The Bloodletting, Part II

I was really hoping that I wouldn't have to post more thoughts on the financial markets recent stumble, but it's too important not to at least post a few random thoughts.

- The Fed decided to bailout troubled insurer AIG last night. While I'm against the government bailing out bad management, this one was needed. AIG wrote credit default swaps and sold them to banks who bought bad mortgages from mortgage companies. Their 'promise' was that in the event of default, AIG (the world's largest insurer, well, it was, anyway) would be good to pay back the bad loan. Lo and behold, bad loans start rolling in, and the piper demands to be paid. AIG sold these derivatives pretty much unregulated, to anyone and everyone that would buy them. Suffice to say, if the Fed didn't step in, the bloodletting would be a lot worse.

- Lots of debate as to whether or not the FOMC should lower short-term rates. Assuming the market opens dramatically lower tomorrow, I don't see this as implausible.

- Word on the street is puts for Goldman Sachs went from around $.15 to over $20 in the space of two hours. No photographic proof of this, but I don't see this as too illogical, given that it's one of two independent banks left standing.

- I overheard something a bit concerning while walking through the Financial district of San Francisco today, two well dressed men standing in front of the Mandarin Oriental whispering into their mobile phones about 'manipulation'. Then, about an hour later, a commentator on CNBC mentions the same word.

- The SEC released an emergency order today preventing naked short selling. Not sure if this isn't too late.

- Both WaMu and Morgan Stanley are seeking their own respective deals to take them out of their bad positions.