AIG

Why is AIG important? Why did the Fed rescue AIG?

AIG insures banks and other institutional investors in on securities that they buy.

Having the insurance reduces the security owner's risk and allows them to buy more securities and have less capital on hand in order to back themselves. It's my understanding that goverments regulate how much capital companies need to back their securities.

If AIG goes under then all of the banks and investors would have higher risk and would have to have much more capital in order to protect themselves from defaults of their security.

The CEO of Bank of America says that he "doesn't know of any major bank that doesn't have some significant exposure to AIG." More here

So what about Lehman Brothers? It's mainly banks and pension funds that have deals with Lehman. I imagine these are investments with Lehman and banks probably hold Lehman's debt.

"Unwinding Lehman's complex deals will take months if not years. During that time the global financial system will be snarled up. Many banks won't know for sure how much they are exposed to Lehman, and will have difficulty freeing up the money in those deals." From BBC