Other companies that need federal bailouts should use the AIG (AIG) approach. It told the the government that if it did not get a large slug of money the global financial system would burn to the ground.

Impressive threat, and all the more powerful because it is probably true.

According to Bloomberg, “American International Group Inc. appealed for its fourth U.S. rescue by telling regulators the company’s collapse could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers’ stake in the firm.”

That almost certainly means that AIG will get more money if it runs low on capital. It is also a illustration of the sword that every major financial firm in the US holds. These banks and insurers have a labyrinth of relationships that span the world. If they are forced to renege on significant obligations, the ripple effect would cause central banks outside American to put hundreds of billion of dollars in additional capital into the banks in their countries to protect them from the loses caused by the failure of a large US financial house.

And, it has come to that. The largest financial companies need to be saved in increments, day-by-day, week-by-week, and month-by-month. The money needs to be dripped in as it is needed. If the flow is interrupted the global financial system could still be shocked at a level which does not have a precedent.

Given the trillions of dollars that would be required to make the largest banks around the world whole with one set of investments by central banks, the need for financial  life support as a prophylactic could last for years.

Douglas A. McIntyre

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