not sure how the "value" is in the trillions

as a derivative, I gather it is stripped out of the bond payment stream, somehow

or is it plain insurance?

does it affect the extent to which bonds can be leveraged? So when they go plunk, does it expose trading houses to margin calls on bonds, straining cash reserves?

I am obviously guessing. Any knowledge would be appreciated

the "trillions" got my attention

To get the bailout you must be splintered into pieces which are not "too big to fail".

“The Playboy reader invites a female acquaintance in for a quiet discussion of Picasso, Nietzsche, jazz, sex.” - Hugh Hefner

American International's shares already trade a few pennies north of $5 - just where Fannie Mae was before they collapsed. Once they cross below that line, there are all sorts of investment firms, mutual funds, hedge funds, which can't hold them in their portfolio because $5/share is their lower limit. Hence the rapid move down into pennies a share, where the market says effectively "you are bankrupt".

If this is what the market says, then if there are healthy subsidiaries with billions in customer deposits and an ability to pay claims to these customers as needed, there must be something else (like the parent company in this case) with losses that dwarf that of the subsidiaries. That's why you get all this fanciful talk of separating out the good bank from the bad bank, but this only works if the Fed or Treasury takes on the liabilities of the bad bank. And here we are talking about trillions of liabilities on paper in the collateralized debt swap and debt obligation market, something at least Timothy Geithner at the NY Fed is very familiar with and probably wants kept completely separate from the Fed balance sheet.

But in this case he seems happy to let the good bank and bad bank get all mixed up at AIG to buy time for some miracle loan to be created by the banking industry's survivors. If and when the loan does show up, even if it is tomorrow, it now seems that it will be used to allow AIG to be wound down in an orderly manner through the bankruptcy courts, while the derivatives market sorts through all the swaps and options on mortgage backed securities, and all the insurance guarantees made by AIG. Maybe the $75 billion will even be used to absorb all the losses caused by these derivatives, though you might remember just a month ago industry experts were telling us at most these losses would come to $15 billion. Just like Richard Bove, the analyst, was telling us the worst was over and a bottom had been reached on financial stocks. Funny how we all forget these things, because he is all over TV this week dispensing more wisdom as if he never said anything a month ago about a bottom.

Maybe also that line of credit will allow the good bank to be sold intact to Warren Buffett or someone who knows how to run an insurance company. Then there would be a favorable outcome to all this. But as the hours tick by and no loan materializes, with bankruptcy looming, it sure looks like those insurance premiums people paid in over the years, and the investments AIG put them into, are going to get swallowed up in derivatives losses. If that happens, the stock market will catch on, as will the general public, to the fact that your bank account is not safe anywhere. This is the type of panic that the authorities are toying with in trying to save AIG.

A Former Regulator on the Fed Allowing Deposits to Fund Investment Banking Operations

I worked as a senior supervisory analyst at the Federal Home Loan Bank of New York in the late 80s/ early 90s when the FHLB (and later the Office of Thrift Supervision) were cleaning up the S&L mess. In reading of this development, I am speechless. The whole point of our job was to minimize risk to the deposit insurance funds, and our bosses really drummed that one into our heads.

The 23A suspension will make it hard for us to know how much is being risked, at what odds, and for how long. It is a blank check issued under the table.

The problem that the rule suspension creates is even more serious - basically, it leads to massive adverse selection, when the already suspicious interbank market completely shuts down due to the lack of what's left of banking transparency.

Meltdown in US finance system pummels stock market

The Dow Jones industrial average lost more than 500 points, more than 4 percent, its steepest point drop since the day the stock market reopened after the Sept. 11, 2001, attacks. About $700 billion evaporated from retirement plans, government pension funds and other investment portfolios.