Bad times in the stocks

First Merryl Lynch is sold to the Bank of America, then Lehman Brothers’ files for bankruptcy. Today, JP Morgan has announced that it plans to build to buy Washington Mutual for next to nothing, and people are speculating that without US Government intervention, AIG will have to declare bankruptcy by the end of the week. If AIG fails, brace yourself. We’d be in for an unprecedented storm of epic proportions, perhaps exceeding the Great Depression of the 1930s in severity.

AIG is an insurance firm, not a lending institution, so it seems counter-intuitive that they have been affected by this financial crisis, and could affect us. Unfortunately, AIG is one of the largest insurance firms around, with more than a trillion dollars in business, and they invested heavily in assets backed by subprime mortgages. Since the loans are defaulting, its importance, and unsurprisingly, its exposure, has increased. Like most Wall Street institutions, they have been caught unaware, and their stock has paid the price, down over 90% since the beginning of the year, dropping to less than half of yesterday's worth before rallying on news of a potential Federal Reserve bailout plan.

What does this mean for us commoners on the outside of this financial game? Any investments held in mutual funds have the possibility for exposure, as many mutual funds invest in AIG (and the other firms that are collapsing at the moment). Prices on everything could inexplicably go up, as the Wall Street world “passes the savings on to you” so to speak, increasing the cost of credit (unavoidable at this point, or reckless to avoid it any longer). Companies will be forced to increase their prices, lest their liquidity dry up.

And it’s just Tuesday. I’ll try to get something positive for Thursday…

The market has been overdue for a correction for a long time, as I mused about nearly a year ago. Unfortunately for us, it is likely to be a big one. I just hope I wasn’t right when I mused that we could be looking at the beginning of a collapse much like the end of the USSR’s economy, because I haven’t stocked up on enough food and vodka for that yet.