As I've been tutored to understand it, AIG is
AIG does well when, in aggregating and packaging risks, it invests them and see returns that are better than what their actual acturarial obligations are.
AIG has a trillion dollar balance sheet. If it goes under, a lot of insurance claims get frozen -- not what the economy needs right after a hurricane. Indeed, more than a trillion dollars gets frozen in the process of unwinding it all.
If AIG goes bankrupt, then the entire financial system could seize up, as firms would stop lending money. The next dominos to fall would be banks.
Your money is fine, your money is fine -- the FDIC guarantees all deposits up to $100,000. But if a major bank like Wachovia goes under, panic may ensue. The FDIC doesn't have an infinite resvervoir of cash -- it has something like $50 billion in reserves. If there's a major bank run, the treasury would have to give the FDIC more money -- or Congress would have to appropropiate it -- not sure how that works -- but really, the only think preventing a panic would be a political figure who people trust enough to listen to their counsel.
Right now, neither President Bush nor Congressional leaders have any credibility right now.
When John McCain says the fundamentals of the economy are strong, this is what he means. As long as no one panics, there is nothing to panic about. He is right, to a point. But his party lacks the standing to make these assurances.
The country trusts Democrats a bit more, but Barack Obama hasn't found a way to explain what's happening and to carefully spell out what government can do, what people should do, and what people should expect.
The political system is still playing catch up.
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