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CNN Article

 

"NEW YORK (CNNMoney.com) -- In an unprecedented move, the Federal Reserve Board is lending as much as $85 billion to rescue crumbling insurer American International Group, officials announced Tuesday evening.

 

The Fed authorized the Federal Reserve Bank of New York to lend AIG (AIG, Fortune 500) the funds. In return, the federal government will receive a 79.9% stake in the company.

 

Officials decided they had to act lest the nation's largest insurer file bankruptcy. Such a move would roil world markets since AIG (AIG, Fortune 500) has $1.1 trillion in assets and 74 million clients in 130 countries.

 

An eventual liquidation of the company is most likely, senior Fed officials said. But with the government loan, the company won't have to go through a tumultuous fire sale.

 

"[A] disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said in a statement.

 

The bailout marks the most dramatic turn yet in an expanding crisis that started more than a year ago with the mortgage meltdown. The resulting credit crunch is now toppling not only mainstay Wall Street players, but others in the wider financial industry.

 

The line of credit to AIG, which is available for two years, is designed to help the company meet its obligations, the Fed said. Interest will accrue at a steep rate of 3-month Libor plus 8.5%, which totals 11.31% at today's rates.

 

AIG will sell certain of its businesses with "the least possible disruption to the overall economy." The government will have veto power over the asset sales and the payment of dividends to shareholders.

 

The company's management will be replaced, though Fed staffers did not name the new executives. The board will remain. For customers, it will be business as usual, officials said.

 

Taxpayers will be protected, the Fed said, because the loan is backed by the assets of AIG and its subsidiaries. The loan is expected to be repaid from the proceeds of the asset sales.

 

The government had resisted throwing a lifeline to AIG, hoping to entice investment firms to set up a $75 billion rescue fund. Officials opted not to bail out Lehman Brothers, which filed for bankruptcy on Monday. But by Tuesday night, it became clearer that the private sector would not step in to help AIG, which has a greater reach into other financial companies and markets than Lehman does.

 

"We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimize the disruption to our economy," said Treasury Secretary Henry Paulson. "I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers."

Dramatic end, high stakes

 

The firm's options grew more limited as the day wore on. Its already-battered share price fell another 21% with more than 1 billion shares trading hands, and plummeted another 46% in after-hours trading.

 

At one point Tuesday morning, shares fell more than 70% - a day after losing 61% of their value.

 

In a statement late Tuesday night the company said, "AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis."

 

The company also commended the Federal Reserve and the Treasury Department for "taking action to address AIG's liquidity needs and broader financial market concerns."

 

Furthermore, the firm expressed its gratitude to New York Governor Paterson, and other NY State as well as Federal officials.

 

New York State officials, who regulate the insurance titan, had urged the federal government to rescue AIG. The state attempted to help AIG on Monday by allowing it to tap into $20 billion in assets from its subsidiaries if the company could comes up with a comprehensive plan to get the much-needed capital, said a state Insurance Department spokesman.

 

Pleased with the federal government's response, New York Gov. David Paterson said Tuesday night: "Policy holders will be protected. Jobs will be saved. Business will continue."

 

The funding became ever more crucial as the insurer was hit Monday night by a series of credit rating downgrades. The cuts meant AIG (AIG, Fortune 500) could be forced to post more than $13 billion in additional collateral.

 

Late Monday night, Moody's Investors Service and Standard & Poor's Ratings Services each said they had lowered their ratings. A few hours earlier, Fitch Rating had also downgraded AIG, saying the company's ability to raise cash is "extremely limited" because of its plummeting stock price, widening yields on its debt, and difficult capital market conditions.

 

The downgrade could force AIG to post $13.3 billion of collateral, Fitch said in a statement. Also, the moves would make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.

 

All the while, analysts urged the company to unveil its restructuring plan.

 

"Management needs to address investor concerns now before the market sell-off becomes a self-fulfilling prophecy," Rob Haines, analyst at CreditSights, said Tuesday.

Global ripples

 

The failure of AIG could have caused unprecedented global ripple effects, said Robert Bolton, managing director at Mendon Capital Advisors Corp. AIG is a major player in the market for credit default swaps, which are insurance-like contracts that guarantee against a company defaulting on its debt. Also, it is a huge provider of life insurance, property and casualty insurance and annuities.

