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Wednesday 17 September 2008
Top Economist, Nouriel Roubini, Says American Depositors Should Worry
A top economist said Monday Americans with money in the bank should be concerned about their deposited assets, a warning that comes on the heels of another massive financial institution failure. More at Market News...
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Lehman’s outstanding debts total $600bn
By Stacy-Marie Ishmael and agencies September 15 2008
Lehman Brothers Holdings owes more than $600bn to creditors scattered across the US, Europe and Asia, according to the investment bank’s Chapter 11 petition.
The largest unsecured creditors include Citigroup and Bank of New York Mellon, who have around $138bn of exposure to Lehman’s bond debt as indenture trustees.
Indenture trustees act as agents on behalf of bondholders, and while they help enforce the rights of creditors, they are not necessarily creditors themselves.
Bank of New York Mellon has an additional $17bn in exposure to both subordinated and junior subordinated debt, again as an indenture trustee.
Apart from the trustees, Japan’s Aozora Bank, which is part owned by Cerberus, is owed $463m.
But Aozora said its actual exposure to Lehman would be ”significantly lower” due to collateral and hedging, Reuters reported.
”Whatever may appear in a filing by Lehman in terms of gross exposure will be very different from what we have net of our hedges and net of our collateral,” Richard Layton, Aozora’s chief financial officer, told Reuters in a telephone interview on Monday.
Other Japanese banks cited in the filing include Mizuho Corporate Bank, with a $382m exposure in the form of a bank loan, Shinsei Bank with $231m and UFJ Bank with $185m. Japanese markets were closed on Monday for a holiday.
The top European creditor is BNP Paribas, which according to the filing extended a $250m bank loan to the investment bank. Shares in the French bank fell 7.2 per cent to €59.88 in midday trade in Paris.
Other European banks named in the filing include Svenska Handelsbanken, KBC, Lloyds TSB, Standard Chartered and DnB.
Sept. 16 (Bloomberg) -- Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.
The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.
Money-market funds are considered the safest investments after cash and bank deposits, and Reserve Primary's losses come as confidence in financial markets has been shaken by the collapse of subprime mortgages, the failure of 11 U.S. commercial banks and Lehman's bankruptcy yesterday. The only other money-market fund to break the buck was the $82.2 million Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of investments in interest-rate derivatives.
``This is uncharted territory,'' said Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds. ``That's certainly a stunner.''
Reserve Primary, run by closely held Reserve Management Corp. in New York, held $785 million in Lehman Brothers commercial paper and medium-term notes. The fund's board revalued the Lehman holdings as worthless effective 4 p.m. New York time, the company said today in a statement.
Unable to Prop Up Fund
Spokeswoman Ming Lee Hatch said she couldn't immediately comment on whether the company planned to secure credit to support the fund or wind it down. Investors who requested redemptions by 3 p.m. today will get all their money back.
Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA, said the fund's failure ``exacerbates some of the flight-to-quality into Treasuries.''
Crane said Reserve Management probably was unable to prop up the fund before halting redemptions because it lacked the backing of a large institutional owner.
``Reserve just didn't have the deep pockets to buy troubled securities out,'' he said.
Boston-based Evergreen Investment Management Co. said yesterday it had secured support from Wachovia Corp., its parent, to protect three money-market funds from losses linked to debt issued by Lehman. The funds' Lehman holdings totaled $494 million.
SEC Regulated
Money-market funds, which are regulated in the U.S. by the Securities and Exchange Commission, strive to preserve a $1 a share net asset value, meaning that investors can always get back their principal, as well as interest earned by the fund on its investments. They are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less. The securities must have top short-term corporate debt ratings.
U.S. money-market mutual-fund assets were $3.58 trillion as of Sept. 10, just below their peak of $3.59 trillion set a week earlier, according to the Investment Company Institute, a Washington-based trade group.
``The company and its counsel apprised staff of the fund's situation earlier today and discussions between staff and the company and its counsel are continuing,'' Andrew J. Donohue, director of the SEC's investment management division, said in a statement. ``SEC examiners are on-site at the fund to monitor activities.''
Sound Structure
ICI President Paul Schott Stevens released a statement attempting to bolster investor confidence in money-market funds.
``The fundamental structure of money-market funds remains sound,'' he said in the statement. ``These funds are subject to strict regulation governing credit quality, liquidity, diversification and transparency.''
Federal Reserve spokesman David Skidmore declined to comment.
Bruce Bent, chairman of Reserve Management, often said the best money-market funds should be ``boring.'' He derided other funds that invested in securities linked to subprime mortgages and other risky debt.
Reserve Management's assets rose 95 percent in the year ending June 30 to $125 billion, as investors sought safety from falling equity markets. Banks and other institutional investors accounted for 65 percent of total assets.
