White Flag To Early

As details of the government's belated "Federal Toxic Landfill Act" emerge -- that is, the rescue plan put forth by Treasury Secretary Hank Paulson -- many thoughts come to mind but none more often than how ticked-off the troops at the Thundering Herd must be that their chief raised the white flag 3 1/2 days too early.

Had John Thain and the board of Merrill Lynch just hunkered down for a few more days, then their famous white-shirted army of advisors would not be POWs under a new general in Charlotte.

What also strikes me is that the Merrill management ignored the very advice that their brokers were espousing these past few days -- be calm, stay the course, don't panic, don't do anything rash, this too shall pass, etc., etc.

The Markets' Wild Ride

If you didn't have a chance to keep up with how things played out from day to day, let me do a quick and dirty recap:

Sunday: The Federal Reserve pumped a bunch of money into the system, increased the amount it will provide in its lending facilities and further liberalized the collateral it will except in exchange for loans.

Monday: Lehman Brothers declared bankruptcy. Bank of America took control of Merrill Lynch. And AIG's fate hung in the balance.

Tuesday: The Federal Reserve denied the markets a much anticipated interest rate cut. Instead, it followed with a two-year, $85 billion loan to bail out AIG.

Wednesday: The Treasury announced a finance program where it would auction off Treasuries, separate from what it already offers. The proceeds will go to the Federal Reserve to use for "initiatives."

Thursday: Central banks around the globe decided to join the party. They declared efforts to pump nearly $250 billion into the global system to avert a financial train wreck.

Friday: We learned of a new initiative, spearheaded by Treasury Secretary Henry Paulson, to put together $800 billion in a new-fangled institution and $400 billion more at the FDIC. The money will be used to take crappy assets off troubled balance sheets and grease up money markets.

Prior to this week, steps taken to stabilize the market were considered ineffective. By the looks of it, though, this week's actions tell me these guys don't want to fail in their efforts to restore order ... again. But the condition of credit markets is far from cured.

THE BEGINNING OF THE END

Financial juggernaut Lehman Bros. (LEH), the oldest U.S. investment bank, belly-flopped.

This is significant for a lot of reasons, not the least of which that Lehman's failure reduced the number of major U.S. investment banks from five at the beginning of the year, to just three.

Then, Merrill Lynch (MER), the largest retail broker and investment bank, agreed to Bank of America's (BAC) takeover offer for $29 a share, which equates to about $44 billion. MER closed today just above $17 a share today, a 77% drop from the stock's value this time last year.

Looming in the future -- rather, darkening the horizon -- is that financial behemoth American Insurance Group (AIG) was informed that its credit quality will get downgraded. Investors now see that the ailing firm will have to sell many, if not most, of its assets . or be bought or go bankrupt.

I think an offer could even come overnight, but in the meantime, the Fed threw AIG a $40 billion line of credit, as private equity firms are hemming and hawing about what, if any, parts of AIG they might want.

The Treasury and Federal Reserve are showing some tough love, though, and said they won't bail anyone else out. They did, however, jawbone all weekend and added liquidity by expanding the loan availability through traditional mechanisms.

Will it be enough?