 

"If AIG fails and can't make good on its obligations, forget it," Bolton said. "It's as big a wave as you're going to see."

 

AIG has had a very tough year.

 

Rocked by the subprime crisis, the company has lost more than $18 billion in the past nine months and has seen its stock price fall more than 91% so far this year. It already raised $20 billion in fresh capital earlier this year.

 

Its troubles stem from its sales of credit default swaps and from its subprime mortgage-backed securities holdings.

 

AIG has written down the value of the credit default swaps by $14.7 billion, pretax, in the first two quarters of this year, and has had to write down the value of its mortgage-backed securities as the housing market soured.

 

The insurer could be forced to immediately come up with $18 billion to support its credit swap business if its ratings fall by as little as one notch, wrote John Hall, an analyst at Wachovia, on Monday.

 

This year's results have also included $12.2 billion in pretax writedowns, primarily because of "severe, rapid declines" in certain mortgage-backed securities and other investments.

 

The company brought in new management to try to turn the company around. In June, the company tossed out its chief executive, Martin Sullivan, and named AIG chairman Robert Willumstad, who joined AIG in 2006 after serving as president and chief operating officer of Citigroup (C, Fortune 500), in his place. To top of page"

 

Hmmmm, wonder what this will do to foreign attitude to the Phils banking structures?

 

On google this am

 

The Philippines' two largest banks, Metropolitan Bank and Trust Co. and Banco de Oro, were setting aside provisions totaling 94.7 million US dollars to cover their exposure to the Lehman Brothers' collapse, reports said on Wednesday.

 

TLDR version; Investments are risky. AIG was supposedly very very solid even after the recent Lehman failure.

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Stuff ; TLDR version; Investments are risky. AIG was supposedly very very solid even after the recent Lehman failure.

 

Yahoo analyst opinions

 

http://finance.yahoo.com/q/ao?s=AIG

 

Analyst Opinion Get Analyst Opinion for:

RECOMMENDATION SUMMARY*

Mean Recommendation (this week): 2.5

Mean Recommendation (last week): 2.3

Change: 0.2

* (Strong Buy) 1.0 - 5.0 (Sell)

Compare to Industry

PRICE TARGET SUMMARY

Mean Target: 29.70

Median Target: 26.00

High Target: 54.00

Low Target: 6.00

No. of Brokers: 15

Data provided by Thomson/First Call

 

I wonder how many of those analysts are right on their price target now? Not trying to be doom and gloom but I suspect there are more large FI's financial institutions that will fail. However hindsight is 20/20.

 

How many other Phil based banks have this level of exposure and as a what if, but what if a major FI collapsed in the Phils ? Might bring a whole new level of fun to life .....

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I still have a number of contacts at high levels in London banks, and from them, I understand that at least two major banks are likely to be announcing serious problems.

Also, the general opinion is that the situation is far worse than is being admitted.

 

(Had the Glass-Steagall Act not been repealed, the situation would not have been anywhere near as serious.)

 

The one group of banks that are doing well out of it, are the Chinese.

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I still have a number of contacts at high levels in London banks, and from them, I understand that at least two major banks are likely to be announcing serious problems.

Also, the general opinion is that the situation is far worse than is being admitted.

 

(Had the Glass-Steagall Act not been repealed, the situation would not have been anywhere near as serious.)

 

The one group of banks that are doing well out of it, are the Chinese.

 

I have an interest in this, and posted as many members have investments and $$$$ are always of interest etc. The value of paper investments has always been a bit dubious in my book, unless the company had real assets. I was reading another thread about where kc8ual posted a bit on the great depression. I think it would really sting a lot of folks to lose their pension funds etc. As a Canadian I really wonder about the solidity of the market when the largest single player is the Ontario Teachers pension fund on the TSE (Toronto Stock exchange a mini NYSE), all of which is Ontario government taxpayers money funneled through teachers and into the market. Its a lot of paper generating paper in my opinion as opposed to say a tangible asset like pulp and paper, gold, food, construction etc..When I look at a lot of the market I see similar patterns to the Ontario Teacher pension fund; as in paper building paper. When I don't see an asset or income to back it; it isn't worth anything.

