The empire has over eaten, its going into cardiac arrest. If it survives, I'm pretty sure it will, it will require long term therapy and a drastic change of lifestyle and eating habits. When the US went into its economic depression in the 1930s it was not as vulnerable as it is today. The US was an industrial powerhouse back then. The US government was not in deep debt. The US did not have countless serious problems around the globe. The US financial system was not as dependent on foreign exchange. It was not as dependent on foreign energy. And other than western Europe (who were close trading partners) the US did not have any serious financial or political competitors on earth. Today, the US is too fat, too bloated, too stupid, too shallow to withstand a deep and lasting recession. The biggest mistake one can make is to simply assume that the economic mess today is simply the result of the mortgage crisis. The fundamental problems in the economy were there for may years. We saw a little introduction in the year 2000, at a time when the mortgage sector was doing very well. Then came the wars, Afghanistan and Iraq, to remedy the problems. Since the wars have not gone as planned, the situation seems to be getting worst. Today's mortgage crisis is the trigger not the cause.

Federal Reserve Chairman Ben Bernanke said today - "the system could be days away from total collapse." The Fed is in essence forcing the government to somehow come up with trillions of dollars to remedy this problem. One problem, however. The US government does not have the money, it has to borrow it at the tax payers expense. And guess who it has to borrow it from? The Federal reserve, China, Europe, Russia... America is for sale. The current national debt which will have to be payed sooner or later in one way or another is already about 10 trillion dollars. If you can't see the severity of the current crisis, you must be deaf, dumb and blind. Again, the mortgage crisis is not the problem, it's simply the trigger that set things in motion. Thus far, all the mayhem remains in the investment sector and the housing sector. If not checked properly it could get out of control like wildfire and ravage the entire country. Let's listen to what the 'real' president of the US had to say today:

Arevordi

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Bernanke Warns of 'Deep and Extensive Recession' If Feds Don't Take Action

Ron Paul on the Late Edition with Wolf Blitzer: http://www.youtube.com/watch?v=3qLefrvxbq8

September, 2008

Federal Reserve Chairman Ben Bernanke told House Republicans Friday morning that the country is facing its “most severe post-war” financial crisis, and warned of a “deep and extensive recession” if nothing is done. Sources who participated in the phone call briefing with Treasury Secretary Henry Paulson and Bernanke told FOX News that details of the federal government’s proposed rescue package are thin. But Bernanke described the situation as “quite dire,” as he suggested conditions were the worst since World War II. Sources said Paulson described stress in the financial infrastructure as "significant" and "spreading." He said that if the government doesn't act soon it would be "nothing short of a disaster" for the markets. Paulson and President Bush warned Friday morning in separate press conferences that it would take a “significant” infusion of taxpayer dollars to correct the economy. Lawmakers and members of the Bush administration are meeting over the weekend to draft a rescue plan, which Paulson says he hopes will pass through Congress next week. However, while Bernanke and Paulson briefed Republicans, there has been no such meeting with Democrats. The briefing could be indicative of complaints on the GOP side that they have not been kept in the loop on the administration’s rescue of Freddie Mac, Fannie Mae and this week American International Group.

Source: http://www.foxnews.com/printer_frien...425501,00.html

With Fed’s $85 Billion Loan, A.I.G. Starts to Calculate a Measured Sell-Off

September, 2008

A day after the Fed’s stunning takeover of American International Group, its new managers began contemplating a breakup of the insurer’s far-flung empire and selling it off in coming months. They are not under pressure to act quickly and settle for fire-sale prices. The purpose of the Fed’s $85 billion loan, after all, was to buy time for A.I.G. so it would not have to dump its healthy companies in a chaotic market. Even so, A.I.G. is borrowing the Fed’s money on expensive terms, and it must pay it off within two years. So A.I.G. also has an incentive to sell off subsidiaries and pay off its costly loan early. Many questions remain to be answered about the process. The Fed oversees the banking system and has no experience dismantling a gigantic insurance company with global reach. A committee of state insurance regulators is being formed to oversee the sale of A.I.G.’s life and property-casualty insurance companies, considered the jewels in its crown.

