Congratulations, Mr. and Mrs. U.S. Taxpayer!  You're on the hook this morning for an insurance company. 

Maybe the name should be changed from "American International Group" to a suitably socialist name like "People's International Group," which has the added benefit of the acronym PIG.

Let's see here… In the space of exactly six months, the Federal Reserve has expanded its purview from commercial banks to investment banks and now to insurance companies.

Which raises the question:  How in the world can an insurance company screw up this badly?  An insurance company!  Insurance companies sit on massive quantities of cash that flow in every month in the form of premiums.  Granted, not every insurance executive will parlay those premiums into gazillions the way Buffett did, but you have to really really foul up to arrive on the brink of insolvency.  You have to leverage up those premiums and put yourself at the center of a worldwide nexus of credit default swaps.   Which is exactly what AIG did.

I don't think this is what the wizards of New Finance meant when they talked about the "dispersal of risk."  But maybe I wasn't paying attention.

Anyway, we now have a partial answer to the question I posed Monday, which was why did the Fed and the Treasury suddenly decide to get free-market religion with Lehman Bros?  They didn't, of course: They were getting ready to bail out AIG, seeing as Goldman and JPMorgan had no interest in doing it for them.

The 80% stake that Uncle Sam is taking in AIG is a whole lot of garbage the Fed might have to print money to cover — $85 billion.  But it's pocket change compared to the potential closure of 1000 banks (Wilbur Ross's estimate) or 4500 banks (Ken Lewis). Seeing as the FDIC has already blown through 17% of its reserves just with Indymac and about a dozen podunk banks, we're talking about the Mother of All Bailouts.

You do have our Strategic Financial Survival Library, don't you?

The Daily Reckoning