Word: crediteers
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...years the financial markets - and many borrowers - showed no fear at all. Wall Streeters didn't have to worry about regulation, which was in disrepute, and they didn't worry about risk, which had supposedly been magically whisked away by all sorts of spiffy nouveau products - derivatives like credit-default swaps. (More on those later.) This lack of fear became a hothouse of greed and ignorance on Wall Street - and on Main Street as well. When greed exceeds fear, trouble follows. Wall Street has always been a greedy place and every decade or so it suffers a blow resulting...
...Uncle Sam Steps Back In The market lost faith in AIG too, but the government was forced to save it. A major reason is that AIG is one of the creators of the aforementioned credit-default swaps. What are those, you ask? They're pixie-dust securities that supposedly offer insurance against a company defaulting on its obligations. If you buy $10 million of GM bonds, for instance, you might hedge your bet by buying a $10 million CDS from AIG. In return for that premium - which changes day to day - AIG agrees to give you $10 million should...
...make sure that swap meisters can make good on their obligations, they have to post collateral. If their credit is downgraded - as was the case with AIG - they have to post more collateral. What put AIG on the brink was that it had to post $14 billion overnight, which of course it didn't have lying around. Next week, the looming downgrades might have forced it to come up with $250 billion. (No, that's not a typographical mistake; it's a real number.) Hence the action. If AIG croaked, all the players who thought they had their bets hedged...
...like Lehman, was ultimately done in by credit-rating agencies, of all things. The main credit raters - Moody's and Standard & Poor's - had blithely assigned top-drawer AAA and AA ratings to all sorts of hinky mortgage securities and other financial esoterica without understanding the risks involved. Would you know how to rate a collateralized loan obligation? Or commercial-mortgage-backed securities? Sophisticated investors took Moody's and S&P's word for it, and it turned out that the agencies didn't know what they were doing. Credit raters, who claim to offer only opinions, are party...
...some industry experts say the stand-alone investment-bank model is no longer working. Investment banks made buckets of money for many years by tapping capital markets and leveraging to the hilt. But with credit drying up, financing activities with deposits - like commercial banks do - appears to be a better strategy. Commercial banks like Wachovia also have fairly conservative caps on the amount of leverage they use, which affords them greater flexibility during periods of financial-system stress...