Forget the markets, sorry, forget the movement of the Dow, the Footsie and the ASX200 and the Nikkei.
The big deal for investors around the world is the fate of the huge American Insurance Group.
Talks in New York after hours Monday apparently ended without any statement on whether a huge line of credit or short term loans totalling $US70 billion or more would be extended to the struggling insurer.
Now more talks are underway this morning in New York, at the Fed, to try and find a solution, with one option a move similar to the way that Fannie Mae and Freddie Mac were bailed out by the US Government.
That’s via the so-called conservatorship method, where AIG is taken into the control of the Government, but not fully absorbed into the Government itself.
The survival of AIG, one of the world’s largest insurers, depends on these talks after hopes of private sector bail-out faded during another day of drama and high pressure dealings on Wall Street, and in markets around the world..
Regulators and company executives held a fresh round of emergency meetings at the New York Federal Reserve amid fears that the collapse of the troubled insurer would further destabilise the global financial system.
The talks were called by the Fed, which had baulked at providing a direct loan. Goldman Sachs and JPMorgan were involved in discussions about the loans.
That lifeline was made really necessary when Standard & Poor’s slashed AIG’s credit rating three notches to A minus from double A minus. Other rating agencies followed.
Wall Street was down 100 points overnight and worried that AIG might fail, then a story on CNBC suggesting that a Federal Government lifeline might be offered (Even though the Fed had said nothing and the Monday night meeting had ended without agreement).
Wall Street rose, up 141 points at the close for Dow, the most positive end for any market in the world after two days of sustained selling and rising concerns about the stability of major banks and financial systems.
Goldman Sachs reported lower quarterly earnings (down 70%), but beat most forecastst and the shares seem to steady. That was reported early in the day. After trading, Morgan Stanley revealed its quarterly figures a day early.
They were down just 3%, not a Lehman Brothers-like disaster as feared by some on Wall Street. The shares rose in after hours trading.
Central banks injected over $US200 billion yesterday, taking the two day total to well over $US300 billion.
The Fed added an extra $US50 billion on top of a normal $US20 billion in daily funding; the European Central Bank added $US100 billion, more than double the Monday injection and the UK Bank of England pumped over $US36 billion into the UK system, up sharply from a smaller injection Monday.
Our Reserve Bank added a gross $A1.8 billion on top of the gross $A2.1 billion on Monday.
Asian and European stockmarkets fell sharply for a second days: more than 3% was common in Europe (Russia was the exception where it was off over 11%). Asian markets were weak; China shed over 4% to see the Shanghai index under 2000 points for the first time in well over 18 months. Japan was weak as some of its big banks were caught by the Lehman collapse and worries about AIG.
The central banks attempted to steady the ship to prevent liquidity drying up, as it has done in Russia, where the central bank and the finance ministry have pumped in over $US15 billion in funds to support banks and the system after trading on the two stockmarkets were stopped for an hour after falls of up to 17%.
AIG needs the highest possible rating for many of its credit insurance and other products.
If a cash lifeline, on top of the $US20 billion allowed by New York State insurance regulators (AIG will be able to draw on the $US20 billion in capital in its insurance subsidiaries) is agreed to quickly, the company may be spared whopping great losses on these products: if not, no one knows at this point.
The fate of the troubled insurer has emerged as the big question about the stability for the financial system.
That ratings cut potentially triggering billions of dollars of collateral payments on its many credit and derivatives trades: it can’t afford to pay; we can’t afford to have it default.
The ratings cuts come after US authorities moved to fight this latest fire in the crisis on Wall Street, throwing a $20 billion lifeline to AIG while convening that fresh set of emergency talks at the Federal Reserve in New York to find potential sources of funds for the insurer.
The ratings cut by Standard & Poor’s reflects the large losses AIG is expected to make on mortgage-related investments and credit derivatives.
S&P warned the insurer could face further ratings cuts – perhaps even into the lower BBB category – unless it is able to ”implement further liquidity options” and ”the successful sale of at least a portion of its business assets”.
Rival rater, Moody’s cut AIG’s rating to A2 from AA3 and Fitch Ratings downgraded AIG to A from double A minus.
AIG and its advisers had spent the weekend hammering out plans to raise up to $US40 billion in capital, which the insurer needs to repair its balance sheet to try and prevent the crippling ratings downgrades.
AIG is the biggest provider of commercial insurance in the US, one of the biggest writers of life assurance there, and the biggest provider of fixed annuities, a popular retirement savings product. It also has enormous global operations.
But the problem is its financial products division that acted like an investment bank and has
