Aig

Who here works for them?
Are they going bankrupt?
Is it credit crunch related?

 

They've insured a load of CDO's apparently

 

I work for them

Yes, it really bad right now. Only the other day the head of finance confided in me that we can't get any finance!

It is credit-crunch related.

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Not really!

Just looked at their share price. Think people may be over reacting. I may employ a "contrarian" investment strategy by going long on equity futures.

 

Tend to agree, at $12 I may take a little punt myself if I'm still feeling bold in the morning. Surely the short sellers have done their worst now? Maybe not Lehman Bros though - I'm not that brave!

 

If it is in big trouble (and I've no real idea if it is), then it is pretty unlikely to be bailed out. The failure of an insurance company does not represent a systematic risk to the financial system.
The failure of a large investment bank like Lehman's is another story. Mind you I wouldn't even have bailed out Northern Rock, or Bear Stearns, let alone Fannie and Freddie.

 

AIG has asked for a 40 billion dollar loan from the Fed.

 

Think I might hold off placing that bet!

Can anyone help me with my ST5 question: http://www.acted.co.uk/forums/showthread.php?t=2208

 

Very wise Avanbuiten

 

It looks as if the failure of AIG may be more serious than I thought

http://ftalphaville.ft.com/blog/2008/09/15/15883/on-aig-cash-calling-the-fed/

The fall of Lehman brothers might well leading the news this morning, but the situation for AIG is potentially more serious. Systemically speaking, AIG is a much bigger domino.

For starters, AIG has written more credit protection - via CDS - than Bear Stearns. It is, to wit, a crucial counterparty in many Wall Street firms’ hedging strategies.

Then there’s the fact that AIG is the world’s largest insurer. Trouble for AIG could pull the insurance sector into a deep and very nasty spiral and might well be the knock-out blow to ailing economies.
Which is why an AIG bailout is somewhat imperative. How though, can it be achieved?

AIG is now asking for a $40bn bridge loan from the Fed.

Much as the Fed might like to give that to AIG, it may not be able to, thanks to the foolhardy hauteur of AIG’s executives.

As the WSJ’s Real Time Economics blog and also RBS analysts note, the Fed has the power to broaden access to its discount-window lending facilities under Section 13, Paragraph 3 of the Federal Reserve Act. The circumstances must, though, be extreme. Check.

Here though, is the rub (emphasis ours):

The Act states that before agreeing to a loan “the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions.”
Which rather puts the Fed in a hard spot. As Real Time Economics reports:

AIG turned down a capital infusion from a group of private-equity firms led by J.C. Flowers & Co. because an option tied to the offer would have effectively given them control of the company.
AIG then just have to lump a PE bailout at a steep (now steeper?) discount. Asset sales - the other alternative pusued right now - might prove equally fruitless. Where is the appetite to buy? Bear in mind that even if private equity firms succeed in moving on AIG, it may prove a bottomless pit. Buyout firms might have the wherewithall, but if more cash is needed, will they have the means?

All that’s left then is to draw attention to an exceptionally prescient call from Goldman Sachs analysts barely a month ago. “Calling all cash: please report to AIG FP“. At the time, Goldman’s analysis was derided as being rather melodramatic. Citi, among others, had a much more sanguine outlook for the insurer.

 

I'm just heading down to Canary Wharf now (my gym is there). I'm going to take my camera, this is a historic day!

 

AIG AMER INTL GROUP INC 3.97 $ 4:58PM -8.17 (-67.30%) 289,764,685

Only 67% down today

 

Glad I held back! Is total failure conceivable?

 

No idea

I must admit, that even though I have been advising all my students not to go into banking for the last 5 or 6 years, I have encouraged some to consider doing the actuarial exams. I would feel a little guilty if the insurance industry suffered the same fate as the banking industry

 

-2.38 (-50.00%) Real-time: 9:58AM EDT

Down another 50%

 

I do not believe that AIG can be allowed to fail - the consequences would be catastrophic for global markets - what we have seen up to now would look like a spot of rain in comparison.

What may very well happen is that AIG is put into run-off...

 

Parnell, I like your posts. Would you care to give us your opinion of what some of the consequences of AIG's failure might be?

