The problem is that AIG underwrote a lot of contracts that were then used to cover leveraged positions, etc. It's turtles all the way down and AIG is somewhere

The problem is that AIG underwrote a lot of contracts that were then used to cover leveraged positions, etc. It's turtles all the way down and AIG is somewhere down at the bottom of the pile. In addition to the load of mortgage debt it dabbled in it played a role writing insurance for a massive shitpile of financial instruments; if the underwriter declares bankruptcy then a lot of things need to be unwound in a hurry. This is a huge problem, and would have a far greater impact than letting some retail bank fail. While other companies could fill the void, they could not do so quickly. The speed that is required here is the problem (e.g. when LTCM went tits-up it had the good grace to do so on a Friday so that deals could be struck over the weekend.) As far as Sweden's banks go, I think you should check again. They have losses in US mortgages (it wasn't just US and Chinese banks buying those securities) to cover and are also feeling the heat on over-exposure to Baltic loans that are starting to go sour. The Swedish bank takeover was somewhat akin to the US S&L takeover in the 80s, except in the US case it did not eat 4-5% of GDP...