The Fall of US Financial Institutions

American international Group popularly known as AIG is world's biggest Insurance provider but it ran into crises in mid september 2008 when it showed signs of cashlessness (having no cash reserve at all). Everyone was surprised when the news of AIG going for sell off came open and it spread like fire in a forest. soon the news reached fed reserve(Federal Bank) and it had no other option then investing in AIG by giving it loan of US$ 85 billion and purchase 80 % stake in world's largest insurance provider.

The Fall of AIG(American international Group) :
So what was the reason behind cashlessness of world's largest insurance company?? The decline of AIG started after the attack on World trade center's on 9/11 by terrorist groups. AIG used to provide insurance cover to world's biggest organizations and was running soundly until the credit crunch and mortagage crises began to start in US economy, various US investment banks like Lehman Brothers(158 years old institution), Merill Lynch, Morgan Stanley, Bear Sterns etc provides loans in real estate.

US public wanted expensive houses which were beyond their budget. US banks gave them loans thinking of gaining more profits from the interest rates which they will get on loan amount however they overlooked the most important condition which was "whether the customer is eligible for purchasing house which was out of the budget for him/her" still they gave the loan which eventually was never returned back to the lender bank.

Now small mortage banks which felt the pinch of credit crises earlier took loans from bigger banks in order to sail their bank to shore in these tough times when their was almost zero income for small mortage banks, now big investment banks like Lehman Brothers, Merill Lynch, Morgan Stanley, Bear Sterns gave loan to these much smaller banks which were facing credit crunch at that time thinking that they will get batter rewards for the investments made in mortagage banks.

To insure their loan to smaller banks they insured their investment with insurance company AIG in particular. Since AIG was dealing with much bigger banks the risks were even higher for insurance companies like American international Group(AIG). Now bigger investment banks never got their money back from smaller mortagage banks and their amount was dead. so the bigger banks could not pay the premiums to insurance companies and this was the time when insurance companies started helping them according to the terms and conditions of the insurance type done with the banks, during this time there was no source of income for insurance companies like AIG.

This was the time when the cash reserve of Insurance companies reached almost nil. Investment banks which had invested in Credit crunch facing mortage banks were already on verge of bankruptcy. US citizens lost their faith on Financial Institutions and began to sell their shares, the environment of investment bank stocks was discouraging. Share Markets all over the globe felt the heat and all the major indices including DJIA, Standard and Poor index, NASDAQ, BSE, NSE felt drastically.

Hence Federal Reserve bank had to act fast to control the situation and offered loan of US$85 billion to the AIG for improving it's financial conditions, due to this act Fed reserve acted as last hope for many other banks.

Looking at present uncertainity the US government has made an announcement for providing a US$700 billion package to the financial market so that the US $ remains the strongest US economy in future too. but their has been resentment in citizens of USA when they heard about the news that US government is pumping money earned from taxes into the Financial Market to control global uncertainities .

my fingers are crossed when it comes to question "will supremacy of US $ continue after worst economic depression after the depression of 1929". lets wait and see how things unfold in coming couple of months.

Recently markets tumbled most due to biggest US bank failure in history(Washington Mutual).
Read about Washington Mutual Failure now!

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Lehman Brothers to file Bankruptcy - Markets Crash

Global equities took a beating on Monday as the US financial market crisis worsened with Lehman Brothers Holdings Inc set to file bankruptcy.

Taiwan's Taiex plummeted 4.09 per cent, Australia's ASX fell 1.76 per cent, Singapore's Straits Times declined 3.11 per cent and Philippines PSEi dropped 4.16 per cent. The BSE Sensex plunged 4.66 per cent below 14000 and NSE's Nifty tumbled 4.85 per cent.

Lehman has been driven to file for Chapter 11 following failure of talks between prospective buyers and the US government declining to fund a takeover of the ailing investment Bank. Barclays Plc was the first to pull out for want of guarantees from the government and Wall Street firms against losses on Lehman's assets. Bank of America Corp. withdrew later, opting instead to acquire Merrill Lynch & Co. for $50 billion.

Adding fuel to fire, American International Group Inc plans to approach the Federal Reserve for help, even as it looks to sell some of its assets and raise more capital.

The US mortgage market is worth about $12 trillion and consumer credit is $2.59 trillion. So far, the losses suffered by securities firms are only 3.4 per cent of the consumer credit and mortagage credit available.

Freddie Mac and Fannie Mae, which were bailed out by the US government, both control nearly half of the $12 trillion mortgage market. The failure of these housing credit giants triggered default swaps to the tune of $1.6 trillion.

What isn't known is how all of this credit was leveraged. By conservative estimates, if this credit was leveraged five times, then a $1 trillion credit loss turns into a $5 trillion liquidity loss. A $2 trillion loss becomes a $10 trillion liquidity loss, which is only $3 trillion less of the US GDP.

The losses will increase as more people miss their mortgage payments. Credit card debt will also rise as people who just lost their jobs default.

"Given the likelihood of more credit losses, it will choke global liquidity. This crisis will slow the global economy without exception. Sectors related to exports such as IT and auto will feel the heat. The next major effect will be on real estate as funding for the same is through PE money.

The sector is already starved for funds. FIIs may not have funds to divert to Indian markets. Rupee will depreciate further, which in turn will make imports costlier. Overall, a total muddle," said V Theegala, analyst at large brokerage.

BSE IT index plunged 6.71 per cent, Auto index declined 2.52 per cent and Realty slumped 9 per cent.

Said Ranjan Sadhu, fund manager at Raxson Global, "Financials (stocks) will continue to be slammed, commodities won't have the same 'fire' we saw over the past few years, and debt-heavy corporations will find it harder to rollover their bonds."

BSE Bankex dropped 5.24 per cent.

"Gold and silver don't do well in deflationary environment. We expect them to under perform over the next twelve months," Sadhu added. Gold in international market was trading at $781 per ounce.

- Economic times