Sign in to follow this  
Followers 0
Robert J

What, no thread on the banks?

158 posts in this topic

I do not think AIG "will be fine". They should be but I think you missed something Connie.

Share this post


Link to post
Share on other sites

I do not think AIG "will be fine".

Was talking to a normally unflappable, conservative-minded, very experienced stockbroker today, and he agrees with Chuck.

Share this post


Link to post
Share on other sites

Friend of mine who favors a certain form of recreational smoking IM'd me today: Brother, can you spare a dime-bag?

But jokes aside, some folks around here are more than a bit jittery about what's going on.

Share this post


Link to post
Share on other sites

I am still fuming that the evil Democrats stopped George Bush, John McCain, and the GOP from privatizing Social Security back in 2005-06. How I wish Social Security funds were enjoying a brisk ride in the current stock market! Sadly, John McCain now tries to claim that he never was for privatizing Social Security--but blast me with a T-34, comrades, he was!!!

Why is he not proud to speak of his campaign appearances with President Bush advocating for such??? :mellow:

Comrade, God forbid(Pardon the expression! ;) ) the people have a say in what they do with their own money. What was the percentage they were talking about again???

Your filtered press may have hid this info from you, but did you know that there is going to be an inevitable Social Security shortage???? That your pals have been into the till and spending the surplus??? But, don't let people be able to invest their own money, Government knows best! :rolleyes:

Share this post


Link to post
Share on other sites

http://money.cnn.com/2008/09/15/news/compa...index.htm?t=new

September 15, 2008: 8:16 PM EDT

NEW YORK (CNNMoney.com) -- The pressure on troubled insurer American International Group intensified Monday night as a credit rating agency downgraded the firm.

Another cut could prove very costly to AIG, which is scrambling to raise much-needed capital.

Fitch Rating downgraded AIG to A, from AA-, 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 company could be required to post $10.5 billion of additional collateral if it is downgraded one notch by one of the other major rating agencies and $13.3 billion of collateral if downgraded by both, Fitch said in a statement, citing AIG's July 31 estimates.

Standard & Poor's late Friday warned it might downgrade AIG, placing the company on CreditWatch negative.

Hoping to avoid such downgrades, state and federal officials raced Monday to help the insurer gain access to much needed cash. Credit downgrades could doom its business...

Edited by GA Russell

Share this post


Link to post
Share on other sites

Can anybody here speak to the implications of an AIG belly-up? Obviously it wouldn't be good...

Share this post


Link to post
Share on other sites

Can anybody here speak to the implications of an AIG belly-up? Obviously it wouldn't be good...

Any large financial failure is bad, but a credit downgrade does not mean that AIG is in danger of failure. It means that it costs them more to borrow and attract customers. It's not the same thing. Reports today on TV indicated that AIG is not saddled with loads of debt, although I haven't really checked it on the internet or anything.

Share this post


Link to post
Share on other sites

I do not think AIG "will be fine". They should be but I think you missed something Connie.

I get your point, Chuck. I know that employees might lose jobs and that company earnings will be reduced. I was referring to the greater impact of a failure. If that were to happen it would domino to other institutions and hurt everyone.

Share this post


Link to post
Share on other sites

I do not think AIG "will be fine".

Was talking to a normally unflappable, conservative-minded, very experienced stockbroker today, and he agrees with Chuck.

Of course he's concerned, Larry. He's going to have a tough time making any sales for a few months.

The ironic thing is that people's money is safer in mutual funds right now than in a bank.

Share this post


Link to post
Share on other sites

Can anybody here speak to the implications of an AIG belly-up? Obviously it wouldn't be good...

At least part of the problem is that AIG wrote a lot of insurance contracts for the kind of shaky financial assets that are currently putting so much pressure on financials' balance sheets. So if the company gets downgraded by the ratings agencies, so do the insured assets, meaning another round of downgrades/losses for financials owning the insured assets. And so the circular firing squad continues...

This article from the WSJ discusses the latest developments; key point: "Indeed, the company's woes could pose problems in many corners -- a concern that has the federal government on watch. AIG's massive assets mean that its millions of traditional insurance customers will likely get claims paid, no matter what happens next. But AIG's shares and debt are widely held, and the firm is used by many companies world-wide to manage a range of risks, including exposure to investments in subprime mortgages. Its demise would potentially make it harder or more expensive for businesses to control their risks."

