As discussed Monday, the financial system continues to collapse.

While the Treasury’s $700 Billion Proposal is in a stalemate, the US government has siezed Washington Mutual.

For more information about the Treasury’s plan read the following link from the Wall Street Journal.

While the congress debates the details of the plan, hundreds of economist urge congress not to rush on a rescue plan. Read more at Bloomberg.com

Meanwhile, Washington Mutual has $307B assets and $188B in deposits. However the US government has closed the back and sold it’s assets to JPMorgan Chase & Co for $1.9 billion. From a financial standpoint, this just doesn’t make sense… JPM has recieved two deals of a life time in one year! There is definitely something strange about this deal.

The Office of Thrift Supervision said, “With insufficient liquidity to meet its obligations, WaMu was in an unsafe and unsound condition to transact business.” FDIC Chairman Sheila Bair said the bailout happened on Thursday night because of media leaks, and to calm customers. Usually, the FDIC takes control of failed institutions on Friday nights, giving it the weekend to go through the books and enable them to reopen smoothly the following Monday.

Read more about WaMu’s story, the largest U.S. bank failure in history!

How will anyone ever want to buy financial stock if the government can seize them at a moment’s notice when the markets are close. The only people who lose here are the private investors!

Investors Flee, Funds Freeze

Talking about the financial sector, it is interesting to note the XLF. This is the financial ETF which is back to the same level it was in June ~$22 despite major changes with AIG, C, FRE, FNM, and LEH. AIG was a 7% holding in this ETF, Citigroup another major component, and FRE, FNM & LEH are basically worthless… so it is a surprise. That the XLF is up to these levels!

We need to hold ~$22 this week in this sector to really see any turn around to bring investors back to the market.

After the last two devastating days, everybody in the World is scrambling to find something that isn’t failing.

“Forget about retail investors, all the pros are scared,” says one broker. “People have no idea where to put their money.”

The VIX is at nearly an all time high, the only question is if we can top 37? It would be the first time since 2002!

When credit fears shake the market? What can hold them up?

The short answer is only “hope.” A credit crisis begins when the fear of devaluation creeps in the mind. Shortly thereafter investors move money to safer positions. But with money market funds being devalued, is a dollar really worth $1 anymore?

If stable investments can drop overnight… then what do you do with your money? Is it even worth slaving all day to even earn a “worhtless” pieces of paper?

This is a MAJOR problem! The federal government has been trying to solve it by throwing Billions of Dollars away to failing companies… to “cushion” the fall. Why not figure out why the fall started… housing! Use that same Billion and “save” families from foreclosure where the government then owns part of your home. When you sell it, the government collect their share. It’s at least a thought better than just burning paper and perpetuating the problem!

This is simply an awful market!

AppleOption has froze all trading on accounts until a sign of improvement nears.

AppleOption Short Term Portfolio is buying back one of our positions on Apple (AAPL) Stock Options.

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