The 500-point drop in Wall Street yesterday was just an appetizer. Today could be where the fireworks truly start. AIG is on the brink of filing bankruptcy unless it gets help (i.e. a bailout) from the Feds. When Lehman Brothers filed for bankruptcy, it was for $639 billion… the largest bankruptcy ever. AIG would trump that with $1 trillion…. think about that for a second. A lot of this is tied up with derivatives and other exotic financial instruments, and AIG defaulting on a basket of these weapons of financial mass destruction could trigger an unwind of tens of trillions of dollars of this crap.
From what I’ve been reading, the government made a decision to let Lehman go in order to save it’s final bullets for the real big boys like AIG. There will be more failures coming after AIG… how much money will it take to keep putting band-aids on what is fundamentally a broken financial system?
In other news, if you haven’t heard, the Federal Reserve just pumped another $70 billion into the markets to try and keep things as liquid as possible. Hard to believe, but right now that seems like a paltry amount.
Let’s see if Mr. Bush or Mr. Paulson come out and say that our economy is fundamentally sound today or later this week. Their idea of ‘sound’ and mine are apparently radically different. Call me a cynic, but as more pundits and government officals tell us to not panic, the more worried I get that the economic shit is truly starting to hit the fan.
We are overdue for a financial day of reckoning… perhaps this is the start of that process. I’ve reached the point where I’m more interested in taking the major pain and getting it over with so we can move on and make things better for the next generations.