– Another day another bailout. At 6:30pm yesterday evening on Capitol Hill the government’s plunge protection due Hank Paulson and Ben Bernanke announced to lawmakers a plan to plunge $85 billion of taxpayers’ money into insurer AIG (NYSE:AIG) to prevent it from going under. In return, the government will take a 79.9% stake in the company.

– Interests of taxpayers “protected,” according to Fed statement. “Loan is collateralized by all the assets of AIG.” “Loan is expected to be repaid from the proceeds of the sale of the firm’s assets.” 

– “The US government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.” 

– Here’s a scary thought, says the WSJ: What if the US government runs out of rescue cash? What if investors lose their appetite for Treasury bonds?

That thought likely lay behind Ben Bernanke and Henry Paulson’s hesitation to aid AIG, though finally the Fed seemed ready to cough up in a truly big way last night. Even those who closely follow the credit crisis probably expected to see banks and savings institutions heavily laden with mortgage debt end up on the triage pile — not an insurance company known for its pioneering work in China, its giant aircraft leasing business, and the like.

– “What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy,” says The New York Times, “but A.I.G.’s role as an enormous provider of financial insurance, which effectively requires it cover losses suffered by other institutions in the instance of defaults of securities that they have purchased. That means A.I.G. is potentially on the hook for securities that were once considered safe.”

– It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University quoted in the paper. “The spillover effects could have been incredible.”

–  An AIG bankruptcy would dwarf that of Lehman Brothers (NYSE:LEH), says William Patalon III. “The diversified insurance-and-asset-management firm is much bigger than Lehman, with $110 billion in annual sales last year and an employee roster of 116,000 people. An AIG failure would impact many more average consumers than the Lehman debacle, as some of AIG’s biggest units include commercial life insurance and retirement planning.”

– Credit default swaps and mortgage business to blame, says WSJ.

– The AIG bailout is burying some other pretty stirring news… like the crash in Russian stocks. This from the FT:

Russia’s two main bourses, RTS and MICEX, said on Wednesday they were suspending trade until further notice from the state’s main market regulator as shares continued to tumble one day after their steepest decline in more than a decade.

Russian stocks had continued to slide on Wednesday morning even as the government unveiled new anti-crisis measures to pump up to $29.5bn in extra budget funds into the three main state-controlled banks.

– The worse things get on Wall Street the better the Vanguard Short-Term Bond Index ETF (AMEX:BSV) looks says Andrew Snyder at Today’s Financial News. This high-yield bond fund is one of the safest places to park your cash right now.

– “It’s during times like this when all those guys you read about (Buffett, Templeton, et al.) made their best investments,” says Chris Mayer.

This from the 5 Min Forecast:

During times like this, there are no ‘safe’ stocks, in the sense that the prices can’t go down. Nearly everything goes down when the market averages fall 20% or more. Anyone tells you to buy safe stocks, hit ’em over the head with a book. There are a lot of great companies out there, I certainly agree. And many great buys. But they are safe only insofar as their businesses are highly unlikely to suffer some permanent impairment – like a bankruptcy or major loss.

– Crude oil is getting hammered. Prices dropped below $90 a barrel, and are now at just over $94 a barrel.

– That AIG is the sponsor of one of the largest commodities index isn’t helping matters. The DJ-AIG commodity index has about $30 billion in derivatives that track the benchmark, says the FT. The index fell 2.7 per cent to its lowest level since September 2007.

– Eric Fry at Rude Awakening says commodities will rebound. Stupidity and greed can wipe out stocks (see above); they can’t wipe out commodities…

A hypothetical portfolio that contained half S&P 500 stocks and half commodities would have lost 9.75% during the month of September, so far. That performance would rank as the fourth worst monthly performance of the last 50 years. In other words, these are strange times indeed.

But even though commodity prices have retreated substantially from their all-time highs, they will rebound eventually. By contrast, the financial sector has wiped out more than one trillion dollars of investor wealth…and that wealth is gone for good.

So at the risk of repeating ourselves, we will repeat ourselves anyway: we like commodities, at least for the long haul, if not also for the short haul. We like commodities because supplies are limited and demand is not. But we also like commodities because they lack CEOs and executive management teams. We like commodities because greed and stupidity cannot destroy their value.