September 15, 2008 (LPAC)--American International Group, the giant insurance company seeking a $40 billion Federal bailout, will be allowed to lend itself $20 billion dollars! That brilliant plan was announced today by N.Y. Gov. David Paterson, who said the company could borrow the money from its own subsidiaries. The crisis at A.I.G. came to a head yesterday, as part of the Lehman/Merrill Lynch crisis, at least in part because of A.I.G.'s role as a major seller of credit derivatives. The insurer was also a major speculator in the mortgage-securities market, and lost some $14 billion during the first half of 2008.

A.I.G., acting through its London-based financial products unit, became a major seller of credit default swaps, a type of credit derivative. Credit derivatives are a form of insurance on securities; a buyer of a security, say a bond issued by Lehman, can buy a credit derivative from a third party, which will pay off if the bond defaults. Perhaps, in addition to all its other problems, A.I.G. now finds itself unable to cover its credit derivatives obligations.

Perhaps in addition to loaning itself the money to bail itself out, it should also buy credit protection from itself in case it defaults on the loan. If you're going to go nuts, why not go all the way?