Surveying the Carnage

When the Dow falls 500 points in a day, you know that's going to lead the news everywhere both tonight and tomorrow morning. So, being a natural contrarian, my first reaction was to put today's action in the "not nearly as bad as it might have been" category: all the major indices were down less than 5%, which I arbitrarily set last night as the level at which we should really start worrying.

But actually, it is bad -- very bad.

The news -- or lack thereof -- from AIG is particularly worrying. Goldman and JP Morgan are being asked to lend the insurer $70 billion? Where on earth are they supposed to find that kind of money? I'm sure the idea is that they would syndicate it out, but is that realistic? AIG closed at $4.97 a share, which sounds like "zero" to me. (This time last year, it was in the mid-60s and rising.) So yes, AIG has collapsed, which was the other criterion I set last night for determining whether we were entering a meltdown.

And remember, we still haven't had a Chapter 7 filing from Lehman Brothers (the brokerage). That means the liquidation of Lehman's assets hasn't even started yet -- and already we're down 500 points. There are lots of rumors going around that Barclays or even the Korea Development Bank might step back in to try to pick up the brokerage as a going concern; I do hope that happens, it would save a lot of pain.

My favorite stock-market datapoint, meaningless though it is: Merrill Lynch closed up one cent on the day. So much for that massive premium people thought Ken Lewis was paying.

And in the credit markets, if you thought Libor looked bad this morning, just wait until the fixing tomorrow.

The problem, in a nutshell: things are going to get worse until they start to get better, and I can't for the life of me see what's going to turn things around here. A deal to buy Lehman Brothers, thereby averting a Chapter 7 liquidation, might conceivably do it. A convincing recapitalization of AIG might, too. But neither of those two events looks particularly likely right now, and in their absence, I feel as though we're facing a nasty downward spiral.

Could yet another emergency rate cut save the day? I dunno, it's not like the Fed hasn't thrown all its windows wide open already. The regulators are out of ammunition, and the bears are on the rampage. Right now, I suspect that this is going to get ugly.