Financial exchange traded funds (ETFs) and Wall Street in general don’t look like they’ll be getting a reprieve today after the Federal Reserve stepped in to bailout American International Group (AIG).

Shares in the world’s largest insurer have plunged by almost half this morning after the $85 billion bailout that would give the government control of the company. This comes just two weeks after the Treasury took over Fannie Mae and Freddie Mac.

AIG’s time ran out after it failed to get a bank loan and avoid bankruptcy, and the rescue plan was hatched Tuesday night, report Edmund L. Andrews, Michael J. de la Merced and Mary Williams Walsh for the New York Times. Had AIG collapsed, institutional investors all over the world would have been forced to reappraise the value of all the risky securities AIG had insured.

As seemingly one institution after another is taken down in this crisis, some experts and lawmakers are floating the idea of creating an agency that would buy troubled assets from these companies. We’re seven weeks from a presidential election, so the government probably wouldn’t move with lightning speed on a plan that would put taxpayers at risk for hundreds of billions in bad assets, reports Stephen Labaton for the New York Times.

Floyd Norris at the New York Times points out a paradox: it’s too bad that the government didn’t think of such a crisis when they opposed an effort to regulate the very markets that are now in such dire straits, because it would have been interfering with free enterprise. Now they have to step in because they see it as a national emergency.

What about what caused this problem in the first place? It might be time to think about that. Economists are meeting to discuss how we get out of this mess, but no one seems to be talking about what got us here, David Leonhardt for the New York Times writes. He expresses frustration that government is focused on the immediate crises, but given nary a thought to the underlying issues, including stagnant income, higher debt and a lack of government oversight.

Most of these big investment firms and banks are components in financial ETFs. AIG is a holding in:

  • KBW Insurance (KIE): down 21.8% year-to-date; AIG is 7.3%
  • iShares Dow Jones US Insurance (IAK): down 30.9% year-to-date; AIG is 13.2%

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.