AIG may or may not have died on its own. They had the life-expectancy of a junky hitting rock-bottom. But what finished AIG off (the “deathblow” described by Chris Desbarres in New York magazine) was Moody’s and S&P's downgrading of AIG’s debt on Monday.

Downgrading credit not only makes conducting ongoing business more expensive, it amounts to a capital call. AIG, already teetering on the brink due to the ongoing crisis, was being asked to come up with $14.5 billion in short order. Even in good times, it would have been a challenge for AIG to survive. Coming when it did, the downgrades virtually guaranteed AIG would die.


The Solution

People aren’t selling bank stocks like Goldman Sachs (GS) today out of “panic”; they're selling it because Goldman faces a potential organic run on their bank. Should that run develop, and perhaps simply as a function of the drop in the price of the common stock, every downtick in GS increases the chances that a suddenly conscious and utterly unashamed credit agency will drop Goldman’s credit rating.

If you think there's a rational, high-level decision-making process behind these agencies’ ratings, I encourage you to carefully watch this interview between my friend Dylan Ratigan and Jay Dhru, the head of financial institutions ratings for Standard & Poors.

Mr. Dhru, in effect, says that S&P downgraded AIG because there seemed to be an underlying problem in the business. Considering that Mr. Dhru’s institution had its stamp on this very garbage on AIG’s books in the first place, the fact that these agencies are empowered to deliver the death blow on the institutions -- and are demonstrably willing to do so -- makes it impossible to be long financial stocks.

What the Street is trying to price into the bank stocks is the very real threat that they will, in fact, go to zero.

We can’t regulate a solution to the debt, derivatives and garbage sold over the last 2 decades, which are stuck in every nook and cranny of the financial system. The argument that “the shorts” are behind the drops in bank stocks is simply ludicrous. The stocks are falling because of a genuine unwinding of improperly priced risk, along with the fact that agencies like Mr. Dhru’s can, at this point, kill almost any financial institution on what seems to be a whim.