American International Group (NYSE: AIG), once the world's largest insurer, is selling assets outside the U.S. to repay a government bailout. The Carlyle Group, KKR, JC Flowers, and other U.S. private equity firms and Asian financial groups are reported to be interested in AIG's Taiwanese unit Nan Shan Life Insurance Co.

"Everyone hopes this is going to be a fire sale as AIG is in a difficult situation," said a local partner of Standard & Poor's.

Microsoft (NASDAQ: MSFT) has engaged investment bank Morgan Stanley (NYSE: MS) to help it unload digital agency Razorfish. Publicis (OTC: PGPEF) is looking for targets in the online ad space and could be a possible bidder.

Razorfish has been valued at $600 million to $700 million, based on a top line of approximately $400 million for its last fiscal year and peer margins of 12% to 13%. The company boasts 2,000 employees and clients that include Audi, Nike (NYSE: NKE) and Kraft (NYSE: KFT). Microsoft bought the company as part of a $6 billion deal to acquire aQuantive. At the time, Razorfish was known as Avenue A Razorfish, as the result of a merger sealed in the wasteland known as the "dotcom bust."

Mergers and acquisitions aren't delivering the fees that investment bankers used to enjoy, but fortunately, the money's coming from elsewhere. Data from Thomson Reuters reports a 29% increase in capital markets and M&A fees for the first time in more than a year. Share sales (e.g., rights offerings) were where dealmakers found the action. In the shrinking M&A space, Morgan Stanley (NYSE: MS) has taken the lead spot.

Since there are fewer banks in the marketplace than there were a year ago -- and they have less money -- the capital is starting to come from elsewhere. Because they aren't lending at their previous pace, companies are issuing bonds and equity to replenish their coffers. Pfizer (NYSE: PFE), for example, raked in more than $23 billion from the bond market to fund its acquisition of Wyeth (NYSE: WYE), and Roche nabbed Genentech with the help of a $30 billion debt issuance.

Goldman Sachs (NYSE: GS) closed at $145.64. GS is expected to report Q2 EPS soon. GS June 145 straddle is priced at $6.10, July 145 straddle is priced at $15.50. GS July option implied volatility of 45 is below its 26-week average of 75, according to Track Data, suggesting decreasing price movement.

Morgan Stanley (NYSE: MS) closed at $29.70. MS is expected to report Q2 EPS soon. MS June 30 straddle is priced at $1.75, July 30 is priced at $4.05. MS July option implied volatility of 54 is below its 26-week average of 91, according to Track Data, suggesting decreasing price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

Analyst upgrades:

• Keefe Bruyette upgraded Morgan Stanley (NYSE: MS) to Outperform from market Perform after transferring coverage to a new analyst. The firm expects Morgan to benefit from the pending joint venture with Smith Barney and improvements in its operating environment.
• FBR Capital upgraded Winn-Dixie (NASDAQ: WINN) to Outperform from Market Perform as it believes the company is executing well and shares are cheap at current levels. The firm keeps a $16.50 target on the stock.
• Baird believes Polaris's (NYSE: PII) consensus expectations and valuation are too low and that the company will expand beyond powersports. The firm upgraded shares to Outperform from Neutral and raised their target to $37 from $32.
• J. Crew (NYSE: JCG) was upgraded to Neutral from Sell at Goldman.
• Lexmark (NYSE: LXK) was upgraded to Equal Weight from Underweight at Barclays.
• Global Hunter upgraded Big Lots (NYSE: BIG) to Buy from Neutral.

This story shows where integrity and greed, the good and the bad are present at all times in the market. Let's take trader A who follows the cardinal rules of trading. He holds an order to buy say $10 million of US treasuries. He knows that such an order will most likely drive the price up. He places his client's order first, then decides to piggy back him and places a trade for his own account after his client's trade is completed.

Trader B holds a similar order from a client to buy $10 million of US treasuries. But unlike trader A, he places an order for his own account first. So he already is in the market. After his trade is completed, he places his client's order which he believes will drive up the price. This practice is called "front running.

Can our government waste the taxpayers money or what? This time its a mere $10 billion. Banks are negotiating to reclaim warrants they granted in return for the TARP monies. Old National Bancorp (NYSE: ONB) was the first to negotiate a deal with the Treasury. The bank bought back its warrants for $1.2 million. They may have been worth $5.81 million. Now, isn't this the sweetest deal you can imagine. The banks are getting a pile of free money.

If the Treasury follows the Old National Bancorp deal, it would save Bank of America Corp. (NYSE: BAC) $2.03 billion, Wells Fargo & Co. (NYSE: WFC) $1.48 billion, JPMorgan Chase & Co. (NYSE: JPM) $1.46 billion, Morgan Stanley (NYSE: MS) $983 million, Citigroup Inc. (NYSE: C) $965 million, and Goldman Sachs Group Inc. (NYSE: GS) $693 million.

Analyst upgrades:

• Citigroup upgraded Lennar (NYSE: LEN) to Buy from Hold as it believes the company's near-term liquidity profile is improved following the $400M debt issuance. The firm raised its target price to $12 from $11.
• Jefferies upgraded Rowan Companies (NYSE: RDC) to Buy from Hold as it believes jack-up drillers will continue to outperform deepwater names. The firm raised its target price to $27 from $20.
• Keefe Bruyette upgraded First Financial (NASDAQ: FFIN) to Market Perform from Underperform to reflect more positive loan data for the Texas banks. The firm raised its target price on shares to $44 from $38.
• MGM Mirage (NYSE: MGM) was upgraded to Overweight from Neutral at JP Morgan.
• Morgan Stanley (NYSE: MS) was upgraded to Outperform from Market Perform at JMP Securities.
• Brinker (NYSE: EAT) was upgraded to Overweight from Equal Weight at Barclays.

In yesterday's online edition of The Wall Street Journal, it was reported that MBIA (NYSE: MBI) is facing lawsuits from a group of 18 different financial institutions. The lawsuit was filed in New York State court and includes the likes of J.P. Morgan Chase (NYSE: JPM), Bank of America (NYSE: BAC), Morgan Stanley (NYSE: MS), and UBS (NYSE: UBS).

These banks are claiming that the way MBIA split its municipal bond insurance business earlier this year was "an unlawful attempt to escape" its contractual obligations to cover losses from mortgage securities. In addition to the split earlier this year, MBIA shifted $5 billion to a municipal bond insurance company.

Analyst upgrades:

• FBR Capital upgraded KBW, Inc (NYSE: KBW) to Market Perform from Underperform as it sees increased capital-raising opportunities for small and mid-sized banks and believes the company's quarter is off to a strong start. The firm raised its target price to $23 from $18.
• Pali Capital upgraded Morgan Stanley (NYSE: MS) to Buy from Neutral on expectations the company's strategic shift towards advisory, distribution and retail will be monetized sooner than expected and its capital markets business is gaining traction. The firm set a $33 target on the stock.
• Baird upgraded Stericycle (NASDAQ: SRCL) to Outperform from Neutral and raised its target to $58 from $55 based on valuation predictable earnings, and its market leading platform.
• Apollo Investment (NYSE: AINV) was raised to Outperform from Market Perform at Keefe Bruyette.
• HSBC Holdings (NYSE: HBC) was lifted at Goldman to Buy from Neutral.
• Dow Chemical (NYSE: DOW) was upgraded to Outperform from Neutral at Credit Suisse.