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Robert J

What, no thread on the banks?

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AIG might be OK for the moment...

Stocks rise on report of possible govt. aid to AIG

A government bailout of AIG is very BAD news.

Worse than AIG actually going under? Again, I don't profess to know the particulars. I'm reading the posts of those who do with great interest.

There have been estimates that AIG may be effectively "in the red" by as much as $100 billion, so it could prove to be a very expensive tab for the taxpayers to pick up, even if you gave the bondholders (largely pension/retirement funds) $0.

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Yet another socialist scheme.

Government takes an 80% stake in AIG through the issuing of warrants. Hmmm, seems to me that this will dilute the crap out of the stock and individual shareholders will take a major pasting. I don't feel sorry for the fat cats who own shares, but I bet that most value-oriented mutual funds and index funds own a ton of AIG. All of our retirement accounts will take a bit of a hit, but if it saves the overall market...

I think it is okay for government to bail out weak companies and take ownership stakes, but here we have them doing it to a basically sound company which was sent into a credit crunch via a combination of shortselling and bad timing (as far as creating an environment which didn't allow them to liquidate some of their assets to cover liabilities.) Not sure if all this is good.

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...AND (and I'm not making this up), AND... "in return, the federal government will receive a 79.9% stake in the company."

The government just paid $85 billion dollars to buy 80% of AIG???

What the holy motherfucking fuck???? :blink::blink::blink:

source

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I've just been reading up on the Glass Steagall Act of 1933. This is the law that was repealed by the actions of our friend Phil "Bunch of Whiners" Gramm when he co-sponsored the the Gramm Leach Bliley act of 1999. GLB was the culmination of intense lobbying on the part of what's now known as the financial services industry that began as far back as the 1980's. More than a few economists believe that this laid the groundwork for the sub-prime crisis and all the attendant fall out. Interesting stuff.

Up over and out.

From my understanding of G-S and G-L-B (which admittedly is superficial), this is not a convincing argument. Bear Stearns, Lehman, Merrill Lynch - these are investment banks, hence the repeal of the law did not affect them. And the depository institutions that have failed so far had very little, if any, investment banking activities.

The root cause of this crisis - excessive lending/borrowing - could have occurred with or without the integration of investment and depository banking under one roof.

Guy

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AIG might be OK for the moment...

Stocks rise on report of possible govt. aid to AIG

A government bailout of AIG is very BAD news.

Worse than AIG actually going under? Again, I don't profess to know the particulars. I'm reading the posts of those who do with great interest.

Disclaimer up front: I work in the financial services industry, so I am not a disinterested party.

Here's a summary of why an AIG bailout matters.

1) Financial institutions currently have on their balance sheets many assets whose value is maintained by the fact that it is insured by AIG. That is, even if the underlying asset goes down in value, AIG promises to pony up the difference.

2) This in turn implies that if AIG is no longer able to honor its insurance, those assets drop dramatically in value.

3) So an AIG default would imply further writedowns for those financial institutions.

4) Such writedowns would leave financial institutions even shorter on capital at a time when such capital is scarce. i.e., bring them closer to possible insolvency.

5) Even those that do not become insolvent will become more tightfisted with lending in order to conserve capital.

6) Thus -- whether through insolvency of financial institutions or tightening of lending standards -- the functioning of the financial system will become further impaired.

Guy

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The U.S. government announced an emergency rescue of American International Group Inc. -- one of the world's biggest insurers -- signaling the intensity of its concerns about the danger a collapse could pose to the financial system.

It's a dramatic turnabout for the federal government, which has strongly resisted overtures from AIG for an emergency loan or some intervention that would prevent the insurer from falling into bankruptcy. Just last weekend, the government effectively pulled the plug on Lehman Brothers Holdings Inc., allowing the big investment bank to fail instead of giving it financial support.

The precise details of the government's plans were still being formulated late Tuesday. The primary option being hammered out involved the Fed providing AIG with a short-term "bridge" loan of $85 billion, according to people familiar with the situation. In exchange, the government would receive warrants in AIG representing the right to buy its stock, under certain conditions. That could put the government in a position to potentially control a private insurer, a historic move, particularly considering that AIG isn't directly regulated by the federal government.

The moves capped a day of high drama in Washington. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke convened in the early evening an unexpected meeting of top congressional leaders, including Sen. Harry Reid of Nevada, the majority leader, top members of the Senate Banking Committee and leaders, too, from the House.

Sen. Richard Shelby of Alabama said he didn't receive a "satisfactory" answer from Mr. Paulson in an early conversation about the ultimate scope of government intervention. "I laid out -- where do you stop? Where do you draw the line?"

