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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.

And?

The sales process was dragging on without any agreement. At the beginning of the week, the authorities in New York relaxed the rules and granted AIG approval to grant itself a briding loan of $20 billion using its own assets. It could then take this capital to the Fed as a downpayment on a much bigger loan.

So why the immediate crisis?

AIG had been under pressure because of worries that its credit quality would be downgraded. That happened late on Monday. Two credit agencies, Standard & Poor’s and Fitch, cut AIG’s credit standing. This means the insurer will have to put up as much as $25 billion of extra capital to cover its positions. If it survives, it will also make it more expensive for it to borrow money. In some cases, AIG will have to find the extra money immediately. In others, it will have to pay up by the end of the year.

This puts the pressure on. David Paterson, the New York state governor, said that AIG had 24 hours to get its house in order.

So the Fed paid up?

Yes, but there is a high rate of interest on the $85 billion loan and AIG will have to sells assets.

But it let Lehman fail?

Yes. The Fed’s rationale is not always entirely clear. It orchestrated the bailout of Bear Stearns, another Wall Street investment bank that almost failed in March. The thinking was that AIG is far more complex and more embedded in the financial system than either of these two banks. AIG is a lot bigger than Lehman. It employs more than four times the number of staff at about 116,000.

This is something of a test case, though. It is the first time an insurance company has sought financial aid from the Federal Reserve. Until now it has just been banks. Insurers are usually regulated by their individual states in America, so this shows just how big the problem is.

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