Don't get all Chicken Little on us. The sky is not falling.
Here is an article from a source I like, Chief Economist for First Trust.

Quote Originally Posted by Brian Wesbury & Robert Stein
Gales of Punitive Destruction

There is not enough room on page one of the nation’s
newspapers for all of today’s news. Any of today’s stories –
a Lehman bankruptcy, a sale of Merrill Lynch, AIG capital
needs, plummeting oil prices, or new Fed lending facilities –
could be above-the-fold headline news. The US is moving
through its deepest set of financial market difficulties since
the 1980s and 1990s, during the banking and S&L crisis.
The key thing to remember here is that the emphasis
belongs on the word financial. These financial market
problems are not a result of widespread economic weakness,
otherwise known as a recession. In fact, real GDP has
grown 2.2% in the past year and accelerated to a 3.3%
annualized growth rate in the second quarter.
The economy is not taking down investment banks;
lousy lending standards and the excessive use of leverage are
taking down investment banks. And just like the problems
of the 1980s and 1990s, the roots of the problem reach back
to a period of absurdly low interest rates. When the Fed cut
interest rates to 1% in 2003, balance sheet math involving
leverage-based strategies turned so lucrative that many
financial market players could not help themselves. Wall
Street based its business model on leveraging up the most
leveraged asset on Main Street – housing.
This double set of leverage has blown up because the
housing market became overbuilt and housing prices stopped
rising. When the Fed pushes interest rates below their
“natural” level, mal-investment always occurs. Mark-tomarket
accounting exaggerated this process by letting firms
mark-up assets above true fundamental value on the way up,
but has now turned to force firms to mark-down assets, to
below true fundamental economic value.
The good news is that this financial earthquake is
unlikely to turn into an economic earthquake. The bad loans
made earlier this decade did not create a widespread
economic boom; and the realization of how bad some of
these loans are will not create an economic bust. The nonhousing
economy, which is roughly 95% of total US
economic activity, has been remarkably stable. In the three
years ending March 2005, non-housing real GDP grew at a
2.7% annualized rate. In the three years since then, nonhousing
real GDP has grown at a 3.2% average annual rate.
This is not that hard to understand. Think about a bad
loan made to a home buyer. Clearly that allows the
borrower to spend more than they have earned. But every
dollar of this cash comes from someone else, who has to
spend less than they earn. Even when the money comes
from abroad, that means fewer dollars available to foreigners
to buy our exports. Is it any wonder that the trade deficit
was booming when capital was readily available for
mortgage loans on easy terms and now the trade deficit is
falling rapidly when mortgage credit has slowed?
Remember: lending and credit expansion, by itself, is not
the equivalent of printing money; it simply shifts the pocket
in which the money is located. Credit contractions come and
go, but only credit contractions caused by government policy
mistakes lead to widespread recession. This is why the
current financial market problems are unlikely to spread.
There have been no major increases in tax rates, no
sudden lurches into trade protectionism, and no prolonged
period of tight monetary policy, where the federal funds rate
is persistently above the trend in nominal GDP growth. In
fact, tax rates are still relatively low and the Fed is holding
interest rates at extremely accommodative levels.
It is difficult to gauge when financial market upheaval
will finally come to an end. However, as long as
policymakers steer clear of tax hikes, tight money, and
protectionism, the economy should remain resilient.
Couldn't have said it better, so I stole it.

As for AIG they have plenty of core insurance businesses that are profitable, but they cannot just shift money from the insurance surplus side to the parent company that is too heavily leveraged in the sub-prime mortgage debacle. The parent company may fail and that would be a shame, but that is/was capitalism(until the government stepped in). But many parts of that company would be sold off and still likely will be to pay debts incurred by losses due to sub-prime exposure & write-downs.