 

I used to be in upper mid management at one of the ten largest banks on earth. As a former credit guy we backed people with hard assets, who made money. Paper backed companies; as in no assets, with new Mercedes in the driveways were automatic bad feels, and rarely got any credit (for speculative purposes lets say less than .02% say). There are still a few large FI's that look like this to me.....Some banks are notoriously conservative, on non asset based credit, but even they are getting crunched as District Vice Presidents, Regional Vice Presidents, Assistant Vice President, Vice Presidents, Senior Vice Presidents, Executive Vice Presidents, Senior Executive Vice Presidents, to the BOD COO, CFO and CEO (yes they exist in that order too) all know. I think most banks/FI's are solid but bad news travels at twice the speed of sound....

 

In part kc8ual aka Nick ids some concerns here.

 

http://www.livingincebuforums.com/inde...5&start=125

 

Also I wonder what would happen if one of the Phils major FI's tanked/s like AIG. I see a scary scary scenario evolving if this occurs; martial law? Food shortages which become really real? Serious strain on relationships as any offshore funds become desperately wanted? I can't see the Fed, or an Asia Pacific neighbour bailing out a large Phils FI collapse. There is enough of a sense of panic in the west over this sort of thing, and in comparison the west is percieved as much more financially stable than RPI. While not always true perceptions tend to become realities.

 

The Chinese banks are stable as they have hard assets and income, and are backing the largest and near most rapid growth economy going. India is a very close second. However as part of the BRIC (Brazil, Russia, India, China) forecast to crush the US as the global leader only India and China have solid FI's, Russia's & Brazil's corruption & government instabilty don't allow for solid banking experiences.

 

Edit: Lord if I could spell! And i forgot about the nebulous AVP Assistant Vice President !

Edited by parksb2
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Current latest:

 

HSBC talking to JP Morgan

Lloyds TSB talking to HBOS

 

This is just today. Deals work quick in this market

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As the ripples spread from the toxic US paper, no banks can be immune. Aussie Macquarrie could be soon. The position is dire. The real problem is interbank. No one trusts anyone at the moment.

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Sweet...I was recognized by one of my posts....

 

Like I said over there though, I am in no was a conspiracy theorist but I do like being prepared. There are a lot of people out there saying that this will blow over much like many other recessions which were supposedly a lot harder than this one. Of course if they were harder, then why has this one continued to claim so many major financial institutions.

 

I think the number one reason that this is all being downplayed is also THE MOST IMPORTANT one.... and that is the self prophesy known as the....

 

I cannot bring myself to say it.... Oh wait yes I can....

 

A run on the bank, or bank run depending on where in the world you are from. The truth hurts and that truth is that if this whole situation were not downplayed, then the concept of a new Great Depression would unfold almost instantaneously. Everyone knows that the banks do not have enough money to cover all of their accounts, especially not right now with all of the mortgages being foreclosed on. People will panic and get their money in cash form. The banks will not be able to handle it and will end up going bankrupt.... we are talking on a world wide scale and not just in the United States neither. At the same time, those with money in the stock markets or FOREX markets will try to pull out their money before it is too late and the banks close.

 

It has been suggested that this is already occurring but in slow motion which is why major financial institutions are filing one right after another while the rest still manage to stay afloat.

 

I am not saying at all that anyone should run and take out all of their money in cash form as this will speed up the inevitable. The longer it takes, the better chances that the crisis can be reversed and that people can be prepared for it.

 

This is the only reason it is truly being downplayed and why politicians everywhere are canceling their speeches on the economies in their own country. Furthermore, unlike in the 1920s and 1930s, we are all more finely intertwined. While the US crashed first and sent a ripple affect across the word back then, today this would happen a lot faster. The biggest example was when Lehman Brothers shut down, first the US stock market lost some serious points... as a result and the fact that many Asian countries were on a holiday on Monday, they too followed suit when their markets opened. If I remember correctly, the largest loss was almost 10% with the Philippines dropping like 4.6%. China is not immune neither, just because they have the world's wealthiest bank does not mean a thing. If the American or the British economies collapse for that matter, then the old saying, "The bigger you are the harder you fall" will come into play.

 

I can assure you of one thing though, I am now making every attempt to change my wife's mind about purchasing a house right now because the last thing I want to happen is to have a bunch of money tied up in a mortgage should everything go south.

 

-Nick

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As the ripples spread from the toxic US paper, no banks can be immune. Aussie Macquarrie could be soon. The position is dire. The real problem is interbank. No one trusts anyone at the moment.

