Letting AIG go bankrupt in 2008 would have resulted in a “catastrophic” impact on entire insurance market: U.S. Treasury report

The U.S. government did not allow American International Group (AIG) to go bankrupt in part because AIG’s failure would have been “catastrophic” to the insurance industry as a whole, according to the U.S. Treasury’s Two-Year Retrospective Report on the Troubled Asset Relief Program (TARP).
At the time of the crisis, the report notes, AIG was the largest provider of conventional insurance in the world. Its assets exceeded $1 trillion, and it insured 180,000 businesses and other entities employing more than 100 million people in the United States.
“Among other things, if AIG had failed, the crisis would have almost certainly spread to the entire insurance industry, and its failure would have directly affected the savings of millions of Americans in a way that [the bankruptcy of] Lehman Bros. [investment bank] did not.”
Had AIG failed, a large number of companies would have lost AIG’s credit insurance cover on the credit derivative products they held. And without AIG, they would not likely have been able to purchase credit insurance elsewhere, the report notes.
This would have triggered a mass selling of the credit instruments, “amplifying the selling panic that had already started following the Lehman bankruptcy,” the report says.