AIG on the brink of collapse

The event that could trigger an even bigger fallout in global financial markets than Lehman Bros is said to be just “one day away”...

That is the gloomly prognosis for insurance giant AIG being reported by the financial wires this afternoon. See here in the FT and here in the Times.

If AIG does go down, and it looks increasingly likely, then we are truly in uncharted territory. The problem is not the insurance market generally - it is that AIG has insured many of the complex, rotten financial instruments developed by the likes of Lehman Brothers. The effects coud be dreadful across the entire global financial system.

These are fascinating, but perhaps also frightening times for any student or teacher of business or economics. I watched an interview this morning with Jon Moulton, a venture capitalist who I got to know and respect in my time at PwC. He too admitted that he is frightened - it takes something extraordinary for him to say that.

Lets see what happens over the next 24-48 hours. I have a hunch that should AIG fail, then all bets are off. Might HBOS become the UK’s biggest-ever banking failure over the weekend? It sounds far-fetched, but confidence in the banking sector can evaporate so quickly (as we saw with Northern Rock). Will the Central Banks let such names fail?

Hold on tight…