There has been no issuance of corporate bonds this week, a rare event. Typical issuance is over $20 billion per week.

In addition, the total amount of commercial paper outstanding fell by $52.1 billion in the week ended September 17th to $1.763 billion, the largest weekly decline since last December. The drop reflects the seizing up of the credit market that has occurred this week and withdrawals of monies from money market funds. The commercial paper market has been relatively stable since contracting sharply a year ago and in recent weeks had seen strong increases in the total amounts outstanding, so this latest decline marks an abrupt shift.

The Lehman bankruptcy sent waves of asset sales and capitalraises throughout the system. One of the early casualtieswas the "Breaking-Of-The-Buck" at the Primary Reserve moneymarket fund. However, there are numerous otherripples.

The Straits Times reports that some Singaporeinvestors of a product linked to Lehman Brothers have receivedlate-night phone calls from DBS Bank warning them that theirentire stake may be wiped out. "The investors havetheir cash in a product called DBS High Notes 5 that the bankoffered wealthier clients last year." Even muni bondswere hit hard yesterday (check out ETF MUB) which underscoresthe extent of the panic.

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CNBC Stock Blog:

-VIX at 50!?Options Boil on Volatility

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The point isn't to single out one bank or product, but thatthis is a microcosm of what is occurring as the bankruptcyreverberates throughout the system. Then we had thecollapse in the Russian stock market and then we hadAIG.....And the mad rush to "safe" collateral was on yesterdayculminating with US cash management bills being bought at 0.1basis point. Yes, that's 0.1.

After Fed Funds traded as high as 9% last night, we had acoordinated liquidity add by the major central banks that isassisting in easing this panic into cash. The U.S.Federal Reserve made an extra $180 billion available to centralbanks around the world to lend on to their local commercialbanks in a bid to get dollars circulating in overnight and termmoney markets according to Reuters. The Fed wire is nowopen late into the night to add the liquidity necessary to keepthe gears of capitalism going.

• 'Four Bazookas' Needed to End Crisis:El-Erian
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We've seen a big shift overnight in the direction of Yen/Chfcarry positions as these trades have rallied signaling a returnback into "risky" assets. Oil has rallied strongly, bondshave sold off, and equities have rallied....for now. I'mlooking for more of this today as the markets try to catchtheir breath and assess the damage. GS and MS haverallied as well as they appear to be surviving the crisis.

Wachovia and MS are in merger talks according toCNBC. Wamuhas put itself up for auction with itsextensive California branch network a major attraction forbuyers. SEC's Cox has changed the rules for short sellingand is now requiring hedge funds to report their shorts. Lloyds Bank buys troubled HBOS mortgage lender. There'stalk in Congress of putting together an RTC like entity to buydistressed debt from the entire financial sectorcommunity. Even Russia has come out with a package toassist their stock markets.

A major reason for the dollar's sharp plunge today is the notion that the Federal Reserve's expansion of its balance sheet will boost the supply of dollars and devalue the dollar. This would be true if banks were expanding the money supply through securities purchases, loans, and leases, but such is not the case: bank credit has been falling since March, the worse 6-month period in 50 years.

Three Words For Today: Unusual, Exigent, andCatastrophic

Unusual: Yesterday, Reserve PrimaryFund, a money-market mutual fund with $64.8 billion in assetsas of Aug. 31, fell below $1 a share in net asset value becauseof losses on debt issued by Lehman Brothers Holdings Inc.

"Investor redemptions will be delayed as long as sevendays," the fund's owner, Reserve Management Corp., said todayin a statement.

The shock waves are already reverberating through the systemas the scramble for US Treasuries and repos fall to almost 0.5percent ... extremely expensive to get collateral. We maysee the Tsy issue cash management bills to ease thecrunch. It's an extreme situation and the witch hunt formoney market funds that contain paper from Lehman and AIGcontinues...

Exigent: By now, everyone knows that theFederal Reserve has taken over AIG by issuing a two-year loanof $85 billion at libor plus 8.5 percentage points. Thegovernment gets warrants (equity participation) for aneffective 79.9 percent equity stake in the insurer.

Under the "unusual and exigent" circumstances, the FederalReserve has the legal authority granted to it to act. USTreasury Secretary was insistent that AIG's chief executive,Robert Willumstad, step down. I think the ideais to give the parent company time to unwind positions andgenerate capital to meet obligations that they can't do rightnow. LikeChrysler, some analysts are expecting thegovernment to make a significant amount of money on theinvestment.

Catastrophic: So are the markets happywith the deal? I think in the short term, the markets arecomforted by not having to go through two major bankruptciessimultaneously. Medium term, the government will most likelymake a killing on the deal. Longer term, every company thatgets large enough to cause ripples on the financial sector pondin a distressed environment should be extremely worried. Whatare the rules of engagement for the US Treasury and the FederalReserve when it comes to intervening in the private sector?Unusual and Exigent? This is a dangerously broad and widelatitude for government intervention without any guidelines.

