Financial markets were down and there was no good news coming and the economy had already gone into recession. Thus the economic consequences for US could have been huge (Falling Giant).
As far as the management of AIG was concerned there were no option left for them to consider preventing the bankruptcy of AIG. The firm was faced with huge losses and there was no money left with the firm to pay the insurance payout. The stock price had plummeted. Only option was that the firm received money from an outside source and they give equity of the firm.
Government had intervened in the financial crisis as it was taking an ugly turn and its effects on US economy were worsening. Government had to decide whether to give bailout money to AIG in order to save it from bankruptcy or let it default on its payments. Considering the fact that Lehman had already defaulted and other financial institutions were also on the verge of bankruptcy, another default could dampen the situation and can lead to more bankruptcies. Thus in order to save the economy from defaulting government decided to bailout AIG.
AIG was considered as too big to fail. There was huge investment made by the investor, institutional investors, hedge funds and also the pension funds. These people had either invested or were insured by the firm. Many of the money market funds had also put in their money in AIG. If AIG had defaulted all the investors, institutions who were insured and the money markets could have taken a huge hit. Money market which was already reeling under the pressure could have been the most impacted. This could have led to huge economic crisis for US (Karnitschnig, Solomon, Pleven & Hilsenrath, 2008).