$85 Billion Emergency Loan to Rescue the huge insurer AIG

In a bid to save financial markets and the economy from further turmoil, the U.S. government agreed to provide an $85 billion emergency loan to rescue the huge insurer AIG.

The Federal Reserve said in a statement it determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

It also could "lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance," the Fed said.

"The president supports the agreement announced this evening by the Federal Reserve," said White House spokesman Tony Fratto. "These steps are taken in the interest of promoting stability in financial markets and limiting damage to the broader economy."

Treasury Secretary Henry Paulson said the administration was working closely with the Fed, the Securities and Exchange Commission and other government regulators to "enhance the stability and orderliness of our financial markets and minimize the disruption to our economy."

"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 taxpayers," Paulson said in a statement.

The Fed said in return for the loan, the government will receive a 79.9 percent equity stake in AIG.

Earlier, Fed chairman Bernanke and Paulson met with Senate Banking Committe Chairman Sen. Christopher Dodd, Senate Majority Leader Harry Reid, and House Republican leader John Boehner to brief them on the government's options.

"At the administration's request, I met this evening with Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke. They expressed the administration's views on the deepening economic turmoil and shared with us their latest proposals regarding AIG," Reid told reporters. "The Treasury and the Fed have promised to provide more details in the near future, which I believe must address the broader, underlying structural issues in the financial markets."

On Tuesday, shares of the insurance company swung violently as rumors of potential deals involving the government or private parties emerged and were dashed. By late Tuesday, its shares had closed down 20 percent - and another 45 percent after hours. Still, no deal emerged.

Sean Egan, president of rating company Egan Jones, would have gone bankrupt if it didn't raise at least $40 billion quickly.

"Trust is so important with these securities that are being handled by the major financial institutions," he told to the new agents. "And that's gone right now."

Michel Lewitt, a money manager at Harsh Capital Management, said the insurance giant could not have been allowed to go under, calling such an event "as serious a situation as this country has faced since the Great Depression."

The problems at AIG stemmed from its insurance of mortgage-backed securities and other risky debt against default. If AIG could not make good on its promise to pay back soured debt, investors feared the consequences would pose a greater threat to the U.S. financial system than this week's collapse of the investment bank Lehman Brothers.

Also on Tuesday, Barclays PLC announced a deal to buy Lehman's North American investment banking and capital markets businesses for $250 million in cash, two days after walking away from a deal to acquire the entire corporation.

The worries about AIG were triggered after Moody's Investor Service and Standard and Poor's lowered the company's credit ratings, forcing AIG to seek more money for collateral against its insurance contracts. Without that money, AIG would have defaulted on its obligations and the buyers of its insurance - such as banks and other financial companies - would have found themselves without protection against losses on the debt they hold.

"It might not just bring down other financial institutions in the U.S. It could bring down overseas financial institutions," said Timothy Canova, a professor of international economic law at Chapman University School of Law. "If Lehman Brother's failure could help trigger AIG's going down, who knows who AIG's failure could trigger next."

New York-based AIG operates insurance and financial services businesses ranging from property, casualty, auto and life insurance to annuity and investment services. Those traditional insurance operations are considered healthy and the National Association of Insurance Commissioners said "they are solvent and have the capability to pay claims."

Despite the fate of AIG looming over investors, Wall Street ended another tumultuous session with a sizable gain Tuesday, partly recovering from its worst sell-off in years after the Federal Reserve said it was keeping interest rates steady.




American International Group Inc., the world's largest insurer, was hit by a wave of downgrades by credit-rating agencies worried that the deteriorating housing market is further undermining the company's battered finances.

All three major agencies - Standard & Poor's, Moody's Investors Services and Fitch Ratings - dropped AIG's ratings at least two notches late Monday. While the new ratings are all still considered investment grade, the downgrades add to the pressure on AIG as it seeks billions of dollars to strengthen its balance sheet.

AIG spokesmen did not return calls seeking comment on the impact of the downgrades. But last month, the company estimated in a regulatory filing that a one-notch downgrade of its long-term senior debt ratings by both S&P and Moody's would force it to post $13.3 billion in extra collateral.

The need for that extra capital would put a constraint on AIG's day-to-day liquidity position, which is why the company has been seeking new financing or capital investments.

Financial stocks across Europe and Asia took a pounding as news of AIG's credit downgrades, along with the collapse of Lehman Brothers, stoked investor fears of wider financial and economic damage.

"My guess is that we haven't seen the bottom," said Tony Dolphin, director of economics and asset allocation at Henderson Global Investors in London.

AIG is in a precarious position, in part, because of concerns about its credit ratings and how that would affect its portfolio of financial instruments known as credit default swaps. The swaps are essentially insurance coverage to protect investors against defaulting bonds or debt.