OB-CI837_aigdea_D_20080916132411.jpg Associated Press Businessmen leave an American International Group office building Tuesday in New York.

The Federal Reserve appeared to be motivated in part by worries that Wall Street's financial crisis could begin to spill over into seemingly safe investments held by small investors, such as money-market funds that invest in AIG debt.

Indeed, on Tuesday the $62 billion Primary Fund from the Reserve, a New York money-market firm, said it "broke the buck" -- that is, its net asset value fell below the $1-a-share level that funds like this must maintain. Breaking the buck is an extremely rare occurrence. The fund was pinched by investments in bonds issued by now collapsing Lehman Brothers.

Money-market funds are supposed to be among the safest investments available. No fund in the $3.6 trillion money-market industry has lost money since 1994, when Orange County, Calif., went bankrupt. A number of money-market funds own securities issued by AIG. The firm is also a big insurer of some money-market instruments.

AIG's financial crisis intensified Monday night when its credit rating was downgraded, forcing it to post $14.5 billion in collateral. The insurer has far more than that in assets that it could sell, but it could not get the cash quickly enough to satisfy the collateral demands. That explains the interest in obtaining a bridge loan to carry it through. AIG's board approved the rescue Tuesday night.

The final decision to help AIG came Tuesday as the federal government concluded it would be "catastrophic" to allow the insurer to fail, according to a person familiar with the matter. Over the weekend, federal officials had tried to get the private sector to pony up some funds. But when that effort failed, Fed Chairman Bernanke, New York Fed President Timothy Geithner and Treasury Secretary Paulson concluded that federal assistance was needed to avert an AIG bankruptcy, which they feared could have disastrous repercussions.

Staff from the Federal Reserve and Treasury worked on the plan through Monday night. President George W. Bush was briefed on the rescue Tuesday afternoon during a meeting of the President's Working Group on Financial Markets.

View Slideshow

OB-CI377_915leh_D_20080915105520.jpgThat the government would prop up AIG financially offers a stark indication of the breadth of the insurer's role in the global economy. If it were to have trouble meeting its obligations, the potential domino effect could reach around the world.

For one thing, banks and mutual funds are major holders off AIG's debt and could take a hit if the insurer were to default. In addition, AIG was a major seller of "credit-default swaps," essentially, insurance against default on assets tied to corporate debt and mortgage securities. Weakness at AIG could force financial institutions in the U.S., Europe and Asia that bought these swaps to take write-downs or losses.

AIG's millions of insurance policyholders appear to be considerably less at risk. That's because of how the company is structured and regulated. Its insurance policies are issued by separate subsidiaries of AIG, highly regulated units that have assets available to pay claims. In the U.S., those assets can't be shifted out of the subsidiaries without regulatory approval, and insurance is also regulated strictly abroad.

Tuesday afternoon, after the market closed, AIG put out a statement saying its basic insurance and retirement services businesses are "fully capable of meeting their obligations to policyholders." AIG said it was trying to "increase short-term liquidity in the parent company," but said that didn't "include any effort to reduce the capital of any of its subsidiaries or to tap into Asian operations for liquidity." Asia is one AIG's largest markets.

Where the company is feeling financial pain is at the corporate level, even while its insurance operations are healthy. If a bankruptcy filing did ensue, the insurance subsidiaries could continue to operate while in Chapter 11, or could also be sold.

Still, a collapse of the parent company would have huge ripple effects. The urgency of federal aid came into stark relief Tuesday as other options fell off the table and pressures continued to build. On Tuesday, AIG's attempt to raise as much as $75 billion from private-sector banks failed. The banks advising the firm concluded it would be all but impossible to organize a loan of that size, making the government AIG's chief hope.

The AIG bailout caps a tumultuous 10 days that have remade the American financial system. In that time, the government has engineered rescues that insert it deep into the housing and insurance industries, while Wall Street has watched two of its last four big independent brokerage firms exit the scene.

The U.S. on Sept. 6 took over mortgage-lending giants Fannie Mae and Freddie Mac as they teetered near collapse. This Sunday, the U.S. refused to bail out Wall Street pillar Lehman Brothers, which filed for bankruptcy and is now being sold off in pieces. That same day, another struggling Wall Street titan, Merrill Lynch & Co., sold itself to Bank of America Corp..

As a result of AIG's credit downgrades, the insurer has to post $14.5 billion in collateral to bolster its credit rating. In the debt markets, AIG also has to post additional collateral to investment banks and others it trades with.

Adding to AIG's woes, investors continued to pummel the company's stock on Tuesday, pushing the share price down another 21%, to $3.75. It was the third double-digit percentage decline in the last three trading days.

