The Mother Of All Bailouts

The Dow is up huge at this hour. It was down 150, now up almost 400. Why?

The entire financial sector is about to get a bailout.

U.S. Treasury and Federal Reserve officials are considering a ``permanent'' plan to address the financial crisis, said Senator Charles Schumer, who proposed a new agency to pump capital into troubled financial companies.

``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today. ``I've been talking to them about it.''

Schumer proposed an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages to make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.

Discussions with the Treasury and Fed focus on ``trying to do something more permanent'' after the series of government interventions, the New York senator said. For the Fed, ``it's hard for them to do monetary policy, which is their primary task, and then run all these businesses,'' he said.

It's nothing short of the nationalization of the whole financial sector.

It will take trillions and trillions of dollars to do this. This is the endgame, folks. If this goes through we'll be on the hook for millions of dollars for every single American. It will wipe the country out.

This is downright terrifying...and it's being proposed by a Democrat.

[UPDATE] Bonddad takes this idea out back and shoots it.

Why is this a dumb idea? Let me count the ways.

1.) Where is the money for this going to come from? I've detailed the proposed spending plans we've seen so far. They total $900 billion. Now we're going to pump more money into the system from some as yet unknown source.

2.) Just what will the government do with these interests? They're going to wind up the majority shareholder in some of these institutions -- and a minor big holder in others. Who will decide the government's policy?

3.) What is the criteria for investing in a company? If ever there was going to be a highly politicized process this is it. I can see it now ... "Senator from big important district gets huge cash infusion not because it's a good investment but because the Senator is in a close reelection bid and needs votes.

4.) Will the government ever get out of these companies? Will there be a time limit?

5.) Will there be a time limit for this entity's duration? Will it go on forever?

6.) Will the government become intimately involved with the company's internal deliberations and policy? Will Congressmen sit on various boards?

I could go on, but you get the idea. This is a disaster waiting to happen.

Agreed wholeheartedly.

The problem is the Dems will jump on this and pass the thing. They now have to. There's a reason the stock market shot up 400 points. Wall Street is posititively giddy about the prospect of being able to unload trillions of debt onto the American taxpayer. You thought moral hazard and Too Big To Fail consolidation was bad before?

Republicans will be crowing. The party of "fiscal conservatism" and "small government" will immediately fall in line behind this program because now they can say the Democrats are preventing this vital solution from reaching Preznitman's desk, and they will lay every second that this Uberagency doesn't exist at the feet of Barack Obama, Nancy Pelosi, and Harry Reid. You'd better believe the marching orders are being put out right now, and that this is how the GOP plans to take control of the "it's the economy, stupid!" argument.

Absolutely bet on it. Wall Street has spoken. Everybody will want their piece of this multi-trillion dollar bailout, and they want it NOW. The lobbyists are already working the halls of power.

You will hear McSame call for this legislation to be passed as early as tomorrow. You will hear Obama call for this legislation to be passed as early as tomorrow. You will hear Preznitman call for this legislation to be passed as early as tonight.

More McSpain

The Washington Post has McSame's response to McSpain:

So, was McCain purposely trying to diss the Spanish leader? Questions about whether McCain forgot which country Zapatero leads, got confused about Spain's geographic relationship to Latin America, or confused Zapatero with the Zapatista rebels from Mexico have exploded on blogs since reports of the interview first surfaced.

McCain foreign policy adviser Randy Sheunemann said McCain's answer was intentional.

"The questioner asked several times about Senator McCain's willingness to meet Zapatero (and id'd him in the question so there is no doubt Senator McCain knew exactly to whom the question referred). Senator McCain refused to commit to a White House meeting with President Zapatero in this interview," he said in an e-mail.

Bullshit. Absolute bullshit. Spain is a NATO ally and one of the few countries that doesn't publicly hate us in a part of the world where we badly need help. You're telling me McSame won't commit to meeting with a NATO ally leader as President?

Doesn't that disqualify him from the job?

