So...the government has bailed out AIG, the world's largest insurance firm. Apparently, it was deemed too big to fail without dragging down the entire economy.
There need to be penalties for mismanaging, and for the mismanagers' investors, too. I am happy to see that AIG's stockholders will have their equity diluted to roughly 20% of what it formerly was, as a consequence of this bailout. In this case the penalty is that the government ends up owning 80% of the firm, an equity stake which it will be unlikely to hold for long, I think.
This penalty should be large enough to forestall the occurrence of a so-called "moral hazard." That is, the temptation to act in a less-than-prudent fashion because the government won't let you fail.
