Bloomberg

Sept. 16 (Bloomberg) -- The cost of borrowing in dollars overnight more than doubled to the highest since 2001 as the collapse of Lehman Brothers Holdings inc. and credit downgrades of American International Group Inc. led banks to hoard cash.

The overnight dollar rate soared 3.33 percentage points to 6.44 percent today, its biggest jump, according to the British Bankers' Association. The rate was 2.19 percent a month ago and 2.15 percent last week. Lehman filed for bankruptcy yesterday after succumbing to mounting credit-market losses.

The credit squeeze deepened after American International Group Inc.'s debt ratings were downgraded by Standard & Poor's and Moody's Investors Service, threatening the company's efforts to raise emergency funds. The biggest U.S. insurer by assets is seeking $70 billion to $75 billion in loans arranged by Goldman Sachs Group Inc. and JPMorgan Chase & Co. to replenish capital, according to two people familiar with the situation.

``It's fear, you don't know who has exposure and who might not be getting their money anymore,'' Imke Jersch, a senior money-market trader in Hanover at Norddeutsche Landesbank Girozentrale AG, Germany's fourth-biggest state-owned bank. ``It's a domino effect. You never know who might fall next.''

more at the link

I did inhale.

They have a gift for understatement over at the Times...

Headline: A Sense That Wall St.’s Boom Times Are Over

CNBC, By Charlie Gasparino, September 16

With a private sector solution looking highly unlikely, the government is once again considering providing American International Group with some sort of financial support a day after such a potential lifeline was denied, according to investment banking sources involved in the meeting.

The New York Federal Reserve is currently meeting to discuss the fate of the troubled insurance giant, these people say.

[...]

The Fed declinded to comment Tuesday on report that the government is in discussions on the situation of troubled insurer AIG.

However, a Treasury official told CNBC that the comments of Treasury Sectary Hank Paulson on Monday still stand.

On Monday, Paulson had said, "We do not take, and and I don't take, lightly ever putting the taxpayer on the line to support an institution ... Don't read it as no more; read it as that it's important, I think, for us to maintain the stability and orderliness of our financial system. Moral hazard is something I don't take lightly.''

Sources close to the situation said a private sector solution to AIG's situation is definitively dead.

Therefore any rally from Fed actions today will be short lived. When Bear was rescued the financial market rally lasted two months; when in July the Fannie and Freddie legislation was proposed the rally lasted a few weeks; when the actual nationalization of Fannie and Freddie occurred a week ago the rally lasted only one day. The ability of policy authorities to prop financial markets is rapidly eroding as market participants perceive that policy makers are desperate and running out of options. At this point the perfect financial storm of the century cannot be contained. The only light at the end of the tunnel is the one of the coming financial and economic train wreck.

AP story of the moment

"Stocks fluctuated Tuesday following a report that the government is considering extending aid to troubled insurer American International Group Inc. — the latest in a string of companies that investors worry could be undone by a shortage of cash.

But a CNBC report said the government is at least discussing extending a financial lifeline to the company; it cautioned that an agreement is far from certain and also that the company isn't likely to find help from the private sector. AIG fell $2.07, or 43 percent, to $2.69 after being down nearly 75 percent in earlier trading."

The message needs to be sent that if anyone decides to dine on a scoop of Ben and Henry's "Bailout Banana Split", the consequences to the company will be draconian, much akin to a Chapter 11 bankruptcy. The company can continue to operate, but under strict government controls and oversight.

From CNN

MOSCOW -(Dow Jones)- Russian stocks suffered their worst day in 10 years Tuesday after fallout from Lehman Brothers' demise and concerns over banking sector liquidity prompted a fresh wave of brutal selling.

The benchmark dollar-denominated RTS index closed 11.5% lower at 1,131.12, while the more liquid, ruble-denominated MICEX shed 17.5% to 1,067.45. Amid the rout, both of Russia's major bourses suspended trading for an hour towards the close, the first time such a step has been taken since Russia's financial crash in 1998.

