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Black Monday update: AIG tries to borrow its way out of debt

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By Michelle Malkin  •  September 15, 2008 12:40 PM

Yes, the fit is still hitting the shan.

MarketWatch now reports that AIG has won approval to borrow $20 billion in assets from subsidiaries to try and bail itself out.

Just keep my money out of it!

Next in line to beg for a fed handout: Washington Mutual.

Watch your wallets.

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What I’ve been saying for the past year: It’s all a vicious cycle of their own making.

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Why worry? Re. Lehman:

Lehman’s collapse will send deep and painful ripple effects across the markets. The firm sat on $33 billion of commercial real-estate assets and $13 billion in residential mortgages at the end of August; a liquidation could mean forced sales of those and other assets, which could knock down the value of other firms’ holdings.

Lehman is also deeply intertwined in many other markets — most notably the vast market for credit-default swaps, in which it is a top-10 player. Even as they were holding the line about being involved in funding a rescue, Fed staff members over the weekend were working with Wall Street credit traders to help sort through their positions with Lehman in this market. Officials also were involved in discussions during the weekend of brinksmanship that brought agreement Sunday night on the sale of Merrill to BofA.

Fed officials have some confidence that they are better prepared to deal with the fallout from a failure than they were when Bear Stearns failed, and the Fed arranged a shotgun wedding to J.P. Morgan Chase & Co. The emergency lending facilities it set up after Bear could help cushion the blow to the market if Lehman now fails. But some areas, like swap trading, are still a huge source of uncertainty.

…Officials worry that the collapse of an investment bank could send problems cascading through the financial system by way of this market. The Fed has been pushing Wall Street to create a new clearinghouse to diminish that risk, but it isn’t in place yet.

Sorting out Lehman’s CDS positions promises to be difficult and time-consuming, because many of the contracts have different terms and maturity dates. In a survey last year by Fitch Ratings, Lehman was listed among the 10 largest CDS counterparties by number of trades and the amount of debt to which the contracts were tied.

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