Moody's said it downgraded AIG "in light of the continuing deterioration in the U.S. housing market and the consequent impact on the group's liquidity and capital position due to its related investment and derivative exposures."

AIG has been battered over the past year by billions of dollars of losses tied to deterioration in the mortgage and credit markets. On Monday its shares fell $7.38, or 60.8 percent, to close at $4.76.

The Federal Reserve has asked Goldman Sachs Group Inc. to work with JPMorgan Chase & Co. about a possible short-term loan to keep AIG in business, according to a person familiar with the request who could not speak publicly because talks were still ongoing. The loan could be for about $70 billion, the person said.

JPMorgan is a financial adviser for AIG. Calls to Goldman Sachs were not immediately returned. Treasury spokeswoman Brookly McLaughlin declined to comment when asked about the possible financing efforts.

New York Gov. David Paterson, meanwhile, stepped to the company's aid by saying the state will allow AIG to use $20 billion of assets held by its subsidiaries to provide cash needed to stay in business.

Paterson asked New York state insurance regulators to essentially allow New York-based AIG to provide a bridge loan to itself. The governor has also asked the head of New York's insurance department to talk with federal regulators about providing an additional bridge loan to AIG.

"AIG still remains financially sound," Paterson said.

The move will allow AIG to use those assets as collateral to borrow cash to fund its day-to-day operations, Paterson explained.

It also helps AIG by "giving them what they need most, which is time," said Keefe Bruyette & Woods analyst Cliff Gallant, who added that the relaxation of insurance regulations is "unprecedented."

Typically, a state insurance commissioner's priority is to protect the policyholder, and that includes making it very difficult for an insurer to access the funds that are used to pay claims.

AIG's chief executive, Robert Willumstad, who has been CEO since June, has indicated he is willing to shed some assets, saying about a month ago that a "less complex AIG would be a better competitor."

Here are five key questions and answers about AIG's current woes and what they mean to you.

I have insurance through AIG. How worried should I be about the problems at the company?

At least in the short term, you probably don't need to be worried at all. The problems are with the AIG holding company, not the individual insurance company subsidiaries that you do business with, according to a source with New York State's insurance regulator.

Even if AIG's holding company is forced to file for bankruptcy court protection, there's a good chance that the subsidiaries will continue to operate normally with no disruption in claims payments. That has happened in the case of other insurance holding companies' bankruptcies in the past, such as Conseco (CNO).

What guarantees that my claims will be paid?

Typically, if an insurance company falls into financial distress and is at risk of having claims that exceed the assets it holds to make those payments, the insurance regulator in its home state will take control of the firm and make payments.

The state regulator will not only use the firm's own assets to make those payments but, if necessary, can also make payments out of a state fund into which all insurers in the state are required to pay.

This guarantee applies not just to traditional insurance policies but also to retirement products that have a promised payout, such as annuities.

But there are limits to the payments that will be made to customers that vary depending on which state a particular AIG subsidiary is based, according to Joseph Belth, professor emeritus of insurance at Indiana University and editor of The Insurance Forum, a newsletter often critical of the industry.

Should I be thinking about changing my policy away from AIG to another insurer?

While credit rating agencies downgraded debt held by AIG (AIG, Fortune 500) on Monday, AIG's ratings are still considered investment grade and the company's insurance subsidiaries are considered to be secure, at least for now.

Belth said changing insurers is not a simple decision.

"A lot depends on what kind of insurance you talk about," he said. "If you're talking about life insurance, you have to think about whether you can qualify with a new insurer, if your health has changed. But it's something you have to consider if the ratings decline into the vulnerable range."

Why should I care about problems at AIG if I'm not a customer?

AIG is by far the world's largest insurer and its stock is found in many mutual funds, including any S&P 500 index fund. It is also a component of the Dow Jones industrial average. All by itself, it's been responsible for dragging the Dow down more than 400 points so far this year.

AIG is also active in the business of credit default swaps, complicated financial instruments used by investors to protect themselves from bond defaults. Lehman Brothers (LEH, Fortune 500) was another major player in that field. If both go away, it would create a tighter credit market for consumers and businesses trying to get loans.

AIG is an insurer, not a lender. Why do I keep hearing about its problems with subprime mortgages?

All insurers take money they collect in premiums and invest them in different forms of assets. The idea is to make money on those investments so that the insurer can keep their premiums low and attract more clients.

But AIG made a bigger investment into securities that were backed by subprime mortgages than most other insurers. As defaults and foreclosures of those loans rose, the value of those securities fell, creating big problems for the firm.

In the past nine months, AIG has reported net losses of more than $18 billion, largely due to its exposure to bad mortgages.

