AIG is the nations (worlds) most crippled financial institution by this credit crunch and balance sheet recession (which lead us into this global recession).

AIG was connected to several if not all other big banks in the US and world wide with CDOs (collateral debt obligation) CDSs (credit default swap), mortgages, insurances.

For example, it held CDOs against LehmanBrothers for other banks. Which meant that AIG has to pay money to the banks who bought that CDOs from AIG with the name LehmanBrothers on it - when LehmanBrothers goes brankrupt. If not - the bank who held the CDOs with the name LehmanBrothers on it pays some small amount of money each month to AIG, the seller. This was common practice throughout the financial market and everyone held/bought some kind of financial instrument (risky ones, which we later discovered) from Bank A or Bank B or Insurer C or Money Fund D or the Mortgage Broker E and back to Bank A and on and on and on.

This connectedness throughout the system, the dependency on every new financial return (earning money each month) from this instruments which origins are the housing market (a bubble), the wall street in general (another bubble), and the growing US economy (with unsustainable economic fundamentals like negative saving rates) caused the financial collapse of our world economy.

Now - this would not have happened without the fact that all that money on the papers (balance sheet) of the banks was not real (physical, it just was in the computers), they were leveraged with ratios from 1:30 to 1:40 (i.e. I have $1 in the piggy bank and can borrow 30 or 40 dollars) - _short-term_ wise, means 3-6 months or even shorter at the overnight money market. Note: This was a failure of regulation by the SEC (Securities and Exchange Commission / www.sec.gov) which in 2001 increased the possible leverage ration from 1:20 due to the global market competition pressure as other regulated markets in the world had already 1:40 leverage ratios established.

This construction of our financial system and financial revenues from this instruments looked like a 'House of Cards' and it collapsed as Bear Stearns went bankrupt (was eventually bailed out by the FED+JPMorganChase). After this hear attack - LehmanBrothers went bankrupt and wasn't rescued due to the moral hazard dilemma (see PBS documentary below). After this second heart attack our financial system was in a cardiac arrest (it was about to die), the patient couldn't live without a life-support-system (aka now the Gov't/FED/TARP) and the near death of AIG (an important interconnected organ) and the patient itself (our financial system) was rescued.

It was seen under expert - if we let such an big player (one of the biggest of many) fail and go bankrupt. We would have had now NO modern economy as we know it.

Thus - AIG _still_ receives money from the $700bn TARP budget to keep the organ AIG and the patient itself alive. So do other big players/organs like Citigroup, Bank of America, RBS in the UK saved by UK Gov't, HypoRealEstate in Germany saved by their Gov't, Fortis saved by Belguim Gov't ... and so on world wide.

But our financial system is far from being healthy, it is in a coma, it does not act properly, and we have now to figure out how to get it healthy, get it into rehabilitation and going again without further help by government and taxpayer money. This might take several years and will not be the same one after this process.

For some more information you can watch this PBS documentary;
http://www.pbs.org/wgbh/pages/frontline/meltdown/view/

Or skim through this blog post for more details;
http://baselinescenario.com/financial-crisis-for-beginners/

And here is one of the latest article on this issue (AIG) from the NewYorkTimes:
http://www.nytimes.com/2009/02/28/business/28nocera.html?_r=1
Source(s):
http://www.nytimes.com/2009/02/28/business/28nocera.html?_r=1
http://www.pbs.org/wgbh/pages/frontline/meltdown/view/
http://baselinescenario.com/financial-crisis-for-beginners/


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