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yakers

What If Aig Folds?

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I believe AIG lost about 35% (!!!) of its value today. It is possible that it could go bankrupt. This is a very large company with a lot of insurance and other financial 'products'. What happens to all the annuities they have issued if they fail? What about other other banks and insurance companies if they fail? It is not unusual for a small insurance company that is failing to be taken over by a large company but who is large enough to take over AIG?

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Yakers,

Hmmmmmmm, reading your post caused me to read other interesting material about the dangers that are befalling Lehman, Merrill Lynch, and so on. Very interesting. UBS, Bear Stearns, and these big firms with so many high-priced invesment advisors seem to have encountered difficulty doing precisely what they should know best -- investing. Interesting that our son, a regular fireman in a small town the the financially strapped midwest had been telling us for a long time about how many people were losing their homes, how many people he saw taking "bad" high-priced or adjustable mortgages who were unable to pay, and how many homes were for sale.... and these big firms kept right on buying, re-packaging and re-selling these mortgages for stunning profits. Our son's a regular guy in a pick-up truck, no financial whiz at all, and HE could see it... One is inevitably led to wonder if some of these big guys in New York, with ivy league degrees, fancy cars and weekend parties in the Hamptons were operating in a world they knew to be wrong and dangerous. Among other things, a moral failing, it appears.

 

It's not much comfort, but interesting to note that the no load fund families -- Vanguard, Ariel, American Century, Fidelity, T Rowe Price, T/C and others -- seem pretty much unscathed so far. True, their businesses are confined to a narrower part of the financial field, but I wonder if it's also true that they operate with a different eithical compass. More than ever I wonder if THESE are the people we should be dealing with.

 

What do others think?

 

Not that I answered your question... and you sound worried.

 

JudyS

 

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Yakers,

Hmmmmmmm, reading your post caused me to read other interesting material about the dangers that are befalling Lehman, Merrill Lynch, and so on. Very interesting. UBS, Bear Stearns, and these big firms with so many high-priced invesment advisors seem to have encountered difficulty doing precisely what they should know best -- investing. Interesting that our son, a regular fireman in a small town the the financially strapped midwest had been telling us for a long time about how many people were losing their homes, how many people he saw taking "bad" high-priced or adjustable mortgages who were unable to pay, and how many homes were for sale.... and these big firms kept right on buying, re-packaging and re-selling these mortgages for stunning profits. Our son's a regular guy in a pick-up truck, no financial whiz at all, and HE could see it... One is inevitably led to wonder if some of these big guys in New York, with ivy league degrees, fancy cars and weekend parties in the Hamptons were operating in a world they knew to be wrong and dangerous. Among other things, a moral failing, it appears.

 

It's not much comfort, but interesting to note that the no load fund families -- Vanguard, Ariel, American Century, Fidelity, T Rowe Price, T/C and others -- seem pretty much unscathed so far. True, their businesses are confined to a narrower part of the financial field, but I wonder if it's also true that they operate with a different eithical compass. More than ever I wonder if THESE are the people we should be dealing with.

 

What do others think?

 

Not that I answered your question... and you sound worried.

 

JudyS

 

 

Judy:

 

Most of the employees at Bear Stearns and Lehman are/were not investment bankers (big guys), but are administrative and back office personnel who have families and mortgages to pay just like everyone else. About 7,000 employees at Bear lost their jobs and most of Lehman's 25,000 employees will be gone in the next few weeks in addition to the 3,000 who were laid off in the last few weeks. The NYC area has lost over 100,000 jobs in financial services since the beginning of the year which will force cuts in NYC services next year (due to a decline in revenue from the city income tax and state aid) demonstrating that the economy does not benefit from unemployment. There will be similar effects to the local enonomy when WAMU is taken over (JPM was reported to have offered to buy WAMU yesterday).

