the implications of such a large insurance company going under is dier, the scar would loom on the market for a long time and would create an absolute mess.

will government step in to finance their debt? perhaps a foriegn government if not the US? ( quote Sinister Ji)

Yes, it will be saved, as you are aware of it, AIG has 3 trillion dollars in assets and is a significant Giant of job provider, and its doom could be an unbearable impact on U.S economy and all other related to it. So, you bet, the Govt. will support it. Fed has decided not to cut interest rates (even a quarter) obviously is a hint of another possible fear of inflation too. With a limited knowledge on all this, I feel U.S. will remain in recession for some time to come but will survive as many other players in this game would not like to go in to drain especially China etc. What will happen to India in this context?