The government's 11th-hour takeover of American International Group (AIG) late Tuesday was followed Wednesday by the second 4-percent drop in the Dow Jones industrial average this week, proving that even an $85 billion federal loan can't buy Wall Street's confidence these days.

The irony is that AIG, with a market value that has fallen from about $140 billion to $5 billion this year, operates healthy global life and property-casualty subsidiaries and retirement services.

"The guys I work with are doing a great job," said Jim Hays, CEO of Hays Companies, a big multi-line insurance broker in Minneapolis. "It's a shame. The shareholders and the employees, who were doing their jobs and nothing fancy [and who] had so much of their wealth invested in AIG stock over the years, have lost so much.

"But that CEO and whoever was guaranteeing those hybrid financial products, I don't know what they were doing."

It turns out, they didn't know what they were doing, either.

Unlike most insurance companies, AIG in recent years was a major peddler of "credit-default swaps," basically insurance contracts covering corporate debt and mortgage securities, including the tidal wave of subprime mortgages that has gotten some big banks and investment houses in trouble.

"AIG was a great company with a great vision," said Bob MacDonald, a retired veteran insurance company CEO and now a management consultant. "They were the best in the world. But with these 'credit-default swaps,' they assumed the worst would not happen. And in insurance, you price the products based on the worst thing that can happen. And if you're good, you'll make money.''

AIG entered that market basically because there was a lot of money to be made guaranteeing those exotic debt instruments, MacDonald said. "Others [insurance companies] would not go near that business. That took guts to avoid the peer pressure. AIG was run by intelligent, educated people who were doing too much of something they should not have done."

If there is an upside to this story, it's that AIG ran its financial product-guaranty business outside its traditional insurance companies.

"They have 60 insurance companies ... and we feel confident that the insurance business is solvent," said Minnesota Commerce Commissioner Glenn Wilson, whose department has fielded calls from concerned policyholders. "The money is there for the insureds." AIG is a significant player in the Minnesota market, with 4.5 percent of the property casualty market and 2 percent of the life/annuity market, according to the Commerce Department.

The government moved in to prevent a run on the company by policyholders.

The Federal Reserve and U.S. Treasury have installed former Allstate CEO Ed Liddy after booting AIG Chief Executive Bob Willumstad as a condition of the deal.

AIG may have to auction its good businesses to pay off taxpayers at 11 percent interest. In return for the life-sustaining capital, taxpayers now own 80 percent of the company, according to an analysis by Credit Suisse.

Hays predicts that the government loan was worth the risk and that the business will rebound.

"I think those assets will come back," he said. "The U.S. will own 80 percent of what will be a $200 billion company. It will prove a good investment. The short-sellers have run amok, but that won't last. The government should have done this. AIG touches everything around the world -- companies, customers, personal lines and portfolios."

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com