Bharper

The AIG Bailout: Advice from Buffett, Munger and Grantham

This was in Berkshire's 2002 Annual report...it was part of Buffett's thoughts on "financial weapons of mass destruction". It describes to a T what happened to AIG:

"Another problem about derivatives is that they can exacerbate trouble that a corporation has run into for completely unrelated reasons. This pile-on effect occurs because many derivatives contracts require that a
company suffering a credit downgrade immediately supply collateral to counterparties. Imagine, then, that a company is downgraded because of general adversity and that its derivatives instantly kick in with their
requirement, imposing an unexpected and enormous demand for cash collateral on the company. The need to meet this demand can then throw the company into a liquidity crisis that may, in some cases, trigger still more downgrades. It all becomes a spiral that can lead to a corporate meltdown."