Invest $1,500 in insulation and maintenance and get more than USD 3000 in Savings per year

A little investment of money and time can save for you more than three thousand $s per year by cutting the cost of your utility bills.

Following are the some points that would guide you to Invest about $1,500 in insulation and maintenance of installations and you will get over twice that in energy savings the first year.

Call for Service

Cost: $100 to $200 per unit a year

Payback: $300 to $500 a year

Cleaning your furnace's oil burners or removing scale from gas units, changing filters and checking refrigerant levels in the air-conditioning system are not exactly do-it-yourself jobs. You'll need some help from the professionals.

For every year that you fail to schedule service for your furnace (gas or oil), you'll wind up using 5% more heating fuel because of all the gunky buildup, and you'll pay 10% to 30% extra for neglecting your central air conditioning.

Insulate Your Attic

Cost: $500 to $1,000

Payback: $500 to $1,000 a year

"The attic floor is the house's most important barrier to heat loss because heat rises," says Charley Cormany, project manager at Renu, a home energy performance contractor in San Anselmo, Calif.

The thickness of the insulation between joists in the unfinished floor should be at least 10 to 12 inches. If it isn't, lay on additional rolls, or "batts."

You should also insulate a pull-down door or hatch with an attic tent. Made of fabric-covered insulating material, it keeps out drafts but allows you access through a zippered flap.

Cover the Ducts

Cost: $50 to $250

Payback: $500 to $1,500 a year

Inspect heating and cooling ducts in the attic, basement and closets. If you find exposed metal ducts, cover the seams with foil tape to plug any leaks.

Then cover the entire duct with insulation (such as Thermwell Self- Adhesive Foil/Foam Duct Insulation) and you can save as much as 50% on heating and cooling costs.

Time Settings for Heat

Cost: $40

Payback: $500 a year

Install a programmable thermostat :

You can set it to lower the heat automatically just after you've gone to bed and to warm up the house before the alarm clock rings so that you won't have to put on an overcoat when you wake up.

If you lower the thermostat by 7° from the normal daytime temperature, you'll knock 10% off your heating costs. Connecting the unit is a (warm) breeze; you merely unscrew the low-voltage wires and attach them to the new thermostat.

Seal Those Cracks

Cost: $15

Payback: $500 a year

If your attic or basement is unfinished, use a can of expanding foam insulation (such as Great Stuff Insulating Foam, $5 at deerso.com) to seal holes in the attic floorboards and basement ceilings.

That could reduce heating and cooling costs by about 10%. "Electricians and plumbers turn ceilings and floors into Swiss cheese when they run their pipes and wires," says Cormany.

You may also see gaps around the chimney or around recessed lighting. Ask at the home center for heat-resistant insulation for those spots.

Wrap Your Water Heater

Cost: $40

Payback: $100 a year

Drape a water-heater blanket - really nothing more than an overcoat - around your tank to keep heat from leaking away.

Also, wrap pipe insulation around the first five feet of both the hot-water outlet pipe and the cold-water pipe leading into the tank. You can find the stuff at any hardware or plumbing-supply store.

Taking these measures will knock as much as 15% off the unit's operating costs in utilities bills.

Stock market futures fell on Friday

Stock market futures fell on Fridayon 26 th September, 2008, extending losses after a White House meeting with congressional officials was unable to produce agreement over the $700 billion bailout plan meant to save the financial system.

The S&P 500 and Dow futures were both down 1.1 percent, while the Nasdaq future fell 1.3 percent.

In addition, the Wall Street Journal reported that JPMorgan Chase & Co is expected to buy the deposits of Washington Mutual Inc (WM.N) in a government-brokered bailout.

Yesterday on 25 th September, 2008:
Hard hats, transit workers, machinists, teachers and other labor unionists railed against the U.S. government's proposed bailout of Wall Street on Thursday in a protest steps from the New York Stock Exchange. Several hundred protesters yelled their enthusiastic support as union leaders decried a proposed $700 billion plan aimed at reinvigorating the credit markets by relieving financial institutions of distressed debt.

WaMu Bank becomes biggest bank to fail in US history

As the debate over a $700 billion bank bailout rages on in Washington, one of the nation's largest banks — Washington Mutual Inc. — has collapsed under the weight of its enormous bad debts on the mortgage market.

The Federal Deposit Insurance Corp. seized WaMu on Thursday, and then sold the thrift's banking assets to JPMorgan Chase & Co. for $1.9 billion.

Seattle-based WaMu, which was founded in 1889, is the largest bank to fail by far in the country's history. Its $307 billion in assets eclipse the $40 billion of Continental Illinois National Bank, which failed in 1984, and the $32 billion of IndyMac, which the government seized in July.

