SEC Played a Big Role in Creating This Chaos

To me, this was all pretty obvious. I was a short-seller, and I know that when a stock gets hit, people fret about the company regardless of whether the company is in good shape or not. There was a time that AIG had an immense amount of capital and it bought its stock back hand over fist in the $60s, and so it was somewhat able to defend itself from short-sellers. Even then, though, there were strict limits to when and how much companies could buy of their stocks. There are no such limits as to when short-sellers can operate.

So, without an ability to slow the short-sellers down by forcing them to wait for buyers to come in and pay up, and with no ability to demand that short-sellers or their brokers borrow stock first to short directly or to sell puts to the customers, shorts were able to take AIG down from the $20s to $4 in a week's time.

To be sure, there were plenty of problems with AIG -- including, presumably, the insurance they may have offered on the solvency of Lehman (LEH) and on their debt that they would be expected to pay off.

What matters, though, is how easily hedge funds were able to take this company down through endless selling.

The academics at the SEC had no idea how important their rules were when they put in the bottom on July 15, and they had no idea how catastrophic it would be when they pulled them.

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