- Assets: LEH was not just illiquid, it was insolvent. There was a hazard with rescuing it in that it was throwing good money after bad. With AIG, most of its trillion dollars in assets are really good. So a loan can be considered as a calculated bet. The loan is supposed to be a bridge loan until AIG can secure loans from elsewhere (SWF's, private equity) and sell off assets at non-firesale prices.
- Too big to fail: A failure would have caused other institutions to immediately write off all their assets that were insured by AIG creating a ripple effect and seizing up markets across the board.
As far as market technicals, a rally from here would not be just about short covering. This is a way pessimistic permabear view of things. I think getting through this time brings more clarity in the financial markets. Institutions that were the most levered have already failed and FNM, FRE have been nationalized. Excessive risk is being punished severely. And for those waiting for GS, MS to fail...i think it's going to be a long wait. This is how bear market rallies are supposed to happen.
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