AIG warned of 'catastrophic' collapse

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<TABLE cellSpacing=0 cellPadding=0 width=452 border=0><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published March 10, 2009

</TD></TR><TR><TD vAlign=top width=452 colSpan=2>US ECONOMY
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>AIG warned of 'catastrophic' collapse
It sought rescue by saying failure would cripple money funds

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(NEW YORK) American International Group (AIG) appealed for its fourth US rescue by telling regulators the company's collapse could cripple money-market funds, force European banks to raise capital, cause competing life insurers to fail and wipe out the taxpayers' stake in the firm.

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</TD></TR><TR><TD bgColor=#fffff1><TABLE cellSpacing=0 cellPadding=0 width=124 align=center border=0><TBODY><TR><TD vAlign=top>'It is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce.'
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- AIG​

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</TD></TR></TBODY></TABLE></TD></TR></TBODY></TABLE>AIG needed immediate help from the US Federal Reserve and Treasury to prevent a 'catastrophic' collapse that would be worse for markets than the demise last year of Lehman Brothers Holdings, according to a 21-page draft AIG presentation dated Feb 26, labelled as 'strictly confidential' and circulated among federal and state regulators.
'What happens to AIG has the potential to trigger a cascading set of further failures which cannot be stopped except by extraordinary means,' said the presentation by New York-based AIG. 'Insurance is the oxygen of the free enterprise system. Without the promise of protection against life's adversities, the fundamentals of capitalism are undermined.'
Regulators revised AIG's bailout last week to ease loan terms and extend US$30 billion in fresh capital after the firm posted a US$61.7 billion Q4 loss, the worst in US corporate history.
AIG warned of turmoil around the globe if the government allowed the insurer to fail, adding 'it is questionable whether the economy could tolerate another shock to the system that a failure of AIG would produce'.
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</TD></TR></TBODY></TABLE>The value of the US dollar might fall, Treasury borrowing costs could rise and the agency would face 'doubts about the ability of the US to support its banking system', according to the presentation, parts of which were reported earlier by the New York Times.
Under the scenarios sketched by AIG, European banks that bought credit-default swaps might need to raise US$10 billion in capital and could face rating downgrades. Life insurance customers, their faith shaken in the industry, would redeem some of their US$19 trillion in US policies, overwhelming firms already weakened by the credit crisis, AIG pointed out.
The US$38 billion in support provided by the firm to money-market funds would be in jeopardy, AIG said, possibly forcing some to 'break the buck'. The term refers to a money fund that suffers losses so large that it must pay investors less than the traditional US$1-a-share value that gives the short-term funds their reputation for safety.
Outside the US, where AIG operates in more than 140 countries, a collapse could lead to the 'immediate seizure' of its businesses by regulators and could impair 'the entire insurance industry within certain regions', the presentation said, which added that its conclusions were 'speculative' and a matter of judgment.
AIG said that without more US help, investment losses would mean 'AIG will not be able to repay its obligations' and that cash previously provided by the US, which controls a 79.9 per cent stake in the insurer, could be lost. Chief executive officer Edward Liddy, who took over the top job in September, has vowed that AIG will repay all of its debts to taxpayers.
At AIG itself, failure could have led to dismissals from its workforce of 116,000, the document said. At that level, the staff is unchanged from the end of 2007 before AIG's bailout. The global credit crunch has led to at least 284,000 job cuts at the rest of the world's financial companies, according to Bloomberg data. -- Bloomberg
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[makapaaa]

<TABLE cellSpacing=0 cellPadding=0 width=452 border=0><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published March 10, 2009

</TD></TR><TR><TD vAlign=top width=452 colSpan=2>US ECONOMY
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Fed setting things up for a big fall: Jim Rogers

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(SINGAPORE) Investor Jim Rogers said the US Federal Reserve will probably start buying Treasuries to keep borrowing costs down, staving off a bear market.

<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD></TD></TR><TR class=caption><TD>Mr Rogers: Said the Fed is closer to buying Treasuries </TD></TR></TBODY></TABLE>Fed chairman Ben Bernanke said last week that the US central bank will use 'all the tools' available to revive economic growth, indicating that the central bank is closer to buying, Mr Rogers said.
Record government borrowings will lead to losses later, said the chairman of Singapore-based Rogers Holdings and author of the books Hot Commodities and Adventure Capitalist.
'He's setting things up for a gigantic fall down the line, but that does not mean he can't drive long-term interest rates to zero,' Mr Rogers said. 'Governments are printing money everywhere, borrowing stupendous amounts. Throughout history that has led to problems in the bond markets, and it will this time too.'
Merrill Lynch & Co told clients last week that Treasuries will have a 'siren song' rally before falling in the second quarter.
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</TD></TR><TR><TD bgColor=#fffff1><TABLE cellSpacing=0 cellPadding=0 width=124 align=center border=0><TBODY><TR><TD vAlign=top>'Governments are printing money everywhere, borrowing stupendous amounts. Throughout history that has led to problems in the bond markets, and it will this time too.'
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- Jim Rogers​

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</TD></TR></TBODY></TABLE></TD></TR></TBODY></TABLE>'We will continue to forcefully deploy all the tools at our disposal as long as necessary to support the restoration of financial stability and the resumption of healthy economic growth,' Mr Bernanke said in a speech in Dillon, South Carolina. He first discussed the possibility of Fed purchases of longer-term Treasuries on Dec 1.
New York Fed Bank president William Dudley said on March 6 that policy-makers had decided for the time being not to expand the range of securities that the central bank purchases to longer-term Treasuries.
The Fed cut its target for overnight loans between banks to a range of zero to 0.25 per cent in December and has more than doubled its assets to US$1.9 trillion in the past year. Goldman Sachs Group Inc, one of the 16 primary dealers required to bid at the Treasury auctions, estimates that the US will almost triple debt sales this year to a record US$2.5 trillion.
'The impact of the relentless flood of Treasury supply' will help send yields higher, Merrill said on March 5 in a note from economists including David Rosenberg in New York. The company is part of Bank of America Corp, another primary dealer.
Mr Rogers said he unwound in the fourth quarter so-called short positions that would benefit from declines in Treasuries. He 'made a loss' betting that notes would decline, he said.
'I am waiting to short them again,' he said. 'I have no idea when. US government bonds are going to be one of the great shorts of our time somewhere down the road.' Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen. -- Bloomberg
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