Sweeping for More Land Mines After AIG

"Uncertainty is the only certainty there is, and knowing how to live with insecurity is the only security," John Allen Paulos was quoted yesterday as saying in the Financial Times. If we didn't know that before, we had better embrace the thought now.

The government's payback for AIG's (AIG - commentary - Cramer's Take) failure is huge. The interest rate on the 24-month loan being given to AIG is 8.5% over the Libor rate and the warrants the Fed receives gives the government almost 80% ownership. If the mark-to-market accounting provision is as destructive as I believe it to be, the government is going to make a lot of money on this "trade" as assets being marked down now get marked up later.

Stefan Abrams said on Kudlow & Company last night that pragmatism outweighed philosophy. It's a point well taken. Teddy Forstmann, the most cautious leveraged buyout player around, remembered Warren Buffet's "Three I" rule. The Innovator is followed by the Imitator, who is followed by the Idiot. The Idiots get carried out. AIG was probably all three in the creation and eventual mismanagement of financial engineering. The company has always been on the cutting edge of what insurance to write and how to price it. But it copied itself too often and got carried away with its own brilliance and forgot the rules of risk vs. reward. The shareholders are paying the price.

I think the "dangerous cocktail" (a term coined by my friend Robert Albertson of Sandler O'Neil) of a wrongheaded accounting rule and inept rating agencies contributed mightily to AIG's downfall. That does not excuse the company from putting itself in a position where it no longer controlled its own destiny.

Are there any more land mines out there? Tough to say. The money market fund that announced last night it "broke the buck" will contribute to the mix today. Money funds are supposed to be safe places where your dollar a share is stable and the interest rate you receive fluctuates. Because this fund owned too much Lehman (LEH - commentary - Cramer's Take) paper (turns out any Lehman paper was too much Lehman paper!), the net asset value of the fund fell below $1. I would expect money will flow out of such funds into the safety of Treasury bills and the yield on T-bills will fall.

With the Fed not raising rates yesterday, the "hard money" advocates can expect to see the dollar rally. Oil should continue its decline if the only factor weighing on the price was the value of the dollar. (Because oil is priced in dollars, a stronger dollar allows the price of oil to fall.) I'm guessing that oil has fallen so far so fast, though, that it's due for a countertrend rally.

One of the more remarkable things in all of this is the overall strength of the financial sector. The BKX, an index of commercial bank stocks I often refer to, is 50% above its July low. That is not a misprint. The Financial Sector SPDR (ETF - commentary - Cramer's Take), an index of financial stocks that includes the brokers, is 22% above its low. The S&P average dipped below its July intraday low of 1201, but rallied back yesterday to close at 1213. That's perilously close to the low, but that's what a test of the low is supposed to do. We may fail the test, but the resiliency of the market, and the economy for that matter, is impressive.

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Vincent Farrell Jr. is chief investment officer for Soleil Securities Group and a regular guest on CNBC and other national print and broadcast media.

Prior to joining Soleil in August 2008, Farrell was a principal of Scotsman Capital Management. Before that, he was chairman of Victory Capital Management of Cleveland and chairman of Victory SBSF Capital Management in New York. He was a founding partner of Spears Benzak Salomon & Farrell, which was acquired by KeyCorp in 1995. Vince held a variety of positions in his 23 years at SBSF, including chief investment officer, and he served as the portfolio manager on a number of the firm's largest client relationships.

Prior to joining SBSF, Vince spent nine years at Smith Barney as a vice president, sales.

Vince graduated from Princeton University in 1969 and received his MBA from the Iona College Graduate School of Business in 1972.