It now appears that AIG is going to avoid Chapter 11 bankruptcy, but it's striking how much power the credit rating agencies have in determining whether it fails or not.
By threatening to lower AIG's credit rating, the agencies precipitated a crisis. This in turn sent AIG's share price down, which was enough to persuade those very same credit rating agencies to carry out their threat. This in turn caused the share price to fall again.
Let's not forget that these are the very same credit rating agencies who were earlier very happy to give AAA ratings to the exotic financial instruments that caused the downfall of Lehman Brothers, forced Merrill Lynch to sell itself to Bank of America and pushed AIG to the brink.
You might think that the whole point of having credit rating agencies would be to stop clever bankers sticking some lipstick on a pig and pretending that it's something altogether more alluring. Instead the credit rating agencies admired their handiwork and handed out the AAA ratings that they needed. Then other clever bankers were happy to buy because that was how they got their bonuses, and if it had an AAA rating then that had to be OK, didn't it?
Having been so negligent earlier, the credit rating agencies seem happy to force AIG into bankruptcy, despite knowing that if it was given time it could sell off assets and recover.
One more interesting statistic, from The Guardian: "Figures out today showed hedge funds and other investors that had been shorting Lehman's stock since March had made $29bn from the firm's demise."