Gritting teeth

World stock markets are taking a beating today, as the Federal Reserve's AIG bailout failed to soothe investors on the integrity of the global financial system.

As some analysts have put it AIG's bailout is in effect a controlled bankrupcy. The Federal Reserve has given the company a 2 year credit line worth $85 billion to allow AIG to meet it's obligations and to unwind its positions without adversely impacting the credit market. The loan's terms are predatory, "punitive" as Bloomberg News called it, because they call for a double digit interest rate on the government loan. AIG has agreed to the 3 month LIBOR + 8,5 percentage points interest rate. After failing to attract outside private equity, the company had no choice. Senior management has been ousted. And dividends are likely to be eliminated. AIG's shares are tumbling once again and on the brink of being scrapped from the Dow Jones Industrials Index.

Despite all the criticism I have expressed against US monetary authorities regarding their past dovishness, I believe they are now acting properly. The world financial system simply cannot waste anymore time on useless academic discussions on themes such as "moral hazard" and "die hard liberalism". Reality demands action.

Meanwhile, there are already many rumours as to the Fed's own liquidity situation and how much more pain it too is able to absorb. However, as things get uglier, there's only one way out: printing more money to sustain the systemic risk posed by these high profile bankrupcies. The US dollar is holding its ground which is a good sign. As for equities, one can only hope for a rebound and fast.