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Implosion or Turning Point?

As I sit here tonight and watch the news and plan our strategy, I see that the one thing everyone feared has now happened: AIG has been downgraded by S&P and Fitch, and its waiting for Moody’s. AIG is important because it is a big counter party to credit default swaps, insuring so many dollars against default based upon its capital…

Uh, what was that, it has no capital at this point?

This is why Japan and Asia markets opened down 6%. Tuesday will will tell the tale.

Monday, AIG told the market it needed $40 billion in bridge financing to shore up its base. It got $20 billion, based upon some financial enginering from State of New York that waived some capital regulaitons and allowed AIG to borrow from some subsidiaries. So, you’d think AIG would simply need $20 B to get over the hump. So, why did the Treasury force Goldman and JP Morgan to figure out a $75B loan facility if AIG only needs $20B? It sounds to me like the usual accounting chicanery that we’ve come to know from our government.

Back in college civics, we learned about Woodrow Wilsons 14 Points of Progressivism shich shaped international politics for most of the 20th Century. This tretise shaped the treaties that ended WWI, and I believe that it also shaped financial dealings between the G7 until now. The intial point that is so on target here but which is being ignored to the detriment to our financial markets is: Open covenants, openly arrived at, after which there shall be no private international understandings of any kind ( in the areas of free trade, open agreements, democracy and self-determination). Too much is happening on weekends with our Treasury and Fed and dropped on the public before the markets open on Monday.

We definitely need change in our government. Wilson’s 14 Points guided FRD and Reagan; they should also guide our next President.

As I sit here, S&P futures show more significant downside of 1.5% after today’s big 5% down day, as we wait to see what happens to AIG.

Moody’s just announced their downgrade of AIG as I’m writing.

Time for another round of Tums.

I’ve lived through these melt downs in the past. I internalize it – no sleep, grind my teeth, my ulcer stabs – but we get through it. The best course of action is always to NEVER over-react, invest in earnings growth – even if the stock prices are temporarily falling; and don’t follow the herd over the cliff.

AIG failing would be huge, but we do not own the banks and brokers; we own the companies that have earnings. When the smpke clears, that is what matters.

Mark