AIG failure would be disastrous for global markets

Lehman's collapse caused significant losses for banks worldwide. Many more could suffer if AIG failed, as it would leave trading partners -- banks around the world -- to absorb giant losses, something their already weakened balance sheets can ill afford.

"It would surely have had a bigger impact if AIG had failed at the same time as Lehman" last September, said Suki Mann, credit strategist at Societe Generale in London.

But even now, in AIG's weakened state, "they simply can't be allowed to fail. There would be more unwinds on trades and obviously markets are very fragile," Mann added.

Moody's Investors Service and Standard & Poor's both have AIG on review for downgrade from the seventh highest investment grade, and have said that only government support was keeping ratings from being cut to "junk" status.

"If AIG is allowed to fail -- many banks holding CDS paper from AIG could also fail," said Mark Keenan, insurance partner at law firm Anderson Kill & Olick. "In other words, I don't think the U.S. government can afford to allow AIG to fail -- no matter how many bandaids may be needed," he added.

Over time, however, some analysts say the U.S. government may find that an orderly failure of AIG is the only way to stop the financial bleeding.

"The whole thing is ridiculous. How much longer are we going to do this? This is another bandaid, and we'll be having this discussion again," said Christopher Whalen, co-founder of Institutional Risk Analytics, a provider of analysis and ratings for banks.

"The government can not fund AIG's operating losses, the numbers are too big," he added. "We should have simply restructured AIG. Between their real estate exposure and structured exposure on CDS, I don't think this company is viable."