The fact thatTreasury Secretary Hank Paulsonmet withCongressional leaders prior to doing the deal brings up a moralhazard question of a different color: who was lobbying for thebailout or who wanted it to go through?

While I have the utmost confidence in Hank Paulson, someoneelse at the helm might have a different agenda down the road.This takeover function needs to have oversight and rules or ithas the potential to transform the US financial system into theJapanese financial system.

With the takeover of AIG, we may have already begun theprocess...

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I did today's edition of "The Call" on CNBCand the news was almost too much to stay on top of AIG and government help or not: Oil off probably due to hedge fund liquidation, the aftermath of the Lehman bankruptcy. You almost forgot there is a Fed meeting today and the decision on interest rates will be out soon.

The feeling of some is the Fed will leave rates unchanged and see if the moves of the past few days help. The Fed expanded the types of securities that can be pledged to the different vehicles set up recently to help get liquidity into the system. Diane Swonk of Mesirow Financial had a very astute observation as to why the Fed should cut today.

If AIG were to fail, or even if they weren't, the level of markdowns being taken on assets of every variety are preventing banks from issuing new loans as the markdowns are requiring ever increasing amounts of capital to be held in reserve. Profits are the life blood of capitalism followed closely by credit. Credit is in perilously short supply in our system. A lower Fed Funds rate equates to a lower cost of capital and if banks had to withhold even more capital to support counterparty trades they may have with AIG then a lower cost would be helpful. I hadn't thought of it in quite that way, but Diane is right.

I can get the notion the Fed wants to keep some ammo for a move tomorrow if needs be. But the issue of AIG's potential failure really trumps all and rates should be lowered today.

I don't believe in government bailouts, but I do think a bridge loan should be extended to AIG secured by one or more of their crown jewel businesses, like aircraft leasing. The size and complexity of a potential AIG bankruptcy makes a move like this necessary.

The common shareholders can be diluted out of existence with the terms of a loan if that's what Paulson feels necessary. The likelihood of a private sector solution is nil, in my opinion. The role of the Fed, Central Bank, Treasury is to provide a measure of stability during stressful times. Like now for example.

• US Considers Aiding AIG; Private Bailout Is Unlikely

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This morning on CNBC Governor John Corzine (D) of New Jersey blamed the current crises in the market on what he called the "laissez faire" mood of regulation which we have seen "over the past decade." (Video below). Does he even believe this stuff? Lehman Brothers, like Bear Stearns and others was basically lobotomized by Corzine’s former colleague Eliot Spitzer, who severed communication between the research divisions of these firms from the trading operations. He did this in the name of "conflict of interest." Who’s interest was served by severing the higher brain functions of these firms from the rest of the nervous systems? With one populist fell swoop, allegedly designed to make Wall Street safer for investors, Spitzer made it dumber.

Then there’s AIG , another victim of steamroller populism a la Spitzer. One of the coolest and most venerable heads in finance was forced out, and AIG’s descent began. Let’s make perfect clear to Mr. Corzine and his friends in the United States congress, the current cascade of financial crises doesn’t have a blooming thing to do with "laissez faire" capitalism. These banks are regulated to the hilt. When (then) Senator Corzine and others decided to use the Enron scandal to ramp up the volume of new Wall Street regulations, I and other supply siders warned about the unintended consequences of their actions. “Legislate in haste, repent at leisure,” said John Adams and he was right.

Riskier financial assets including corporate equities opened as weak as expected this morning, but I believe these assets will stabilize before long for a number of reasons, shown below. Current conditions emphasize yet again the challenges that investors face in investing from the bottom up and why knowledge of the macro situation is essential today.

This is the basis of my brand new book, Investing from the Top Down.

1) Market participants have had ample warning on Lehmanand have likely already taken the precautions they felt were necessary to guard against risks Lehman's potential failure might pose.

2) This weekend's deliberations by the nation's top financial firms will help cushion the blow. For example, the International Swas and Derivatives Association (ISDA) on Sunday between the hours of 2 p.m. and 4 p.m. orhestrated a so-called netting trading session enabling transactors in credit, equity, foreign exchange, and commodity derivatives to "reduce risk associated with a potential Lehman Brothers Holding Inc. bankruptcy filing." The banding together of counterparties on Sunday almost certainly extends beyond the derivatives market into other vital areas such as the $4 trillion repo market, where dealers go to obtain the short-term financing they need to carry their securities positions.

While Hurricane Ike may have been a large storm in a literal sense, the spiral engulfing cornerstone financial institutions is a much larger storm, figuratively.

