Deal?  No wait, no deal.  Wait, deal. 

The on-again-off-again negotiations to save American International Group, Inc. (AIG) were finally completed this week with the Federal Reserve stepping in to save the mammoth insurance company.

Do you remember the great cultural anthem, “American Pie”?  Maybe this week will be the week capitalism died.  Talk about a game changer! The massive governmental intervention truly changes the way business is and will be conducted in this country. That is, of course, assuming that the rescue truly stems the landslide that is the collapse of financial companies on and off Wall Street. I’m incensed by this move and frankly, you should be too.  Let me explain.

It is my understanding that the reason for the government change of heart was a direct result of pressure from insurance customers that feared losses caused by a collapse of AIG.  This pressure manifested itself in the State of New York and resulted in that government making a case for the rescue direct to the Federal Reserve.

The preferred private solution to the problem apparently hit a roadblock when worries about liquidation preference for insurance contracts greatly increased the risk that the discussed $70 billion infusion would be dwarfed by such claims. No longer was the issue isolated to rating agency concerns and credit default swap collateral shortages.  One slip-up and the new capital could be gone.  Say goodbye to the private solution!

So that was the dynamic that concluded with the Federal Reserve takeover of AIG.  I say takeover because the $85 billion loan required the company to issue warrants to the government that gives the central bank 80% equity ownership of the company (see also, “Global Revolt Melts Down U.S. Financials.“).

The move is reminiscent of countries nationalizing oil companies or communist governments taking over private companies.  The only difference here is… >that without intervention, AIG would simply cease to exist.

Supposedly that was a price that we could not afford to pay.  Letting AIG fail would reverberate throughout the entire world economic system.  According to former AIG CEO, Hank Greenberg, saving AIG was in the national interest. Oh really, since when? Did I miss something?  Has Lenin been reincarnated and now alive and well in the United States?

Watching the drama play out, I admit I, too, was concerned about AIG failing, but I was ready to face the music.  Greenberg’s comments frankly made me more concerned. Anytime a private party with a huge equity and sentimental stake in an entity claims that such entity is in the national interest, I become skeptical.  Call me a cynic.

I get that AIG is an important financial institution with many tentacles, but no entity can ever be truly in the national interest.  Capitalism is not supposed to work that way. My biggest beef with the AIG bailout is that the company became an industry leader as a result of taking risks on its balance sheet that allowed it to maintain a competitive advantage. In other words… they profited greatly from investment income generated from derivative securities, and as a result, were able to charge lower prices for insurance products.  AIG took risks that then positioned itself to become a dominant competitor in its space.

With such a strategy, there is always the potential price that may need to be paid for rising to the top.  That price is the collapse of investments, loss of ratings, and the need for more collateral (see also, “Profit as Lehman Folds & Merrill Disappears“). If the balance sheet cannot withstand that risk, the company is at risk for collapse.  There is a claim that AIG does indeed have the assets to provide the capital needed for collateral, but clearly they could not liquidate those assets quickly enough to save the firm.

The market missed the boat completely on pricing the risk of a forced liquidation scenario, that much is clear.  Now that we are living that unimaginable scenario, the company should be forced to face the consequences. They are not.  In my humble opinion, nobody complained when all was well and derivative income supported lower prices across many insurance products.  It very well may be that we had it too good (see, “A Healthy Dose of Reality“).

What would the market look like without AIG?  I don’t believe the hyperbole being thrown about that a collapse would have resulted in calamity.  I just don’t buy it. So here we are today with a new paradigm of government intervention.  Did we simply stick our finger in the damn?  We are going down irrespective of AIG.  Why take socialist actions if the outcome is the same?

Deal or No Deal?  I say no deal!

This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight likes this, go to: www.InvestorPlace.com.