It's a lie to cover his growing senility. He's losing it. These are legitimate questions and they involve McSame being able to discharge his duties as President. If he can't, Sister Sarah is one heartbeat away from being leader of the free world.

Of course, there's the Obama option, America. Consider looking into it.

[UPDATE] Viva McSpain!

Muy bueno!

Who Could Have Possibly Predicted The Russia/Georgia Problem?

Well, turns out of all people it was a friggin Republican Senator. Steve Clemons lays it out.

Of particular note in Chuck Hagel's letter relating vaguely to autonomous provinces in Georgia:

. . .Across the board, officials are clearly concerned about the consequences -- including unintended and uncontrollable consequences -- of a Kosovar declaration of independence. This includes a former senior Russian official known for his pro-Western views, who told me that, "there is no way that one cannot view a Kosovar declaration of independence as anything but a precedent" for other similar conflicts.

Hagel also writes:

At a time when our relations with Russia are badly frayed, our military is overly engaged, we're dealing with serious fissures in NATO over Afghanistan, and European willingness to respond militarily to an outbreak of violence in Kosovo and the Balkans is uncertain, I urge you to proceed with caution, weighing carefully the potential implications of a diplomatic event that could stretch well beyond the Balkans.

We need to weigh our current policy against our strategic interests -- in the Balkans, in Europe, with Russia, and in a shared, international understanding of national sovereignty under international law. It is not at all clear to me that a unilateral settlement of Kosovo can provide a lasting, stable solution for this region. We must think through all of the complexities ofthe Kosovo issue, the grave risk of violence against Serb minorities in Kosovo, and how to avoid isolating and alienating Serbia.

This letter warns the administration that its actions in the Balkans ran the risk of triggering blowback from Russia -- and yet there is no evidence that the administration worried that Russia would exploit the model of Kosovo in other ways -- particularly as we saw Russia assert the independence of South Ossetia and Abkhazia.

While many US Senators write to the President and other cabinet officers on requests for consideration of this project or that, Chuck Hagel was regularly provoking the administration with sensible, realistic assessments about America's geostrategic choices and their consequences.

Many of these letters -- if not all -- seem to have been ignored. I have not been able as of yet to find a letter from Rice back to Senator Hagel -- but Hagel's letter is enough to show that the administration had more than adequate warning from Senate Foreign Relations Committee members that a Russia storm could be on the way.

Once again, Preznitman listens to...nobody.

Bushenomics 101

Preznit Chucklepants took a break from fundraising to reassure the American people six days after the problem started.

Bush said recent actions by the government to take over the huge insurance company AIG on Tuesday as well as mortgage giants Fannie Mae and Freddie Mac were necessary to prevent a "severe disruption" in financial markets.

"These actions are necessary and important, and the markets are adjusting to them," Bush said.

Sure it is, pretzelboy. Even congressional Republicans are pissed.

Key Republicans on Capitol Hill blasted the Treasury Department and the Federal Reserve on Wednesday for orchestrating an $85 billion bailout of insurance giant American International Group, and the White House for not informing them of the plan.

Meanwhile, Democrats blamed the Bush administration for the financial crisis, while the White House pointed a finger at Congress.

The criticism came a day after lawmakers were surprised by the news that taxpayers would again be called on to shore up a member of the struggling financial sector.

"Once again the Fed has put the taxpayers on the hook for billions of dollars to bail out an institution that put greed ahead of responsibility and used their good name to take risky bets that did not pay off," said Sen. Jim Bunning, R-Kentucky, a member of the Senate Banking Committee.

A spokesman for Sen. Richard Shelby of Alabama, the top Republican on the committee, said the senator "profoundly disagrees with the decision to use taxpayer dollars to bail out a private company" and is upset the government has sent an inconsistent message to the markets by bailing out AIG after it just refused to save investment bank Lehman Brothers from bankruptcy.