 

Why did you you ignore the mortgage companies based on the West Coast such as Countrywide and WAMU (the # 1 and #6 sub prime lenders) who sold sub prime mortgages all over the US to unsuspecting buyers? How many millions did the presidents and VPs of Countrywide and WAMU earn from selling this toxic waste? I bet ' THESE' are also people with ivy league degrees who own a lot of nice homes overlooking the Pacific Ocean, fancy cars and weekend parties in LALA land. If they didnt sell sub prime mortgages to unsuspecting customers there would have been no loans for the NY investment firms to buy from them.

 

Also why did your condemnation of packaging and reselling mortgages overlook the biggest players in that market, the Government sponsored entities Fannie Mae and Freddie Mac who were taken over on Monday? Together they hold or guarantee $5.3T of the $12T (yes, T not B) in home mortgages issued in the US (compared to $70B held by Lehman). US taxpayers will now pay for the losses resulting from the defaults on the mortgages issued by Fannie and Freddie estimated as at least $25B. Fannie and Freddie got themselves into trouble because they carried out the US government's policy of encouraging home ownership which resulted in almost 70% of Americans living in their own home. Senior management was paid over $100M in the last few years and will recieve $38M in severance. Many investors were burned when they bought Fannie/ Freddie securities earlier this year based on assurances by Treasury officials that the companies were financially sound. (The stocks are no longer traded on the NYSE because their share price is less than $1.) Several large banks have impairments to capital because their "safe" investments in preferred stock of F and F are now worthless which could result in their receivership by the FDIC.

 

As for the fund families, they are conduits for investments issued by other entities and have purchssed securites in the financial companies that have collapsed. Many mutual funds have had sharp declines in value because they held large stakes in Fannie, Freddie, Bear, Lehman and WAMU. As of April $15B of the 106B held in the VG S & P 500 was invested in financial stocks including Fannie, Freddie, Lehman, WAMU and AIG. The NJ state pension fund has lost $50M since June when it purchased 4.2M shares of Lehman stock at a price of 28. (The fund purchased the stock because Lehman employed 2,000 people in NJ.) LEH closed below 4 on Friday. Ultimately taxpayers will make up all the losses.

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I believe AIG lost about 35% (!!!) of its value today. It is possible that it could go bankrupt. This is a very large company with a lot of insurance and other financial 'products'. What happens to all the annuities they have issued if they fail? What about other other banks and insurance companies if they fail? It is not unusual for a small insurance company that is failing to be taken over by a large company but who is large enough to take over AIG?

 

 

AIG is a corporate holding company for regulated insurance companies that do business in 130 countries as well non regulated financial service companies, such as aircraft leasing and mortgage companies. Under US law an insurance company cannot declare bankruptcy, so any AIG bankruptcy would not include any insurance companies it owns. The insurance companies (such as American General/VALIC) have separate balance sheets and are rated by Best Reports and will not be affected by any bankruptcy but would be a valuable asset that could be sold to a buyer.

 

However, even though AIG's stock has declined by 80% in the last 12 months it is still in a better place than Lehman because it hold long term assets that cannot be withdrawn by its customers which prevents a decrese in its capital reserves. While AIG has written down$25B in losses from credit default swaps and mortgages, it also owns discounted assets that will increase in value when the market stablizes. (Lehman owns $70B in mortgages of which 30B are non performing loans.) AIG also has valuable assets that can be sold to increase its capitalization such as the air leasing co and/or can sell an interest to a large investor. In 1990-1 Citibank fell to the equivalent of $2 today when the last RE bubble burst before the Saudi royal family invested several $B in return for a 5% ownership of C's stock. Chase (now JPM) fell from 40 to 9 in 12 months between 89-90 before it was turned around.

 

Customer accounts at commerical banks are insured by the FDIC. Investment banks are supervised by the Federal reserve who is brokering a deal to sell Lehman before the Asian markets open tomorrow evening.

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I believe AIG lost about 35% (!!!) of its value today. It is possible that it could go bankrupt. This is a very large company with a lot of insurance and other financial 'products'. What happens to all the annuities they have issued if they fail? What about other other banks and insurance companies if they fail? It is not unusual for a small insurance company that is failing to be taken over by a large company but who is large enough to take over AIG?

