This isn't like Y2K, when if computers were still working at 1am, you knew that they'd survived the test. If AIG (AIG) hasn't collapsed after New York markets open and the broader stock market is down less than 5%, all that will mean is that there hasn't been a systemic meltdown yet. It's going to take a long time to liquidate Lehman and unwind all of its positions, and nobody has a clue how that's going to play out. Specifically, there might well be a levered-to-the-eyeballs multi-billion-dollar hedge fund or two with enormous Lehman Brothers counterparty risk, and if they start defaulting on their derivatives contracts, delayed contagion could spread very quickly indeed.
It's not just hedge funds, either, which could end up being the vector by which crisis is spread. It could be a big insurance company, or it could be a series of failures of small and medium-sized banks. Or it could come out of left field entirely: the "shadow banking system" is now so big and so global that for all we know a series of bad decisions by a mid-level technocrat in Kazakhstan could precipitate cataclysm across America and the world.
An interesting point from Tim Duy.
"...the Fed has already pushed their legal boundaries; some would argue they have stepped well beyond those boundaries. And it hasn’t stopped – the Fed expanded the collateral it will accept in repo operations, putting taxpayer dollars at risk in a less explicit manner (I see no legal justification to open a credit line to AIG – if them, why not Ford or GM?). Still, despite the Fed’s creative efforts to date, the crisis is moving to a stage that is simply too big for the Fed; Congress needs to step up and define the parameters of any mass bailout of the financial sector. Some version of the Resolution Trust Corporation is the most likely outcome. I suspect that taxpayers will ultimately absorb significant losses, but it will be a crime if such a bailout does not entail a radical reevaluation of financial regulation. But to what extend will Congress be willing to perform a hard look as an industry that has brought the illusion of wealth that hides gaping and undeniable equity flaws in the US?"