Most of the Asian stock exchanges were on holiday on September 15, but Asian markets that traded slumped 4-5 percent, as did most of the markets in Europe, largely in response to the Lehman Brothers bankruptcy news.  In the U.S. the Dow Jones Industrial Average tumbled 504.48 points to 10917.51, a 4.4 percent decline; the DJIA still held above its 1073.96 52-week low on July 15. Investors were shaken not just by the non-rescue of Lehman but the increasingly disheveled appearance of AIG, which reportedly is seeking around $75 billion in bridge financing from the Federal Reserve. Given Treasury Secretary Henry M. Paulsen’s no-help stance on Lehman, investors drove AIG shares down 60.8 percent to $4.76. The State of New York will allow the insurer to borrow at least $20 billion from its own subsidiaries; the Fed was trying to arrange a $75-billion bridge loan for the AIG from JPMorgan Chase and Goldman Sachs.

The Lehman liquidation and AIG’s troubles had the markets on edge, and the Federal Reserve tried to allay fears by expanding, stretching, and widening its liquidity outlets. Bottom line: the collateral allowed for the Fed’s Primary Dealer Credit Facility now includes not only investment-grade debt securities, but just about everything; the same goes for the Term Securities Lending Facility. Got equities? They’re good enough for the Fed. And the TSLF schedule 2 auctions will be held each week instead of every two weeks. The Fed will offer a total of $382.5 billion at TSLF auctions from September 17 through October 30.

European financial institutions were hungry for funds on September 15. They oversubscribed the European Central Bank’s $43-billion one-day auction by a 3 to 1 margin. The Bank of England offered $5 billion; the banks wanted $24 billion. And the Swiss National Bank was lending out an unspecified but “generous” amount of francs at a 19 percent overnight rate.

The market has seen such generosity often since October 2007. Despite the largess, there is no more Countrywide Financial, Bear Stearns, Lehman Brothers, or independent Merrill Lynch.

Treasury Secretary Paulsen drew a line. How firm it will or can be is anybody’s guess. The vagueness of his statement on September 14 may be a clue. Among other generalities, Paulsen included these words: “Today we are looking forward. This weekend’s discussions made clear that both market participants and regulators in this country  and abroad recognize the need to support market stability and remove uncertainty as they address current challenges.”

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