The US Federal Reserve has refused a desperate plea from American International Group (AIG), the world's biggest insurer, for a US$40 billion bridging loan that it hoped would save its AA+ credit rating and allow its survival. Instead the Fed is asking JP Morgan and Goldman Sachs to lend US$70 billion to US$75 billion to AIG. The refusal of the Fed and the US Treasury to bail out Lehman Bros was the catalyst for a weekend of chaos on Wall St that saw Merrill Lynch sold for a cut price to Bank of America and the Fed widen its pool of securities it lends against to include equities and lower rated bonds. 10 Big banks also launched a US$70 billion cash fund to provide liquidity if any of them were in trouble. The US Federal Reserve is essentially saying that the assisted sale of Bear Stearns in March and the bailouts of Fannie Mae and Freddie Mac are the end of the line. Any more risks creating massive moral hazard problems. The collapse of AIG would have more severe implications than the collapse of Lehman Bros. AIG has over US$1 trillion in assets, whereas Lehman Bros had just over US$600 billion. AIG has 116,000 employees and operates in over 100 countries, whereas Lehman had 26,200 employees. AIG owns the world's largest airline leasing operation with over 900 passenger and cargo jets.There is no word yet on whether JP Morgan or Goldman Sachs either can or would want to lend that amount of money to AIG, which is heavily loaded with securitised debt over mortgages. AIG is tipped to write down the value of these bonds by US$30 billion when it next reports its results. Meanwhile, New York Insurance authorities have relaxed a rule that would have prevented AIG borrowing US$20 billion against the assets of its subsidiaries. AIG has has life insurance and general insurance operations in New Zealand since 1970.