The escalating cost of bailing out financial conglomerate American International Group (“AIG”) is staggering. Last week, Federal Reserve Chairman Ben Bernanke testified at a Senate Budget Committee hearing that AIG, which has recently benefited from multiple government rescues, made him “angry” because it had made “huge numbers of irresponsible bets” and “was a hedge fund, basically”. He reported that AIG’s investment vehicles lacked oversight. Last week, AIG confirmed it would give the US government a large stake in its two largest divisions as part of a more than $30 billion rescue package for the company, which lost nearly $100 billion in 2008. The Federal Reserve Chief defended the bailouts on the ground that as the world’s largest insurance company, AIG was too big to fail. In fact, the insurance operations of AIG that serve policyholders for property casualty, health and life insurance are regulated and presumably adequately reinsured and reserved for expected claims. It was the non-insurance financial businesses of AIG, in particular AIG Financial Products which took extraordinary risks on credit default swaps, that caused the fiancial losses of the company. Our policymakers should be clear in their use of language to avoid misleading the public as to what is really at risk here. And as economist Nouriel Roubini reported, this current round of bailouts for AIG was for the benefit of the large banks that were counter-parties to the aggressive financial trades made by AIG Financial Products. One would have thought that sophisticated Wall Street institutions would have diversified their risks to limit their exposure to any single counterparty and would have set aside allowances for expected credit losses. It is disingenuous to pretend that the bailout actions are being taken to protect the integrity of our financial system.