The company also has a strong business in personal lines of insurance, like car insurance. The recent turmoil was mostly contained within A.I.G.’s financial products unit, which dealt in structured finance and derivatives. Its insurance businesses are generally considered stable. “Any company that wants to buy market share would certainly want to look at this,” said Donald Light, an insurance industry analyst for Celent, a research and consulting firm in Boston. The regulators’ committee will work closely with Edward M. Liddy, the former chief executive of Allstate who was installed as A.I.G.’s chief executive when the Fed announced its rescue package. Mr. Liddy, also a director of Goldman Sachs, 3M, Boeing and Kroger, is credited with shaking up Allstate’s hidebound culture, expanding Allstate into new businesses like banking and raising its profitability.

Mr. Liddy also showed at Allstate that he did not shrink from conflict. Shortly before he became chief in 1999, he told a roomful of the company’s 200 top managers that a number of them would be gone within the year. About 6,400 Allstate agents sued the insurer the next year, after Mr. Liddy reclassified them as independent contractors, ending their health and pension benefits. The lawsuit eventually collapsed. A.I.G. was built into a colossus by Maurice R. Greenberg, who joined in 1960 and focused on making big acquisitions that took A.I.G. into areas considered unusual at the time, like insurance against kidnappings and environmental spills. The company’s biggest block of business, general insurance, accounts for nearly half of the holding company’s $110 billion annual revenue. It also operates an asset management division, an aircraft leasing business with more than 900 planes and mortgage lending companies.

A.I.G. also has extensive holdings in Asia. Founded in Shanghai in 1919, it is now the biggest foreign insurer in Japan and China, Asia’s two richest markets. Of A.I.G.’s 116,000 direct employees, about 62,000 work in Asia, and about 40 percent of A.I.G.’s $54 billion in life insurance premiums and retirement services fees is from Asia, excluding Japan. “China is a growth market, and their operations in China are certainly on the list of companies that potential acquirers would look at,” said Mr. Light, of Celent. “Whether A.I.G. wants to sell is the question. Whether A.I.G. is, maybe, forced to sell is more the question.” Another factor pressuring A.I.G. to sell quickly is that many worried customers have shown how quickly they can pull their money out of A.I.G. subsidiaries, especially in Asia. V. Sunil, the executive creative director of Weiden & Kennedy, a marketing agency in New Delhi, said that buying insurance from a company was just starting to catch on in India. Until a few years ago, the only retail insurer was backed by the government and was considered safe. “Now people have extra salaries and they’re using insurance as a kind of investment,” said Mr. Sunil, noting that customers might be particularly skittish because the products are new.

If customers keep walking away from A.I.G.’s subsidiaries, they will lose value to prospective buyers. And the longer they stay on the market, the harder it may be to sell them. “People are looking at and will continue to look at the assets,” said Kenneth A. Lefkowitz, co-chairman of the corporate department at the law firm Hughes Hubbard & Reed in New York. Perhaps the first priority for A.I.G.’s new management will be to stop the bleeding in the financial products unit, where its liquidity crisis began. This will be expensive. A.I.G. will have to unwind derivatives contracts, a process that involves paying big termination fees. It will also probably have to sell mortgage-related securities at a loss, because their value will continue to fall until the housing slump ends. “Everyone starts doing the math and they start seeing a shortfall,” said Eric R. Dinallo, the New York State insurance superintendent, who was active in the frantic efforts to rescue A.I.G. that began late last week.

The need to cover that shortfall will dictate how many companies must be sold, said Mr. Dinallo, who will lead the committee of insurance regulators. He said it would be the regulators’ job to make sure the companies changed hands at a fair price and were sold to new owners with adequate capital. He said that in the worst case, A.I.G. could still end up in bankruptcy, where creditors might claim that the sales were improper and make the buyers give them back. The regulatory committee’s vice chairman is to be Joel Ario, Pennsylvania’s insurance commissioner. A.I.G. has a large subsidiary in that state, American Home Assurance. Other members of the regulators’ committee had not yet been named. The National Association of Insurance Commissioners is putting the committee together. A.I.G. made no comment on a possible sell-off, beyond issuing a statement saying that the Fed’s loan would provide “the time necessary to conduct asset sales on an orderly basis.”

