Merrill Lynch Sold, Lehman Brothers Bankrupt, While AIG And WaMu Totter

The financials are falling! The financials are falling!

We awoke this morning to the cry of Chicken Little, only this time our poultry little friend is not over reacting.

Lehman Brothers tried to avoid bankruptcy over the weekend by negotiating a buy out with Bank of America and Barclays. Henry Paulson, Secretary of the Treasury, had told the market not to expect the tax payers to bail out Lehman Brothers and there was none.

With no government guarantee to protect them against losses, Barclays and Bank of America walked away from a potential sale, prompting Lehman Brothers to file for Chapter 11 Bankruptcy protection earlier this morning.

When Bank of America walked away from Lehman Brothers, they walked over to Merrill Lynch and negotiated a price to acquire the firm.

AIG is scrambling to raise capital to avoid what would be a devastating downgrade of its credit rating. The company rejected a couple of deals that would have injected needed capital, but at the price of control shifting to those capital investors.

An AIG deal may require Fed participation and it is presently unclear whether the government is willing to take on more now that they have a $200 billion bail out to finance off the tax payers' back following the take-over of Fannie and Freddie.

Washington Mutual is now seeing as much as 45% of their Payment Option ARM loans, which were written by the thrift from 2004 to 2007, heading into default.

Today's market open is going to be rough. Minutes prior to the open the DJIA futures are down 370+ points, the S&P 500 futures off more than 45 points, and the Russell 2000 showing 23 points to the downside.

We could talk about how you could have made a small fortune playing these falling financials to the downside. While that is true, it feeds into the sort of greed and lack of risk management that has lead Lehman, Merrill, and perhaps AIG and WaMu to their demise.

Risk management is an absolute necessity, if you hope to survive and even prosper during what will be remembered as the worse financial crisis to hit Wall Street since the market crash of 1929.

Christopher Smith
TheOptionClub.com