John Mauldin Writes On Betting On Financial Armageddon!

In this week's newsletter, John Mauldin writes the following Betting on Financial Armageddon

This is one issue, you should read and if you are not a subscriber to his weekly newsletter do subscribe to his newsletter via his link here

The following passage on what needs to be done is taken from this week's newsletter Betting on Financial Armageddon

• It simply takes your breathe away. As President Bush said today, it does not help to find who is at fault today, we have to figure out how to get out of this mess. It is going to cost the taxpayers a lot of money. While I think the losses on AIG will be rather minor in the grand scheme of things, if you add up Fannie and Freddie and a new RTC, coupled with the stimulus package, you can easily get to $500 billion, and that is probably a low number.
  
  For such a price, we had better get a new regulatory scheme which requires reduced leverage. Want to get really mad? Up until 2003, all investment banks were allowed only 12 to 1 leverage. Then in 2004, the SEC basically gave five banks (and only five banks) the ability to lever up 30 or even 40 to 1. Bet you can guess the five banks. Bear, Lehman, Merrill, Morgan and Goldman. Three down.
  
  As Barry Ritholtz wrote: "So while the SEC runs around reinstating short selling rules, and clueless pension fund managers mindlessly point to the wrong issue, we learn that it was the SEC who was in large part responsible for the reckless leverage that led to the current crisis." (Don't get me started on blaming the short sellers. Let's not blame the people who leveraged up their companies 40 to 1 with bad investments.)
  
  We absolutely must move credit default swaps to a regulated exchange, no matter how much investment banks and hedge funds scream. Must be done. Do it now. Real rules about writing mortgages, although now that losses are in the hundreds of billions, underwriting rules are already becoming quite restrictive.
  
  And while we are at it, a thorough revamping of the rating agencies and the rules they use should be at the top of someone's list.
  

A Brand New Financial World??

Holy Cow!

My oh my.

What's next?

And it seems that Hitler is getting extremely popular and according to sources, the current financial mess is so terrible that even Hitler has gotten the dreaded margin calls! No joke.

Here's the video evidence and I would like to warn everyone that this clip is not for the faint hearted!

Hope you had enjoyed it as much as I had!

Have a wonderful weekend!



ps: See also this posting made a couple of months ago: Cristiano Ronaldo Leaves Manchester United!!

Money Market Fund Warns Of Losses!

WOW! Here's an article about a money market fund warnings of losses!

It's amazing and truly shocking, in my opinion, for I always assumed that money market funds, despite its low returns was always a safe investment because money market funds basically invests in bonds issued by government.

However, this is not the case for Primary Fund.

Here's the article posted on Herald Tribune: Money market fund warns of losses

• Money market fund warns of losses
  By Diana B. Henriques
  
  Wednesday, September 17, 2008
  In a new sign of market turbulence, managers of a multibillion-dollar money market fund said on Tuesday that customers might lose money in the fund, a type of investment that has long been considered as safe and risk-free as a bank savings account.
  
  The announcement was made by the Primary Fund, which had almost $65 billion in assets at the end of May. It is part of the Reserve Fund, a group whose founder helped invent the money market fund more than 30 years ago.
  
  The fund said that because the value of some investments had fallen, customers now have only 97 cents for each dollar they had invested.
  
  This is only the second time in history that a money market fund has "broken the buck" — that is, reported a share's value was less than a dollar.
  
  This year alone, big banks and fund management companies have pledged more than $10 billion to rescue affiliated money funds that were caught holding mortgage market securities that were deteriorating rapidly in value. As a result, consumers have felt confident in the safety of money funds, and have been moving assets into such funds as markets have grown more turbulent.
  
  The Investment Company Institute, the mutual fund industry's trade group, issued a statement Tuesday assuring investors that "the fundamental structure of money market funds remains sound." It noted, too, that in the only previous case of a fund breaking the buck, investors nevertheless were paid 96 cents on the dollar.
  
  But the Reserve Fund's announcement may shake investors' confidence. Moreover, institutional markets that are already under severe stress could be further shaken if this giant fund, and others like it, are forced to sell some less-liquid holdings to meet redemption demands from nervous customers in coming weeks.
  
  The Primary Fund allowed its share price to fall below a dollar "after reviewing the unprecedented market events of the past several days and their impact" on the fund, the company said in a statement.
  
  Specifically, the fund's management, which boasted as recently as July about its cautious approach to the current crisis, determined that its stake in debt securities issued by Lehman Brothers Holdings, with a face value of $785 million, was essentially worthless, given the investment bank's filing for bankruptcy protection. As a result, the fund said, its per-share value fell to 97 cents a share.
  
