CHESSNOID

As expected overseas, the foreign stock markets sold off after Lehman filed bankruptcy and the fed said they were no longer giving handouts.  Of course the 500 point drop in the DOW didn’t help.

Japan’s benchmark Nikkei 225 index was down 5.3 percent to 11,560.66 in mid-afternoon trading, while Hong Kong’s blue-chip Hang Seng Index shed 5.7 percent. Both markets — Asia’s two biggest — had been closed for holidays on Monday, when news first broke about the dramatic events on Wall Street.

Across the region, markets were all deep in the red. South Korea’s Kospi was down 5.4 percent, Taiwan’s benchmark was off 4.7 percent and China’s Shanghai index was down 3.2 percent.

Japan’s central bank on Tuesday injected 2.5 trillion yen ($24 billion) into money markets and issued a statement vowing to take measures to maintain stability in the country’s financial markets. Cabinet ministers, along with the central bank chief, were also holding an emergency meeting.

Now AIG is on the ropes and getting pummelled badly.  Its stock price took a big hit but they are getting a big cash infusion.  Unfortunately, the investors’ confidence is being greatly tested right now.

Moody’s said it downgraded AIG “in light of the continuing deterioration in the U.S. housing market and the consequent impact on the group’s liquidity and capital position due to its related investment and derivative exposures.”

AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets. On Monday its shares fell $7.38, or 60.8 percent, to close at $4.76.

The Federal Reserve has asked Goldman Sachs Group Inc. to work with JPMorgan Chase & Co. about a possible short-term loan to keep AIG in business, according to a person familiar with the request who could not speak publicly because talks were still ongoing. The loan could be for about $70 billion, the person said.

JPMorgan is a financial adviser for AIG. Calls to Goldman Sachs were not immediately returned. Treasury spokeswoman Brookly McLaughlin declined to comment when asked about the possible financing efforts.

New York Gov. David Paterson, meanwhile, stepped to the company’s aid by saying the state will allow AIG to use $20 billion of assets held by its subsidiaries to provide cash needed to stay in business.

Now, the Federal Reserve may surprise us with another rate cut tomorrow. All the other rate cuts have not helped, so I think they may realize they need to identify the problem and apply the correct actions. The last time they did the 7 rate cuts in 7 months, crude oil shot up to $147. That made problems worse with consumers going from $2.50 to $4.50 a gallon for gas in less than a year’s time. Just a couple of months ago, Bernanke and Paulson were signaling increasing rates again. Right now it is sitting at 2%. If they cut it again tomorrow, investors will not be motivated to keep their money here and a flight of capitial will be renewed.

All this fallout is from the housing bubble bursting.  It was Alan Greenspan who started the housing bubble in 2001 when he did his excessive rate cuts during Bush’s first term to get us out of that mild recession.  At that time, he lowered rates to historic 40 year lows and made easy credit accessable to everyone.

NEW YORK (CNNfn) – In a surprise move, the Federal Reserve slashed short-term interest rates Wednesday and signaled it is ready to make further cuts to keep the U.S. economy from sliding into a recession.

The move, which came nearly four weeks ahead of the Fed’s regularly-scheduled policy meeting, caught most investors off guard, triggering a mighty rally on Wall Street with the Nasdaq composite posting its best day ever and the Dow industrials surging nearly 3 percent.

Citing weakening sales, production and lower consumer confidence for its decision, the central bank lowered the fed funds rate, the rate banks use for overnight loans, to 6 percent from 6.5 percent. The Fed cut the discount rate, which it uses when it loans funds to banks, to 5.75 percent from 6 percent.