Stocks Climb After Fed Holds Steady

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asp?symbol=BAC'>BAC; +11.3%) agreement to buy Merrill Lynch (MER; +30%).

Investors remained nervous as another potential calamity loomed: AIG, battling credit downgrades and market worries about its exposure to credit default swaps, is seeking billions of dollars to stay afloat.

The market was speculating about what role the Federal Reserve might play in efforts to resolve AIG's liquidity problems. According to a CNBC report late in Tuesday's session, the Fed has reviewed AIG's books and has a good idea of what the firm needs. There is some hope the Fed will have something together by end of the day (not the business day). If not, it is likely AIG will file for bankruptcy.

Late Monday, S&P Ratings Services lowered its long-term counterparty rating on AIG to A- from AA- and its short-term counterparty credit rating on AIG to A-2 from A-1+. A.M. Best Co. downgraded the firm's financial strength rating to A (Excellent) from A+ (Superior) and issuer credit ratings of the domestic life and retirement services subsidiaries of AIG to a from aa.

Credit Suisse slashed its target price on AIG to reflect what it thinks to be the heightened probability of a potential bankruptcy filing.

Former AIG CEO Hank Greenberg indicated in a CNBC interview that if the insurer didn't get a bridge loan from the private or public sectors and the ratings agencies give the company "breathing space," it would be a disaster if AIG went under, creating a systemic problem that would take years to unravel given massive counterparty risks.

Washington Mutual (WM; +16%) was also in the ratings crosshairs Tuesday as its corporate credit rating was cut to junk late Monday. S&P Ratings Services lowered its counterparty credit rating on WaMu to BB-/B from BBB-/A-3. S&P also lowered its rating on Washington Mutual Bank to BBB-/A-3 from BBB/A-2. S&P's ratings outlook is negative. S&P said the current ratings and negative outlook assume an improvement in earnings for thje second half of 2008, but a loss for the full year.

On the Lehman front, the Financial Times reports that the bankrupt firm reached a deal to sell certain parts of its business to Barclays (BCS; +7.9%), which had been in talks over the weekend to buy the entire investment bank before it filed for bankruptcy protection on Monday. The two parties reached a deal in the early New York morning, though the exact Lehman businesses involved, and the price at which they will be sold, remained unclear. A deal could be accompanied by a small capital raising by the UK lender.

Wells Fargo (WFC; +12.7%) says that, as a result of the Chapter 11 filing by Lehman, it will record other-than-temporary impairment and take a non-cash charge to earnings in the third quarter for its investments in senior unsecured notes and perpetual preferred securities issued by Lehman. Wells Fargo says its investments in the notes and preferred securities are included in securities available for sale at a cost of about $90 million and $109 million, respectively.

The demise of Lehman was having an impact on companies outside the financial sector. Evergreen Solar (ESLR; -3.7%) said that in connection with its Senior Notes offering, it entered into a capped call transaction with Lehman Brothers OTC Derivatives to reduce ultimate dilution that would otherwise occur. The company said it working with several investment banks to determine its best course of action to maintain the original intent of the capped call transaction. Evergreen also entered into common stock lending agreement with Lehman Brothers International (Europe) pursuant to which Evergreen loaned 30.9 million ESLR shares to Lehman Brothers International.