By Hugh Son

Sept. 16 (Bloomberg) -- American International Group Inc. investors led by former Chief Executive Officer Maurice ``Hank'' Greenberg may consider taking control of the insurer through a proxy fight or buyout.

(more at link)

By Erik Holm

Sept. 16 (Bloomberg) -- The Federal Reserve is considering extending a ``loan package'' to American International Group Inc., the insurer facing a cash shortage, according to a person familiar with the negotiations.

---------

How many more times can we keep doing this instead of just taking our licks and reaching a bottom?

Reuters, September 16

WASHINGTON - The top Republican on the U.S. Senate Banking Committee said on Tuesday the federal government should not step in with financial help for insurance giant American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz).

Asked whether the government should provide a bridge loan or some other support for the company, which faces a liquidity crisis, Alabama Sen. Richard Shelby told reporters, "Absolutely not ... I hope that they will not bail out, or get a bridge loan, to AIG."

He added, "Where do you stop? Where do you draw the line?"

Why doesn't the SEC (or any other Federal regulatory entity) simply say "Okay boys, you've had your fun. As of midnight Friday, all contracts for the following classes of toxic derivatives are hereby null and void"?

We really need to get the poison out of the system, no?

By Joseph A. Giannone

Goldman Sachs Group Inc (GS.N) said quarterly profit plunged 70 percent as the worst market slump in decades led to weaker-than-expected revenues, knocking the stock to its lowest level in nearly three years.

Still, the larger of the two major U.S. investment banks still standing, beat profit expectations on Tuesday, even as it recorded $1.1 billion in write-downs and losses from its principal investments. It was the biggest earnings decline since Goldman went public in 1999.

Goldman shares dropped 2.5 percent in afternoon trading.

The results upset investors during a week in which Lehman Brothers filed for bankruptcy and Merrill Lynch (MER.N) agreed to sell itself to Bank of America (BAC.N).

"People were hoping for some good news in a sea of gloom, and I don't think they got it," said Matt McCormick, portfolio manager and analyst at Bahl & Gaynor Investment Counsel.

Banks and brokers have recorded more than half a trillion dollars in write-downs over the past year as the U.S. mortgage crunch has widened into a full-blown credit crisis that shows no signs of abating.

Goldman so far has navigated the turmoil better than its peers, avoiding big write-downs. Yet Goldman executives acknowledged their business follows the global economy and right now conditions are grim.

In response, the company is playing defense -- hoarding capital and cash, and shedding risky assets.

"We've become even more cautious in our approach," Goldman Chief Financial Officer David Viniar told reporter

more

While a weakening U.S. is taking fewer of our manufactured exports, and Canadian consumers have been hurt by higher gasoline costs, the economic damage in the real economy -- the one that underpins the banks -- has so far been contained.

..... If Ontario does trip into a recession, the banks will be sure to feel it. But not in the same way as their U.S. counterparts have.

In part, this is thanks to history. The U.S. pattern of independent investment banks has not been replicated here. Each of Canada's big banks has its own investment banking arm. If the latter find themselves in difficulty -- as Lehman did -- the bank will pick up losses as a matter of course.

The Canadian banks can do this because their balance sheets are generally much healthier. While the top six banks have to date written off $11.6 billion in bad money tied to U.S. debt instruments, most of this was the fault of just one financial institution -- the Canadian Imperial Bank of Commerce. The write-downs were a comparatively modest 10 per cent of the banks' combined equity and a much tinier fraction of the amounts written off in the U.S .

..... There are a number of explanations for this state of affairs, but a key one is that Canada's bankers have resisted copying the more aggressive U.S. financial institutions.

This stance might have been much more difficult had Canadian trade negotiators not consistently opposed the idea of opening up our financial services industry to greater foreign ownership.

For instance, had Lehman Brothers acquired control of a major Canadian bank under relaxed ownership rules, the ripple effect of its demise yesterday would would now be a scary thing.

