The Baseline Scenario has a post that goes into a bit more detail than I have here about the bailing out of AIG. The basic points are the same though. First, making sure AIG didn't fail by guaranteeing their insurance was the whole point of the bailout at the time. Second, that doesn't mean that you have to protect those who bought the insurance forever:
I, for one, don’t think that “saving” the too-big-to-fail financial institutions is or was among the legitimate purposes of our financial policy. The idea is—or at least ought to be—that we’re trying to prevent them from failing in a way that causes everyone else’s business to go under.
And third, the goddamn bonuses are a pimple on an elephant's ass already. Pay them or don't pay them, whatever. Just don't let congress cynically bog down the debate with this pseudo-populist crap. Focus on the important and systematic stuff.
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