By David S. Hilzenrath and Zachary A. Goldfarb Tuesday, September 16, 2008
The Federal Reserve has tentatively agreed to provide $85 billion in emergency lending to insurance giant AIG in hope of preventing a bankruptcy that could send tremors through the U.S. and global financial markets, according to two sources familiar with the plan.
In exchange, the Fed would get rights to 79.9 percent of AIG's stock, a source said. One source said the government would replace the company's management while the other source said the government gained the right to replace the chief executive and board and appeared likely to do so.
The company would be put up as collateral. The insurance subsidiaries of AIG, which are regulated by state authorities, would be excluded from the arrangement, a source said. The proceeds of any asset sales would be used to pay down the federal loan.
The plan must still be approved by the governors of the Federal Reserve.
The rescue represents a stunning turnaround for federal officials, who this weekend stressed they would not provide taxpayer money to bail out private companies. Without such a federal backstop, investment bank Lehman Brothers failed to find a buyer and was forced to file for bankruptcy earlier this week.
Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke traveled to Capitol Hill Tuesday evening to brief congressional leaders on the government's plan for AIG. A source said Paulson and Bernanke explained that AIG would be put into conservatorship, which would allow the federal government to operate the company on a caretaker basis.
After that briefing in the office of Senate Majority Leader Harry Reid (D-Nev.), some of those at the meeting expressed initial support for the intervention but declined to provide details.
"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times," said Sen. Charles Schumer (D-N.Y.), who heads the Joint Economic Committee. "Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse,"
Rep. Spencer Bachus (R-Ala.), ranking Republican member of the House Financial Services Committee, said, "I believe you put a floor under the market with this. I do feel this is an opportunity to start stabilizing the markets." He added, "I think we've got a shot at getting some finality to this market."
Talks to avert a bankruptcy filing by AIG continued today at the Federal Reserve Bank of New York, which has been trying to orchestrate a private rescue. J.P. Morgan, which is advising AIG, yesterday was trying to get a collection of lenders to put up $70 billion to $75 billion.
New York Gov. David A. Paterson (D) said today that would be difficult.
Former AIG chief Maurice "Hank" Greenberg, whose personal fortune is largely tied to the company, hired the financial firm Perella Weinberg Partners to explore a variety of scenarios, including a takeover of the company. In a document filed with the Securities and Exchange Commission, Greenberg said he might also buy assets from or make an investment in AIG.
It was unclear whether Greenberg's efforts could change the picture.
Greenberg was forced out as chief executive of AIG in March 2005 after regulators raised questions about the company's accounting.
AIG's situation became more urgent Monday night when major ratings agencies downgraded the insurer, potentially requiring it to post billions of dollars of collateral. In its last quarterly report, AIG indicated that the type of ratings action taken last night could require the insurer to put up an additional $14.5 billion of collateral. The collateral could be demanded to secure AIG's obligations under contracts insuring other parties against financial risk.
When the markets closed today, the company's shares were trading at $3.75, down 21.2 percent from yesterday's close and far below their high during the past year of $70.13.
In a morning briefing, Bruce Ballentine, a vice president of the Moody's rating agency, said AIG's most pressing challenge is coming up with more collateral. The terms of certain AIG contracts that protect counterparties against financial risks allow the counterparties to demand more collateral if AIG is downgraded.
In downgrading AIG Monday night, Moody's said further downgrades "are likely if the immediate liquidity and capital concerns are not fully addressed." That could feed a downward spiral.
Downgraded along with the parent company last night were an array of subsidiaries, including life insurance and retirement services companies. Moody's has concerns about the amount of capital at certain AIG insurance subsidiaries, Ballentine said today. Like the parent company, some have exposure to the troubled mortgage market.
That observation came after the New York governor said yesterday his state will allow the AIG parent company to use $20 billion from its own insurance subsidiaries to shore up its financial condition. By posting the subsidiaries' assets as collateral, AIG could borrow money to run its day-to-day operations, Paterson said. The move required special dispensation from the state insurance superintendent, Eric R. Dinallo, who is responsible for protecting the stability of AIG subsidiaries in New York and their policyholders.
Paterson made clear today that AIG will be allowed to tap the subsidiaries' assets only as part of a larger deal to rescue the company.
AIG has $1 trillion of assets and serves clients in 130 countries. Businesses and individuals rely on it for life insurance, retirement annuities and coverage against all manner of calamities, from financial to natural disasters.
The collapse of subprime loans and other mortgages threatened to hobble the company, which was heavily involved in the business of issuing complex insurance contracts to investors in securities backed by mortgages. If AIG falters, it could weaken other players in the financial system.