AIG Seeks Huge Loan

As Stock Dives 61%

By MATTHEW KARNITSCHNIG and LIAM PLEVEN

September 16, 2008

American International Group Inc., its shares in free-fall, struggled Monday to pull off a tangled deal that involved placating state and federal regulators, convincing banks to give it a huge loan and staving off the credit-rating agencies that hold the giant insurer's fate in their hands.

Late Monday, Standard & Poor's cut AIG's credit rating by three notches but it was unclear what direct effect the move would have on the company's abilities to meet its obligations. Moody's Investors Service also downgraded AIG's debt Monday night.

AIG stock fell 61% in 4 p.m. trading Monday, knocking more than $18 billion off the company's stock-market value. Investors feared the worst for the company as it became trapped in the massive decline in shares of financial companies that have been tarred by their holdings of securities tied to mortgages.

The company, one of the world's most important financial institutions, turned to the government in earnest after a weekend where intense efforts failed to produce a plan to raise roughly $40 billion in capital. AIG needs the money to sidestep a potentially fatal downgrade by credit-rating firms.

With AIG now tottering, a crisis that began with falling home prices and went on to engulf Wall Street has reached one of the world's largest insurance companies, threatening to intensify the financial storm and greatly complicate the government's efforts to contain it. The company is such a big player in insuring risk for institutions around the world that its failure could undermine the global financial system.

The Federal Reserve, which is being advised by Morgan Stanley, hosted a meeting to discuss AIG's prospects at the central bank's offices in New York on Monday with company executives, a host of bankers and state regulators, as well as Treasury and Fed officials.

With strong encouragement from the Fed, Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. are seeking to raise $70 billion to $75 billion in loans to help prop up AIG, according to people familiar with the situation. Word of AIG's efforts to borrow that much sent the stock market tumbling in the last hour of trading, which made Monday the worst percentage decline in six years.

Analysts believe that AIG's insurance businesses remain healthy. But its losses over the past year have made the major credit-rating agencies skeptical of its ability to raise enough capital to offset the losses. If it can't come up with the cash, the company could be forced into bankruptcy proceedings. On Monday, after the market closed, Fitch Ratings downgraded the company by two notches.

In New York, where AIG is based, Gov. David Paterson announced Monday that state officials are working with the insurer on a plan that would allow the firm to, in effect, loan itself $20 billion, by borrowing against its assets. The state would allow the company to shift assets that are subject to tight regulation in order to give the company better liquidity in the short term.

The private loans facilitated by banks, were they to become available, would provide a huge measure of relief to AIG. The insurer had sought a bridge loan from the Fed to tide it over until it was able to sell some assets, but Fed officials are not inclined to provide one, especially right after spurning Lehman Brothers. The Fed's failure to come to Lehman's aid forced the firm to file for Chapter 11 bankruptcy protection Monday.

At a midday news conference, U.S. Treasury Secretary Henry Paulson said AIG's meetings with federal officials had "nothing to do with any bridge loan from the government" and rather represented a private-sector effort that was important to the "financial system."

Indeed, the company's woes could pose problems in many corners -- a concern that has the federal government on watch. AIG's massive assets mean that its millions of traditional insurance customers will likely get claims paid, no matter what happens next. But AIG's shares and debt are widely held, and the firm is used by many companies world-wide to manage a range of risks, including exposure to investments in subprime mortgages. Its demise would potentially make it harder or more expensive for businesses to control their risks.

AIG had hoped to have a comprehensive plan in place before the start of trading on Monday. It was unable to broker a deal in time and made no public pronouncements about its plans. But each day lost can make it harder to craft a solution. On Monday, nervous investors continued to hammer its stock. AIG's share price closed at $4.38 on Monday in composite trading on the New York Stock Exchange, down $7.38, and is down 92% for the year.

The lower the stock price, the harder it can be for the firm to raise capital.

AIG's businesses include selling life and property-casualty insurance policies. It operates in more than 100 countries around the world. With more than 100,000 employees world-wide, AIG has a sprawling portfolio of companies that also includes units that make consumer loans and lease aircraft.

AIG's business selling credit protection against the possibility of default in a variety of assets, including subprime mortgages, set it apart from most other insurers and tied it more closely to the fate of the housing and credit markets.

When the housing market began to spiral downwards, the value of those contracts plunged. That issue is at the heart of AIG's massive losses, which have totaled $18 billion over the last three quarters.

The losses have put the company over a barrel. To raise money, AIG in recent days has explored selling off valuable units. The company, for instance, is looking into selling AIG Variable Annuity Life Insurance Co., which provides retirement services, according to a person familiar with the matter. An AIG spokesman declined to comment.

