According to Bloomberg, a 21-page A.I.G. presentation dated Feb. 26 and labeled as “strictly confidential was circulated among federal and state regulators. In it, the company warned that without a fourth rescue, which was provided last week, the company could collapse.

The conclusion of the report was that a failure of A.I.G. could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers’ stake in the firm. Regulators revised AIG’s bailout last week to ease loan terms and extend $30 billion in fresh capital after the firm posted a $61.7 billion fourth-quarter loss, the worst in U.S. corporate history.

“What happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means,” said the presentation. “Insurance is the oxygen of the free enterprise system. Without the promise of protection against life’s adversities, the fundamentals of capitalism are undermined.”

Lawmakers in Congress are reluctant to give more support beyond the package already in place, because they say regulators haven’t given enough detail about how the funds are being used or when the bailouts will end.
Banks and other financial companies were trading partners of AIG's financial-products unit. This AIG unit sold credit-default swaps, which acted like insurance on complex securities backed by mortgages. When the securities plunged in value last year, AIG was forced to post billions of dollars in collateral to counterparties to back up its promises to insure them against losses.

Some $440 billion in credit default swaps sat on the company’s books before it collapsed. Its biggest customers, European banks and United States investment banks, bought the swaps to insure against defaults on a variety of debt holdings, including pools of mortgages and corporate loans.
When A.I.G. couldn’t meet the wave of obligations it owed on the swaps last fall as Wall Street went into a tailspin, the Federal Reserve stepped in with an $85 billion loan to keep the hobbled insurer from going bankrupt; over all, the government has pledged a total of $160 billion to A.I.G. to help it meet its obligations and restructure operations.

Because of the way A.I.G. wrote its swaps, and because the company had a double-A credit rating at the time, it did not have to put up collateral to assure its customers that it would be able to pay on the insurance if necessary. Collateral would be required only if A.I.G.’s credit rating were cut or if the debt underlying the swaps declined. Both of these “unthinkable” events occurred in 2008. Suddenly, A.I.G. had to cough up collateral it didn’t have.

The rescue of A.I.G. actually involved a bailout of its many customers, none of whom the insurer or the government is willing to identify. But it isn't hard to draw conclusions regarding who they are, because A.I.G.'s counterparties to the swaps trades were likely some of the world's biggest financial companies--commercial and investment banks in the U.S. and Europe.

For example, the WSJ said today that Goldman Sachs and German banking-giant Deutsche Bank each got $6 billion over last Fall. It also said other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America, and French bank Société Générale.

In other words, the government's rescue of AIG helped prevent its counterparties from incurring immediate losses on mortgage-backed securities and other assets they had insured through AIG by providing AIG with cash to pay the banks on the money-losing trades.