Why AIG Was Saved

An article on the WSJ's opinion page says the AIG hearings in Washington "showed that the story of why AIG could not be allowed to fail continues to change, which inspires little confidence that Washington can be trusted with new powers to identify and address systemic risk."

The best illustration I've seen of why AIG had to be saved is this chart from the IMF. The arrows show the % change in default risk of an institution, if the institution the arrow is pointing at defaulted. For example, if AIG defaulted, Bank of America was 4.56 times as likely to default. If AIG had gone under, the US government may have ended up in the position of backing up consumer deposits at Bank of America, Wells, Fargo, Wachovia, Citigroup, etc. The FDIC doesn't have nearly enough reserves to take care of that. By bailing out "Wall Street" (many of these institutions are not part of Wall Street, but politicians refer to them as such), the US government essentially bailed out Main Street. However, demonizing "Wall Street" is a message that gets more votes.