Girding for a Tumultuous Tuesday

Yesterday I said that in order to turn this market around, we'd need to see either (a) a deal to buy Lehman Brothers, or (b) a convincing recapitalization of AIG. The latter seems as far away as ever, but the WSJ says we might be close to the former, which would be really good news.

Barclays confirmed in a brief statement Tuesday it is "discussing with Lehman Brothers the possible acquisition of certain Lehman Brothers assets on terms that would be attractive to Barclays shareholders." The U.K. bank added that, at this stage, no deal is certain.

In my view this market is reacting to realities, not to rumors. News of talks is not going to turn things around: only a done deal will suffice. But clearly the talks are a necessary precondition for a done deal, so I'm slightly more optimistic this morning than I was last night.

Still, things are still brutal out there, especially at AIG. Elsewhere on the gorgeous new WSJ website we're brought back to earth with a bump:

AIG has been scrambling to raise as much as $75 billion to weather the crisis, and people close to the situation said that if the insurer doesn't secure fresh funding by Wednesday, it may have no choice but to opt for a bankruptcy-court filing.

There's only one entity with the ability to lend $75 billion in a hurry, and Hank Paulson has already said he's not going to do it.

An AIG bankruptcy would have a more immediate effect on the broad economy than Lehman's bankruptcy: AIG policyholders would start worrying about little-known and little-understood animals like the National Organization of Life & Health Insurance Guaranty Associations (FAQ here). Remember that AIG has a reputation for insuring things that no one else will insure -- a lot of these policies are very large and very specialized and pretty much impossible to replicate unless and until that particular bit of AIG gets spun off or bought out.

Right now, stock-market futures are negative, but not massively so. Asian markets fell only in line with the US and Europe, no more, but European markets still show no sign of bottoming. As ever though in times of global stock-market turmoil, it is the US which matters. And as the markets open this morning, they'll be concentrating not only on the ongoing mess at Lehman but also on the seemingly imminent demise of Dow component AIG. I wonder how long it will take until it drops out of the average, and whether another financial will replace it. Berkshire Hathaway would make a lot of sense, if it weren't for the fact that it can't join any average, because its share price is too high.