OK, a lot has happened over the last two weeks, and it is hard to know where to start. In the first place, you the taxpayer are now the proud owner of most of the mortgage finance industry in the country -- the takeover of Fannie (FNM) and Freddie (FRE)' -- and also the owner of the largest insurance company in the world, AIG (AIG) . In a bid to stem moral hazard, the shareholders of each of these firms were essentially wiped out, the bondholders however were bailed out.
Both the bondholders and the stockholders of Lehman Brothers (LEH) were effectively wiped out. This led to the original money market fund, a fund with $63 billion in it, breaking the buck and suspending redemptions for a week. This is only the second time a money market fund has broken the buck, and the last time it was a very small fund that it happened to.
Fear rules the Street, and banks are afraid to lend to anyone, even each other. In a bid to find a safe place to park money, the interest rate on the three month T-Bill actually went negative briefly. I guess it is hard to find a mattress big enough to hold billions of dollars, but effectively that is what a zero rate on a T-Bill is. That is the first time that has ever happened -- the closest parallel was in January of 1940. Think about it, this is a bigger flight to safety than before the U.S. had engaged in World War II!
If that's not enough, Merrill Lynch (MER) was forced into a shotgun wedding with Bank of America (BAC), a $50 billion deal (all stock and based on the prices at the announcement) that was reached with as much due diligence as most people use when buying some candy at the checkout lane at the grocery store.
Three of the top five investment banks at the start of the year are either gone or
subsumed by large commercial banks, and it looks like the remaining two, Goldman Sachs (GS) and Morgan Stanley (MS), are desperately looking for dance partners. Meanwhile, the largest S&L, Washington Mutual (WM), is hanging by a thread. If (when) it goes under, it will use up most of the existing FDIC insurance fund.
