Wednesday, September 17, 2008

Market Stresses Persist Despite AIG Bailout

The market has opened lower despite the Fed bailing out AIG with a big loan. To prevent systemic failure, the Fed gave AIG an $85 billion 2-year loan in exchange for an 80% stake in the insurance company. Unlike Lehman, the Fed felt the failure of AIG would weigh heavily on the already fragile markets.

The credit strains are high not just in the U.S., but across the globe this morning. The TED spread (the diff. between 3-month T-bills and 3-month LIBOR) spiked to its highest levels since the crisis began. Central banks in England and elsewhere are adding liquidity to the system to try to ameliorate current conditions.

Morgan Stanley (MS) reported results that handily beat consensus estimates, but the stock is -15% lower nonetheless as its credit default swaps (the cost to protect debt) spike higher. These credit default swaps raise the costs for financial firms when they spike higher, and add to the liquidity strains. They have been a big problem, and are one of the main reasons the Fed felt the need to help AIG. AIG insures credit default swaps for large financial institutions across the entire globe.

The SEC also issued new short selling rules which apply to all public companies that should make it harder for short sellers to engage in some of the activities that have added pressure to some stocks this year.

On a positive note, SanDisk (SNDK) is trading +46% higher after receiving a buyout offer from Samsung, and telling them that the price is still too low.

Asian markets were mixed overnight. The dollar is lower this morning, while oil is rising $3 to $94. The 10-year yield is lower at 3.40%.


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