Global No-Confidence Vote: Deal Or No Deal Pt 3

Deal or No Deal has gone global, folks!

Yesterday AIG got the mother of all deals, an $85 billion dollar loan to buy the company enough time to sell off assets. The government now has an 79.9% stake in the world's largest insurance company, and it's going to be selling chunks of AIG to try to make that money back.

Fearing a financial crisis worldwide, the Federal Reserve reversed course on Tuesday and agreed to an $85 billion bailout that would give the government control of the troubled insurance giant American International Group.

The decision, only two weeks after the Treasury took over the federally chartered mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank's history.

With time running out after A.I.G. failed to get a bank loan to avoid bankruptcy, Treasury Secretary Henry M. Paulson Jr. and the Fed chairman, Ben S. Bernanke, convened a meeting with House and Senate leaders on Capitol Hill about 6:30 p.m. Tuesday to explain the rescue plan. They emerged just after 7:30 p.m. with Mr. Paulson and Mr. Bernanke looking grim, but with top lawmakers initially expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by A.I.G. and other institutions it does business with.

What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.'s role as an enormous provider of esoteric financial insurance contracts to investors who bought complex debt securities. They effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars' worth of risky securities that were once considered safe.

If A.I.G. had collapsed -- and been unable to pay all of its insurance claims -- institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt. Small investors, including anyone who owned money market funds with A.I.G. securities, could have been hurt, too. And some insurance policy holders were worried, even though they have some protections.

"It would have been a chain reaction," said Uwe Reinhardt, a professor of economics at Princeton University. "The spillover effects could have been incredible."

Ahh, but the game isn't over yet. Not by a long, long way. For you see, today is a new day...and we have a new contestant on the other side of the pond, UK megabank HBOS is about to be bought out by Lloyd's of London.

Embattled mortgage lender HBOS PLC confirmed Wednesday that it is in advanced talks about being taken over by Lloyds TSB PLC in what would be a further reshaping of the financial industry amid the credit crisis.

The brief announcement to the London Stock Exchange gave no details, adding that the talks may not lead to an agreement.

Lloyds is the fifth-largest U.K. bank by market capitalization and the U.K.'s third-biggest home mortgage lender. HBOS, parent company of Halifax and the Bank of Scotland, writes about a fifth of the home mortgages in the U.K.

Here on this side of the pond, the bailout of AIG has failed to stop the bloodbath. The Dow is down 350+ at noon and speculation is swirling around who is next. Odds are it's WaMu, but the bloodbath is rolling across the board.

U.S. stocks tumbled as bank lending seized up in the wake of the government's takeover of American International Group Inc. and investors fled to the relative safety of Treasuries.

Goldman Sachs Group Inc. and Morgan Stanley, the two largest U.S. securities firms, plunged more than 14 percent after Oppenheimer & Co. analyst Meredith Whitney cut profit estimates. General Electric Co., the world's third-biggest company, fell 7.7 percent and U.S. Steel Corp. slid 11 percent. Yields on three-month bills sank to a 54-year low and a measure of corporate borrowing costs surged to the highest since the crash of 1987.

``It's ugly,'' said Michael Mullaney, a Boston-based money manager for Fiduciary Trust Co., which oversees $10 billion in stocks and bonds. ``It's about the worst I've seen it in 25 years. You have to have free-flowing credit to lubricate the system. That's not happening right now.''

The S&P 500 lost 36.6, or 3 percent, to 1,176.99 at 11:24 a.m. in New York, its lowest in almost three years. The Dow Jones Industrial Average decreased 275.36, or 2.5 percent, to 10,783.66. The Nasdaq Composite Index sank 69.71, or 3.2 percent, to 2,138.19. More than 10 stocks retreated for each that rose on the New York Stock Exchange.

About $2.8 trillion of market value was erased from global stocks this week, triggered by Lehman Brothers Holdings Inc.'s bankruptcy. Russia halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the worst financial crisis in a decade.