 

Yeah, western media is pure doom & gloom this morning pre open. Bear market, everything will drop, the world is coming to an end... They're making the Y2K scare seem minor.

 

While there are real problems, it doesn't help when you have the Simpsons kent brockman attitude pervasive in the media.

 

"Kent: Hordes of panicky people seem to be evacuating the town for

some unknown reason. Professor, without knowing precisely what

the danger is, would you say it's time for our viewers to crack

each other's heads open and feast on the goo inside?

 

Prof.: Mmm, yes I would, Kent. "

 

Ah fun fun.

 

HSBC wading in is a good sign, they rarely make mistakes. Put obobys nerfect !

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Sweet...I was recognized by one of my posts....

 

Like I said over there though, I am in no was a conspiracy theorist but I do like being prepared. There are a lot of people out there saying that this will blow over much like many other recessions which were supposedly a lot harder than this one. Of course if they were harder, then why has this one continued to claim so many major financial institutions.

 

I think the number one reason that this is all being downplayed is also THE MOST IMPORTANT one.... and that is the self prophesy known as the....

 

I cannot bring myself to say it.... Oh wait yes I can....

 

A run on the bank, or bank run depending on where in the world you are from. The truth hurts and that truth is that if this whole situation were not downplayed, then the concept of a new Great Depression would unfold almost instantaneously. Everyone knows that the banks do not have enough money to cover all of their accounts, especially not right now with all of the mortgages being foreclosed on. People will panic and get their money in cash form. The banks will not be able to handle it and will end up going bankrupt.... we are talking on a world wide scale and not just in the United States neither. At the same time, those with money in the stock markets or FOREX markets will try to pull out their money before it is too late and the banks close.

 

It has been suggested that this is already occurring but in slow motion which is why major financial institutions are filing one right after another while the rest still manage to stay afloat.

 

I am not saying at all that anyone should run and take out all of their money in cash form as this will speed up the inevitable. The longer it takes, the better chances that the crisis can be reversed and that people can be prepared for it.

 

This is the only reason it is truly being downplayed and why politicians everywhere are canceling their speeches on the economies in their own country. Furthermore, unlike in the 1920s and 1930s, we are all more finely intertwined. While the US crashed first and sent a ripple affect across the word back then, today this would happen a lot faster. The biggest example was when Lehman Brothers shut down, first the US stock market lost some serious points... as a result and the fact that many Asian countries were on a holiday on Monday, they too followed suit when their markets opened. If I remember correctly, the largest loss was almost 10% with the Philippines dropping like 4.6%. China is not immune neither, just because they have the world's wealthiest bank does not mean a thing. If the American or the British economies collapse for that matter, then the old saying, "The bigger you are the harder you fall" will come into play.

 

I can assure you of one thing though, I am now making every attempt to change my wife's mind about purchasing a house right now because the last thing I want to happen is to have a bunch of money tied up in a mortgage should everything go south.

 

-Nick

 

Yep yep, exactly right. A run on a bank is exactly what is feared.

 

And the market analysts really fear it ! I've heard it again and again since yesterday something to the effect that "the worst thing investors can do is pull their money from the market and put it in low yield investments like GIC's or Bankers Acceptances". MOST people know GIC's but very few knew what BA's were, if the mrket takes a liquidity hit they devalue their paper assets which some FI's have large investments in, then the banks lose their paper value on their share of the credit. Ah well smarter people than I are working on this I'm sure... Lets hope the Fed can buffer this and take some corrective action.

 

No one is immune if this starts to spin as the Chinese sell a lot of product to the USA. I think the 2007 stats I looked at in my former career reflected that 40% of all material wealth (electricity, fuel, food, concrete, steel etc) not paper $$$$ was in North America with near 34% of that in the USA. I am looking for a source to validate this....

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Apart from the 1929 depression, which I dont remember (lol) we had minor credit crunches (for want of a better expression) in 1981, 1971, and in the 60's. All caused a degree of panic, plus some problems, but, I agree, this could be worse than any of them.

 

Personally, I am fairly well insulated from trouble, but I am in a minoroty.

 

If things go wrong, or more wrong than they are right now, it will affect the majority, and the ripple effect will cause even more problems.

