A banker friend in London writes that the credit crunch has had a positive impact on his relationship with colleagues: “for the very first time in my career I didn’t get mad when the old grey guy on Credit Committee tried to reject my deal by pointing to the interest rate hedge and saying “and what if Treasuries go bankrupt?”

In today’s Times, columnist Ben Stein writes, ” Almost no one (except Mr. Buffett) saw this coming, at least not on this scale.”

Stein certainly didn’t see it coming. A year ago, he pooh poohed the mortgage crisis in a column titled “its time to take a deep breath,”

Yes, there are real problems: housing, mortgage defaults, losses at financial firms, rot in hedge funds. But over all, things will be fine. Unless there is a genuine dollar crisis or a devastating recession (very unlikely), things will work out. This economy is very big and very solid. It cannot be derailed for long by anything we have seen lately. If I were the editor of the business section for just one day, I would run one immense headline: ‘Everything Is Going to Be Fine. Go Back to Work.’At that time (in a post titled “Creeping to collapse“) I wrote, “It will be fun to watch what Stein writes when the Dow is plumetting towards 8,000, rather than 13,000.” Well, now we know.

Traditionally, banks get shut down over weekends, since the extra time gives regulators room to get into the banks and take control. Wamu’s shutdown last night suggests either that regulators wanted to put the fear of God into Congress or that there was an acceleration of the run on the bank yesterday.

That makes Wachovia’s trading today particularly dicey. Twice in the last six weeks, the stock has been down to $9 during the blackest of trading days. Last night, on the back of anticipated Congressional approval for the $700 billion bank bailout, WB closed at $15.

This morning, with the bailout apparently still weeks away, WB opened at $10, then drifted up to $11.34. But now WB has sunk back to $10.

Keep your eye on WB. Here’s a chart of trading so far.

Update: Have you lent long-term money to WB and want some insurance? It will cost you, upfront, 30 cents on the dollar and 5 cents a year. Why would anyone (except a retail account with FDIC $100k guarantee) leave money in WB?

It’s Thursday, so time again for my favorite economic indicator… initial unemployment claims.

In the week ending Sept. 20, the advance figure for seasonally adjusted initial claims was 493,000, an increase of 32,000 from the previous week’s revised figure of 461,000. It is estimated that the effects of Hurricane Gustav in Louisiana and the effects of Hurricane Ike in Texas added approximately 50,000 claims to the total. The 4-week moving average was 462,500, an increase of 16,000 from the previous week’s revised average of 446,500.

To get a sense of how bad this looks versus recessions of the last 50 years, look at this graph. At 493,000 claims last week, we’re headed on a straight trajectory into the territory of the horrible economy of the early eighties. We’re over the precipice into a recession with no signs visible of a bottom.

The New York Times continues to churn out great graphics. This graph shows the degradation of various finance stocks over the last year. The graph highlights the perversity of the fact that one of the biggest as-yet-non-bankrupt losers, Wachovia, is often mentioned as a potential savior of Morgan Stanley.

When junk bond wheeler dealer Drexel Burnham Lambert went bust in 1990, my buddy Pete and I bought a hundred t-shirts in the company’s liquidation sale. “Back to the future,” they said. Long before eBay, we recognized that those shirts were a keen investment. Now if we could just find them.

Ken Layne sums this week up best. Noting that the stock market ended the week essentially flat — after many finance stocks gyrated up and down by 50%-75% in a day — Ken concludes “A half-trillion in new U.S. debt just doesn’t buy what it used to!”

A few weeks back my banking guru Humphrey, holed up in Geneva minting money at the expense of evil VCs, recommended the book Bailout, by Irvine Sprague. Sprague worked for and ultimately ran the FDIC during four of first, precedent-setting bank bailouts of the 70s and 80s.

In his years of watching bankers beg for public assistance, Sprague became profoundly skeptical of their pleas for special treatment. Too often, even with the strongest of due diligence and regulatory strictures, bankers used public assistance to simply dig themselves deeper holes.

Though the giant bailout that’s now cobbled together in DC and NYC seems to unavoidable — we did seem to be minutes from a meltdown yesterday — our economy will be gravely harmed by the fact that many reckless, idiot, greedy bankers will, thanks to this giant buttress of public assistance, hold on to their jobs to do another decade or two of harm.

