is why the company's common stock holders are being allowed to retain any interest. Without the government, the company would surely have plunged into bankruptcy now and shareholders would have been wiped out. If saving AIG at the expense of taxpayers is necessary for the health of the financial system, I understand. But why does the bailout have to stuff cash into the pockets of stock market speculators? That's wrong. If the market for the distressed assets we're buying doesn't improve, taxpayers could stand to lose billions of dollars. It just seems obvious that a situation so desperate that it requires the Treasury to speculate on obscure securities shouldn't also provide an opportunity for shareholders to make billions.