AIG, the giant insurer, posted a $61.66 billion dollar loss for the fourth quarter of last year, and the Treasury and the Fed jointly announced a new bailout program for the company. From the Wall Street Journal:

The federal government is boosting its investment in embattled insurer American International Group Inc., providing the company with an additional $30 billion in capital on an as needed basis, but also exposing U.S. taxpayers to additional risk.

The new terms ease the financial burden on the company, which on Monday reported a $61.66 billion loss for the fourth quarter.

The Treasury Department and Federal Reserve announced the overhaul of the government’s bailout of the firm in a joint statement early Monday. In addition to providing up to $30 billion in additional capital to AIG in return for preferred stock, the Treasury said it would convert its existing $40 billion of preferred shares into new preferred shares that more closely resemble common stock. Under the new terms, the Treasury is to get a 77.9% equity interest via preferred stock on Wednesday.

The new credit line is astounding in light of the prior federal committments, but even more astounding is the conversion of the governments prior financial committment to common stock status. It seems to be the way Treasury and the Fed want to move going forward as they did with Citi, but the risk to taxpayers is enhanced under this scenario. And we now have two major behemoths of U.S. finance effectively nationalized, with Bank of America likely to be the third. (If they are not already). Federal officials fear an AIG meltdown, and believe it would be a disaster for the economy.

The decision to approve another revision of the AIG bailout amounts to a calculated bet by Treasury Secretary Timothy Geithner and Federal Reserve Chairman Ben Bernanke — both architects of the original bailout — that there would be even greater risk to letting AIG fail.

Fed officials feared that a bankruptcy filing by AIG could be disastrous for the economy, which is in worse shape than it was six months ago. While AIG is trying to unwind many of the derivatives contracts in its Financial Products unit, deepening trouble at AIG would create more trouble for municipalities that have business relationships with the firm.

In addition, a bankruptcy risked driving away many of AIG’s roughly 74 million policyholders, forcing them to replace insurance contracts at a difficult time, adding to economic troubles in the more than 100 countries in which AIG operates.

The hole keeps getting bigger. I realize the potentially large downside of an AIG bankruptcy, but someone is going to have to start considering plan b here. How much federal money can be sunk into this cesspool?