While in the best FDIC bailouts, Sprague was able to use the ticking clock to put a gun to bankers’ heads to force them make significant concessions and share risk and upside with the government, it seems the urgency and all-encompassing size of the current bailout puts the gun at the government’s head — bail us out on our terms or watch the US economy melt-down. In retrospect, the AIG deal earlier this week — in which the government gets 80% of the upside — will look incredibly sweet.

No doubt Merrill and AIG and Lehman will soon be sueing to try to retroactively get a piece of the new bailout.

I wish I could see how we’ll get out of this… or even figure out a way to hedge against the idiocy that’s ahead. Right now I can’t. I’d welcome your thoughts.

Politico reports: “House Speaker Nancy Pelosi has ordered a broad, swift investigation of Wall Street and will demand testimony from Bush administration officials and captains of finance, congressional officials said.”

How about a broad and swift investigation of Congress’s role in the meltdown? Why were our legislators dozing while financial wizards built mountains of fantastical paper profits that are suddenly crumbling into a pile of ashes? How many millions of dollars have legislators been paid over the last twenty years to turn a blind eye to the scheming?

Any idiot with a calculator (or any idiot reading this blog for that matter) could see this all coming. See some posts here, here, here, here, here, here, here.

Asked whether she bears any responsibility for the debacle, Pelosi said “no.” I guess she’d give the same answer to the question “can you read?”

Now that the government has taken over AIG and given the rotten institution a $85 billion loan, I’ll repeat what I said back in February, when the government first started to try to shore up firms that have insured bad debts in an attempt to forestall the day when the whole house of cards falls. This time, they took the full plunge with AIG, as the New York Times reports:

What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but A.I.G.’s role as an enormous provider of esoteric financial insurance contracts to investors who bought complex debt securities. They effectively required A.I.G. to cover losses suffered by the buyers in the event the securities defaulted. It meant A.I.G. was potentially on the hook for billions of dollars’ worth of risky securities that were once considered safe.

If A.I.G. had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of those securities, and that in turn would have reduced their own capital and the value of their own debt. Small investors, including anyone who owned money market funds with A.I.G. securities, could have been hurt, too. And some insurance policy holders were worried, even though they have some protections.

That’s the rational explanation, though the Wall Street Journal also pegs the bailout to a desire to protect money market money market funds. (I find this explanation less credible, though even more worrisome if true.)

Indeed, on Tuesday the $62 billion Primary Fund from the Reserve, a New York money-market firm, said it “broke the buck” — that is, its net asset value fell below the $1-a-share level that funds like this must maintain. Breaking the buck is an extremely rare occurrence. The fund was pinched by investments in bonds issued by now collapsing Lehman Brothers.

Money-market funds are supposed to be among the safest investments available. No fund in the $3.6 trillion money-market industry has lost money since 1994, when Orange County, Calif., went bankrupt. A number of money-market funds own securities issued by AIG. The firm is also a big insurer of some money-market instruments.

AIG’s financial crisis intensified Monday night when its credit rating was downgraded, forcing it to post $14.5 billion in collateral. The insurer has far more than that in assets that it could sell, but it could not get the cash quickly enough to satisfy the collateral demands. That explains the interest in obtaining a bridge loan to carry it through. AIG’s board approved the rescue Tuesday night.

The Fed, the Treasury, Congress, insurance regulators, bank regulators, company representatives… everyone is behaving like Jerome Kerviel, the French trader, who hid his giant losses from himself and his bosses by constantly creating false counter-trades that would hide the losses. Eventually, the ruse failed and Kerviel’s $7 billion losses came to light.

And when the band-aid comes off the “fix” of AIG, we’ll be paying again and again in coming months and years, whether in higher taxes, or inflation or indebtedness to third world creditors.

We are all Jerome Kerviel now.

“In the week ending Sept. 6, the advance figure for seasonally adjusted initial claims was 445,000, a decrease of 6,000 from the previous week’s revised figure of 451,000. The 4-week moving average was 440,000, an increase of 250 from the previous week’s revised average of 439,750.”

There’s an interesting pattern here. Almost every week there’s a decline, but it’s always a decline from the previous week’s “revised figure.” The telling number is the 4-week moving average, which keeps edging ever higher even with the weekly “declines.”

The four week moving average for initial unemployment claims rose again this week, notching up from 438,500 in the August 9 week to 445,750 last week.

The headlines say this week’s claims fell 13,000 versus to 432,000, but that’s just because last weeks number was revised up to 445,000.

This time a year ago, 326,000 people filed for unemployment.