So I had not expected a Fed bailout.
From Felix Salmon:
AIG stock is now trading on option value only, which means that we can no longer look to its share price as an indication of what the market thinks is going to happen. But we can certainly look to the bond market, and if you thought the share price was ugly, just wait until you see this:
AIG's $2.5 billion of 5.85 percent notes due in 2018 plunged 19.5 cents to 33 cents on the dollar as of 9:55 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
33 cents on the dollar? The message is loud and clear: AIG is toast. This is the massive counterparty failure everybody's been scared of, and frankly I'm astonished that the broader stock market isn't plunging as a result. No one is prepared for the repercussions here: the failure of AIG is likely to be an order of magnitude more harmful than the failure of LTCM would have been. And it's not even happening on a Friday, where we could have yet another Emergency Weekend to try to work things out.
Felix also points to an interesting index: CDR Counterparty Risk Index.
These are interesting times. Even the US default risk has risen. The price of 10 year US Treasury Credit Default Swaps has risen to 25 from 21 last Friday. Who's next? WaMu? Citi? It would be interesting to see the prices of the credit default swaps for these institutions but I haven't been able to find any publicly available data but some interesting news pieces, like this which shows the prices of CDS as July 16, 2008. Going by the 1 week change, Citigroup looks okay along with JPMorgan Chase, BofA, and Goldman Sachs. Top of the list (which excludes AIG, unfortunately) was Lehman Brothers, followed by Wachovia, WaMu, Merrill Lynch. Morgan Stanley and Wells Fargo rounds up the list.