AIG failure would be catastrophic

09-17-2008 | REUTERS.

WIll they, or won`t they? buzz hits the market as AIG looks for Federal aid.

Panama Star NEW YORK. A day after the failure of investment bank Lehman Brothers Holdings Inc (LEH. P), government debt prices jumped. Debt protection costs were also higher for the two surviving brokerages, Goldman (GS. N) and Morgan Stanley (MS. N), which was expected to report a slide in earnings on Wednesday.

"It caused a nice little short squeeze to take us higher, but who knows if they'll really bail AIG out," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey of a CNBC Television report that the government could take a role in an AIG rescue.

"The market thinks it would be good, but who knows how much it will cost?"

The cable news channel reported that a government role in an AIG bailout was being discussed but that no resolution had been reached.

Earlier, New York Gov. David Paterson told CNBC that the insurer has "a day" to solve its problems

A failure would result in a "catastrophic problem" for the market, said Paterson, whose administration oversees regulation of AIG.

In a sign that worries about AIG's solidity were spreading to other asset classes, some firms ceased making markets in commodity securities backed by matching contracts from AIG on Monday afternoon, ETF Securities said.

Hours before Lehman's rs were set to have their first formal meeting post-bankruptcy, there was a glimmer of hope for some of its roughly 26,000 employees

Britain's Barclays Plc (BARC.L) is near a deal to buy Lehman's core U.S. broker-dealer business, including equity, fixed income, M&A advisory and other parts.