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Lehman’s outstanding debts total $600bn
By Stacy-Marie Ishmael and agencies
September 15 2008
Lehman Brothers Holdings owes more than $600bn to creditors scattered across the US, Europe and Asia, according to the investment bank’s Chapter 11 petition.
The largest unsecured creditors include Citigroup and Bank of New York Mellon, who have around $138bn of exposure to Lehman’s bond debt as indenture trustees.
Indenture trustees act as agents on behalf of bondholders, and while they help enforce the rights of creditors, they are not necessarily creditors themselves.
Bank of New York Mellon has an additional $17bn in exposure to both subordinated and junior subordinated debt, again as an indenture trustee.
Apart from the trustees, Japan’s Aozora Bank, which is part owned by Cerberus, is owed $463m.
But Aozora said its actual exposure to Lehman would be ”significantly lower” due to collateral and hedging, Reuters reported.
”Whatever may appear in a filing by Lehman in terms of gross exposure will be very different from what we have net of our hedges and net of our collateral,” Richard Layton, Aozora’s chief financial officer, told Reuters in a telephone interview on Monday.
Other Japanese banks cited in the filing include Mizuho Corporate Bank, with a $382m exposure in the form of a bank loan, Shinsei Bank with $231m and UFJ Bank with $185m. Japanese markets were closed on Monday for a holiday.
The top European creditor is BNP Paribas, which according to the filing extended a $250m bank loan to the investment bank. Shares in the French bank fell 7.2 per cent to €59.88 in midday trade in Paris.
Other European banks named in the filing include Svenska Handelsbanken, KBC, Lloyds TSB, Standard Chartered and DnB.
Reserve Primary Money Fund Falls Below $1 a Share
By Christopher Condon
Sept. 16 (Bloomberg) -- Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.
The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.
Money-market funds are considered the safest investments after cash and bank deposits, and Reserve Primary's losses come as confidence in financial markets has been shaken by the collapse of subprime mortgages, the failure of 11 U.S. commercial banks and Lehman's bankruptcy yesterday. The only other money-market fund to break the buck was the $82.2 million Community Bankers Mutual Fund in Denver, which liquidated in 1994 because of investments in interest-rate derivatives.
``This is uncharted territory,'' said Peter Crane, president of Crane Data LLC in Westborough, Massachusetts, which tracks money-market funds. ``That's certainly a stunner.''
Reserve Primary, run by closely held Reserve Management Corp. in New York, held $785 million in Lehman Brothers commercial paper and medium-term notes. The fund's board revalued the Lehman holdings as worthless effective 4 p.m. New York time, the company said today in a statement.
Unable to Prop Up Fund
Spokeswoman Ming Lee Hatch said she couldn't immediately comment on whether the company planned to secure credit to support the fund or wind it down. Investors who requested redemptions by 3 p.m. today will get all their money back.
Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA, said the fund's failure ``exacerbates some of the flight-to-quality into Treasuries.''
Crane said Reserve Management probably was unable to prop up the fund before halting redemptions because it lacked the backing of a large institutional owner.
``Reserve just didn't have the deep pockets to buy troubled securities out,'' he said.
Boston-based Evergreen Investment Management Co. said yesterday it had secured support from Wachovia Corp., its parent, to protect three money-market funds from losses linked to debt issued by Lehman. The funds' Lehman holdings totaled $494 million.
SEC Regulated
Money-market funds, which are regulated in the U.S. by the Securities and Exchange Commission, strive to preserve a $1 a share net asset value, meaning that investors can always get back their principal, as well as interest earned by the fund on its investments. They are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less. The securities must have top short-term corporate debt ratings.
U.S. money-market mutual-fund assets were $3.58 trillion as of Sept. 10, just below their peak of $3.59 trillion set a week earlier, according to the Investment Company Institute, a Washington-based trade group.
``The company and its counsel apprised staff of the fund's situation earlier today and discussions between staff and the company and its counsel are continuing,'' Andrew J. Donohue, director of the SEC's investment management division, said in a statement. ``SEC examiners are on-site at the fund to monitor activities.''
Sound Structure
ICI President Paul Schott Stevens released a statement attempting to bolster investor confidence in money-market funds.
``The fundamental structure of money-market funds remains sound,'' he said in the statement. ``These funds are subject to strict regulation governing credit quality, liquidity, diversification and transparency.''
Federal Reserve spokesman David Skidmore declined to comment.
Bruce Bent, chairman of Reserve Management, often said the best money-market funds should be ``boring.'' He derided other funds that invested in securities linked to subprime mortgages and other risky debt.
Reserve Management's assets rose 95 percent in the year ending June 30 to $125 billion, as investors sought safety from falling equity markets. Banks and other institutional investors accounted for 65 percent of total assets.
