So much for the principle of no more government bailouts.  Equity and debt markets were in flux Wednesday morning, after the Federal Reserve said Tuesday night it will rescue insurer American International Group (nyse: AIG - news - people ) with an $85.0 billion loan.  In what had become a standoff between the government and the private sector, the Fed, with the full support of the Treasury Department, blinked. The 24-month lending facility, with an interest rate of three-month LIBOR plus 850 basis points, gives AIG some breathing room so it can sell certain businesses without disrupting the overall economy, but it is hardly a sweetheart deal. In an unprecedented move, the U.S. government is receiving a 79.9% equity interest in AIG, and the right to veto dividends to common and preferred shareholders. Shares of AIG fell $1.15, or 29.9%, to $2.63, once again trading with tremendous volume. (See "Fed Rescues AIG.")  U.S. stocks were rocky on a broader scale, with the Dow Jones industrial average down 159 points, or 1.4%, to 10,900, while the Standard & Poor's 500 lost 18 points, or 1.5%, to 1,196, and the Nasdaq was off 33 points, or 1.5%, to 2,177. Bond prices jumped in early action as traders reacted to the bailout. Treasury yields slipped, with the 10-year note offering 3.42%, down from Tuesday's 3.49%, and the two-year note yield falling to 1.74%, from 1.91%.  The AIG bailout comes on the heels of Lehman Brothers Holdings (nyse: LEH - news - people ) filing for Chapter 11 bankruptcy protection, an outcome the government made no move to prevent. The Fed and Treasury Department declined to backstop any acquisition of Lehman, scaring off potential bidders like Bank of America (nyse: BAC - news - people ), which pursued an acquisition of Merrill Lynch (nyse: MER - news - people ) instead, and Barclays (nyse: BCS - news - people ).  Late Tuesday, Barclays was back in the picture, agreeing to acquire Lehman's North American investment banking and capital markets operations for the bargain price of $250.0 million, and to pay about $1.5 billion for the firm's New York headquarters and two New Jersey data centers in deals that require the approval of New York bankruptcy court. Meanwhile, the unwinding of Lehman continues, as the firm continues to negotiate a sale of its prized investment management division, which includes asset manager Neuberger Berman. Private equity firms Bain Capital, Hellman & Friedman and KKR are said to be in the running for the business. (See "Heart Of Lehman Beats In Barclays.")  With Lehman out of the picture and Merrill agreeing to BofA's takeover offer, Goldman Sachs (nyse: GS - news - people ) and Morgan Stanley (nyse: MS - news - people ) are the last of the major securities firms still standing on Wall Street. After the close Tuesday, Morgan Stanley tried to pull an end around, prereleasing its third-quarter results ahead of its scheduled Wednesday morning announcement. The firm handily beat analyst expectations with profits of $1.32 a share and said its net subprime exposure was zero at the end of August, but that did little to stop the rumors from flying. Reports surfaced Tuesday night that Morgan Stanley officials are mulling whether to remain independent or pursue a tie-up with a major bank. Shares of the brokerage dropped $4.52, or 15.8%, to $24.18.  In the technology sector, SanDisk (nasdaq: SNDK - news - people ) shares spiked $6.20, or 41.2%, to $21.24, after the flash memory company rejected a takeover offer from South Korea's Samsung Electronics (other-otc: SSNLF - news - people ). SanDisk's CEO Eli Harari called the $5.9 billion, or $26.00 a share, cash offer "opportunistically timed at the trough of an industry-wide downturn." The press release from SanDisk also noted that Samsung has indicated it may be willing to raise its offer above the $28.75 a share SanDisk traded at on May 22, the day when the company was first approached. (See "Samsung Still Has Leverage On SanDisk.")  Investors were also sorting through the latest batch of housing data, after the Commerce Department issued a report before the opening bell. The figures showed housing starts dropped to 895,000 in August, from 954,000 in July, while completions were down to 961,000, from 1.1 million. Meanwhile, new building permits also fell, sliding to 854,000, from 937,000.
The central bank agreed to bail out the insurer with an $85B loan Tuesday night; Lehman looks to sell its crown jewel asset manager; SanDisk spurns Samsung Electronics' offer.