AIG to post $60 billion loss, is it time to stop the bailout madness?

Whatever happened to the idea of free markets? That was a quaint notion in which companies that offered better products made a profit and rewarded their shareholders and those that couldn't make money went bankrupt.

I am not sure there was ever a time when things were that simple but now we're in a situation where average Americans are watching their tax dollars go to bail out the record breaking mistakes of executives who use that money to take expensive vacations.

This is where things stand with American International Group(NYSE: AIG) which is about to post the biggest quarterly loss in American history: $60 billion.

AIG has a new set of problems in the form of bad commercial real estate. That record loss will force AIG to come up with collateral it doesn't have and to reduce its book value below a level that triggers defaults in some of its debt instruments.

In short, AIG -- which has already gotten $150 billion from you and me -- is either going to declare bankruptcy or try to work out some kind of prepackaged bankruptcy in which is swaps $40 billion to $60 billion in debt held by the Federal Reserve for equity in AIG. This raises an important consideration: Will the U.S. just write off the $150 billion it gave AIG if it files for bankruptcy? And does this mean that all the toxic waste that the Federal Reserve took on to increase its "assets" from $800 billion to $2.2 trillion is similarly worthless?

Will it take an insolvent Fed to put the brakes on this endless stream of taxpayer bailouts?

Peter Cohan is president ofPeter S. Cohan & Associates. He also teaches management at Babson College. His eighth book isYou Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns AIG shares.

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