Inside the corridors of power in Washington, a 21-page document has been getting a lot of attention. It is marked confidential and titled “A.I.G.: Is the Risk Systemic?”

The report, prepared for regulators by the American International Group, examines the economic apocalypse that would follow if A.I.G. failed.

This document may help explain why the federal government just rescued the insurance giant for the fourth time in six months — and why the government was willing to spend $30 billion more of taxpayers’ money for very little return. The government, which owns nearly 80 percent of A.I.G., not only did not take more equity in A.I.G., but it also converted its preferred shares, which paid a 10 percent dividend, into shares that don’t pay a dividend at all.

“Systemic risk” is a phrase often used to describe the domino effect of one business’s failure on the rest of the economy. We saw the dangers of systemic risk in action when Lehman Brothers failed in September. And we’ve heard a lot from Detroit automobile executives about the systemic risk they say the nation would face should General Motors teeter.

But those failures look like summer thundershowers compared with the financial hurricane that a collapse of A.I.G. would represent, according to the document, which was presented to Treasury Secretary Timothy F. Geithner and Lawrence H. Summers, head of the National Economic Council, in recent weeks.

One of the biggest worries, besides the considerable collateral damage to the banking system, is a risk that most people aren’t talking about, perhaps because it’s too scary. This one is probably easier to understand than any kind of financial chicanery: the dangers lurking below A.I.G.’s seemingly stable, highly regulated life insurance business. A.I.G. has more than 81 million life insurance policies with a face value of $1.9 trillion globally.

If policyholders lost faith in A.I.G. and rushed to cash in their policies all at once, the entire life insurance industry could falter.

“A ‘run on the bank’ in the life and retirement business would have sweeping impacts across the economy in the U.S.,” according to the A.I.G. document. “In countries around the world with higher savings rates than in the U.S., the failure of insurance companies would be a catastrophe.”

Even though A.I.G.’s insurance business is regulated by states, there probably would not be enough money to pay out to consumers from what’s known as a guarantee fund. Other regulated insurance companies, which have been weakened by credit losses, would be required to pay money into the fund to cover the shortfall, weakening them further and in some cases bankrupting them.

Some would have to sell more and more of the bonds in their portfolios to honor their obligations to the scared-off policyholders. And that would freeze up the bond markets again, because life insurance companies to a very great extent are the bond markets. They buy more corporate debt than any other institutions.

David E. Wood, a partner at the law firm Anderson Kill Wood & Bender, takes the possibility of a bankruptcy one step further. “Given the number of states in which A.I.G. is domiciled or in which it issued large numbers of policies, the net effect may be regulatory gridlock and high administrative expenses, delaying payment and decreasing the funds available to pay claims.”

What’s worse, if A.I.G. failed, many people would be unable to obtain the same insurance from a competitor for the same price. In fact, many people would probably be shut out. “Some life-policy holders may no longer be insurable at commensurate rates or as a result of adverse health situations since the purchase of the original policy,” the document said.

How we got here is a well-worn tale that others have detailed extensively: A.I.G. used its triple-A rating from the insurance part of its business to run a huge casino that then overwhelmed the entire business.

“It’s an interesting structure where you have an insurance company that works really well and on top of it is a holding company and the holding company’s biggest asset is this huge hedge fund,” Edward M. Liddy, who became A.I.G.’s chief executive last fall, told me, sitting in the conference room adjacent to his office, which was once the den of Maurice R. Greenberg, A.I.G.’s former patriarch. “It just doesn’t make any sense to me.”

The problem is that the casino has infected the rest of the business. That’s why the structure of the government’s deal is actually quite clever.

First, Mr. Geithner appears to have decided that he can’t be punitive — a reversal from the deal he helped shape in September while at the Federal Reserve Bank of New York, which nearly wiped out shareholders and added a huge cost to A.I.G. to do business. Indeed, it was all those added costs, in part, that forced the multiple restructurings because A.I.G. couldn’t afford to make the payments. The new deal makes it more likely A.I.G. can afford to stay in business.

Of course, there seems to be a slight disconnect: at one moment Mr. Geithner appears to be toeing a populist line when it comes to executive pay and corporate aircraft, and at another, he is generous about spending tax dollars without an immediate return. The good news is that he’s taking a more long-term, holistic approach — and he’s setting up A.I.G. for a much-needed breakup down the road. (The deal calls for two units of A.I.G. — American International Assurance and the American Life Insurance Company — to be owned directly by taxpayers.)

The bad news is that he had every right to press to own 100 percent of A.I.G., and he didn’t take it.

The markets, of course, didn’t react well to all this maneuvering, as investors cashed out of their shares on Monday, sending stocks to their lowest levels since 1997. Let’s just hope people don’t start cashing out their life insurance policies, too.