Hanging by a thread

From NYTimes:

Major credit ratings agencies downgraded the American International Group late Monday, worsening its financial health, as Federal Reserve officials and two leading investment banks were in urgent talks to put together a $75 billion line of credit to stave off a crisis at the company.

The credit downgrades are likely to force the company to turn over billions of dollars in collateral to its derivatives trading partners.

Without the financing, which was being arranged by Goldman Sachs and JPMorgan Chase in talks with the Federal Reserve officials, A.I.G. might be forced to declare bankruptcy, according to two people briefed on the situation.

[Snip]

“It’s not just the failure of one company,” said Julie A. Grandstaff, vice president and managing director of StanCorp Investment Advisers. “It’s the ripple effect of the disappearance of counterparties” that was spurring urgent efforts to bolster A.I.G.

A large counterparty to derivatives contracts has not declared bankruptcy since the market grew to such enormous size, so Lehman will be a test. Financial officials fear another failure of a big counterparty could start a chain reaction.

It AIG fails, hold onto your hats kids. Not gonna be pretty.