Into The Grey Zone The future is always a grey zone, never black and white.

Monday, March 2, 2009 could be a rough day in US financial markets. As I write this, Asia is down hard in early trading while it is still Sunday here in the United States.

The most probable driver here is the combined takeover of Citigroup by the US Government coupled with the illegal taking of a stake in AIG by the US Federal Reserve. Both of these actions are clear statements by their respective bodies that the Fed and the Treasury don't know what they are doing and are simply throwing more money into the endless black holes of Wall Street. If that is how the investment community perceives these actions then downward movement in the US market could be substantial tomorrow. There is even the risk of panic and market shutdown at key cut points if the panic drives the drop too fast.

Naked Capitalism notes in its story Black Hole Alert: AIG to Get as Much as $30 Billion More that the original Bloomberg coverage outlined who was really getting protected in all this:

Goldman Sachs Group Inc., Societe Generale SA, Deutsche Bank AG and Merrill Lynch & Co. are among the largest banks that bought swaps from AIG, according to a person familiar with the situation. The insurer handed over about $18.7 billion to financial firms in the three weeks after the September bailout, said the person, who declined to be named because the information hasn’t been made public.

However, that information was subsequently edited out by Bloomberg, probably under prodding from one of those named companies.

A Wall Street Journal story about AIG casually mentions the Obama administration letting AIG off the hook, reducing their debt, reducing the interest owed the United States, and basically being buddy-buddy with one of the companies directly responsible for the current meltdown. It's pathetic. And it's also why the market continues to collapse - investors don't know the truth of anything anymore and the Obama administration, like its predecessor, seems intent on protecting the malefactors in this play rather than dealing with them harshly.

We're getting dangerously close to a hard crash scenario. That doesn't mean it will happen but that it can happen. Are you prepared?