Will AIG Be Able to Pay Your Insurance Claim If Needed?

"Sanford Bernstein analyst Todd Bault said AIG is facing an $11 billion shortfall to cover potential claims in its property and casualty insurance business, according to media reports Monday."

The public has been reassured repeatedly that AIG's troubles with exotic financial instruments written by its London division at the behest of some of the Wall Street banks could not affect its personal and commercial insurance business which is regulated by the states.

We have raised the issue in the past that corporations such as AIG, with its exposure to individual and small business insurance claims and annuities, have no business engaging in raw financial speculation with a commingling of liabilities and risks. At one time AIG was a major speculator in the silver markets, holding enormous short positions along with a few of the Wall Street commercial banks.

Banks and insurance companies have absolutely no business engaging in financial speculation that exposes its non-qualified investors and depositors to risk of loss that has not been fully disclosed. It is the job of the government regulators to prevent this from happening in the first place as part of the corporate licensing process. Period.

We freely admit that we do not understand the exact structure of AIG's interwoven obligations and corporate structure, who owes what, what is safe and what is not. It is not clear to us who does understand it, except to say that it is a massive conglomerate, and that there are investments and speculations and commercial enterprises that have absolutely no business being in the same portfolio as others from a risk profile. The same goes for the money center banks. These companies look more like pyramid schemes serving their management to the detriment of shareholders and customers.

AIG ought to have been broken up and taken through a restructuring process, and the commercial business fully capitalized and separated from its speculative operations first, before anyone was paid with government funds, including enormous employee bonuses and full payments to counterparties in financial speculation like Goldman Sachs.

If the financial insiders were paid, and individuals are left high and dry on car and life insurance and retirment annuities, there will be hell to pay, of this we are certain.

AP
AIG shares decline amid reports of shortfall in insurance reserves
Monday November 30, 2009

NEW YORK (AP) -- Shares of American International Group Inc. tumbled nearly 15 percent Monday after an analyst stirred concerns that the troubled insurer doesn't have enough reserves to pay some potential claims.

AIG shares dropped $4.90, or 14.7 percent, to finish at $28.40 -- their lowest close since August 19. The shares have more than quadrupled from a low of $6.60 in March.

Sanford Bernstein analyst Todd Bault said AIG is facing an $11 billion shortfall to cover potential claims in its property and casualty insurance business, according to media reports Monday. Bault declined to share the research note.

Covering that shortfall could cause problems for the New York-based insurer as it tries to repay a government bailout package it received to help stay in business.

Separately, the Financial Times reported AIG may soon get a bid for a part of its aircraft leasing unit from a group that includes the head of that business.

A spokeswoman for AIG, which is based in New York, declined to comment on either report...


NY Times
Report Cites Big Shortfall In Reserves At A.I.G.
By MARY WILLIAMS WALSH
November 30, 2009

An independent analysis of whether the insurance industry has been setting aside enough money to pay its claims estimates that the American International Group has a shortfall of $11.9 billion in its property and casualty business.

The conclusion is at odds with the often-repeated refrain that A.I.G.’s troubles can all be traced to its derivatives portfolio, and that its insurance operations are sound.

Other researchers have raised doubts about A.I.G.’s total worth since it was bailed out last year, and even the federal government has acknowledged that the company might have difficulty repaying all the money it owed taxpayers, currently about $120 billion.

In a report distributed to clients on Monday, the investment research firm Sanford C. Bernstein pointed to a big shortfall in A.I.G.’s property and casualty insurance business — which has been renamed Chartis and is intended to be the future core of the company’s operations.

The stock fell by almost 15 percent, to $28.40 from $33.30, in trading on Monday. Bernstein cut A.I.G.’s price target by 40 percent, to $12 from $20. The report’s author, Todd R. Bault, called the results “a big surprise.” He also said the inadequacy of A.I.G.’s reserves had grown in recent years — “nearly the opposite behavior that we would expect,” since the claims-paying reserves of other insurance companies had been growing...

Customers Frequently Asked Questions

1. Is my insurance policy safe?
Yes, your insurance policy is safe. Our insurance companies remain strong and well-capitalized. Regulations ensure that the assets of our insurance companies are there to back up each policy. You are protected. Your policy is safe.

2. If I have a claim, will it be paid?
Yes, our insurance companies are able to pay all valid claims. As stated above, our insurance companies are financially strong and are not in jeopardy.

3. Should I cancel my insurance policy?
Your insurance policy is safe. As stated above, our insurance companies are financially strong so your policies are not in jeopardy. Please be aware that some policies may contain surrender charges and/or cancellation penalties. Talk to your financial advisor before making any decision.

