Interesting question from the Times, eh? You know that when the Old Grey Lady gets as snarky as I do, that there's a real problem somewhere. Times:

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.

If that turns out to be true, naturally there'll be some sort of accountability for the CEOs, right? I mean, at least Enron didn't take the taxpayer's money with them with they went down.

You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.

Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.

But losses on that scale do not show up in the company’s financial filings.

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.

And that the heart of the problem? Those "innovative" and "complex" financial instruments, Credit Default Swaps:

For $59 billion of the $72 billion A.I.G. has used, the company has provided no breakdown. A block of it has been used for day-to-day operations, a broad category that raises eyebrows since the company has been tarnished by reports of expensive trips and bonuses for executives.

The biggest portion of the Fed loan is apparently being used as collateral for A.I.G.’s derivatives contracts, including credit-default swaps.

The swap contracts are of great interest because they are at the heart of the insurer’s near collapse and even A.I.G. does not know how much could be needed to support them.

Well, there's a very simple solution, right? Transparency. Which hasn't happened. Yet.

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. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.

A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.

No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.

Why is this important?

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.

Which is why HOLC really is a solution, because it would clean up the banks' balance sheets for the only real assets in play.

Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say.

“When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”

So, we still don't know how big the Big Shitpile is, and so -- assuming that it's fear (lack of trust) that's driving the crisis, not greed -- the banks still won't lend to each other, or us. It looks like Paulson's solution is to triage the weak banks by using the money to let the big banks buy them up, so an accounting never has to be made, and pray that restores confidence. But why would it? After a year, nobody knows how big the Big Shitpile is -- except most people who are even willing to ask the question answer that it's more money than there is in the world.

Bottom line is that, under the Bush + Reid + Pelosi + Obama + Paulson bailout bill, Paulson is pouring billions of taxpayer money -- your money, and my money -- into a bucket. But the bucket has a big hole in the bottom. How big? We don't know. But what we do know is that the bucket doesn't seem to be filling up, and that means the hole must be pretty big.

There's a hole in the bucket, dear Henry, dear Henry...

NOTE In the subject line, AIG got its own little bailout after Lehman tanked; this is not the Bush + Reid + Pelosi + Obama + Paulson bailout, which happened afterwards. Looks to me like since the AIG bailout happened first, its problems are surfacing first.