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