We still have a lot of bad news to come through the system, before things get back to nromal, whatever that may be!

 

As for banks and banking, in my day, one lent money TO a customer, FOR a specific purpose, AGAINST adequate security.

What a shame that more bankers didnt stick to that tries and tested formula.

 

I dont wholly agree about SE Asia, and the Philippines.

As their banking is less sophosticated than in the West, they have less exposure to the high risk "investments" that have caused most of the problems.

This, the derivatives market, really was a big boys game, and they are the ones who have come unstuck.

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I dont wholly agree about SE Asia, and the Philippines.

As their banking is less sophosticated than in the West, they have less exposure to the high risk "investments" that have caused most of the problems.

This, the derivatives market, really was a big boys game, and they are the ones who have come unstuck.

 

Metrobank said it has invested in Lehman Brothers bonds amounting to US$20.4 million.

 

Other Philippine banks which held Lehman Brothers Bonds include RSBC, Banco de Oro and Union Bank...

 

In a disclosure to the stock exchange Sun Life Financial said it has an exposure of $334-million in Lehman bond securities and $15 million in derivatives. This will likely affect the insurer's profit goals for the third quarter.

 

AIG in the Philippines is PhilAM insurance

 

-Nick

Edited by kc8ual
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Looks like it's Morgan Stanley and Wachovia. Goldman Sacks next - I wonder who they will surrender to. http://www.bloomberg.com/apps/news?pid=206...&refer=home

 

Luckily this all happened in the UK back in the 90's ie investment banks being taken over by deposit holder banks. Wall Street's greed has put paid to independant investment banks and mega salaries - damb good show I say.

 

Talking on run on banks, we've had quite a few so far. Lehman and Merrills of course, Fannie and Freddie, first off was UK's Northern Rock now HBOS. Looks like Macquarie and Babcock have gone. Expect a Japanese one but may be kept quiet. The big Chinese are state owned and dont need the overnight financing the big western ones do I think. Russia in deep doodoo and serves them right.

 

When this all settles will by my last chance of a lifetime to pile in but could be 6 months or more yet. All in my opnion of course.

 

Nationalisation of AIG saved the day this week. Who would have thought the Fed would end up as the worlds biggests hedge fund, lol

Edited by johnrainey
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Well actually it was British economist who outlined the ideas that the only way for a nation to leave a depression, is by the government letting inflation sky rocket, lowering taxes and bailing out businesses until everything levels out. Of course this is hard to happen because nations do not want their inflation to get to high, they do not want to lower taxes and they surely do not want "print money"just so they can bail out a business. I do say print money because the world is based on fake money. The 85 billion for AIG was not tax payers money, they are "guaranteeing" the company and as such is equivalent to printing money.

 

-Nick

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Well actually it was British economist who outlined the ideas that the only way for a nation to leave a depression, is by the government letting inflation sky rocket, lowering taxes and bailing out businesses until everything levels out. Of course this is hard to happen because nations do not want their inflation to get to high, they do not want to lower taxes and they surely do not want "print money"just so they can bail out a business. I do say print money because the world is based on fake money. The 85 billion for AIG was not tax payers money, they are "guaranteeing" the company and as such is equivalent to printing money.

 

-Nick

What do you think is causing this problem? Trillions printed by Wall Street in toxic loans that doesn't actually exist but which bank balance sheets are full of. It is estimated the CDS market is $500 TRILLION. At this point in time inflation/deflation is a side issue. We are looking at the possible collapse of fiat money on a global basis thanks to the wunderkinds of Wall Street.

 

The $85b for AIG is "created" by The Feb by electronic means. They don't print anymore. Indeed the rumour now going around is that the Treasury is loaning the Fed as it's ability to create credit is running out. If the Treasury isn't taxpayers money I'd like to know what it is.

 

The most scary thing is that S&P have not denied that the $ AAA rating is under review! Gold has surged the most since 1980 and overnight rates are 3% above those on Black Monday 1987. http://www.ft.com/cms/s/0/8058d308-84d3-11...00779fd18c.html

 

This is serious folks, get into cash fast if you havent already and put tin hats on. Keep money in a Big bank, not local ones and certainly not more than the maximum guaranteed by the the Government. It gives me no pleasure to say all this but as it is my job at present it's like being a rabbit infront of the headlights, lol

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