<H3 class=first>Crisis on Wall Street</H3>

Federal officials worked throughout the day to help the company forestall a possible bankruptcy filing. Insurance regulators in New York, where AIG is based, are also working on a plan to let AIG move some assets into and out of its subsidiaries in order to be able to borrow up to $20 billion against some of them. But a spokesman says the department is confident it is protecting policyholders.

"Our deal is contingent on a broader solution to AIG's problems," says the department spokesman, David Neustadt.

AIG's cash squeeze is driven in large part by losses in a unit separate from its traditional insurance businesses. That financial-products unit, which has been a part of AIG for years, sold the credit-default swap contracts designed to protect investors against default in an array of assets, including subprime mortgages.

But as the housing market has crumbled, the value of those contracts has dropped sharply, driving $18 billion in losses over the past three quarters and forcing AIG to put up billions of dollars in collateral. AIG raised $20 billion earlier this year. But the ongoing demands are straining the holding company's resources.

That strain contributed to the ratings downgrades on Monday. Those downgrades, in turn, ratcheted up the pressure on the company to come up with more cash, quickly.

Most insurance companies don't have financial-products units like these. But over nearly four decades, former CEO, Maurice R. "Hank" Greenberg built AIG into a firm that resembled no other. He transformed its insurance business, both by expanding abroad -- notably in China, where AIG has its roots -- and by buying up other firms.

Mr. Greenberg pushed into areas that have little to do with bread-and-butter businesses like selling life insurance or protecting companies against property losses. In 1990, for instance, he bought International Lease Finance Corp., which leases planes to airlines.

But in 2005, Mr. Greenberg stepped down amid an accounting scandal. But Mr. Greenberg, who is fighting civil charges related to the scandal and has denied wrongdoing, didn't fade from the scene. He still heads a firm that is AIG's largest shareholder, and on Tuesday, he sent a letter to current CEO, Robert Willumstad, saying he was "ready to offer any assistance that I can."

As confidence in AIG's fate has plummeted, the amount of money it feels compelled to raise to calm its many constituents continues to rise. Though $40 billion was the figure over the weekend, it climbed to 75 billion on Monday and, according to a person close to the company, to $100 billion on Tuesday.

The rapid escalation in its potential needs has raised the spectre of bankruptcy. In preparation for a possible bankruptcy filing, AIG has hired New York law firm Weil Gotshal & Manges to advise it. Weil is also working for Lehman Brothers Holdings, which filed for bankruptcy protection earlier this week.

P1-AM935_AIGjum_NS_20080915190413.gif The ratings downgrades also triggered a provision in some of AIG's large commercial insurance policies that allow holders to cancel the policies and recoup some of the premiums they paid, according a person familiar with the matter. It's not clear whether policyholders are exercising that right.

But insurance brokers are contending with worried clients who have policies issued by AIG. Daniel Glaser, the head of the brokerage unit at Marsh & McLennan Cos. (and a former AIG executive) posted a letter to customers on the company's Web site saying that AIG is "facing a liquidity crisis." Nonetheless, Mr. Glaser wrote that AIG meets the broker's "financial guidelines," despite recent rating downgrades. "Therefore, we have no restrictions on the use of AIG insurance company subsidiaries for client placements," Mr. Glaser wrote.

In Asia, where AIG operates a wide network of businesses, its affiliates sought to reassure clients that they had sufficient capital to meet all policy claims. Regulators in India, Hong Kong, Singapore and Thailand said local AIG units have enough capital to cover their obligations. Regulators in China said they were monitoring the situation.

Customers outside the U.S. accounted for 79% of AIG's insurance premiums for life insurance and retirement services last year. Japan and Taiwan are among AIG's largest markets.

Despite reassurances from regulators that their policies were covered and warnings that cancellations could lead to losses, dozens of people lined up outside AIG-affiliated offices in Singapore. Some waited for three hours to be attended by staffers. Others said that they wanted to make sure that their policies are safe, while others said they would cancel their policies.

—Jon Hilsenrath, Diya Gullapalli, Serena Ng, Damian Paletta and Ashby Jones contributed to this article. Write to Matthew Karnitschnig at matthew.karnitschnig@wsj.com, Deborah Solomon at deborah.solomon@wsj.com and Liam Pleven at liam.pleven@wsj.com

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...AND (and I'm not making this up), AND... "in return, the federal government will receive a 79.9% stake in the company."

The government just paid $85 billion dollars to buy 80% of AIG???

What the holy motherfucking fuck???? :blink::blink::blink:

source

It's a loan, not a transfer. It's unclear how much of this loan will be paid back.

