AIG rescue in the works

It is not quite clear at this moment what a "rescue" or bailout of AIG might look like, but it is abundantly clear that some form of bailout is absolutely needed, and needed ASAP. Whether it comes in the form of direct aid from the Federal Reserve or the U.S. Treasury or a consortium of the remaining Wall Street banks, or a shuffling of assets between AIG subsidiaries, it does need to happen. AIG is not just another "bank", but is an insurance company that many people and businesses are absolutely dependent upon. Its guarantees for derivative constracts are a big concern.

Of course, all of this begs the question of what AIG, an insurance company, is doing by being so synchronized with Wall Street banking. The core problem is that AIG got involved way over its head in underwriting of risks that nobody on Wall Street or anywhere on Planet Earth had a clue how to evaluate. Even now, the best estimates are probably that a lot of these risk evaluations will probably eventually come back down to earth, but it the heat of battle liquidity is the big concern. This is looking more like the same problem that LTCM had back in 1998, where eventually their risky bets did work out, but only after they got a massive infusion of capital to give them enough liquidity to weather the storm.

-- Jack Krupansky