Unless you’re a Wachovia shareholder, you had a happy Friday. Sellers didn’t stampede and buyers didn’t hide. (JPM shareholders even saw their holdings rise 10%.)

There are a few ways of reading this. One is that all is well, the storm has passed.

Another is that sellers, unable to contemplate the horror of no Congressional approval of the $700 billion bailout package clung, simply shut their eyes and hoped for the best. With eyes squeezed shut, shareholders ignored the Chinese banker’s embargo on trading with Western banks, the new high in initial unemployment claims, the frozen money markets.

I’m think it wasn’t good will the kept sent the market sideways Friday, but paralysis. The gravity of our situation is hard to comprehend, much less stratetize for. What do you sell? Where do you move your money? The average American, even the average American fund manager, doesn’t have goggles big enough to imagine what a post-credit world might look like.

It’s interesting to know that even as Wall Street traded sideways, Treasury officials were secretly warning Congress of a 3000 point Dow meltdown.

One Republican said that the message from government officials is that “the economy is dropping into the john.” He added: “We could see falls of 3,000 or 4,000 points on the Dow [the New York market that currently trades at around 11,000]. That could happen in just a couple of days. What’s being put around behind the scenes is that we’re looking at 1930s stuff. We’re looking at catastrophe, huge, amazing catastrophe. Everybody is extraordinarily scared. It’s going to be really, really nasty.”

Back to Wachovia. Citigroup, Wells Fargo and Spain’s Banco Santander have apparently been approached by Wachovia management after its shared traded as low as $8, down from $14, on huge volume Friday. But, as one article (can’t find it now) noted today, potential buyers are incentivized to let Wachovia wash out, like WaMu, and then, like JPM, buy the quality assets post failure. After years of chasing assets higher, buyers are learning that, once again, cash is king and time is always on the buyer’s side.

Today’s WSJ: “Top U.S. policy makers emerged from hours of tense negotiations with a clear message just after midnight Sunday morning: A deal to bailout U.S. financial markets has been agreed on and all that remains to be done is to commit the legislation to paper.”

“All that remains is putting it in writing?” Am I the only person who finds that “agreements in principle” that take 20 minutes to nail down verbally can take months to spell out in writing, once the parties start digging into the nuances and granularities in the vague words that created the initial bridge of agreement?

Sellers, first in trickles and then in crowds, will meet no buyers today. Prices could drop 5%. Or 10%. Or 20%.

My bet is 12%.

* Congress, bailing with forks, thimbles and greasy palms, can’t reach a deal to support banks.
* The Chinese government has asked its banks not to trade with foreign banks.
* Interbank rates are at new highs. (LIBOR at 3.76.)
* The FDIC closed WAMU last night, after depositors pulled $17 billion out of the bank over a ten day period.
* Initial unemployment claims spiked to new highs yesterday, heading us into territory not seen in 25 years.

Any of these nuggets of news, taken alone, would sock prices 2%. Taken together, and coming on the eve of a weekend — a full 48 hours without trading!!! — sellers will take any price for their shares and potential buyers will hide their wallets.

What’s a safe haven these days? I keep calling old friends in finance and nobody has a clue. Gold? (The Chinese have just 2% of their reserves in gold, versus the US at 60%.) Oil or copper? Maybe JPM, who seems to have the Fed, FDIC and Treasury’s full confidence?

Sad sad sad.

Today’s arbitrage suggestion for you Home Depot traders: go long shotgun shells and bottled water, go short ice cream (unless you own a generator) and other extreme luxury items.

Six weeks from now you’ll reap lots of dollars. Lots.

Of course, you’ll need a wheelbarrow to transport them home to use as kindling.

I learned last week that my friend Paul Panitz died August 29.

Paul had written earlier this year saying he had esophageal cancer. The prognosis wasn’t good, Paul wrote, and he might not live out the year. Ever wry, Paul added, “Even my German Shepherd got in on the act, with her spine putting pressure on the nerves to her legs. She was operated on at the end of January, and still can go out only on a leash, but it seems she’s making a full recovery.” Paul went on to write that his businesses — copy shops from Budapest through Moscow and out to Shanghai — were doing well. He closed, “Well, those are the “highlights”. I’m quite busy from now through the middle of next week, but after that, I’ll have time to talk.”

