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Recession Watch: February
Bloomberg
Bloomberg
How much cash can the banks burn through?
Bloomberg
By Hugh Son and Rebecca Christie
March 1 (Bloomberg) -- American International Group Inc., the insurer deemed too important to fail, may get a commitment for as much as $30 billion in new government capital after a record quarterly loss, said two people familiar with the matter.
The insurer may also be allowed to make lower payments on government loans, said the people, who declined to be identified because there was no public announcement. New York-based AIG may forfeit a portion of its stakes in two largest non-U.S. life insurance divisions to lower the firm’s debt, the people said.
AIG, first saved from collapse in September with a package that grew to $150 billion, had to restructure its bailout after failing to sell enough units to repay the U.S. Firms including banks relied on AIG to back more than $300 billion of assets through derivative contracts as of Sept. 30, making the insurer a “systematically significant failing institution” that has to be propped up, according to the Treasury.
“The government has accepted all the downside with little chance of upside,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “They are trying to protect the global financial system from a complete meltdown.”
AIG, which agreed in September to turn over an 80 percent stake to the government, is set to announce a fourth-quarter loss of about $60 billion tomorrow, according to three people familiar with the matter. The company’s board is scheduled to meet today to vote on the revised bailout, according to two other people familiar with the matter.
Credit Rating
David Monfried, an AIG spokesman, and Isaac Baker of the Treasury declined to comment.
The insurer had been in talks in the past week with regulators to restructure its bailout to stave off credit-rating downgrades that would have caused further costs tied to credit- default swaps. AIG had to seek an $85 billion federal loan in September after credit-rating downgrades left the company facing more than $10 billion in potential collateral calls from debt investors who bought credit-default swaps from the insurer.
Chief Executive Officer Edward Liddy, appointed by the government to run AIG in September, had to scrap his strategy to repay a $60 billion government loan by selling AIG units after potential buyers were hobbled by their own losses. AIG struck deals to raise about $2.4 billion through sales. Under Liddy’s plan, revealed in October, AIG was to emerge as a firm mostly providing property-casualty coverage to businesses.
‘Road to Recovery’
The Standard & Poor’s 500 Insurance Index fell by half since Liddy announced his plan, reducing the prices AIG units could fetch and thinning the pool of companies strong enough to bid for them.
Liddy said AIG was on the “road to recovery” after securing a bailout valued at $150 billion in November. That package included $50 billion to wind down liabilities tied to mortgage-backed securities the insurer owned or backed through swaps. He said then that terms of the original rescue, disclosed a day after Lehman Brothers Holdings Inc. collapsed, were unsustainable.
Bloomberg
March 1 (Bloomberg) -- President Barack Obama’s administration will seek congressional approval for as much as $750 billion in new aid to bolster U.S. financial institutions if it is needed, White House budget director Peter Orszag said.
“If additional efforts become necessary, we’ll work with Congress on the scale and scope of them,” Orszag said today on ABC’s “This Week” program. “The budget is intending to be responsible. We put a placeholder in there just as an insurance policy.”
Obama’s first budget, a plan to spend $3.55 trillion during fiscal year 2010, seeks standby authority for $750 billion for financial firms while planning for a health-care system overhaul and almost $1 trillion in higher taxes for 2.6 million of the richest Americans.
U.S. firms have reported more than $700 billion in losses and writedowns since the start of 2007.
The government last week ratcheted up its effort to save Citigroup Inc., agreeing to a third rescue attempt that will cut existing shareholders’ stake. The Treasury Department said it would convert as much as $25 billion of preferred shares into common stock provided private holders agree to the same terms. The conversion would give the U.S. a 36 percent stake in the New York-based company.
Obama said yesterday he expects a fight to get the budget through Congress because it will challenge Washington interest groups and lobbyists. The president, in his weekly radio address, said the spending plan reflects the promises he made during the campaign to change the government’s priorities and take the nation in a new direction.
‘Mind-Boggling’ Numbers
Senate Minority Whip Jon Kyl of Arizona criticized the budget for expanding the government’s role in the economy. “I think it’s terrifying in the policy implications as well as mind- boggling in the numbers,” Kyl said on “Fox News Sunday.”
Obama’s budget is an attempt to “stimulate the economy through government expenditure,” House Minority Whip Eric Cantor said on the “This Week” program. “At best what that can do is redistribute wealth. It can’t create jobs. It can’t create wealth. We’ve got to get back to focusing on job creation and creating prosperity.”
The Obama administration forecasts the gross domestic product, the value of all goods and services, will contract 1.2 percent for the entire year, reflecting the deepening recession, and rebound to an average growth rate of 3.2 percent in 2010.
The 2010 forecast is more optimistic than the 1.5 percent growth rate estimated by the nonpartisan Congressional Budget Office in January or the February Blue Chip consensus for an increase of 2.1 percent.
Obama’s proposed budget “is putting us on a path to restore fiscal responsibility, but he’s starting in a big hole,” Representative Peter DeFazio, a Democrat from Oregon, said on CNN’s “State of the Union” program today. “So I’m going to work with the president to tighten this budget wherever we can.”
How much cash can the banks burn through?
The investors screwed us by hiring executives that ran their banks into the ground. This mess is their fault. They have well earned losing their entire investment.