AIG has also held discussions in recent days with private-equity firms about providing an infusion of cash. But some firms balked at putting in money absent a Fed bridge loan, and at this point, private-equity firms such as TPG and Kohlberg Kravis Roberts & Co. are more interested in buying specific AIG assets rather than contributing money to a capital infusion, according to people familiar with these firms' thinking.

The company also talked with Warren Buffett, chairman of Berkshire Hathaway Inc. which has a number of insurance businesses. The talks didn't result in specific plans, and it wasn't clear if they were ongoing.

The problems confronting AIG are especially striking because the company is so large. At the end of the second quarter, its assets exceeded its liabilities by $78 billion. But most of those assets are held by its insurance subsidiaries, as guarantees that they will be able to pay claims.

As a result, those assets can't be liquidated to meet the company's other obligations, such as those associated with the recent losses. AIG raised $20 billion earlier this year, but it's not clear how much of that it still has on hand. And if ratings agencies downgrade it, the company could have to come up with at least $10 billion, and perhaps as much as $18 billion.

That is one way loans from banks or New York state's moves could aid the company, by giving it short-term cash while it works on longer-term efforts to raise money, such as by selling assets.

In New York, Insurance Superintendent Eric Dinallo is working with AIG on efforts to shift around assets that it could use to help raise cash. Insurance companies operate under strict regulations about moving assets among subsidiaries, in order to guarantee that they can meet their obligations to policyholders.

New York, though, may allow AIG to move certain assets that are harder to liquidate quickly into its insurance subsidiaries, where they would back up possible future claims, and then shift more easily tradable assets, such as municipal bonds, to the parent company. The parent company could then borrow against those more liquid assets, which could in turn help ease its needs for cash in the short term.

--- Susanne Craig, Jon Hilsenrath, Aaron Lucchetti, Peter Lattman and Dow Jones Newswires contributed to this article.

Write to Matthew Karnitschnig at matthew.karnitschnig@wsj.com and Liam Pleven at liam.pleven@wsj.com

Share this post


Link to post
Share on other sites

Can anybody here speak to the implications of an AIG belly-up? Obviously it wouldn't be good...

Any large financial failure is bad, but a credit downgrade does not mean that AIG is in danger of failure. It means that it costs them more to borrow and attract customers. It's not the same thing. Reports today on TV indicated that AIG is not saddled with loads of debt, although I haven't really checked it on the internet or anything.

There's a little more to it than that. Statutory capital requirements for insurance companies are a function of their ratings. Insurance companies can (and have) failed when these capital requirements have increased to an unsustainable level. I have been involved in 11th hour talks with ratings agencies on behalf of clients for this very reason. Given how cash-strapped AIG is right now (thanks to CDO investments, the extent of which I cannot believe passed muster with 50 state commissioners), this is a very real risk. Given the fact that the stock touched $3.50 today (95% below where it was less than a year ago), I think it fair to say that many others share this assessment.

Share this post


Link to post
Share on other sites

I do not think AIG "will be fine".

Was talking to a normally unflappable, conservative-minded, very experienced stockbroker today, and he agrees with Chuck.

Of course he's concerned, Larry. He's going to have a tough time making any sales for a few months.

The ironic thing is that people's money is safer in mutual funds right now than in a bank.

Unless you think the US government is going to go belly up, bank deposits (up to $100K) are FDIC insured. Mutual funds are not.

Guy

Share this post


Link to post
Share on other sites

There's a little more to it than that. Statutory capital requirements for insurance companies are a function of their ratings. Insurance companies can (and have) failed when these capital requirements have increased to an unsustainable level. I have been involved in 11th hour talks with ratings agencies on behalf of clients for this very reason. Given how cash-strapped AIG is right now (thanks to CDO investments, the extent of which I cannot believe passed muster with 50 state commissioners), this is a very real risk. Given the fact that the stock touched $3.50 today (95% below where it was less than a year ago), I think it fair to say that many others share this assessment.

If they passed muster with supposedly-sophisticated institutional investors, chief risk officers at major financial institutions and all the "smart" people in national policymaking circles, I don't think you can be so harsh on state insurance regulators.

Guy

ps How could I forget the rating agencies!!!!!!

Edited by Guy

Share this post


Link to post
Share on other sites

I do not think AIG "will be fine".

Was talking to a normally unflappable, conservative-minded, very experienced stockbroker today, and he agrees with Chuck.

Of course he's concerned, Larry. He's going to have a tough time making any sales for a few months.

