First Lehman, now an AIG bankruptcy? It's a scary, but real possibility.

The fear is palpable on Wall Street right now. Some companies that have previously been deemed "too large to fail" are in the process of failing and it seems there is nothing that our financial system can do about it.

Earlier today it was Lehman Brothers who announced they are filing for chapter eleven bankruptcy. The company, which has been searching desparately for a suitor, found no such help from other institutions or the Federal Reserve, and has ended in a pile of rubble. It has left many to debate the rescue of Bear Stearns by the Federal Reserve and JP Morgan, and why something like that didn't occur with Lehman. It seems that most believe that Lehman's problems were much more company specific, where it is believed that the financial system as a whole was threatened by the Bear Stearns debacle.

Now comes late breaking news that American International Group, better known as AIG, could be the next in the line of troubled companies doomed to failure. The stock plunged 61% in today's trading on the street as the Wall Street Journal reported that the Fed is basically begging Goldman Sachs and JP Morgan to make up to $75 billion in loans to help aid AIG. What did AIG say it was going to do for itself? Basically it told investors that it was going to borrow $20 billion from itself. As if the story couldn't get any worse for the company, the late word tonight is that both S&P and Moody's are downgrading AIG's credit. This certainly could not come at a worse time for AIG, which is fighting for its life, in the worst way possible.

The business news networks are all going crazy with this AIG news, with everyone and their brother having an opinion as to what the government can and should do. Some, such as Jim Cramer, are saying that the Federal Government simply cannot allow a company with the breadth and scope of an American International Group to fail. Others believe that the Feds have drawn a line in the sand and said that the bailouts have to stop, and by not bailout out Lehman Brothers the Fed is telling us that it is done with the bailouts.

It's too early to tell what the result of the AIG debacle will be, but there is no doubt that this is a company with a massive footprint throughout the entire world. This is not just an investment bank like Lehman Brothers or Bear Stearns, this is a financial life insurance company with its hand in a wide variety of businesses.

As time goes on and the mismanagement of countless firms on Wall Street becomes more and more clear, there should be no doubt that companies once dubbed "too large to fail" are far from it. Now the ball is in the court of the Federal Reserve and any other willing partners. Are they going to step in and try to put a lifeline out there for AIG or allow AIG to lie in the bed that it made for itself?

*Update* September 16, 2008

Well the deal has been made. The Fed has decided to step in and rescue AIG. This is most definitely a VERY unprecedented move, and one that will be hotly debated for years to come. The federal government will lend as much as $85 billion to AIG and will have an 80% stake in the company.