Thoughts on government bailouts:

In my personal opinion, we have seen four major government bailouts in 2008. The financial/economic consequences of the first four were an immediate rally in stocks, followed by market dislocations, a sharp decline in asset valuation, and rapid deterioration in broader economy. Below is a brief summary:

3/17/08, JPM took over Bear Stearns with government support, followed by a 75 bp rate cut the following day.

- Market reaction: DJIA recovered from an initial drop of nearly 200 points to finish up 21 points on the 17th. The subsequent rally was remarkable, across all asset classes, and lasted until June.

- Financial/economic consequences: False optimism regarding the length of the financial crisis, which in part fueled the height of the commodity bubble as dollar plummeted.

9/5/08, Government took Fannie Mae and Freddie Mac into conservatorship

- Market reaction: DJIA surged 290 pts on Monday, Sept 8, led by the bank index (+5.2%). 

- Financial/economic consequences: FNM and FRE's common and preferred shares remained listed but dividends are gone, resulting in billions of writedown among financial institutions holding their preferred shares. Directly or not, financial stocks were aggressively punished (yeah blame it on short selling) right before 2Q earnings release, leading to the collapse of Lehman Brothers, the broken money markets, and the downward spiral of AIG.

9/16/08 to 9/22/08, AIG was placed into government conservatorship; Fed approved Goldman and Morgan Stanley as bank holding companies; SEC temporarily prevented investors from short selling of financial stocks (in my opinion this one is the worst)

- Market reaction: a brief short-covering rally was followed by the sharpest sell-off of the year. S&P 500 declined more than 20% in the first 10 days of October. 

- Financial/economic consequences: Short-covering ban effectively shut down the convertible bond market, resulting in further writedowns across financial institutions.  A full blown financial crisis finally was inevitably extended into an economic crisis.

December of '08: Bailouts came into full swing with Citigroup rescue and government's loan to General Motors, Chrysler, and GMAC ... 

- Market reaction: Another sharp rally in December into year end, but wait a minute, the best performing asset class in December was in fact U.S. Treasuries ... and we'll get to see what happens in January.

- Financial/economic consequences: the next bubble to bust in this fiasco - U.S. Treasuries!