The ironic thing is that people's money is safer in mutual funds right now than in a bank.

Unless you think the US government is going to go belly up, bank deposits (up to $100K) are FDIC insured. Mutual funds are not.

Guy

FDIC is woefully underfunded and there is sufficient doubt that it could handle a full blown crisis. I still prefer my mutual funds, thank you, as I don't think all their holdings would necessarily go to zero.

edit to add: another thing to consider is that you might have to wait a year for your insured deposits to be paid out. People might need their money next week. We can sell our mutual funds and get money within a week.

Edited by connoisseur series500

Share this post


Link to post
Share on other sites

There's a little more to it than that. Statutory capital requirements for insurance companies are a function of their ratings. Insurance companies can (and have) failed when these capital requirements have increased to an unsustainable level. I have been involved in 11th hour talks with ratings agencies on behalf of clients for this very reason. Given how cash-strapped AIG is right now (thanks to CDO investments, the extent of which I cannot believe passed muster with 50 state commissioners), this is a very real risk. Given the fact that the stock touched $3.50 today (95% below where it was less than a year ago), I think it fair to say that many others share this assessment.

If they passed muster with supposedly-sophisticated institutional investors, chief risk officers at major financial institutions and all the "smart" people in national policymaking circles, I don't think you can be so harsh on state insurance regulators.

Guy

Point taken, unlike the other agents you mention, the role of state insurance commissioners is to ensure that the companies writing in their states have suitably conservative, traditional investments to ensure the solvency of the firm beyond any reasonable doubt. You're typically looking at a portfolio dominated by treasuries, with a smattering of investment grade corporate bonds.

Share this post


Link to post
Share on other sites

... Given how cash-strapped AIG is right now (thanks to CDO investments, the extent of which I cannot believe passed muster with 50 state commissioners), this is a very real risk. Given the fact that the stock touched $3.50 today (95% below where it was less than a year ago), I think it fair to say that many others share this assessment.

Doubt it's just CDO investments. I've been hearing that AIG trading desks have some seriously underwater/mishedged CDS (credit default swap) positions.

Share this post


Link to post
Share on other sites

One thing that hasn't been discussed is the FDIC. Their "capitalization", if you will, stood at $70 billion prior to the demise of Indy Mac. That cost them $20 billion, leaving $50 billion in the pot. If the game that's afoot continues, it wouldn't take a whole lot to cause a run on the banks once people become aware of the fact that their money may not be protected. In this eggshell environment, even rumors could become very dangerous.

When the historians take a look at the last 30 years, I sure hope Ronald Reagan is smacked upside the head for beginning the process of deregulation that paved the path that led to the kind of situation in which we now find ourselves. The idea of a free market steeped in greed being able to regulate itself is a joke. I'm not saying the government is a whole lot better equipped to handle this, but nothing could be worse than turning over the keys to the henhouse to the fox.

Up over and out.

Share this post


Link to post
Share on other sites

I do not think AIG "will be fine".

Was talking to a normally unflappable, conservative-minded, very experienced stockbroker today, and he agrees with Chuck.

Of course he's concerned, Larry. He's going to have a tough time making any sales for a few months.

The ironic thing is that people's money is safer in mutual funds right now than in a bank.

Unless you think the US government is going to go belly up, bank deposits (up to $100K) are FDIC insured. Mutual funds are not.

Guy

FDIC is woefully underfunded and there is sufficient doubt that it could handle a full blown crisis. I still prefer my mutual funds, thank you, as I don't think all their holdings would necessarily go to zero.

The FDIC is underfunded, but it is a (near) certainty that the US government would make sure that all deposit insurance would pay out. To do otherwise would generate a massive countrywide (excuse the pun) bank run which would truly cripple the US financial system and completely defeat the purpose of having deposit insurance in the first place. Of course, there is the possibility that the US government itself would be unable to raise debt or taxes sufficiently to cover all insured deposits, but I would say this is extremely unlikely.

edit to add: another thing to consider is that you might have to wait a year for your insured deposits to be paid out. People might need their money next week. We can sell our mutual funds and get money within a week.

Is that true about insured deposits requiring up to a year to be paid out? I was not aware of that.

edit: Checking the FDIC's website:

How long does the FDIC take to pay insurance on deposits after an insured bank fails?

Federal law requires the FDIC to make payment as soon as possible. Historically, the FDIC pays insurance within a few days after a bank closing either by establishing an account at another insured bank or by providing a check. Deposits purchased through a broker may take longer to be paid because the FDIC may need to obtain the broker's records to determine insurance coverage.