"The American taxpayer should not be asked to unwillingly assume the inordinate risks that financial experts knowingly undertook, particularly when taxpayer exposure is increased by the ad hoc manner in which these bailouts have been engineered," said Shelby's aide, Jonathan Graffeo.

Silly GOP lawmakers. You don't matter to Bush. You never did. Asking Congress for permission to use money is so 19th Century.

Preznitman does what the hell he wants to. And so will McSame and Palin when they are in charge.

John McSpain

Seems the old man forgot where the hell Spain is. John Aravosis at AmericaBlog has the story.

As I reported last night, John McCain recently did an interview with a large newspaper from Spain, El Pais, and seemed to not know that Spain was in Europe. The interviewer kept asking specifically about "Spain," and McCain kept responding about Mexico and Latin America and "the hemisphere." McCain then refused to say whether he would be willing to meet with the President of Spain should McCain win the presidency, oddly setting down the precondition that the President of Spain would first have to embrace democracy and human rights before McCain would meet him (the president of Spain already does embrace both of those, and in fact, this past April McCain did another interview with El Pais in which he said he'd be happy to meet with the President of Spain). Huffington Post has more.

It's clear that McCain had no idea she was talking about Spain, or the president of Spain, even though the interviewer repeatedly told him she was asking about "Spain" and "the president of Spain." This isn't a case of McCain forgetting something. He quite literally didn't comprehend what this woman was saying. His mind was gone, he was on auto-pilot, giving pat answers because he seemingly didn't understand what Spain was.

Scared yet?
The idea of President Sarah Palin taking over becuase McSame is senile should terrify you even more.

Global No-Confidence Vote: Deal Or No Deal Pt 4

Another major Deal and a new pair of contestants this morning in the great game of Deal or No Deal.

First, the overnight deal...and it's a massive one. All the world's Bankers have combined forces for a massive "liquidity bomb" on the world markets.

The Fed, which is adding $50 billion into its own banking system today, will spray dollars around the world via swap lines with other central banks. They can then auction them in their own markets. The ECB, Bank of England and Swiss National Bank allotted a total of $64 billion for one day today.

``The timing, so early in the trading day, shows both the severity of the strains in the interbank market and as well the authorities' determination to resuscitate orderly functioning of the money markets,'' said Julian Callow, head of European economics at Barclays Capital in London.

Under the new arrangements, the ECB doubled the limit of dollars it can get from the Fed to $110 billion and Switzerland's central bank can offer $27 billion, an extra $15 billion. New swap facilities with the Bank of Japan, the Bank of England and the Bank of Canada amount to $60 billion, $40 billion and $10 billion, respectively. The arrangements are authorized until Jan. 30.

Up to $247 billion in liquidity is being injected into the world markets in order to try to free up the totally locked system.

The London Inter-Bank Overnight Rate (LIBOR) is what global banks charge for loaning each other cash on a daily basis. That LIBOR number went through the roof yesterday because global banks simply don't trust each other.

They don't trust each other because nobody wants to be the next Lehman Bros. disaster. Nobody wants to go under, and that mistrust was represented by a LIBOR of over five percent, which is the equivalent of highway robbery.

The injection of cash loosened up the LIBOR to under four percent, still brutally high but not as bad as yesterday. European shares have muddled through to a dead cat bounce stage.

But that brings us to today's contestants on Deal or No Deal, Washington Mutual and Morgan Stanley. Both are looking for a Deal. WaMu has lost 95% of its value and is on the brink, going from $40 a share to $2. It's auctioning itself off, but so far buyers don't seem to be terribly interested.

At the same time Morgan Stanley is looking to also get a Deal while the dealmaking is good, looking to hook up with a bank like Wachovia.

It wasn't too many years ago that some federal regulators fretted about the dangers of letting commercial banks merge with the big investment houses on Wall Street. But in the current financial crisis, those mergers might be the only thing that saves some of Wall Street's most storied firms, such as Morgan Stanley (MS) and a troubled lender like Washington Mutual (WM).

