The Federal Reserve seemed to draw a hard line against bailouts with Lehman Bros., but just days later it stepped over that line to save AIG. Why? First, says Time: Size. Its implosion would have been "as close to an extinction-level event" as we've been since the Depression. But also: Fear. Whereas Lehman’s collapse was long expected, AIG blindsided the Fed and market participants alike. The business is so complex and mysterious, and its reach so broad, that no one was sure what its failure would mean.
AIG’s troubles arose because it sold too many credit default swaps, essentially insurance against loan failures. The current high-default economy turned those policies cancerous, but not before AIG had sold them to nearly every significant financial player on Earth. It’s that interconnectedness that made an AIG collapse such a scary prospect. It would have touched far more regular Americans than a Lehman bankruptcy. And, unlike Lehman, there's a potential upside for taxpayers: AIG's insurance businesses could pay back the bailout in a few years.
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