Why AIG was bailed out but not Lehman Brothers

There is a theory in finance and economics called the “Big Bank Theory” which asserts that governments — through the Central Bank or the Federal Reserve (in the case of the US) — will not allow a “big bank” to collapse because the economic impact of such occurrence will surely be great.

That was exactly the rationale behind last week’s bailout of the American International Group (AIG) by the US Federal Reserve (Fed).

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