 

 

Yakers,

 

To answer your question on what happens to their annuities? Variable annuities are held in a separate account and are not tied to the general assets of an insurance company. The fixed annuities are the ones that are at risk because they are guaranteed by the general assets of an insurance company. When an insurance company declares bankruptcy these fixed annuity assets are frozen and cannot be accessed. Many years ago this exact thing happened. It was so long ago I cannot even remember the names of the insurance companies that failed. It was maybe two or three companies. The outcome of that was these companies were scooped up by healthy insurance companies. And the accounts were made whole. I do recall a company called United Resources being scooped up by MetLife years ago but cannot remember the exact circumstances of that deal but believe it was financial failure. In my state there is what is called a guarantee fund set up by the state and all insurance companies registered in the state must agree to participate in the fund. It guarantees fixed annuity assets up to $100,000. It has only had to payout one time to cover assets. You may want to check with your states department of insurance.

 

This is not the first time that real estate was a big concern in the financial industry. I recall the days of many downgrades on insurance companies from the ratings agencies regarding their real estate holdings. It was more about commercial real estate at the time.

 

As far as AIG collapsing I believe they will be still standing after all is said and done. Again this is just my opinion.

 

Keep in mind one thing and that is we have been through tough times before but have always come back and thrived. History has a tendency to repeat itself.

 

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CLJ:

 

Insurance companies cannot declare bankruptcy. They are declared insolvent and are placed under the supervision of a state insurance dept. In the early 90's Mutual Benefit life was declared insolvent because it made too many bad commercial RE loans and was placed under the the supervision of the NJ insurance commissioner who appointed an administrator. Customers who had invested in fixed annuities were not allowed to withdraw the funds except for emergencies and were credited with below market rate interest of 5%. When Mutual Benefit's bad RE investments were finally liquidated in 2003(?) the annuities were paid out with all interest credited and the remaining assets and insurance contracts were sold to Sun America. There was similar workout of Executive life by the NY andCA insurance departments.

 

While almost all state have guarantee funds the rules differ from state to state and some guarantees are better than others.

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Intruder and CLJ,

Both of you failed to mention the impact of speculation on the real estate prices of the now defaulted loans (gas price speculation with high demand from gas guzzling SUVs sent it to $147 a gallon just last July and now its around $100). When the economy is soaring as it did with the housing bubble, the meaning of rose colored glasses changes dramatically for the better. In the greed economy, the seduction of speculation becomes sound investing with no end in sight and its very different from the Internet bubble. For god's sake, this is real estate, its concrete, its real and it is suppose to go up. Its only later that we realize that basic growth was inflated with speculation, speculation doomed the appraisers and the banks who probably knew that their loans will be packaged and bought up by somebody else at great profits.

Speculation is not sound investment, its g a m b l i n g. These firms were g a m bl i n g with other peoples money.

So what else is new.

I agree with CLJ that we have gone through booms and busts in the past. But we do not have to participate in this noise and reduce the impact on us by index investing.

 

Yakers: the only way to protect yourself is to invest in broadly diversified index funds across several asset classes which includes bonds and REITS. In that way you cut out all of the noise in the stock market and you get real growth over time, not just the speculation.

 

Just my 2 cents worth,

Steve

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CLJ:

 

Insurance companies cannot declare bankruptcy. They are declared insolvent and are placed under the supervision of a state insurance dept. In the early 90's Mutual Benefit life was declared insolvent because it made too many bad commercial RE loans and was placed under the the supervision of the NJ insurance commissioner who appointed an administrator. Customers who had invested in fixed annuities were not allowed to withdraw the funds except for emergencies and were credited with below market rate interest of 5%. When Mutual Benefit's bad RE investments were finally liquidated in 2003(?) the annuities were paid out with all interest credited and the remaining assets and insurance contracts were sold to Sun America. There was similar workout of Executive life by the NY andCA insurance departments.

 

While almost all state have guarantee funds the rules differ from state to state and some guarantees are better than others.

 

 

Intruder,

 

I stand corrected the correct term is insolvency and not bankruptcy. Thanks for pointing that out. Mutual Benefit is the name I couldn't remember.

