> Does that mean that with these kinds of last resorts against
> panic, the system is basically sound i.e., these guys are not
> creating profits out of whole cloth (or) endless growth is
> possible?
The doomed part of the AIG "business plan" such as it was involved selling insurance whose risk was misunderstood, and funding the required payoffs by borrowing money at AAA rates. They became, like many insurance companies, a huge floating asset base. When the risk was finally understood, they lost their AAA rating and their funding costs went up -- high enough that they were going to have to pay more to borrow than they could make on the premiums they were collecting. You know, spending $1.25 to make $1: you can't make it up in volume; whereas with AAA they were spending $0.98 to make $1, which you *can* make up in volume.
So I wouldn't say that's out of whole cloth; but the model was faulty.
> I mean: AIG IIUC made a lot of bad calls and lost money. As a
> result nobody was willing to loan them money (or do business with
> them?) to keep them going. Government stepped in and gave them money
> to keep going, pay off stuff, etc. And that was enough for AIG to
> recover quickly and significantly enough to pay off the government,
> including a neat return on the investment?
Yes, what they needed at that time was a patient banker. A lot of the payoff has come from them divesting their asset base, but at the time it would have been a fire sale: having the backing of the NY Fed allowed them to get fair pricing on the assets they sold, and they wound down most of their fairy-tale business lines to the point where the public market had enough confidence to, for instance, buy their stock. They ate a lot of crow; but they didn't blow up the world.
/jordan