Here's how normal borrowing works: you borrow money, you hand over some collateral as security, then later on, when you have the cash, you pay back what you owe and get given your collateral.

Here's how borrowing works in the weird and wonderful world that is AIG, according to Thursday's FT: you borrow money, you hand over some collateral as security, then later on, when you have the cash, you try to pay back what you owe except that you find that the lender has squandered your collateral and can't hand it over. Instead of the borrower going bust and not being able to repay its debts, it's the lender who's gone bust.

What AIG has actually been doing is lending shares to institutions - presumably so they can hand them over in settlement for short-selling - oh, the irony! - and getting cash as security. AIG then squandered - sorry, I mean, invested - the cash in crap mortgages which fell in value, leaving AIG unable to return cash to the stock borrowers once they try to settle up.

If a pawnshop did that someone would go to jail, no?