The Sunday night Wall Street tsunami, Part I: What happened?

(NOTE FROM JOHN: I apologize in advance for Chris' tone criticizing Senator McCain over the economic crisis. Obviously he didn't get the Obama campaign memo explaining that this crisis is NOT John McCain's fault - that's what Obama said this morning, not John McCain's fault. No mention of "whiners," no mention of McCain admitting he knows nothing of the economy (gee, McCain as "inexperienced," no we wouldn't want to make his head explode with that charge), no mention of McCain's other adviser writing an op ed this weekend scolding Americans for thinking the economy has problems, no mention of McCain's other banking crisis he very much caused, the Keating Five, no mention of McCain now supporting Bush's tax cuts. So please, Chris, get with the program.)

If ever there was a moment in history that proved just how out of touch McCain is about the economy, it was last night. Yesterday he even had an economic adviser propping up the economy, scolding Americans for buying into the "media-created problems" related to the credit crisis, as if Wall Street gambling and heavy payouts had nothing to do with it. For those wondering why McCain has been focusing on silly non-issues like lipstick, here you go. He admits that he knows nothing about the economy and has no answers.

For starters, what the heck happened last night? Lehman Brothers, founded in 1850 and made it through the Great Depression, fell victim to the credit crisis. The housing bubble extended Lehman too much with bad loans and potential buyers from the US or Europe were uninterested in snatching up the business without significant US government financial assistance, as witnessed with the Bear Stearns bailout. Some were interested in the good pieces (those without debt) but the weight of bad debt was too high, with too much risk. Overall the industry generated roughly $1 trillion in bad money during the credit crisis so the numbers could drag even the largest companies under. The fact that everyone in banking and finance has billions in bad loans also contributed to the caution.

It was very significant to see Henry Paulson and the Fed *not* step in with direct assistance. Yes, the Federal Reserve is extending the free (half the rate of inflation) loans to Wall Street, an extraordinary process that started earlier this year. This is a cost to American taxpayers though not as expensive as a bailout. The Fed has also brokered a $70 billion fund for troubled banks to use and this is exclusively a private initiative by global banks, based on the information provided so far. If this fund keeps this group of bums out of our pockets, fine, but I suspect in one shape or form they will all pass along the cost to normal people. Time will tell.

Of course, Lehman wasn't the only story last night. Since Stanley O'Neal walked away with $161.5 million despite driving the company into the ground, Merrill Lynch has been the center of financial trouble rumors. On Sunday night, Merrill "merged" with Bank of America in a pure stock sale, no cash. This "merger" was yet another act of desperation on Wall Street due to the housing crash, which they all feasted on with jumbo profits and paychecks. To reach out to them with financial assistance is a violation of the what a true free enterprise economy is all about. Jobs will be lost, but let's not forget that these are the people who stoked the housing bubble fires and who were paid well beyond the imagination of most Americans.

Also in the news late Sunday night was long-troubled insurer AIG, another failure who overextended themselves in the housing bubble. And yes, another company who showered their CEO in riches, who still has that money as the company crumbles based on his bad decisions. (Great work, when you can get it.) AIG is asking the US taxpayers to kindly pass along a bridge loan of $40 billion to help them get through tough times. Is there really a polite way to say "sod off" or do we even need to be polite with these spongers? Call in Nancy Reagan and "just say no" to them all.

Let them fail or else they will drag us all under water with bad debt. Investor Wilbur Ross is saying that we could possibly see 1,000 banks in US fail as they did after the John McCain Keating Five/S&L crisis in the 1980s. The flashy banks and financial services companies all wanted the rugged free enterprise system for those with the least but CEO socialism for those at the top. Let them go under and let them live with the consequences, just as the rest of Americans who have been on the receiving end of the credit crisis.

Now read Part II, Where do we go from here.