AIG is on the hook for all of the mortgage backed security and credit default related losses that are being realized by the investment banks because they insured these things against default.

The ratings agencies had them at AAA in part because of the insurance, but subprime loans aren’t going to default at AAA rates. As a result, AIG doesn’t have enough cash to cover potential liabilities (and thus had their own credit ratings downgraded). Because they don’t have any customer deposits like commercial banks do, they can’t fund their business on their own and need to sell assets to raise the money since nobody would lend to them.

Commercial banks not only have customers’ savings, checking, and CD deposits to fund their business with, but they also lend money to each other. It’s a completely different model. Commercial bank loss rates on loans to credit-worthy borrowers are still running at extremely low levels, as they do historically (losses rates of 1%-2%). They are losing money from subprime (and capital raises are replenishing that capital), but core banking is still making money for commercial banks even today.

Insurance gets regular payments against probability.

A commercial bank holds your money, but also needs to pay you yield so it lends your money to a 3rd party agin hoping against probability [that things could go wrong].

Or is it that commercial banks rely on money in checking accounts?

How are they different?

Anonymous-
No firm is impervious to bankruptcy. That said, comparing Citigroup to LEH, BSC, and AIG is apples vs oranges. Citi has a deposit base to fund its business. None of the firms that have gone bankrupt (or needed emergency actions to avoid it) have had a bank’s deposit business model. You can’t paint them with the same brush.

There is a reason the big commercial banks (BAC, JPM, C)aren’t the ones on the brink of going under, but rather the ones who are being asked to be part of the solution. You simply cannot compare an investment bank, an insurance company, and a commercial bank and say they are the same animal.

What happens the next time when a bigger co takes bigger risks assuming the gov will pull it out.

And the obvious comparisons the socialism scare me to death.