When American International Group was run with an iron hand by Hank Greenberg some years back and the insurer was regularly churning out profits, the only real criticism of the company was that it was a black box. Now that A.I.G. is battling to survive, it is its black box that may save it yet. Black box refers to accounting or investments so complex and arcane that they remain unknown to most investors. In the case of A.I.G, these are credit-default swaps that the company sold as insurance on complex securities, including collateralized-debt obligations . Nearly every bank has some form of derivatives exposure to A.I.G. Ken Lewis, the chief executive of Bank of America, said today that a collapse of the insurer would be a "much bigger problem" than the failure of Lehman. In the "shadow-banking system" of derivatives and complex structured-debt instruments, A.I.G. is at its center. The company may not be too big to fail, but it is too interconnected with banks, hedge funds, and others to allow a destructive chain reaction to erupt through the financial world. As a result, there are more varied efforts to secure a lifeline for A.I.G. than there were for Lehman. Yves Smith on Naked Capitalism notes that A.I.G. is bigger in credit-default swaps than Bear Stearns. "If Bear could not be allowed to fail, A.I.G, certainly can't come apart. But how can the Fed extend a lifeline to a party it doesn't regulate or even have as a counterpart ...
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