4. Should I get out of my annuity?
Your annuity is underwritten by one of the AIG insurance companies. Our insurance companies are financially sound and well-capitalized. Please be aware that some annuities may contain surrender charges. Talk to your financial advisor before making any decision.

5. I just heard that AIG is selling the company that issued my insurance policy. What should I do?
You don't have to do anything. Your policy remains safe and intact. Your policy will be seamlessly transferred to the company that buys the subsidiary.

6. Should I pay the insurance premium bill I just received?
Yes, in order for your coverage with us to continue, you will need to pay the insurance premium.

SP 500 Futures Daily Chart

Stocks are being managed on light volumes.

At most times the markets are price discovery and capital allocation mechanisms.

Under the current Bernanke-Summers regime, they have become instruments of financial engineering, the shaping of perception, and government influence.

Draining the Swamp: The Fed's Tri Party Repo Machine

A triparty repo transaction is a transaction among three parties: a cash lender acting on behalf of all holders of dollars (the Fed), a borrower that will provide collateral (dodgy debt holder in shaky financial condition), and a clearing bank, most likely a primary dealer like J.P. Morgan, which is only too happy to collect its fees as an agent of the Fed.

The triparty clearing bank provides custody (agency) accounts for parties to the repo deal and collateral management services. These services include ensuring that pledged collateral meets the cash lenders’ requirements, pricing collateral, ensuring collateral sufficiency, and moving cash and collateral between the parties’ accounts. What if any liabilities the clearing bank such as J.P.Morgan might obtain for the mispricing of risk remain undisclosed, but are probably negligible at worst.

This is the method of obtaining toxic assets from the books of non-primary dealers, and providing stability and liquidity from the aggregate value of all dollar holders to cover the misdeeds of diverse financial institutions and other favored parties.

In other words, the Fed is draining the financial debt swamp and toxic waste dumps into your basement, if you hold Federal Reserve Notes. Your IRA's, your 401k's, your savings, as long as you hold Federal Reserve Notes, which are claims on their balance sheet loosely backed by the Treasury. When the Fed's balance sheet contained nothing but Treasuries and explicity backed agencies that relationship was firmer. Now, we are into the realm of make believe and Timmy's credibility.

The Fed pledges Morgan assure them that there will be no radioactive material in the sludge pond headed your way, and levels of carcinogenic and toxic contamination will be within levels that they believe are adequate based on the non-binding estimates.

In practice the Fed has a defaults account on its book for the shortfalls from fat valuations due to the toxic debt it has already assumed on your behalf.

The source and composition of the sludge will remain a secret among the bankers, without oversight. This seems like taxation without representation, at least for holders of dollars that are US citizens, since the Fed is engaging in the expenditure of public money without hearings, votes, public oversight, or controls. The Fed seeks to become a financial Star Chamber, dispensing 'justice' as it pleases.

WSJ
Tri-Party Repo Could See 1st Round Of Reforms By Year-End
By Deborah Lynn Blumberg
NOVEMBER 30, 2009, 5:20 P.M. ET.

NEW YORK (Dow Jones)--Progress is being made in reaching agreement on a first round of reforms for the crucial tri-party repo market and details could be revealed as early as the end of this year, according to people familiar with ongoing discussions.

The reforms, which focus on margin requirements and intraday credit, are a first step in making security repurchase transactions more secure and preventing this $4.3 trillion over-the-counter market, where firms raise cash against collateral, from becoming a source of instability for the broader financial system.

They also come at a time when the repo market will be in the spotlight as the Fed plans for the day when it will start to pull the massive amounts of cash it has extended to markets from the system. The Fed is planning to use reverse repo operations--selling dealers securities such as Treasurys for cash with the agreement to buy them back later at a higher price--as one tool to achieve that goal.

The drive to reform the repo market--whose smooth functioning is key to the health of the financial system--has recently gained traction, in part due to the expiry of the Fed's primary dealer credit facility in February 2010. The facility serves as the current borrowing backstop for the big banks that deal directly with the central bank. Without it, the banks will have to rely more on repo for funding, which adds to the need to strengthen its functioning.

According to one person involved with the talks, the New York Fed-sponsored Tri-Party Repurchase Agreement Infrastucture Task Force could issue a progress report on repo reform discussions and seek feedback from the broader market as early as December.

The New York Fed was unavailable for comment.

The reforms will focus on the tri-party repo market, which makes up the biggest chunk of the repo market. In this market, a clearing bank stands between the borrower and the lender, holding collateral and facilitating the trades. The two dominant clearing banks in the U.S. are J.P. Morgan Chase & Co. (JPM) and the Bank of New York (BK).

