How can this be happening?

From the NYT

How can it even be possible that we wake up on a Monday morning to discover that Lehman Brothers, a firm founded in 1850, a firm that has survived the Great Depression and every market trauma before and since, is suddenly bankrupt? That Merrill Lynch, the “Thundering Herd,” is sold to Bank of America the same weekend?

Just months ago, Lehman assured investors that it had enough liquidity to weather the crisis, while Merrill raised some $15 billion over the last year to shore up its balance sheet. Now they’re both as good as gone.

Last week, it was Fannie Mae and Freddie Mac that needed a government bailout. This week, it looks as though American International Group and Washington Mutual will be on the hot seat. We have actually reached the point where there are now only two independent investment banks left: Goldman Sachs and Morgan Stanley. It boggles the mind.

But it really shouldn’t. Because after you get past the mind-numbing complexity of the derivatives that are at the heart of the current crisis, what’s going on is something we are all familiar with: denial.

read more at the NYT...

In an extraordinary turn, the Federal Reserve was close to a deal Tuesday night to take a nearly 80 percent stake in the troubled giant insurance company, the American International Group, in exchange for an $85 billion loan, according to people briefed on the negotiations.

In return, the Fed will receive warrants, which give it an ownership stake. All of A.I.G.’s assets will be pledged to secure the loan, these people said.

The Fed’s action was disclosed after Treasury Secretary Henry M. Paulson and Ben S. Bernanke, president of the Federal Reserve, went to Capitol Hill on Tuesday evening to meet with House and Senate leaders. Mr. Paulson called the Senate majority leader, Harry Reid, Democrat of Nevada, about 5 p.m. and asked for a meeting in the Senate leader’s office, which began about 6:30 p.m.

The Federal Reserve and Goldman Sachs and JPMorgan Chase had been trying to arrange a $75 billion loan for A.I.G. to stave off the financial crisis caused by complex debt securities and credit default swaps. The Federal Reserve stepped in after it became clear Tuesday afternoon that the banking consortium would not be able to complete the deal.

Without the help, A.I.G. was expected to be forced to file for bankruptcy protection.

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Someone was pointing out in the letters of the Sydney Morning Herald that loan insurance would prevent the US problem of mortgage collapse, in Australia.

But hopefully the "insurer" would not bite the dust like A.I.G. in the US... Too many payouts and the kitty is dry. Insurance has always been the ultimate game of gambling with the odds stacked in favour of the insurer, as long as the insured making claims do not pass a safety margin number. With wars, natural disasters and carelessness of pundits — plus the greater game of pass the bundle of hot potatoes — have made insurance a bit more risky than in the past. Too many con-artists on the hustle and it becomes difficult to avoid being taken to the cleaners. The game works if the hot potatoes are not dropped on the floor — spilling the beans so to speak at the overinflated value of the package. The fabled treasures horded by funds are no more than inflated crumbling sand piles. In fact for years, by "passing the bundle", they had hidden the true inflation differential of greed. Furthermore, business makes 15 per cent profit extra every year while inflation is 2 to 4 per cent every year. This construct is not sustainable. Further, with the primary production of economies sent overseas, too much of the employment market in Western economies is in what I call third and fourth sectors of paper shufflers that produce nothing, just puffing up the illusion of work (or adding more middle transaction fat personnel)... in which some kickass-trader can make a killing overnight but very unhealthy in the long run. 

Thus, in the end, we have to pay twice for the pleasure, as the governments — us — have to buy at full treasured price the crumbling sand plies accumulated by years of deception and greed. Gangsters get 25 years in the cooler for robbing a few millions in a bank heist. Managers don't even get a slap on the wrist for carelessly — and knowingly (they had to know: if they didn't they're no more managers of money than my dog Zyxo) loosing trillions... And they might get a second chance at doing it again...

Between you and me and a lamppost, the financial market long knew this was going to blow up. It just waited for whom was going to sneeze first... And it knew who was going to pay for it too: the average mug — us. Some of them financial wiz are still laughin'... Imagine if you loose a couple of billions when you have 20 billions: you ride the Gulf storm on the French Riviera. If you have nothing, loosing 10 bucks is a catastrophe...

Congressional Leaders Stunned by Warnings

WASHINGTON — It was a room full of people who rarely hold their tongues. But as the Fed chairman, Ben S. Bernanke, laid out the potentially devastating ramifications of the financial crisis before congressional leaders on Thursday night, there was a stunned silence at first.

Mr. Bernanke and Treasury Secretary Henry M. Paulson Jr. had made an urgent and unusual evening visit to Capitol Hill, and they were gathered around a conference table in the offices of House Speaker Nancy Pelosi.

“When you listened to him describe it you gulped," said Senator Charles E. Schumer, Democrat of New York.

As Senator Christopher J. Dodd, Democrat of Connecticut and chairman of the Banking, Housing and Urban Affairs Committee, put it Friday morning on the ABC program “Good Morning America,” the congressional leaders were told “that we’re literally maybe days away from a complete meltdown of our financial system, with all the implications here at home and globally.”

Mr. Schumer added, “History was sort of hanging over it, like this was a moment.”

When Mr. Schumer described the meeting as “somber,” Mr. Dodd cut in. “Somber doesn’t begin to justify the words,” he said. “We have never heard language like this.”

“What you heard last evening,” he added, “is one of those rare moments, certainly rare in my experience here, is Democrats and Republicans deciding we need to work together quickly.”

Although Mr. Schumer, Mr. Dodd and other participants declined to repeat precisely what they were told by Mr. Bernanke and Mr. Paulson, they said the two men described the financial system as effectively bound in a knot that was being pulled tighter and tighter by the day.