With Lehman Brothers (LEH) now history, panicked Wall Street investors sold off shares in both Morgan Stanley and Goldman Sachs (GS), despite the fact that both firms reported relatively strong earnings in recent days. Morgan Stanley's shares plunged 24% on Sept. 17, as investors worried the white-shoe firm would suffer the same liquidity crisis that felled Lehman and threatened Merrill Lynch (MER). Morgan Stanley executives rushed to condemn the short-sellers they said were driving the sell-off. In a memo to employees (BusinessWeek.com, 9/17/08), Morgan CEO John Mack expressed his view that the firm was "in the midst of a market controlled by fear and rumors, and short-sellers are driving our stock down."

There's one huge problem however.

WaMu is the country's largest S&L. If it does go under without a deal, it'll be the largest consumer bank failure America has seen so far, and it will be the FDIC that has to cover deposits for WaMu customers...to the tune of billions.

Wachovia would have the same issue if they take over Morgan Stanley. They would then be on the hook for Morgan Stanley's losses...and that means the FDIC would be on the hook for Wachovia AND Morgan Stanley's losses as well. That's going to be a lot for anti-trust regulators to swallow.

Because again, the FDIC is almost broke.

BE very, very careful. There are reports the US Federal Deposits Insurance Commission is running out of money. Chairman Sheila Blair has been forced to issue a statement. "US banks are overwhelmingly safe and sound and the Government fund used to cover insured deposits will be adequate to absorb any losses, even high losses," she says.

But Brian Bethune, US economist at consulting company Global Insight, said: "Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund."

Christopher Whalen, senior vice-president and managing director of Institutional Risk Analytics, said: "We've got a ... retail bank run forming in this country."

On Monday, US Treasury Secretary Henry Paulson said the nation's commercial banking system "is safe and sound", and that "the American people can be very, very confident about their accounts in our banking system".

FDIC officials say 98% of US banks still meet regulators' standards for adequate capital.

Associated Press reported that the FDIC was down to $US45.2 billion ($A57 billion) - the lowest level since 2003.

Whalen then wrote that reports the FDIC was running out of cash had no basis.

His statement said: "It is essential that people realise the US Treasury will advance whatever cash is needed by FDIC to address bank failures and make good the deposit insurance guarantee. There is no issue regarding the bank insurance fund, but unfortunately most of the public do not understand this. The FDIC needs to make this clear in all of its public statements."

IRA has been constantly in contact with the FDIC and other regulators and knows more about this situation, I would suggest, than the US Government.

The situation may not have been helped by a report from American Banker concerning the deal by Bank of America, the FDIC's biggest customer, with 10% of the nation's deposits, to take over Merrill Lynch saying "it is unclear how much that acquisition would increase B of A's risk profile"

If the FDIC goes, then bank runs will send us into a depression, period. It wasn't the 1929 stock market crash that caused the Great Depression, but the bank runs that resulted from the bank failures in 1930-1931.

If the FDIC has to make good on billions, confidence in banks will plummet and lead to massive withdrawals, further crippling the system. It won't take much in the environment we're in currently. Cash on hand reserves for most banks are well below 1% of assets. The rest is tied up in risky investments.

If even 1% of depositors take out their cash money on the same day, the bank has to turn people away. This causes a bank run, and people will panic.

IndyMac bank went under because people started making withdrawals. It didn't need much. Imagine that multiplied by hundreds, if not thousands of banks...and imagine the billions if not trillions it would take to cover those deposits.

Now remember the FDIC is down to $45 billion or so. AIG took more than that to save...for one company.

What happens when the Full Faith And Credit Of The United States Of America backing up your bank deposits aren't worth the paper it's printed on?

What happens when Deal or No Deal runs out of money to play? Everything the Fed has done up until now has failed. If the FDIC is challenged and even 1% of America withdraws their funds, the bank runs will collapse the economy overnight. Period.

Phil Gramm was partially right: This is a "mental recession". Only America being blithely unaware of how precarious the financials really are is saving the country from a massive bank run.

Be prepared.

