Another government intervention, another market plunge

The Fed has stepped in to shore up AIG. Bloomberg reports:

The U.S. government took control of American International Group Inc. in an $85 billion bailout to prevent the bankruptcy of the nation's biggest insurer and the worst financial collapse in history.

The Federal Reserve will provide a two-year loan, take 79.9 percent of the New York-based company's stock and replace its management because "a disorderly failure of AIG could add to already significant levels of financial market fragility," according to a statement by the central bank late yesterday.

However, it doesn't seem to be helping markets. Bloomberg reports:

U.S. stocks tumbled as bank lending seized up in the wake of the government's takeover of American International Group Inc., raising concern that more of the nation's biggest financial companies will fail.

The Standard & Poor's 500 Index lost 4.7 percent, extending its decline from an October record to 26 percent and erasing half its gain from the five-year bull market that began in 2002.

Goldman Sachs Group Inc. and Morgan Stanley, the only remaining independent brokerages on Wall Street, plunged the most ever...

Gold and silver surged as investors turned to precious metals as a store of value...

Investors paid up for protection from further losses. The Chicago Board Options Exchange Volatility Index jumped 20 percent to 36.22, the highest closing level since October 2002...

The three-month London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, its steepest gain since 1999.

U.S. Treasury three-month bill rates dropped to as low as 0.02 percent and the so-called TED spread...widened by 0.84 percentage point to 3.02 percent.

Stocks in Europe fared hardly any better than those in the US. From Bloomberg:

European stocks posted the steepest three-day slide since 2002 after U.S. housing starts trailed forecasts and banks' borrowing costs jumped the most since 1999, deepening concern the real-estate slump and credit- market turmoil will push the region's economy into a recession...

The Dow Jones Stoxx 600 Index lost 2.1 percent to 258.04, the lowest close since May 2005, bringing its three-day drop to 8 percent...

With US housing starts falling yet again in August, the financial crisis looks set to continue.