Source: http://www.nytimes.com/2008/09/18/business/18aig.html

Wall Street’s Next Big Problem

September, 2008

When I drove to the Beverly Hills offices of Drexel Burnham Lambert on Feb. 13, 1990, the last thing I expected to hear was that the investment bank where I worked was going under. Yet early that morning, we were told that the company was filing for bankruptcy. I was, to put it mildly, blown away. At the time, Drexel had $3.5 billion in assets and was the biggest underwriter of junk bonds. It all seemed like a very big deal at the time. But what’s happening this week makes me pine for the good old days. When Lehman Brothers filed for bankruptcy on Monday, it became the latest but surely not the last victim of the subprime mortgage collapse. Lehman owned more than $600 billion in assets. Financial institutions around the world have already reported more than half a trillion dollars of mortgage-related losses and that figure will most likely double or triple before the crisis exhausts itself.

But there is a bigger potential failure lurking: the American International Group, the insurance giant. It poses a much larger threat to the financial system than Lehman Brothers ever did because it plays an integral role in several key markets: credit derivatives, mortgages, corporate loans and hedge funds. Late Monday, A.I.G. was downgraded by the major credit rating agencies. This credit downgrade could require A.I.G. to post billions of dollars of additional collateral for its mortgage derivative contracts. Fat chance. That’s collateral A.I.G. does not have. There is therefore a substantial possibility that A.I.G. will be unable to meet its obligations and be forced into liquidation. A side effect: Its collapse would be as close to an extinction-level event as the financial markets have seen since the Great Depression.

A.I.G. does business with virtually every financial institution in the world. Most important, it is a central player in the unregulated, Brobdingnagian credit default swap market that is reported to be at least $60 trillion in size. Nobody knows this market’s real size, or who owes what to whom, because there is no central clearinghouse or regulator for it. Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss. The insurer (which could be a bank, an investment bank or a hedge fund) is required to post collateral to support its payment obligation, but in the insane credit environment that preceded the credit crisis, this collateral deposit was generally too small.

As a result, the credit default market is best described as an insurance market where many of the individual trades are undercapitalized. But even worse, many of the insurers are grossly undercapitalized. In one case in the New York courts, the Swiss banking giant UBS is suing a hedge fund that said it would insure nearly $1.5 billion in bonds but was unable to do so. No wonder — the hedge fund had only $200 million in assets. If A.I.G. collapsed, its hundreds of billions of dollars of mortgage-related assets would be added to those being sold by other financial institutions. This would just depress values further. The counterparties around the world to A.I.G.’s credit default swaps may be unable to collect on their trades. As a large hedge-fund investor, A.I.G. would suddenly become a large redeemer from hedge funds, forcing fund managers to sell positions and probably driving down prices in the world’s financial markets. More failures, particularly of hedge funds, could follow. Regulators knew that if Lehman went down, the world wouldn’t end. But Wall Street isn’t remotely prepared for the inestimable damage the financial system would suffer if A.I.G. collapsed.

While Gov. David A. Paterson of New York on Monday allowed A.I.G. to borrow $20 billion from its subsidiaries, that move will only postpone the day of reckoning. The Federal Reserve was also trying to arrange at least $70 billion in loans from investment banks, but it’s hard to see how Wall Street could come up with that much money. More promisingly, A.I.G. asked the Federal Reserve for a bridge loan. True, there is no precedent for the central bank to extend assistance to an insurance company. But these are unprecedented times, and the Federal Reserve should provide A.I.G. with some form of financial support while the company liquidates its mortgage-related assets in an orderly manner. The Fed cannot afford to stand on principle. The myth of free markets ended with the takeover of Fannie Mae and Freddie Mac. Actually, it ended with their creation.