One positive is that the sale of WaMu's assets to JPMorgan Chase prevents the thrift's collapse from depleting the FDIC's insurance fund. But that detail is likely to give only marginal solace to Americans facing tighter lending and watching their stock portfolios plunge in the wake of the nation's most momentous financial crisis since the Great Depression.

Because of WaMu's souring mortgages and other risky debt, JPMorgan plans to write down WaMu's loan portfolio by about $31 billion — a figure that could change if the government goes through with its bailout plan and JPMorgan decides to take advantage of it.

"We're in favor of what the government is doing, but we're not relying on what the government is doing. We would've done it anyway," JPMorgan's Chief Executive Jamie Dimon said in a conference call Thursday night, referring to the acquisition. Dimon said he does not know if JPMorgan will take advantage of the bailout.

WaMu is JPMorgan Chase's second acquisition this year of a major financial institution hobbled by losing bets on mortgages. In March, JPMorgan bought the investment bank Bear Stearns Cos. for about $1.4 billion, plus another $900 million in stock ahead of the deal to secure it.

JPMorgan Chase is now the second-largest bank in the United States after Bank of America Corp., which recently bought Merrill Lynch in a flurry of events that included Lehman Brothers Holdings Inc. going bankrupt and American International Group Inc., the world's largest insurer, getting taken over by the government.

JPMorgan also said Thursday it plans to sell $8 billion in common stock to raise capital.

The downfall of WaMu has been widely anticipated for some time because of the company's heavy mortgage-related losses. As investors grew nervous about the bank's health, its stock price plummeted 95 percent from a 52-week high of $36.47 to its close of $1.69 Thursday. On Wednesday, it suffered a ratings downgrade by Standard & Poor's that put it in danger of collapse.

WaMu "was under severe liquidity pressure," FDIC Chairman Sheila Bair told reporters in a conference call.

"For all depositors and other customers of Washington Mutual Bank, this is simply a combination of two banks," Bair said in a statement. "For bank customers, it will be a seamless transition. There will be no interruption in services and bank customers should expect business as usual come Friday morning."

Besides JPMorgan Chase, Wells Fargo & Co., Citigroup Inc., HSBC, Spain's Banco Santander and Toronto-Dominion Bank of Canada were also reportedly possible suitors. WaMu was believed to be talking to private equity firms as well.

The seizure by the government means shareholders' equity in WaMu was wiped out. The deal leaves private equity investors including the firm TPG Capital, which gave WaMu a cash infusion totaling $7 billion this spring, on the sidelines empty handed.

WaMu ran into trouble after it got caught up in the once-booming subprime mortgage business. Troubles then spread to other parts of WaMu's home loan portfolio, namely its "option" adjustable-rate mortgage loans. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years. The bank stopped originating those loans in June.

Problems in WaMu's home loan business began to surface in 2006, when the bank reported that the division lost $48 million, compared with net income of about $1 billion in 2005.

At the start of 2007, following the release of the company's annual financial report, then-CEO Kerry Killinger said the bank had prepared for a slowdown in its housing business by sharply reducing its subprime mortgage lending and servicing of loans. Alan H. Fishman, the former president and chief operating officer of Sovereign Bank and president and CEO of Independence Community Bank, replaced Killinger earlier this month.

As more borrowers became delinquent on their mortgages, WaMu worked to help troubled customers refinance their loans as a way to avoid default and foreclosure, committing $2 billion to the effort last April. But that proved to be too little, too late.

At the same time, fears of growing credit problems kept investors from purchasing debt backed by those loans, drying up a source of cash flow for banks that made subprime loans.

In December, WaMu said it would shutter its subprime lending business and reduce expenses with layoffs and a dividend cut.

The bank in July reported a $3 billion second-quarter loss — the biggest in its history — as it boosted its reserves to more than $8 billion to cover losses on bad loans. Over the last three quarters, it added $10.9 billion to its loan-loss provisions.

JPMorgan Chase said it was not acquiring any senior unsecured debt, subordinated debt, and preferred stock of WaMu's banks, or any assets or liabilities of the holding company, Washington Mutual Inc. JPMorgan also said it will not take on the lawsuits facing the holding company.

JPMorgan Chase said the acquisition will give it 5,400 branches in 23 states, and that it plans to close less than 10 percent of the two companies' branches.

The WaMu acquisition would add 50 cents per share to JPMorgan's earnings in 2009, the bank said, adding that it expects to have pretax merger costs of approximately $1.5 billion while achieving pretax savings of approximately $1.5 billion by 2010.

"This is a definite win for JPMorgan," said Sebastian Hindman, an analyst at SNL Financial, who said JPMorgan should be able to shoulder the $31 billion writedown to WaMu's portfolio.