 

Interesting development...

http://www.businessinsurance.com/cgi-bin/news.pl?newsId=13949

 

Thanks for that , I return your appreciation - without decent debate the forum would be rather a little too boring , as a matter of fact I think the entire actuarial community has an entrenched and critical interest in debating these matters in a first stage to realise the gravity of world events and then to help formulate effective measures in a second. There is a historic opportunity for the profession to take a leadership position on an issue that it presents itself as being the expert upon : risk management - it is typically failing to grasp that opportunity.

AIG : Imagine an umbrella of insurers writing a panopoly of risks - I'm talking huge amounts of oil drilling ,mining and international shipping, not just a bunch of D&O covers without which industry would continue unabated. This is the real and critical purpose of insurance - to facilitate industry. Without it rigs in Nigeria will not run , operations in Russia and South Africa will become unviable and in general the price of conducting meaningful business will further send global economies into the hole.

Having said that AIG should be essentially put into run-off - which would prevent the further accumulation of losses and risk - I think that you are effectively seeing the end of the soft market right here.

As I have written before on these forums retail banks have emerged to be little more than leveraged property investors , and worse it appears that investment banks are , with some exceptions, leveraged on the performance of the retail banks. All rating agencies and most financial regulators should be forced into a collective shooting gallery - they have failed catastrophically to accurately depict the correlations of risk underlying financial instruments. Considering that this was their primary (some would say sole) task the cost is doubly high - the next and more important question is how to accurately measure the above.

Better actuaries than I need to be employed for this task but I am absolutely convinced of one thing - property is a poor investment from a macroeconomic point of view - it increases the cost of doing business - and it is a key to unlocking much of market volatility. Governments and governing bodies themselves need to address this issue, speedily.

 

I think everyone can sympathise with the view that the rating agencies and regulators ought to be shot.

The method of resolution of this sorry saga will depend largely on the extent to which the Western Nations and US and UK in particular wish to trash their currencies.

Letting Lehman's fail on Monday was the first positive event we have had since June 07. The constant intervention to save banks and prop others up with "special liquidity" schemes sends a message to them that they can do what they like and the taxpayer will pick up the tab when it all inevitably goes wrong.

We are beyond the point where this is going to be limited to a financial crisis, we are going to have a full scale worldwide economic crisis too. Just like the credit expansions that preceded the economic crises of the 1840's, 1880's and 1930's, we are now going to see a massive "deleveraging" (which is a horrible little word which is merely a euphemism for the more descriptive 19th century term "debt liquidation").

The difference this time was that there was no gold standard to limit the profligacy and idiocy of governments and central banks in the last 25 years. Thus the indebtedness of the ordinary people is so much more severe. Likewise the lack of the gold standard will effectively encourage governments to print money to buy up all this crappy debt and thereby reduce in real terms the their own indebtedness and bail out all these idiotic bankers. In the process they will impoverish vast swathes of the lower and middle classes.

The more we let these institutions fail, the more deflationary the situation becomes. Deflation is miserable, but it has the advantage of placing the burden of the crisis on the banks, the overborrowed and marginal businesses, profligate individuals and the rich who gained from the overvaluation of property during the boom. Unfortunately in returning a greater proportion of the GDP to the lower classes, it will not be shared very equally. Those who keep there jobs will find there wages and savings buy more. Those who don't will be very poor indeed as any such liquidation will be accompanied by a retrenchment of the welfare state

 

deflationary environment...

I'm not at all familiar with what is supposed to happen in a deflationary environment (if it was covered in my economics at all it was about 8 years ago now!).

Why is deflationary environment bad? Excuse my study-addled brain....

Have I even got deflation defined right - is it that nominal prices decrease, just as inflation is when nominal prices increase?

So if everyone knows that in a year's time things will be cheaper, they'll hold off buying. And will then save instead? So savings increases; spending ceases except for essentials - is that why it's bad? Production will also plummet....

Up till what point does it deflate though...? Until goods are cheap enough for people to afford in absolute terms based on their salaries excluding extra 'income' through borrowing? Or when savings + salary are big enough? How would you ever get out of a deflationary environment back to an inflationary one? When everyone forgets the last crash?


in the other scenario, governments essentially print money to bail out the financial markets. So there inflation will go up as more printed money chasing same amounts of goods (production capacity assumed unchanged). And people become in real terms poorer? In the worst case your interest rates will go negative in real terms as in Japan? Meaning no incentive to save and all to spend now?

Apologies for the rather muddled question/s.

 

YetAnotherStudent - I'll put an answer up tomorrow