Another big Wall Street firm looks like it is going under. What’s happening now?

American International Group, known as AIG, was once the world’s biggest insurer. It has now fallen on desparate times after being caught the wrong side of the credit crunch. Unless it can borrow about $75 billion, it may have to file for bankruptcy.

That is big money, but why exactly should I care?

AIG is not just an American company. It operates in more than 130 countries worldwide and is very active in Britain. It is the top seller of investment bonds in Britain. You may also have bought travel, life or household cover from AIG.

Do I need to worry about that?

It is unlikely. Savings and investment policies like AIG’s tend to be separately insured. The firm is regulated in Britain by the Financial Services Authority and policyholders would be able to draw on the Financial Services Compensation Scheme. This guarantees investments up to £48,000 per person. It will pay the first £2,000 of a pension or long-term life insurance policy, plus 90 per cent of the remainder of the claim. The same is true of general insurance policies.

So why should I worry?

The main problem with any collapse of AIG is the knock-on effect it would have on market confidence across the globe, particularly coming so shortly after the bankruptcy of Lehman Brothers. AIG is such a big company - it insures everything from loans to local authorities in America to bonds bought and sold in the London market. It also reinsurers other companies’ risks. Some of the world’s biggest financial institutions would probably start suffering serious losses if AIG was to go under. The effect on the equity markets could also dent the value of your policy.

How did all this happen?

AIG’s biggest problem was that it insured American mortgages, particularly those that had been parcelled up and sold on in the wholesale markets. When the American housing market fell so dramatically, it had to pay up. It also has to post capital to guarantee some of its other financial exposures. The problem is that it no longer has enough cash to meet its obligations.

Has it done anything itself to try to improve things?

Yes, it has. It has been trying to sell assets worth about $20 billion. These include a consumer loans arm, reinsurance business and financial products division. It might also sell off its aircraft leasing operations.

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