Customers with uninsured deposits receive the insured portion of their account as described above. They will wait longer to receive payment for some or all of their uninsured deposits. The amount of uninsured deposits they may receive, if any, is based on the sale of the failed bank's assets. Depending on the quality and value of these assets, it may take several years to sell the assets. As assets are sold, uninsured depositors receive periodic payment on their uninsured deposit claim.

Looks like there is a distinction between regular deposits and brokered deposits; the former are paid out pretty quickly - if not, that would again defeat the purpose of deposit insurance.

I should note - I am not arguing that people should liquidate their mutual funds and move the money to FDIC-insured accounts. As Conn said, a well-diversified mutual fund is not going to go to 000 and in the long run stocks will probably bounce back. It's just that if short-run safety is your paramount objective, FDIC-insured accounts are the way to go.

Guy

Edited by Guy

Share this post


Link to post
Share on other sites

ps How could I forget the rating agencies!!!!!!

Yeah, thank goodness we had the rating agencies to tell us that we might not want to buy any Lehman securities today...

The rating agency industry is almost certain to be the next in line for major reform. I'm not sure what form it will take, but I doubt that in 5 years firms will be paying the agencies millions of dollars to rate them. Given all the problems of late, the appearance (at minimum) of conflict of interest is not sustainable.

Share this post


Link to post
Share on other sites

This should be in the political forum, because this will have a far greater effect on your life than the upcoming election will.

Share this post


Link to post
Share on other sites

Is that true about insured deposits requiring up to a year to be paid out? I was not aware of that.

Guy

I was told this when I worked at a bank, but it wouldn't hurt for someone to research this.

I tell you what: if I had any decent assets in a bank right now, I would be scared. The money would be safer under my mattress. But I don't have any money and I only keep debt at my banks.

Share this post


Link to post
Share on other sites

... Given how cash-strapped AIG is right now (thanks to CDO investments, the extent of which I cannot believe passed muster with 50 state commissioners), this is a very real risk. Given the fact that the stock touched $3.50 today (95% below where it was less than a year ago), I think it fair to say that many others share this assessment.

Doubt it's just CDO investments. I've been hearing that AIG trading desks have some seriously underwater/mishedged CDS (credit default swap) positions.

This may betray my ignorance, but prior to your post I would have considered a CDS to be a type of CDO. Isn't a CDS essentially a firm-specific CDO?

Share this post


Link to post
Share on other sites

According to CNN:

NEW YORK (CNNMoney.com) -- The pressure on American International Group reached fevered pitch on Monday night as the troubled insurer was hit by a series of credit rating downgrades.

The cuts could prove deadly to AIG, the nation's largest insurance company, which is scrambling to raise much-needed capital.

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 downgrades will make it more expensive for AIG to issue debt and harder for it to regain the confidence of investors.

Up over and out.

Share this post


Link to post
Share on other sites

... Given how cash-strapped AIG is right now (thanks to CDO investments, the extent of which I cannot believe passed muster with 50 state commissioners), this is a very real risk. Given the fact that the stock touched $3.50 today (95% below where it was less than a year ago), I think it fair to say that many others share this assessment.

Doubt it's just CDO investments. I've been hearing that AIG trading desks have some seriously underwater/mishedged CDS (credit default swap) positions.

This may betray my ignorance, but prior to your post I would have considered a CDS to be a type of CDO. Isn't a CDS essentially a firm-specific CDO?

I could be wrong (worked on Wall St. for many years, but only hear things second-hand these days), but I think a CDS is a type of derivative swap instrument roughly descended from an interest rate swap agreement, and with similar documentation and counterparty structure.

I think a CDO (collateralized debt obligation) is a kitchen-sink style bond-like investment, which can be backed/collateralized by all manner of things: mortgages, corporate bonds, various senior/subordinate/equity tranches of other collateralized deals, even swap agreements like CDS. Some of the most notorious CDOs, whose prices most spectacularly vaporized, were partly "collateralized" :wacko: by CDS (that in itself is a true absurdity, and could very well be why the Street got stuck with all the "super-seniors" that later melted down).

[Added] As someone mentioned above, the ratings agencies will deservedly undergo big changes. The rating of CDOs was particularly egregious, and riddled with conflicts of interest.

Edited by T.D.

Share this post


Link to post
Share on other sites

Please sign in to comment

You will be able to leave a comment after signing in



Sign In Now
Sign in to follow this  
Followers 0

  • Recently Browsing   0 members

    No registered users viewing this page.