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From the NY Times of 29 Oct 2008:

A Question for A.I.G.: Where Did the Cash Go?
The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.

“You don’t just suddenly lose $120 billion overnight,” ...

Mr. Vickery and other analysts are examining the company’s disclosures for clues that ... company officials knew they had major losses months before the bailout.

Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.

The internal auditor resigned and is now in seclusion ...

These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate. ...

A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. ...

A.I.G. had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company’s accounting for its credit-default swaps and collided with ... the head of the company’s financial products division ...

The company’s independent auditor, PricewaterhouseCoopers, was the next to raise an alarm. ... About a week after the auditor’s briefing, Mr. Sullivan and other executives said nothing about the warning in a presentation to securities analysts ...

At this point, its obvious. AIG was simply a new variation on Enron accounting. Seven years later and the current American administration did virtually nothing to require fiscal responsibility? Of course not. That might cause a downturn. That would require the SEC to investigate which means the SEC needs more money and people. Instead, we do more economic stimulus. We threw more money at the richest members of our economy.

“We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss,” said Bill Bergman, senior equity analyst at the market research company Morningstar.

Instead we are doing what Japan did to ignore their problems for 10 years. Save companies from bankruptcy? Bankruptcy executed early enough only removes top management, saves the company, its employees and its stockholders. Do we let AIG create further and larger economic calamity years later? Or do we swallow the medicine now. Currently Americans have dumped $120biilion into AIG. Next week, we learn how much more George Jr will dump into AIG - because "Reagan proved that deficits don't matter".