The markets are inundated with zombie myths. No matter how many times you stab them through the heart, you just can't kill them.

What's taking down these grand financial icons such as Lehman and A.I.G.? It couldn't possibly be that the companies themselves made stupid and shortsighted decisions. So it must be a conspiracy of the short-sellers. It must be some wrong-headed accounting rules and bad regulation.

In the wake of the demise of A.I.G., we are hearing them again. If only the insurer didn't have to mark its positions to market, this foolishness would have been avoided and we'd all be celebrating how wonderful the economy is. The S.E.C. has rushed to put up restrictions against short-selling again.

And in the Wall Street Journal today, Zachary Karabell writes that the "root cause" of the current meltdown is "bad regulation." His evidence? That A.I.G. had to mark its positions to the market even though it issued a statement saying that the market was getting it wrong.

It issued a statement! Well then! Case closed.

Not so fast. It seems we must review the case of A.I.G. What exactly went wrong at the insurance behemoth?

For several years, A.I.G. dove headfirst into an insurance-like product called credit default swaps. It wrote hundreds of billions worth of protection mostly on the top slice of mortgage-backed structured financial products. Short-sellers and accounting rules didn't cause A.I.G. to enter the C.D.S. protection business.

Supposedly A.I.G. had an expertise in insurance, being the largest of its kind in the world. Insurance is hard to price correctly. When the hurricane hits, were you getting enough money from homeowners all those years? It's a difficult question. But when it was initially writing all that C.D.S. protection, A.I.G. thought it wasn't possible to take a penny of losses because its contracts were backstopping such highly rated, highly protected slices, according to an ex-A.I.G. Financial Products employee I spoke with this week. (That makes perfect sense since this was the same mistake made by the bond insurers M.B.I.A. and Ambac.)

Each time the company wrote one of those contracts, a grain of sand should have dropped to the bottom of the hourglass until an A.I.G. risk-management official said: "Enough. You can't write anymore." But that didn't happen. Short-sellers and accounting rules didn't make the company put little-to-no capital against these positions.

Back when A.I.G. started writing these contracts, the credit-ratings agencies rated the insurer Triple A. Accounting rules didn't prevent the ratings agencies from re-assessing the rating before the crisis. And while it may be hard to believe, short-sellers did not stick their voodoo dolls with their "Maintain the Triple A Rating Until It's Too Late" pins.

A.I.G.'s counterparties didn't require that the insurance company put up any collateral—called initial margin— because its rating was so high. This wasn't an accounting rule. This was a general agreement among the players in the C.D.S. market.