Following the announcement of the bailout, which became necessary after AIG share price movements and credit down grading meant that it could have to post $14.5bn in extra collateral, the Asian markets showed signs of recovery. Speculation about an impending rescue of the worlds largest insurance company had earlier soothed US investors.
Had AIG been allowed to go the way of Lehman Brothers then the implications could have been extremely serious as AIG provides banks with insurance against credit defaults, and with the removal of this cover banks would have ben left looking for cash.
The reason for this is that without insurance against their riskier loans the banks would have had to set aside cash against these loans which while covered by insurance they hadn't needed to do.
This could have led to liquidity issues with more banks, a tightening of liquidity and higher interest rates.
So it would appear that some companies are still TOO BIG TO FAIL.