Guy

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Our banks / lenders are far stricter about home loans, especially first timers. Most of our mortgages are "prime" and maybe a very small portion are subprime, and even then, a very small group of subprimers use variable rates.

All high-ratio mortgages in Canada — those with less than 20 per cent down — must be secured by mortgage insurance such as the Canada Mortgage and Housing Corporation. In addition, Canadian financial institutions do not finance more than 100 per cent of a home's purchase price, and that value must be verified with a separate appraisal.

As I understand it, the problem is not whether the banks in a given country are strict about home loans, but about whether they invest in the financial products whose value is uncertain because they contain "subprime" home loan credit originating in the States. Those subprime mortgages were sliced up and packaged, resliced and repackaged with other stuff, and so on, and sold and resold all over the world--all the while being given good credit ratings. Therefore conscientious Canadian banks could well be stuck holding the same risky assets as banks in any other country.

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I think you people are being silly by treating this as a Repub/Dem partisan issue.

I think you're being silly by suggesting that the solution to the crisis is to turn to the Libertarians, the one group who would remove any and all regulation immediately. This problem was brought upon us in large part due to the wonderful Republican "free enterprise solution" of removing "unnecessary" regulation. Now that this has been discredited, I don't think you'll convince many (other than Berigan) that we should carry this approach even farther...

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The TSX took a hit yesterday, but will rebound as it was mostly energy stock devaluation.

Stand by for a long-term shift to lower valuations worldwide. I suspect it won't significantly recover for a fair old while and nowhere will be immune IMO.

The imploding of 100% mortgages on houses (not to mention 40 year repayment periods, never mind 25) were a time-bomb just waiting to happen. I expect we'll be back to something like the old prudent system of 3 to 3.5 times employer certified income on max. mortgages for the longer term. No more 'liar loans' And not before time either !

Edited by sidewinder

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... This problem was brought upon us in large part due to the wonderful Republican "free enterprise solution" of removing "unnecessary" regulation. Now that this has been discredited, I don't think you'll convince many (other than Berigan) that we should carry this approach even farther...

Yep.

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The imploding of 100% mortgages on houses (not to mention 40 year repayment periods, never mind 25) were a time-bomb just waiting to happen. I expect we'll be back to something like the old prudent system of 3 to 3.5 times employer certified income on max. mortgages for the longer term. No more 'liar loans' And not before time either !

The best were those "interest only" home loans. I believe they were/are adjustable-rate, also (just for an added kick in the ass). What could possibly go wrong!?

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Our banks / lenders are far stricter about home loans, especially first timers. Most of our mortgages are "prime" and maybe a very small portion are subprime, and even then, a very small group of subprimers use variable rates.

All high-ratio mortgages in Canada — those with less than 20 per cent down — must be secured by mortgage insurance such as the Canada Mortgage and Housing Corporation. In addition, Canadian financial institutions do not finance more than 100 per cent of a home's purchase price, and that value must be verified with a separate appraisal.

As I understand it, the problem is not whether the banks in a given country are strict about home loans, but about whether they invest in the financial products whose value is uncertain because they contain "subprime" home loan credit originating in the States. Those subprime mortgages were sliced up and packaged, resliced and repackaged with other stuff, and so on, and sold and resold all over the world--all the while being given good credit ratings. Therefore conscientious Canadian banks could well be stuck holding the same risky assets as banks in any other country.

Our Big 4 banks did take sizable hits from holding ABCP. They did numerous write-downs in the last year which slightly affected some of the already obscene profits these same banks usually record. A few years ago CIBC paid off a massive amount (2.4 billion) to settle their Enron lawsuit, but the bank is still there.

However, there is close to $32 billion in frozen ABCP assets in limbo. The courts and banks are still working out that deal. So yes, there will be some issues for Canadians for sure, but it looks like it will weather OK in the long run after the restructuring of this debt happens.

An update http://www.financialpost.com/reports/legal....html?id=795010

The big issue now is the lawsuits agaisnt investment advisors who sold these products as AA, possibly knowing teh junk value. The Supreme Court has ruled that lawsuits may be possible, but the whole intent part will be difficult to prove.

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Interesting analysis from J.P. Morgan, which I am not at liberty to share. Nonetheless, they think this is actually a pretty good deal for taxpayers in the medium and long-term, the equivalent of owning a Sovereign Wealth Fund, except that no one knows what happens if the Feds start making investment decisions on the basis of political considerations or alternatively start changing federal fiscal policy in ways that benefit AIG holdings.