Cross-posted at the Frog Pond.

The Even Larger Bailout

Yesterday I pointed out the US financial crisis has gone global. Overnight the response has been a joint counter-attack from the world's central banks...to the tune of nearly one-quarter of a trillion dollars.

The Federal Reserve almost quadrupled the amount of dollars central banks can auction around the world to $247 billion in a coordinated bid to ease the worst crisis facing financial markets since the 1920s.

The Fed increased the amount of dollars that the European Central Bank, the Bank of Japan and other counterparts can offer from $67 billion ``to address the continued elevated pressures in U.S. dollar short-term funding markets.'' The Bank of England, the Bank of Canada and the Swiss National Bank also participated.

Policy makers have struggled to revive confidence in markets this week as investors stockpiled money on concern more financial institutions would fail after the bankruptcy of Lehman Brothers Holdings Inc. and the U.S. government bailout of American International Group Inc. The cost to hedge against losses on U.S. government debt climbed to a record yesterday.

``There's a complete lack of faith in the markets,'' said Jim O'Neill, chief economist at Goldman Sachs Group Inc. in London. ``There's a lot of cash hoarding and people losing trust in banks, so the central banks are acting to relieve that. This might not be the last time they have to act.''

Markets welcomed the announcement, which was made in statements from each central bank at 9 a.m. Frankfurt time at the start of European trading. The cost of borrowing dollars overnight slid to 3.84 percent from 5.03 percent yesterday. It was 2.15 percent last week and reached the highest since 2001 on Sept. 15.

That's right, the world's central banks with the Fed leading the way are throwing almost $250 billion at the problem. As I said, the last card the Fed has to play is hyper-inflation, creating massive amounts of money to keep the global economic engine from seizing up. They are doing this now, as are many central banks. They have nothing else they can do now.

So far Asian markets are mixed, European ones are up modestly, and US markets are set to open a bit higher. But keep in mind it took an unprecedented amount of global fiat money this week -- almost four hundred billion dollars -- to stanch the bleeding today.

And nothing has been done to deal with the underlying problems. We're still deep in a housing depression. Plenty of banks are facing toxic balance sheets, now even more toxic after the last three days. Washington Mutual and Morgan Stanley are on the blocks now looking for buyers, and they certainly won't be the last financials to go.

Once again the Bush Administration will try to declare the crisis over and everything is now fine, the "fundamentals of our economy are strong."

They are not strong. We're living in a house of cards built on sand...sand owned by China and Saudi Arabia. Our capitalist society has become socialist overnight. Everything the Fed has done up until now has failed to stop the problem long term.

Every single action the Fed and Treasury has taken over the last two years HAS ULTIMATELY FAILED. Remember that. Each Fed response has only bought time until the next breaking point where even more Fed action is necessary.

This action will fail as well. The only thing that will change is the magnitude of the next phase of the crisis and the magnitude of the response to it, and the magnitude of the disaster when the Fed ultimately runs out of responses. That time is almost upon us.

They are down to their last option right now.

StupidiNews!

• The new I-35W bridge is open in Minneapolis after last year's collapse.
• Jobless claims are swamping Florida's system.
• Obama is ahead again in the latest Gallup poll.
• Israel could have its first female PM in 34 years.
• Could a pair of lawsuits mean the end of the World Wide Web?

If You Can't Dazzle Them With Fiscal Brilliance...

...bury them in economic bullshit. Daryl Cagle's latest 'toon sums it up nicely.

Yeah, What Digby Said

troof.

If you like useless expensive wars, financial scandals, stock market crashes, foreclosures and economic instability as far as the eye can see, vote Republican. They've got everything you need.

We Gots Dealz, Yo

WaMu is auctioning itself off tonight like a street-corner prostitute.

Morgan Stanley is considering a merger into Wachovia.

Lloyds of London is buying UK housing lender HBOS.

As I said, massive consolidation into Too Big To Fail companies is coming. Massive. Consolidation.