Source: http://www.nytimes.com/2008/09/16/op...ml?ref=opinion

Retirement Savings Lose $2 Trillion in 15 Months

October, 2008

The stock market's prolonged tumble has wiped out about $2 trillion in Americans' retirement savings in the past 15 months, a blow that could force workers to stay on the job longer than planned, rein in spending and possibly further stall an economy reliant on consumer dollars, Congress's top budget analyst said yesterday. For many Americans, pensions and 401(k) plans are their only form of savings. The dwindling of these assets -- about a 20 percent decline overall -- is another setback just as many people are grappling with higher gas and food prices, more credit card debt, declining home values and less access to loans. "Unlike Wall Street executives, American families don't have a golden parachute to fall back on," said Rep. George Miller (D-Calif.), chairman of the House Committee on Education and Labor. "It's clear that Americans' retirement security may be one of the greatest casualties of this financial crisis."

Even traditional pension plans, which are formally known as defined-benefit plans and are widely considered more stable, have been hit hard by the stock market's volatility, losing 15 percent of their assets over the past year, Peter R. Orszag, director of the Congressional Budget Office, told the House panel. Despite the losses, companies will still be obligated to pay out the same pensions promised to employees but will have to recoup the extra costs in other ways, Orszag said. "When pension assets decline in 401(k) plans, the burden is on the workers," he said. "When pension plan assets decline in defined-benefit plans, the burden is on the firm to make up the difference. The firm will have to pass those costs on to their workers, to their shareholders or to consumers." Defined-benefit plans are company-sponsored programs that provide retirement payouts based on an employee's salary and tenure. The company shoulders the bulk of the investment decisions and risk. Defined-contribution plans, such as 401(k)s, turn those tasks over to the worker and are subject to the whims of the stock market.

Increasingly, employers have switched workers into defined-contribution plans. The federal government has also pushed 401(k) plans heavily, approving a law late last year that makes it easier for employers to automatically enroll their employees in them and other similar retirement plans. Defined-contribution plans tend to be more heavily weighted in stocks, either through individual holdings or mutual funds. As a result, said Orszag, "the value of assets in defined-contribution plans may have declined by slightly more than that of assets in defined-benefit plans." Through September, the percentage loss for the year in average account balances among 401(k) participants was between 7.2 and 11.2 percent, according to the Employee Benefit Research Institute's analysis of more than 2 million plans. Employees between the ages of 56 and 65 who had the fewest years on the job were the least affected, while those 36 to 45 years old with the longest tenures suffered the steepest declines, said Jack L. VanDerhei, research director for the D.C.-based institute. Younger workers tend to have more stocks in their portfolios while older employees move toward safer investments such as bonds, VanDerhei said.

The findings exacerbate a complaint among many workers and academics about 401(k) and similar plans that are heavily tied to the stock market. Are they really the best retirement vehicles for workers? "The loss of retirement security is a reversal of fortune and the result of very specific flawed governmental policies that have been biased toward 401(k) plans, rather than the result of technological change or the logical consequences of global economic trends," Teresa Ghilarducci, a professor of Economic Policy Analysis at the New School for Social Research, testified before the committee. Other academics and analysts say 401(k) plans allow employees to take control of their retirements. Jerry Bramlett, president of consulting firm BenefitStreet, said 401(k) participants should resist the urge to pull money out of stocks because that would lock in their losses. "Markets do go up and down, and 401(k) participants must try to remember to think long-term," he said.

Many investors have been buying low-yield Treasury bills in recent months because they are considered less volatile. Bramlett cautioned against that because it would leave them vulnerable to inflation. That said, 401(k) participants should evaluate their portfolios to make sure their money is spread among stock and fixed-income investments. They should also make sure they do not have too much of their own company's stock. Public pensions also have suffered. The assets held by state and local governments' pension plans declined by more than $300 billion between the second quarter of 2007 and the second quarter of 2008, according to the Federal Reserve. About 60 percent of public pension funds are invested in stocks, 30 percent in domestic fixed-income securities, 5 percent in real estate, and the remaining 5 percent in other products. Miller called the findings "very cataclysmic for middle-class families." Several analysts who testified at the hearing said the most vulnerable workers are those nearing retirement, who have large balances in their retirement plans that are now shrinking.