In a first step, reform will focus on steps that market participants can address without outside input: standardizing margin requirements and tackling the issue of the intraday extension of credit in the market. Longer-term reforms to reduce systemic risk in tri-party repo are still being debated.

Standardized, or minimum margin requirements, would add security for the two clearing banks. Higher margins could be required for certain types of securities, such as commercial paper, or high-yield debt, or for riskier banks.

Intraday credit has also been a top concern. Currently, for operational efficiency, the two clearing banks extend intraday credit on term repos, or repos longer than overnight, meaning they return cash to the lender and securities to the borrower each day even though the contract continues to run. That leaves the clearing bank on the line should either counterparty falter.

One possible solution is to bring the U.S. term repo market more in line with overseas markets, by not allowing term repos using less liquid securities, such as corporate debt, to unwind every day. Other transactions, such as those using the more liquid Treasury securities, would still unwind every day.

The need for repo reforms has been apparent to policymakers for years, but was paid greater heed after severe disruptions in the market during the recent financial crisis.

Borrowers, lenders, clearers, industry groups and the Fed came together in September to form the repo task force and have been meeting every few weeks since then. Members have been working on crafting an initial set of reforms that would help to protect the tri-party repo market from future financial market disruptions.

The Dangerous US Financial Sector Is Still Smoldering and May Reignite

Timmy and the Merry Pranksters at the Treasury and the Fed are throwing taxpayer money at the financial sector with the same prudence with which Angelo Mozilo used sunblock.

Smothered by paper, the fire in the financials is still smoldering, and could reignite with the breezes of further credit contractions in commercial real estate, mortgage foreclosures, and frothy debt in the developing world.

When the US financial system tumbles there should be little doubt where Ben, Tim, Larry, and their Boss failed the American taxpayer and all holders of US debt.

The ratings fraud and accounting deception will continue until confidence is restored.


Barron's
More Nasty Bank Surprises
By JIM MCTAGUE
November 28, 2009

THERE'S GROWING EVIDENCE THAT THE CASE FOR buying financial stocks is larded with "bulloney." Recent indications are that bank regulators from the Treasury to the Federal Reserve to the Federal Deposit Insurance Corporation and on to the state level remain in the dark about the quality of bank-loan portfolios -- especially at small to midsize institutions. An estimated 21 publicly traded banks that have received TARP injections are on the ropes, according to published reports. The number likely will grow, leading to some nasty surprises for investors.

Because of the political antipathy toward Wall Street, the consensus is that any Congressional financial regulatory reform bill will be punitive in the extreme and consequently inhibit the growth and profitability of the sector for years to come. This hardly is a buy signal.

The latest and perhaps most startling evidence of endemic regulatory weakness is the failure this month of two banks and the bankruptcy of CIT, all recipients of TARP funds from Treasury after they were deemed earlier in the year by "expert" regulators to be safe and sound. CIT received $2.3 billion in taxpayers-financed TARP funds; UCBH Holdings, parent of San Francisco's United Commerce Bank, received $299 million; and Pacific Coast National Bank, a San Clemente, Calif., lender, received $4.1 million. All were publicly traded.

The aforementioned 21 wobbly publicly traded companies that have received TARP money had zero or negative net income. They've suspended dividend payments to the Treasury. Regulators vetted all of these institutions, using the "CAMELS" rating system. CAMELS stands for "Capital, Asset quality, Management, Earnings, Liquidity, and Sensitivity (which measures interest-rate risk, exchange-rate risk, and other market risk). Each bank's CAMELS score is secret. Banks with the lowest scores were excluded from TARP. Those with the highest scores were fast-tracked. Banks with average CAMELS scores received the most extensive vetting. They were recommended by their primary regulators for review by a panel of experts from the FDIC, the Fed and the Office of the Comptroller of the Currency. The panel then forwarded the case file on to the Treasury.

Some of the TARP awards seem outlandish. Linus Wilson, an assistant professor of finance at the University of Louisiana, points out that CIT Group's preferred stock was yielding an astronomical 20% before it received a TARP investment intended for healthy banks. The regulators demanded dividends on the TARP money of just 5%. Wilson says that regulators should have been able to determine in five minutes that this return was far too low to compensate taxpayers for the risk.

No surprise then that regulators recently determined that $5.1 billion in TARP funds are not in healthy banks but rather in banks that have failed or, may soon fail.

As for legislation, be assured it will toughen oversight, increase capital requirements and enhance consumer protection. Profits will shrink. The universe of financial institutions will contract. Here's hoping that you are better than regulators at picking winners from losers.