[UPDATE] DeutscheBank is putting hold on its credit default swaps. The Credit market is coming unglued in real time. It's all changing this week.

What will tomorrow bring?

[UPDATE 2] Nancy wants TEH PROBE! (P.S. Obama just called McSame out for looking like a dipshit when he offered his blue-ribbon commission. We know what happened. There was no regulation. There's no need for a probe. JUST FIX THE DAMN PROBLEM. Nice one, Nan.)

Oh, And In Non-Wall Street Based Carnage

Terrorists hit the US Embassy in Yemen.

Suspected Al Qaeda militants disguised as security forces launched an explosive assault on the U.S. Embassy in Yemen's capital, Sanaa, Wednesday killing 10 Yemeni police and civilians, officials said.

The attack involved two car bombs, a spokesman for Yemen's embassy in Washington said. Six attackers, including a suicide bomber wearing an explosive vest, were also killed in the attack, Mohammed al-Basha said.

There were at least four explosions -- including at least one car bomb -- and sniper fire, a senior State Department official said.

Yemeni officials said the first car contained people in police uniforms who exchanged fire with Yemeni security forces, the officials said.

The second car exploded after it passed an outermost gate to the Embassy but before it reached a second protective barrier, the officials said.

But al-Basha said there were two cars packed with explosives involved in the attack.

The heavily fortified compound in the capital of Yemen -- the ancestral home of al Qaeda leader Osama bin Laden -- has previously been targeted in attacks.

It's always Al Qaeda, just like all soft drinks are "Coke" and all tissues are "Kleenex".

Still On The Fence About Sister Sarah?

Allow me ten minutes for a rebuttal.



If you're not scared out of your mind after seeing this, you should be.

One heartbeat away.

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.

The Art Of The Deal

Like I alluded to earlier, AIG got a nice little going-away present.

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.”

My question is what has fundamentally changed here?

Not much. The underlying cause of the the problem, the housing depression, is still rampant. That hasn't changed, nor has it been even remotely addressed. It will remain with us through at least next year if not well into 2010.

The Fed policy of Too Big To Fail? Hasn't changed at all. Lehman just didn't qualify as systemic enough. You can bet that the next wave of mergers and acquisitions in the financial sector will be hotly contested.

Everyone will want to get to the Too Big Too Fail stage. Everyone in the financial sector will now think they are Too Big To Fail, or be bought out by somebody who thinks they are. That's how the industry works now.

Come to think of it, that's how the airline, auto, and a bunch of other sectors of our economy work now. Everyone's going to try to get to that magical Too Big To Fail level...which means thanks to the wonders of Moral Hazard we will now have companies taking even more risk, not less, than they were before in order to try to make it big. The Fed's actions show you will get a bailout only if your actions are egregious enough to qualify as a systemic risk if you are allowed to fail.

There's no downside now. You'll see this happening across not just the financial industry but all of them. Why not? There's again, no downside to making yourself Too Big To Fail now.

So that's what we'll see. Unless strict new regulations are imposed (and you can bet with both McSame and Obama in the pocket of Wall Street, meaningful new regulations simply will not happen.) we'll continue to be in this mess. The pressure will be there to do something, but we'll hear the same excuses that we're hearing now: "There are already been too much Federal intervention in the markets, less is needed, not more." The GOP surely will say that, including McSame. Obama? He'll be made to get with the program.

Only eventually something systemic will have to go. The Fed is running out of money it can give away. It pumped $155 billion into the financial sector in just the last few days. How long can this keep up?

As long as the Fed can keep printing billions. As long as China and India and the EU decide that the US is Too Big To Fail. As long as the game of Deal Or No Deal comes up with new deals to make and new suckers to exploit.

But when the music stops, the bill that comes due will wreck the country. And the longer we refuse to face it, the worse it will be.

The Fed is hawking T-Bills this morning to raise $85 billion it does not have right now. Once again Asia is paying for our bailout. When they stop buying T-Bills, the game ends.

And the new one begins.