Fed Tentatively Agrees to Provide $85B to AIG
Move Aimed to Avert Insurance Giant's Collapse
By David S. Hilzenrath and Zachary A. Goldfarb
Tuesday, September 16, 2008
The Federal Reserve has tentatively agreed to provide $85 billion in emergency lending to insurance giant AIG in hope of preventing a bankruptcy that could send tremors through the U.S. and global financial markets, according to two sources familiar with the plan.
In exchange, the Fed would get rights to 79.9 percent of AIG's stock, a source said. One source said the government would replace the company's management while the other source said the government gained the right to replace the chief executive and board and appeared likely to do so.
The company would be put up as collateral. The insurance subsidiaries of AIG, which are regulated by state authorities, would be excluded from the arrangement, a source said. The proceeds of any asset sales would be used to pay down the federal loan.
The plan must still be approved by the governors of the Federal Reserve.
The rescue represents a stunning turnaround for federal officials, who this weekend stressed they would not provide taxpayer money to bail out private companies. Without such a federal backstop, investment bank Lehman Brothers failed to find a buyer and was forced to file for bankruptcy earlier this week.
Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke traveled to Capitol Hill Tuesday evening to brief congressional leaders on the government's plan for AIG. A source said Paulson and Bernanke explained that AIG would be put into conservatorship, which would allow the federal government to operate the company on a caretaker basis.
After that briefing in the office of Senate Majority Leader Harry Reid (D-Nev.), some of those at the meeting expressed initial support for the intervention but declined to provide details.
"The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times," said Sen. Charles Schumer (D-N.Y.), who heads the Joint Economic Committee. "Hearing of these plans, you have to stop to catch your breath. But upon reflection, the alternatives are much worse,"
Rep. Spencer Bachus (R-Ala.), ranking Republican member of the House Financial Services Committee, said, "I believe you put a floor under the market with this. I do feel this is an opportunity to start stabilizing the markets." He added, "I think we've got a shot at getting some finality to this market."
Talks to avert a bankruptcy filing by AIG continued today at the Federal Reserve Bank of New York, which has been trying to orchestrate a private rescue. J.P. Morgan, which is advising AIG, yesterday was trying to get a collection of lenders to put up $70 billion to $75 billion.
New York Gov. David A. Paterson (D) said today that would be difficult.
Former AIG chief Maurice "Hank" Greenberg, whose personal fortune is largely tied to the company, hired the financial firm Perella Weinberg Partners to explore a variety of scenarios, including a takeover of the company. In a document filed with the Securities and Exchange Commission, Greenberg said he might also buy assets from or make an investment in AIG.
It was unclear whether Greenberg's efforts could change the picture.
Greenberg was forced out as chief executive of AIG in March 2005 after regulators raised questions about the company's accounting.
AIG's situation became more urgent Monday night when major ratings agencies downgraded the insurer, potentially requiring it to post billions of dollars of collateral. In its last quarterly report, AIG indicated that the type of ratings action taken last night could require the insurer to put up an additional $14.5 billion of collateral. The collateral could be demanded to secure AIG's obligations under contracts insuring other parties against financial risk.
When the markets closed today, the company's shares were trading at $3.75, down 21.2 percent from yesterday's close and far below their high during the past year of $70.13.
In a morning briefing, Bruce Ballentine, a vice president of the Moody's rating agency, said AIG's most pressing challenge is coming up with more collateral. The terms of certain AIG contracts that protect counterparties against financial risks allow the counterparties to demand more collateral if AIG is downgraded.
In downgrading AIG Monday night, Moody's said further downgrades "are likely if the immediate liquidity and capital concerns are not fully addressed." That could feed a downward spiral.
Downgraded along with the parent company last night were an array of subsidiaries, including life insurance and retirement services companies. Moody's has concerns about the amount of capital at certain AIG insurance subsidiaries, Ballentine said today. Like the parent company, some have exposure to the troubled mortgage market.
That observation came after the New York governor said yesterday his state will allow the AIG parent company to use $20 billion from its own insurance subsidiaries to shore up its financial condition. By posting the subsidiaries' assets as collateral, AIG could borrow money to run its day-to-day operations, Paterson said. The move required special dispensation from the state insurance superintendent, Eric R. Dinallo, who is responsible for protecting the stability of AIG subsidiaries in New York and their policyholders.
Paterson made clear today that AIG will be allowed to tap the subsidiaries' assets only as part of a larger deal to rescue the company.
AIG has $1 trillion of assets and serves clients in 130 countries. Businesses and individuals rely on it for life insurance, retirement annuities and coverage against all manner of calamities, from financial to natural disasters.
The collapse of subprime loans and other mortgages threatened to hobble the company, which was heavily involved in the business of issuing complex insurance contracts to investors in securities backed by mortgages. If AIG falters, it could weaken other players in the financial system.
AIG spokesman Peter Tulupman declined to comment.
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