..... No foreign individual or institution can acquire more than 10 per cent of a major Canadian bank, without the blessing of Canada's minister of finance.

As of June, the single biggest investor in Canada's big banks has been a mutual fund owned by one of the other banks -- usually no more than five per cent of total equity.

It's a family compact, in other words. And while this cozy reality has driven free traders to distraction, it also created a risk-averse culture.

..... As for the banks themselves, any financial weakness stemming from a recession is likely to be spread across a very wide number of customers. In the U.S., the mortgage mess was concentrated heavily on financial securities that proved dodgy -- thus undermining the very core of the banks' capital.

It's not that Canadian bankers lacked the imagination to invent such stuff. With some exceptions, they developed their art in an environment that disdained such dangerous alchemy.

Which is why the border became a financial firewall.

_{"While not a Playboy reader, she invites a male acquaintance in for a quiet discussion of Chagall, Nietzsche, jazz, sex." - not a Hugh Hefner quote}

http://news.yahoo.com/s/nm/aig_loan_dc

Fed to provide $85 billion bridge loan to AIG: source

The Federal Reserve will provide a roughly $85 billion bridge loan to AIG (AIG.N) and take a nearly 80 percent stake in the company, according to a source briefed on the matter.

CNBC earlier reported the bridge loan would be secured and that shareholders would be severely diluted by the bailout.

Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson and others were involved in the talks, CNBC said, adding that the bailout plan being negotiated "isn't a conservatorship."

______________________________________________________________________

Is this the bridge-to-nowhere I've been hearing about?

Maybe opening the discount window to AIG, but taking them over and putting all their assets on the Fed balance sheet as collateral? It's really almost too ridiculous. What central bank takes an equity position in an insurance company? And what are Lehman employees to think?

When you put this whole picture together, going back to Bear Stearns, you begin to realize it is all about derivatives and protecting JP Morgan, Citibank, BOA and whichever other big players cannot afford to have systemic risk spread through CDOs and CDSs. This crisis is moving to the ludicrous stages, with the Treasury and the Fed stumbling around piling on the taxpayers' shoulders all these securities the market won't buy, and avoiding the losses the owners refuse to take.

It also looks increasingly as if the government is taking orders from Bill Gross, who issues self-serving advice so PIMCO won't take losses on its investments. How pathetic.

I mean they are nationalizing an insurance company why not the health insurance companies?

"You have no respect for excessive authority or obsolete traditions. You're dangerous and depraved, and you ought to be taken outside and shot!" - Joseph Heller

Roubini has an interesting blog entry on the conundra inherent in the AIG takeover:

So this is the conundrum of the government intervention in AIG: it was made to avoid a disorderly collapse of AIG with the provision of short term liquidity; but in order to avoid short term creditors of AIG to run and be full on their claims you need to impose an effective stay on such claims; otherwise some creditors are bailed out (those with short term claims who can run) and some creditors are whacked even more (those with longer term claims that are junior to the government) and such short term creditors become effectively senior to the government. But if the government has to be truly senior relative to all of the creditors of AIG you need to impose a stay on all creditors. And if you impose such a stay you whack all creditors, you impose losses on all the AIG debt holders and you risk the systemic panic and disaster that you wanted to avoid in the first place.

And:

If we start bailing out those creditors of AIG (holders of bond insurance policies) we may as well nationalize also all of the other private monoline insurers. And we treat differently different bond insurers (we make whole those who bought bond insurance from a too big to fail AIG and we let go bust those who bought the same protections for a non-systemically important bond insurer) we exacerbate moral hazard as in the future no one will buy bond insurance protection from truly private and smaller bond insurers and everyone will buy it from large too-big-to-fail institutions such as AIG where such bond insurance comes now with the additional protection of an implicit government guarantee of insurance. So the US government may become – on top of the biggest insurer in the world with its takeover of AIG – also the biggest re-insurer in the world.