I got to know Paul in 1993 while I working as a business journalist in Budapest. Late one evening I was photocopying some documents in a big copy shop near our apartment. Thinking the copy shop might make an interesting story, I asked to meet the owner. Paul turned out to be there. A wiry chain-smoking American about 10 years my senior, Paul had sold his copy business in DC and moved to Eastern Europe to watch the economy be reborn. Here’s the story I wrote about Paul in the International Herald Tribune.

I didn’t know it then, but hearing about Paul’s incredible tribulations, maneuverings, craftsmanship, triumphs, parsimony and occasional losses awoke in me an entrepreneurial urge. What a life, I thought, to dream and scheme and battle to shape something from nothing.

In 1998, when I started to think about creating a business to rent websites to newspapers and magazines, Paul was one of the first people I called to share the idea with. As the idea became a plan, Paul was the first person who committed money to the idea, called Pressflex. Though Paul asked a lot of questions about the concept and market, he didn’t ask about valuation. “Let me know when you do a deal and I’ll be in,” he said. That commitment gave me the courage to round up other investors.

After a burst of initial sales, Pressflex grew very slowly, much more slowly than our funding or plans anticipated. In 2001, with our bank account dwindling towards zero, Paul asked if we were still confident we had a good idea. Yes, we said. Paul offered to loan us money. He asked for no projections, no additional logic… he just asked if we were confident we could repay him. We were confident, knowing that if we had to abandon our dream, we’d pare down the company to a skeleton and get Paul his money from residual revenues from site rentals. So Paul loaned Pressflex $75,000 and we humped along with a core staff on slashed salaries. We signed a few more newspaper clients, then some magazines and pared our burn rate enough to buy us an additional year of life. And it was during that year that we conceived Blogads.com. Today the Pressflex site rental business is solid and Blogads is thriving.

Both for his example and his unwavering support, I owe much to Paul, and I told him that when we last talked.

There was a tiny but powerful tribute to the College of Wooster in the NYTimes Magazine’s article today about philosopher Kelly Jolley.

Some factlets from the weekends’ papers.

The New York Post highlights the flood of money market fund redemptions last week.

According to traders, who spoke on the condition of anonymity, money market funds were inundated with $500 billion in sell orders prior to the opening. The total money-market capitalization was roughly $4 trillion that morning.

The panicked selling was directly linked to the seizing up of the credit markets – including a $52 billion constriction in commercial paper – and the rumors of additional money market funds “breaking the buck,” or dropping below $1 net asset value.

The Fed’s dramatic $105 billion liquidity injection on Thursday (pre-market) was just enough to keep key institutional accounts from following through on the sell orders and starting a stampede of cash that could have brought large tracts of the US economy to a halt.

While many depositors treat money market accounts as fancy savings accounts, they are different. Banks buy a variety of short-term debt, including commercial paper, with the assets. It is an important distinction because banks use the $1.7 trillion commercial-paper market to fund their credit card operations and car finance companies use it to move autos.

Without commercial paper, “factories would have to shut down, people would lose their jobs and there would be an effect on the real economy,” Paul Schott Stevens, of the Investment Company Institute, told the Wall Street Journal.

Cracks started to show in money market accounts late Tuesday when shares in one fund, the Reserve Primary Fund – which touted itself as super safe – fell below the golden $1 a share level. It had purchased what it thought was safe Lehman bonds, never dreaming they could default – which they did 24 hours earlier when the 158-year-old investment bank filed Chapter 11.

By Wednesday, banks sensed a run on their accounts. They started stockpiling cash in anticipation of withdrawals.

And Joe Nocera noted Saturday that, thanks to the new government guarantee of money market funds, it is now safer to keep your money in money market funds than FDIC insured banks. The FDIC insurance limit is $100k and is restricted to individuals. Now businesses — anyone — is insured infinitely in money market funds. That creates monstrous moral hazard… since investors can now dump money into high-yield funds that invest in the riskiest paper, knowing that their money is insured. It is also difficult to know how this guarantee will ever be terminated, since the minute it is lifted, money will flood out of money market funds.

