Much has happened in the 48 short hours since the first part of this two part series was published. I’m not too interested in the Lehman Brothers garage sale, or the $34 million that Merrill’s CEO, John Thain, will receive in stock options for brokering the sale of the company that he took over just 10 short months ago.

Instead I would like to discuss AIG and how this massive institution failed. I am also going to get into some of the outrageous changes the world’s most powerful hedge fund, I mean the Federal Reserve, made to the rule book as well as its reaction to the failing insurer.
AIG: Failing or Flailing

Two weeks ago, AIG stock was trading in the low $20 /share range. Twelve months ago, you could have sold shares of AIG at $70 /share. Although markets aren’t yet closed today (Wed.) you can buy a share of AIG at $2.23 as I write. What causes such a steep and violent decline?

On Monday, the race for capital was on as the credit spreads on AIG were telling us that they were at or near 72 hours of capital away from a potential fire sale of assets and credit ratings slash. The ratings cut would have resulted in $13 billion in collateral calls and $4.6 billion in swap payments for AIG. Without a capital infusion, the end game here was most definitely bankruptcy.

The partial answer to the question of AIG’s contraction of capital is one you know. A few hundred billion dollars in bad leveraged bets on the real estate market is more than enough to destroy massive amounts of capital and equity. That is a story that has and will continue to be preached going forward, but it’s not what pushed AIG beyond solvency.

To read the rest of this article Click Here…