Tighter household budgets are also crimping workers' retirement savings. According to a survey released yesterday by AARP, 20 percent of baby boomers stopped contributing to their retirement plans in the past year because they have had trouble making ends meet. Already, more and more workers are delaying retirement, a trend that analysts and economists expect to accelerate because of the distressed economy. The people age 55 and older who work full time grew from about 22 percent in 1990 to nearly 30 percent in 2007, according to the Bureau of Labor Statistics. By 2016, the bureau predicts, the number of workers age 65 and over will soar by more than 80 percent, and they will make up 6.1 percent of the labor force. In 2006, they accounted for 3.6 percent of active workers.

Source: http://www.washingtonpost.com/wp-dyn...l?hpid=topnews

A $1.8 Trillion Bailout: Where the Money's Going

$700 billion is nothing: http://www.youtube.com/watch?v=zM79QpaxvOs

The U.S. Treasury Department is working through the weekend with Congress to craft a plan to spend as much as $700 billion to absorb bad mortgages and other assets from bank or other institution balance sheets to keep the financial system from collapsing. The move comes close on the heels of an $85 billion Federal Reserve rescue of American International Group and the Treasury's takeover of housing finance firms Fannie Mae and Freddie Mac . The Treasury plan, which follows a new federal guarantee for money market fund holdings, would push Washington's potential bailout tab to $1.8 trillion. Following are details of actions, proposals and amounts:

—Up to $700 billion to buy assets from struggling institutions. The plan is aimed at sopping up residential and commercial mortgages from financial institutions but gives Treasury broad latitude.

—Up to $50 billion from the Great Depression-era Exchange Stabilization Fund to guarantee principal in money market mutual funds to provide the same confidence that consumers have in federally insured bank deposits.

—The Fed committed to make unspecified discount window loans to financial institutions to finance the purchase of assets from money market funds to aid redemptions.

—At least $10 billion in Treasury direct purchases of mortgage-backed securities in September. In doubling the program on Friday, the Treasury said it may purchase even more in the months ahead.

—Up to $144 billion in additional MBS purchases by Fannie Mae and Freddie Mac.The Treasury announced they would increase purchases up to the newly expanded investment portfolio limits of $850 billion each. On July 30, the Fannie portfolio stood at $758.1 billion with Freddie's at $798.2 billion.

—$85 billion loan for AIG, which would give the Federal government a 79.9 percent stake and avoid a bankruptcy filing for the embattled insurer. AIG management will be dismissed.

—At least $87 billion in repayments to JPMorgan Chase for providing financing to underpin trades with units of bankrupt investment bank Lehman Brothers . Paulson said over the weekend he was adamant that public funds not be used to rescue the firm.

—$200 billion for Fannie Mae and Freddie Mac. The Treasury will inject up to $100 billion into each institution by purchasing preferred stock to shore up their capital as needed. The deal puts the two housing finance firms under government control.

—$300 billion for the Federal Housing Administration to refinance failing mortgage into new, reduced-principal loans with a federal guarantee, passed as part of a broad housing rescue bill.

—$4 billion in grants to local communities to help them buy and repair homes abandoned due to mortgage foreclosures.

—$29 billion in financing for JPMorgan Chase's government-brokered buyout of Bear Stearns in March. The Fed agreed to take $30 billion in questionable Bear assets as collateral, making JPMorgan liable for the first $1 billion in losses, while agreeing to shoulder any further losses.

—At least $200 billion of currently outstanding loans to banks issued through the Fed's Term Auction Facility, which was recently expanded to allow for longer loans of 84 days alongside the previous 28-day credits.

Source: http://www.cnbc.com/id/26808715