Tonight we learned that Morgan Stanley and Goldman Sachs have banking licenses. Bloomberg focused on the impact this has on their liquidity — since they can now tap the Fed directly rather than relying on banks as intermediaries. It’s possible there’s another back story: maybe the rumored takeover last week of Morgan Stanley by Wachovia got it backward. It seems probably that Wachovia, burdened by $122 billion in rotting “pick and pay” loans, is in the weeds and will be taken over — like Bear Stearns — by a more competent and credible Morgan Stanley. Although at Friday’s close WB’s market cap was $40 billion, it spent most of the week valued at roughly $20 billion… significantly smaller than MS’s $30 billion.

Finally, one great tragedy of this bailout is that all the rotten bankers are not going to lose their jobs. Relative to previous banking crises, we haven’t even begun to wash our dirty laundrey.

Between 1989 and 1991, for example, 1,187 banks and S.& L.’s went under, representing more than $454 billion in assets, according to the Federal Deposit Insurance Corporation.

So far this year, there have been 11 failures of these institutions, representing total assets of around $40 billion.

The bailout guarantees that the bozos who put us into the current black hole will live to lend another day.

My buddy Matt Welch’s great book on John McCain is now out in paperback. I’ve just finished reading it for the second time– the first time through I marveled at the organization and thoroughness, this time I relaxed and enjoyed the word-smithing. Read it before your next cocktail party with undecided voters.

Other than watching your 401k erode, it’s hard to relate to Wall Street’s meltdown. Here’s the chain of causation that leads from Wall Street to your wallet.

Right now, anyone with cash — whether banks or investors — is very leery about letting others touch their money. Banks can go under, companies can fold. So everyone with cash is dumping money into US Treasuries. The rate the government has to pay to keep people’s money basically dropped to zero yesterday, down from 2% Monday. (Today’s New York Times has a great graph illustrating this yield slide, but I can’t find it online.) Conversely, the rate that banks and companies have to pay each other for money has jumped 2 to 3 percentage points. AS the WSJ reports:

In the giant market for commercial paper, a reliable source of low-cost, short-term funds in normal times, the cost of borrowing shot up Wednesday. Traders said most lenders were unwilling to extend credit beyond a single day. Sears Holdings said it paid 3.6% Wednesday, about three-tenths of a point more than a day before, to sell $3 million in 30-day commercial paper. Ford Motor Credit Co., the finance arm of Ford Motor Co., paid 7.5% for overnight borrowings, according to one trader, who said the rate would typically be several percentage points lower. General Electric Co., rated one of the safest borrowers, paid 3.5% for overnight borrowing, about 1.5 percentage points more than would have been normal, this trader said.

This is called a flight to quality. An extreme flight to quality. How does this impact your life?

Most companies, even the most profitable, rely on short-term financing to bridge the shortfall that occurs between the time they spend cash to build goods (cars, houses, widgets) and the time when they sell those goods. Without this bridge of financing, companies reduce orders, lay people off and in extreme cases go out of businesses.

Companies don’t report their orders to the government, so it can take months for this contraction in orders to show up in government data.

But layoffs show up quickly. The first thing most people do after getting laid off is to head to the local unemployment office to file a claim for unemployment insurance. And initial unemployment claims is precisely the number that has been ratchetting higher for the last year. The prior week’s numbers are announced every Thursday at 8.30AM. Today the most recent numbers came out and were, you guessed it, worse than last week.

In the week ending Sept. 13, the advance figure for seasonally adjusted initial claims was 455,000, an increase of 10,000 from the previous week’s unrevised figure of 445,000. The 4-week moving average was 445,000, an increase of 5,000 from the previous week’s unrevised average of 440,000.

So watch closely next week.

When will Wall Street’s slide end? Just as markets often overshoot on the upside, they usually overshoot on the downside. Just as the market tops out when shoe-shine boys are giving stock-tips to millionaires, markets bottom when millionaires are the ones giving shoe-shines, and EVERYONE is depressed. Sadly, we’re a long way from that moment.

So, as ugly as this week has been — at least if you’re an investor in AIG or MS or GS or WB — watch out for a few more big really nasty slides and chasms over coming months.

There’s more to come in terms of nasty surprises about balance sheets. AIG had a much bigger hole in its balance sheet than everyone expected. The same for FNMA and FRMC. There are lots of other holes out there, and right now capital is rushing away from those holes, both real and imagined, as quickly as possible.

No amount of liquidity from solicitous central banks will force people to trust each other. We’re going to have to reach prices AND conditions at which greed overwhelms fear. After a 10 year binge of greed… those hormones are tapped out and its gonna take a while for them to build up again.