The global credit crunch is in overdrive. The AIG bailout has locked up the credit markets across the globe, and the markets are in freefall in Asia, Europe, and America.

We're watching Deal Or No Deal come up No Deal all over the world. Credit swaps are locking up. Trillions of credit has evaporated across the globe and will continue to evaporate at a time where credit liquidity is the only thing keeping the markets going, being able to trade phantom fiat cash for other phantom fiat cash...the world's biggest IOU swap meet just ground to a screaming halt.

The Fed is scrambling to raise cash itself. It's in real trouble, having to resort to a special auction of T-Bills in order to save its bacon.

The Treasury will sell more debt to enable the Federal Reserve to expand its balance sheet, a sign of the strains created by the biggest extension of central-bank credit to financial companies since the Great Depression.

The program starts today with a $40 billion auction of 35- day bills, a day after the government agreed to take over American International Group Inc., the Treasury said in a statement in Washington.

The proceeds will ``provide cash for use'' by the Fed as it seeks to boost liquidity in credit markets struggling from $515 billion in writedowns and losses since the start of last year. The announcement illustrates the potential drain on the government's finances in taking over AIG, Fannie Mae and Freddie Mac, and taking on $29 billion in Bear Stearns Cos. assets.

``It is becoming imperative for the Fed to take actions to enlarge its balance sheet,'' said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.

Yesterday the Fed announced an $85 billion loan to AIG, in exchange for a 79.9 percent government stake in the largest U.S. insurer. The Fed also has set up several other emergency lending programs to provide Wall Street firms with ready access to funding.

``The program will consist of a series of Treasury bills, apart from Treasury's current borrowing program'' and ``will provide cash for use in the Fed initiatives,'' the department's statement said.

Fed T-Bill rates have dropped to their lowest level in over 50 years because of this. The Fed is falling apart, its balance sheet is in real trouble now.

Deal Or No Deal is hitting Moscow too.

Russia poured $44 billion into its three largest banks and halted stock trading for a second day in a bid to stem the worst financial crisis since the devaluation and default a decade ago.

The Finance Ministry extended the repayment period on loans available to OAO Sberbank, VTB Group and OAO Gazprombank to three months from one week. The benchmark Micex stock index plunged as much as 10 percent, bringing its three-day decline to 25 percent. The KIT Finance brokerage said it's in talks with investors to sell a stake after failing to meet obligations.

Russia's markets are facing the biggest test since the government defaulted in 1998. The decade-long economic boom is fading, foreign investors have pulled at least $35 billion from the nation's stocks and bonds since the five-day war in Georgia last month, and the collapse this week of Lehman Brothers Holdings Inc. and American International Group Inc. prompted a flight from emerging markets.

``I will tell my clients today to continue to abstain from buying Russian assets'' until economic problems are solved, said Zina Psiola, who manages a $1 billion Russian equities fund at Clariden Leu AG in Zurich.

The cost of lending has soared to a record, with the MosPrime overnight rate reaching 11.1 percent today, deterring speculative bets in equities. Russian stocks have lost more than $425 billion in value since reaching an all-time high May 17.

Since Friday the global financial system has gone into crisis mode. The system is beginning to show huge cracks. Everyone is scrambling to try to save their markets. Deal Or No Deal is being repeated in every corner of the markets on Earth today.

The system is crashing before our eyes. New York. London. Moscow. Hong Kong. Tokyo. All over.

Deal Or No Deal has gone berserk. The game is grinding to a halt because nobody knows what deals are worth anymore...and nobody can make any more deals.

You are witnessing the death throes of the system. Today. Right now. In real time. We're watching the global economic engine seize up because like a car with no oil, the parts are locking up. That oil -- global credit liquidity -- has dried up and turned to toxic sludge. Deal or No Deal has become just No Deal...because deals cannot be made. History books will look back on this week and we'll wonder.

Because we're about to get crushed by the flailing corpse of the global economy. The big one is upon us as we speak.

The final verdict is No Deal.

More than ever folks...

Be prepared.

Cross-Posted at the Frog Pond.