The chronicle of events that produced $147 per barrel oil were legion, punctuated, in July, by fears over an imminent attack on Iran by Israel, with or without help from the US. Underlying it all, however, was financial liquidity. The weakness of the US dollar was emblematic of this liquidity.

For most of the run to the record, I was able to cite the silver lining of a seemingly booming economy that was generating forward-looking energy demand that was increasingly perceived as approaching insatiability. Oil prices were rising for a good reason, at least.

Speculation, certainly, played a role. It made sense to acquire an exposure to hard assets, particularly in an environment of sustained growth from newly emerging industrialized economies in Asia, and investors augustly did so.

Since the record set in July, a lot has changed. The euro has gone from 1.60 versus the dollar to under a $1.40, at one point last night. In terms of currency trading, this is a move that eclipses that decline in energy prices. Europe and Japan are now, for all intents and purposes, in recession. China is being closely watched, as to how its economic activity will hold up in the post-Olympics period.

The events of this weekend, with the loss of Lehman Brothers and Merrill Lynch,and AIG Group teetering on the brink of a similar fate, are producing a knee-jerk reaction by investors. Treasuries are up, as is gold. Everything else, including oil, looks to be down sizably. I had argued that oil had joined the ranks of these safe-haven investments. In these most troubling of times, oil does not appear to make the cut.

• Wilbur Ross: Possibly a Thousand Banks Will Close

I am holding to my outlook that oil does not have much farther to fall, if at all. I expect the Federal Reserve to act aggressively, possibly cutting rates, at its meeting on Tuesday, by as much as 50 basis points. This action should produce further dollar erosion and a clearer view of the path out of this thicket. I believe the Federal Reserve will choose to try to inflate our way out of this crisis.

A quick overview on what credit default swaps are. The biggest issue at this moment (early in the morning) is AIG and can they get by the need for capital.

A credit default swap is like an insurance policy. In fact, it is an insurance policy. Suppose you own bonds issued by XYZ Corporation and you want to hedge against the possibility of a default. The credit default swap market has developed over the years to allow you to do that. You would enter into a contract with say an insurance company that would sell you a "policy" that would make you whole if XYZ defaulted. The contracts usually run for five years and you pay an annual premium for the coverage. AIG is a big insurance company and they issued a lot of these contracts. They allowed their customers to "swap" to them the risk of XYZ defaulting.

Some preliminary thoughts on the Lehman/AIG/financial crisis we'll discuss on the show tonight(8 p.m. ET Sunday, Sept. 14):

1) Bear Stearns failed because it didn't have enough liquidity to conduct its daily business. They had more in overnight loans (repos) than they had in cash on hand by about 4 to 1. When the loans were not renewed, their fate was sealed. Lehman has a far more liquid balance sheet and access to the Fed's borrowing window as well. What Lehman has is a balance sheet full of impaired assets and if their credit rating is lowered, they will have to post more collateral to support the trades/debt they have outstanding. Their issue is lack of capital. If we weren't in such a panic mode, they should be able to conduct daily business. But we are moving at internet speed and while counterparties to Lehman business stood ready to do transact business last week they could easily disappear this week.

The best solution would be a merger of Lehman into a sounder organization. As of this moment (early Sunday evening) that doesn't appear to be happening. The second idea would be for a split of Lehman to good bank/bad bank, with Wall Street being forced by the government to pony up capital to support the bad bank. Lehman's remaining capital would have to go in large measure to this bad bank and the common shareholder would be left with precious little. But the market has been saying that for weeks now as is evidenced by the collapse of the stock. The big issue as well is that Wall Street is capital constrained to say the least. Hello Private Equity firms ! They have got to be there with low ball bids looking to pick at the bones.

What would be left would be liquidation and I believe if the government stands by its statements last week to not come to the rescue, Wall Street will figure this out. Survival is a powerful motivator.

2) AIG , being an insurance company, won't suffer a Bear type run on the bank. They have a capital question (not a near term liquidity issue) but where Lehman needs outside capital to support its $600 billion in balance sheet assets, AIG has life insurance companies, property and casualty insurance companies both domestic and international, a consumer lending unit, a mortgage insurance unit, and the worlds premier aircraft leasing unit. Any or all could be sold or pledged. Not an easy task, but doable.

3) Rumor has it that Bank of America and Merrill Lynch are going to merge. It will probably be more a take-under than take-over, but this one makes sense and would go a long way to ease the panic mode on Wall Street.

4) The big unknown is the state of the interconnected credit default swap market. If Lehman is forced into bankruptcy, what are their credit default obligations, with whom, how much, how many and what are the implications. This is the argument for a government backed rescue. The unknown is always scary.

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