And so the pattern of the markets lurching from bad to “good” news continues. And though Hank Paulsen seemed to rule out support for AIG on Monday, that changed. An $85 billion bailout of AIG was announced by the Fed late last night.

However it looks to me like AIG will have to sell everything in a wind down to pay back the two year $85bn loan at a very penal rate of LIBOR + 8.5% and management is out. This is an attempt at an orderly liquidation, NOT A RESCUE.

There was no private money available at any rate. Investors wanted to cherry pick individual assets rather than bail it all out. There is little in this deal for the equity holders either. As was the case with Lehman’s these accelerated asset sales to repay the loans will create a new lower base for these assets and thus increase further write downs by other banks. This is a very expensive lunch. So there is relief this morning. But as we saw in the aftermath of the Fannie Marx and Freddie Engels debacle, the market can be fickle and the respite short.

BREAKING NEWS: HBoS & LLOYDS in MERGER TALKS
Another shotgun marriage?

Today Market Moving Stories

• The vultures are out. Barclays buys Lehman’s North American investment banking unit for $1.75bn. The lesson here is be patient, bargains will appear when you cherry pick.
• Fed opted not to pander to the market and left rates unchanged and issues as neutral a statement as I can recall given the backdrop! Note the decision was unanimous with no dissent from Fisher & Co. The markets disappointment was somewhat assuaged by the news on AIG.
• The Fed was forced to offer an extra $70bn in overnight funding to prevent their target Fed funds rate jumping through the sky. Dollar cash rates (where a bank could borrow) had traded as high as 20% in the European morning yesterday. What is becoming clear is that we are in for the mother of all year ends when cash is traditionally tight anyway as banks hoard for year end accounting window dressing. Central banks will now have to go to extreme lengths to flood the markets with money in order to keep rates down. That’s why those most reliant on wholesale funding (e.g. HBoS) are getting creamed.
• Swiss economy minister Doirs Leuthard said that banking giant UBS won’t fail because it had taken “proper steps” to improve its capital base. Most reassuring!
• J.P. Morgan is said to be in advanced talks to buy WaMu (Washington Mutual)?
• Morgan Stanley surprised on the upside with better than expected Q3 results while Goldman Sachs disappointed. Despite the good numbers it seems that Morgan Stanley’s days as an independent investment bank are numbered as they seem to be actively seeking a partner in crime.

Data Today. As If It Matters

The minutes of the last BoE meeting will be eye closely this morning at 09.30 to see whether rate cuts are imminent. The markets currently have fully priced in a cut at the November meeting.

This afternoon we will get US building permits (+928k), housing starts (950k) and the news on the current account deficit at 13.30 (-180bn).

Some Light Comic Relief

As Warren Buffet once said ”when the tide goes out, you gets to see who wasn’t wearing any swimming costumes”