Thinking about the Sinking of AIG

News today about the parlous state of AIG, and the strong likelihood that the government will ultimately wind up owning AIG lock, stock and bookkeeper, gave Philo-Junius the urge to investigate the process of cleaning up AIG's books. It seems that when the credit-default swap mess was first unearthed during the collapse of Lehman Bros. last summer, that AIG's CDS exposure was about $400 billion, and now has been unwound to about $300 billion.

Question for discussion: given the fact that AIG has demonstrated the complete failure of its risk-modeling and effective bankruptcy, shouldn't the primary objective of U.S. government involvement be the transparent marking down of the swaps--the underlying systemic risk whose threat Geithner and Obama maintain we must address?

Some have argued that the swaps should be simply declared null and void as improperly registered insurance vehicles--why is it necessary to continue to pretend that these instruments have any effective value other than what the U.S. government ultimately chooses to assign them? Isn't the value ultimately assigned to these instruments a central question of public policy?