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Intruder and CLJ,

Both of you failed to mention the impact of speculation on the real estate prices of the now defaulted loans (gas price speculation with high demand from gas guzzling SUVs sent it to $147 a gallon just last July and now its around $100). When the economy is soaring as it did with the housing bubble, the meaning of rose colored glasses changes dramatically for the better. In the greed economy, the seduction of speculation becomes sound investing with no end in sight and its very different from the Internet bubble. For god's sake, this is real estate, its concrete, its real and it is suppose to go up. Its only later that we realize that basic growth was inflated with speculation, speculation doomed the appraisers and the banks who probably knew that their loans will be packaged and bought up by somebody else at great profits.

Speculation is not sound investment, its g a m b l i n g. These firms were g a m bl i n g with other peoples money.

So what else is new.

I agree with CLJ that we have gone through booms and busts in the past. But we do not have to participate in this noise and reduce the impact on us by index investing.

 

Yakers: the only way to protect yourself is to invest in broadly diversified index funds across several asset classes which includes bonds and REITS. In that way you cut out all of the noise in the stock market and you get real growth over time, not just the speculation.

 

Just my 2 cents worth,

Steve

 

 

You know I love you Steve, but speculators are very important to our market place, they provide liquidity that is needed. The problem in real estate was partly due to speculation, but the real problem was the banks would lend to anyone who could breath. You could buy property with no investment of your own (leverage) and gain all the profits if it went up, if it went down......you could walk away. Sure, you'd have a bad credit rating, but give it a few years and somebody will probably lend to you again.

 

As for oil, speculators may have had something to do with it, however I think the problem had more to do with the dollar and supply issues. Remember, speculators made a lot of money when oil was falling.

 

I think AIG's VALIC entity will be fine, like Intruder said, it is valuable and could easily be sold (can someone say ING?). However, I wouldn't put AIG in the same category as WAMU, though I could be wrong. I think AIG might whether this storm - though at the end of the day anything can and will happen.

 

ScottyD

 

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However, even though AIG's stock has declined by 80% in the last 12 months it is still in a better place than Lehman because it hold long term assets that cannot be withdrawn by its customers which prevents a decrese in its capital reserves.

Yea, some of us know about that because of those wonderful surrender fees.

 

Joe

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Why is it that CA and FL combined have 20% of all the mortgages issued in the US but 30% of all defaults?

 

Is it the water? The sunshine?

 

Intruder,

 

You make it sound as if CA is sucking the country dry. I would like to remind you that CA is a massive PRODUCER for the nation. We send lots and lots of tax revenue to Washington so that it can be redistributed to states that are not nearly as well off. If CA were a nation, it would have somewhere between the 7th and 10th largest GDP in the world.

 

I think you are simply jealous of what you call "LaLa Land." Eat your heart out, wherever you are. We will make sure to continue and subsidize states like yours.

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Why is it that CA and FL combined have 20% of all the mortgages issued in the US but 30% of all defaults?

 

Is it the water? The sunshine?

 

Intruder,

 

You make it sound as if CA is sucking the country dry. I would like to remind you that CA is a massive PRODUCER for the nation. We send lots and lots of tax revenue to Washington so that it can be redistributed to states that are not nearly as well off. If CA were a nation, it would have somewhere between the 7th and 10th largest GDP in the world.

 

I think you are simply jealous of what you call "LaLa Land." Eat your heart out, wherever you are. We will make sure to continue and subsidize states like yours.

 

 

 

I was merely pointing out the obvious fact that there are more defaults in CA and FL than there are in other states whose residents did not try to play flip this house as the way to instant wealth. Isnt there a town called Stockton, CA where 75% of the homes are in foreclosure?

 

Who wants to live in a state with a $15B deficit and a looming obligation to spend $8B more for its 156,000 prisioners health care. Most states dont even have a 15B budget. By the way how much more will the CA income tax rate of 9.3% be increased to pay for the deficit?

 

The state I live in sends much more revenue to the DC sink hole than it gets back from the feds but has a 50% lower income tax rate.

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