I would add that of course the moral risk that everyone will be expecting more and more bailouts, leading to riskier behavior rather than the much needed return to sanity. Probably the best thing would be for the feds to ride through the current storm, give AIG time to unwind the riskiest assets and then slowly disinvest in AIG.

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Anybody know if there's a connection between the weirdness on the Russian stock exchanges & our own financial teeteriness?

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Probably the best thing would be for the feds to ride through the current storm, give AIG time to unwind the riskiest assets and then slowly disinvest in AIG.

I think that is the plan.

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Canada's banks will be fine as we aren't burdened with bad home loans .

But one of our biggest insurers is not so lucky!

__________________________________________________

Canadian insurer Sun Life Financial Inc. disclosed Wednesday that it has $315-million in exposure to American International Group Inc. after its stock had dropped more than 9 per cent.

Shares of the Toronto-based company had lost $3.51 each, falling to $35.40, before its disclosure.

Earlier in the week, Sun Life reported that it holds $334-million of Lehman Brothers Holdings Inc. bonds.

More on this...

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Anybody know if there's a connection between the weirdness on the Russian stock exchanges & our own financial teeteriness?

Supposedly it's based on the falling price of oil and their inability to boost production, thus if oil falls then they fall too. That at least was the opening excuse I read. Truth is I'm spending more time reading about own markets right now than theirs though.

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I think you people are being silly by treating this as a Repub/Dem partisan issue.

I think you're being silly by suggesting that the solution to the crisis is to turn to the Libertarians, the one group who would remove any and all regulation immediately. This problem was brought upon us in large part due to the wonderful Republican "free enterprise solution" of removing "unnecessary" regulation. Now that this has been discredited, I don't think you'll convince many (other than Berigan) that we should carry this approach even farther...

Moose, let me make a couple of points regarding the bipartisan nature of the problem and the Libertarian view.

1) My understanding is that this this sub-prime lending mess was started by Bill Clinton. For political (not economic) reasons, his administration pressured the banks to lend money to the poor (read "blacks"), with the threat of penalties if they didn't. This continued under the Bush administration. The banks would not have made the loans in the first place if they had not been pressured to by the government.

2) The Libertarians oppose such government pressure regarding telling the banks how to do business.

3) The Libertarians oppose all govt/taxpayer bailouts of private corporations.

4) Think in terms of a business cycle. The Libertarians believe that if the market is allowed to do what it thinks is best, of course mistakes ("malinvestments") will be made. But without govt intervention, they will be soon corrected, and the cycle will be mild. Each time the govt intervenes, the correction is postponed and the malinvestments will continue, which will make the cycle more exaggerated, and the eventual resolution more painful.

5) In this case of the past sixteen years, there has been a great deal of corruption by both the bankers and the Congress. I don't believe that any theory will work well if all the parties involved are crooked.

For example, I learned yesterday that Dem party hack Jamie Gorelick (I imagine that googling her will reveal what you may not know about her, such as her prohibitiing the 9/11 Commission from doing its job properly) has been with Fannie Mae since Clinton left office, and in that time she has been paid $26 million! There was another fellow from the Clinton budget office who has also been with Fannie Mae who has been paid a similar amount.

I learned today that the Obama campaign has received $560,000 cash from Fannie Mae, Freddie Mac and Lehman Bros alone!

This doesn't pass the smell test. I think the problem is clearly bipartisan.

6) One final point about the Libertarians. They are in favor of the free market theory, not capitalism per se. What we have here is the so-called "socialism for the rich, capitalism for the poor", where the poor have to pay for their mistakes, but the rich get tax-funded bailouts. Clearly the Libertarians are opposed to this.

edit for typo

Edited by GA Russell

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Anybody know if there's a connection between the weirdness on the Russian stock exchanges & our own financial teeteriness?

Anybody else hearing about this? http://www.ifaonline.co.uk/public/showPage.html?page=815617

Yeah - I heard about this one too.

The biggest defaulters by the way are likely to be the Icelandic banks. Those guys are in deep permafrost doo doo..

Quite a bit of excitement over here in the UK today. One of our banks (HBOS - biggest domestic mortgage provider) went through the floor (probably hedge funds) and they are tonight working on a deal with Lloyds TSB. The Government is probably in there with the sticking plasters. Ouch !

Edited by sidewinder

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... This problem was brought upon us in large part due to the wonderful Republican "free enterprise solution" of removing "unnecessary" regulation. Now that this has been discredited, I don't think you'll convince many (other than Berigan) that we should carry this approach even farther...

Yep.

Yeah, that great Republican piece of legislature passed in 1999 known as the "Financial Services Modernization Act of 1999". :rolleyes:

Clinton and Rubin wanted it since day one, and they got it.

Read the Mother Jones Article

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