Markets hit the wall of reality

Too many things are happening and it is hard to keep the pace, as the financial landscape of the US is radically different today compared to only 2 weeks ago: The biggest american insurance company has gone bust, the two giants of the mortgage market have been nationalized, after the collapse of the 4th biggest broker dealer, the 3rd one has also disappeared, while the 2nd one, Morgan Stanley dropped as much as 40% today, and is rumored to be talking merger with Wachovia, another distressed bank which will probably go bust as well. Washington Mutual, one of the biggest retail bank in the US is desperately looking for a buyer and might end up in the hole as well. And these massive sell offs won't stop until the bank come clean on their balance sheet and stop hiding losses in GAAP loop holes like Level-3 assets or off-balances SIVs. It's quite simple, the market has lost confidence in these companies and their accounting principles, and wants them to show their hands and stop bluffing. If they have nothing to hide, then they should just show their cards. Otherwise, it gets even more suspicious, and generates further sell offs.

Bernanke surprised the markets by not lowering rates, which I interpreted as a willingness to not get naked immediately since things are getting worse and worse and also as a trade-off with the congress to bail out AIG. I turns out that I was right, and the market took off from -2% to finish at +1.75% within 10 minutes, the Russell 2000 doing better and going through the roof up to +3.75%. It was a very nice shorting opportunity, that I took :-)

Please read this post from Karl Denninger who is starting to get seriously worried by the actions of the Paulson/Bernanke duo, who have started the money printing presses. Read this post from Mish regarding the AIG bail-out as well.

Following the meltdown of the US financial system, and Paulson confirming that the US banking system is safe and sound, the vote of non-confidence in the US Treasury/the Fed/the US Dollar made the precious metals soar, as Gold is up $93 or 12% and Silver is up 16%. It's a good thing that I had loaded my portfolio with both for the past few weeks. Oil is also up almost 7% to $97.xx. Countries in the Middle-East are also working on their own monetary union, probably due to the lack of trust in the US Dollar and Government and that they don't want to import the US inflation in their countries anymore and seeking to break their peg to the USD:
Khaleej Times Online: Five of the six Gulf Co-operation Council members have taken a “significant progress” by approving a draft agreement for monetary union, according to a Dubai-based official Standard Chartered Bank

Other news of high interest:

Russian Markets Halted as Emergency Funding Fails to Halt Rout

Sept. 17 (Bloomberg) -- Russian markets stopped trading for a second day after emergency funding measures by the government failed to halt the biggest stock rout since the country's debt default and currency devaluation a decade ago.

The ruble-denominated Micex Stock Exchange suspended trading indefinitely at 12:10 p.m. after its index erased a 7.6 percent gain and plunged as much as 10 percent within an hour. The benchmark fell 17 percent yesterday, the biggest drop since Bloomberg started tracking the gauge in May 2001.

Nationalization of AIG

The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.

The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.

Contrary to what the market believed at first, it sounds like they are going to liquidate the company! This is not really a bail out, but of course, they will do their best to bail everybody (read the post from Denninger as mentioned above).

J.P. Morgan advanced $138 billion to Lehman

J.P. Morgan gave Lehman Brothers Holdings Inc a $87 billion advance Monday and a $51 billion advance Tuesday, according to a filing with the U.S. Bankruptcy Court of the Southern District of New York.

"At the request of [Lehman] and the Federal Reserve Bank of New York, and in order to avoid a disruption of the financial markets ... [J.P. Morgan] advanced [the money] to or for the benefit of Lehman in order to clear, and facilitate the settlement of, certain securities transactions with customers or clients of Lehman," the filing said.

The first advance was repaid Monday night, and Tuesday's advance was made at the request of both Lehman and the New York Fed, the filing also said.

J.P. Morgan "may elect to make additional advances," the investment bank stated in the filing.

The advances were secured by collateral, according to J.P. Morgan. It didn't say where the $138 billion came from, or whether it had access to a Federal Reserve window. A J.P. Morgan spokeswoman did not immediately return calls. A Lehman official declined comment.

Yahoo Finance:

Despite Morgan Stanley's (MS) better-than-expected third quarter earnings and revenue, the stock is down 17% in premarket trading. Yesterday, Morgan Stanley's credit default swap -- which is the cost to protect debt -- traded at 728. By comparison, Lehman Brothers' (LEH) swap traded at 707 before it filed bankruptcy. There is also concern with the TED spread -- the difference betwee three month Treasury bill and three month Libor -- spiking 30% to 2.83%, which is a higher spread than when Bear Stearns collapsed.

Morgan Stanley is on the hook and must come clean or else collapse...

The SEC issued a new short-selling rule, which will apply to all public companies. Rules are tightened, requiring a firm to deliver securities by the settlement date, according to reports.

The SEC is still trying to break the market efficiency and make us believe that the short sellers are bringing the companies down??? They should rather focus on doing their job and trying to catch the people who are making millions by propagating false rumors every day!

The Treasury is setting up a temporary financing program at the Fed's request. The program will auction Treasury bills to raise cash for the Fed's use. The initiative aims to help the Fed manage its balance sheet following its efforts to enhance its liquidity facilities over the previous few quarters. The news gives a boost to gold prices.

Ooops, the printing presses are starting.

Bank of America is also probably going to collapse, as the main story about the Merrill buyout, sponsored by Peter Schiff, is that Merrill and BofA are trying to get big enough to get to big to fail, otherwise who would be stupid enough to buy Countrywide and Merrill Lynch as I wrote? Here's how lucid and rational is the CEO of BofA:
When asked why he didn’t wait until Monday to get Merrill at a lower price, Bank of America CEO Ken Lewis stated “the strategic opportunity was so compelling it couldn’t wait.”