  The fund's financial records also show that more than half of its portfolio on May 31 consisted of asset-backed commercial paper and notes from a host of issuers besides Lehman, few of them names likely to be familiar to the financial markets.
  
  If these arcane investments had to be sold or cashed out quickly to meet redemptions, it is unclear what prices they would fetch or whether the issuers would be able to return the fund's money promptly, said Keith Long, of Otter Creek Management, a hedge fund based in Palm Beach, Florida
  
  The Primary Fund reported that, until further notice, it would delay paying redemptions to customers for up to seven days, as permitted under mutual fund law. That delay will not apply to debit card transactions, automated clearinghouse transactions or checks written against the assets of the Primary Fund, provided that the transactions do not exceed $10,000 from single or affiliated investors.
  
  The fund is part of the complex run by Bruce Bent, who invented the money market fund concept with Henry Brown in 1970.
  
  Since their inception, money market funds increasingly have been seen by individual investors as a safe harbor in turbulent times. According to industry statistics, the assets of money funds have grown sharply since the credit crisis began to intensify last summer.
  
  But, as prospectuses and regulators make clear, money funds are not legally required to keep their share prices at or above a dollar, or to redeem investors' shares immediately. Like all regulated mutual funds, their share prices are determined solely by dividing total portfolio assets by the number of shares outstanding, and they have seven days to meet redemption demands.
  
  Those facts would probably surprise most money fund investors, who have come to think of money funds as being "just like cash, just like a checking account," a fund industry lawyer, Jay Baris, said.
  
  Whenever money funds have run into trouble, they have been propped up by parent banks and investment managers that provided the necessary cash. The single exception was in 1994, when one small regional money fund reported a share price below a dollar, according to the Investment Company Institute.
  
  The continuation of this informal bailout policy "is much discussed in the fund industry, because funds are so much bigger today," said Barry Barbash, a fund industry lawyer with Wilkie Farr & Gallagher and a former senior mutual fund regulator at the Securities and Exchange Commission.
  
  In the past, regulators tended to focus on banning money funds from buying inappropriate investments in the first place, he said. "But now," he added, "we're talking about instruments that were completely appropriate for a money fund when they were purchased. That's what makes this so much harder."
  
  Not only are funds bigger, markets are more turbulent. Many mutual funds have found their portfolios battered by investments in commercial and investments banks that were long considered close to bedrock on Wall Street. Money funds, too, suddenly found that some of their blue chips were tarnishing.
  
  But with individual mutual fund investors showing little sign of panic, most funds have simply ridden out the current turbulence.
  
  Several industry analysts said on Tuesday, however, that the Reserve Fund's action came after its Primary Fund was hit by heavy redemption demands that intensified the impact of the Lehman losses.
  
  "We're really in uncharted territory here," said Peter Crane, the president of Crane Data, a fund industry newsletter.
  

Holy Cow! Only Half A Trillion?

Yes, that's the estimates on how much this new 'rescue' package would cost.

• By Steve Liesman
  CNBC
  updated 11:24 p.m. ET Sept. 18, 2008
  
  WASHINGTON - Treasury Secretary Hank Paulson briefed congressional leaders Thursday night on plans to address the "illiquid assets" on U.S. financial institutions' balance sheets, possibly including the creation of a government facility to take on financial firms' bad debts.
  
  The proposal to create a massive facility to buy mortgage-backed securities could cost as much as a half-trillion dollars and would involve the purchase of both private-label and government-guaranteed mortgages, according to an administration official.
  
  The plan would have two parts. The largest part would be the purchase of private-label (those underwritten by Wall Street) mortgages by some as-yet unnamed vehicle. Financing would occur through the sale of treasuries, the official said. That part of the plan would require congressional approval. The idea is to hold the securities to maturity. The average mortgage has a life of about 7 years.
  
  A second part of the plan would involve the purchase by Treasury of additional government-backed (Fannie Mae and Freddie Mac) mortgages under a plan it announced several weeks ago to rescue the two government-sponsored entities. Back then, it said it would purchase $5 billion initially. The idea is to ramp up those purchases more quickly. It does not require approval by Congress.
  
  The administration is contemplating hiring a private investment manager to run the mortgage vehicle. Yet to be worked out with Congress are the amount of mortgage securities the government would buy and from whom the government would accept them.
  
  The price to be set on those purchases and the process for setting it was also unknown.
  
  CNBC first reported the creation of a Treasury plan, similar to the Resolution Trust Corp., that would take mortgage backed securities off the market.....

read rest of article here on msnbc http://www.msnbc.msn.com/id/26780312/

Kathy explains it better on her write-up, Resolution Trust Corp: What is it and Will it Help the Markets?.

• Resolution Trust Corp (RTC) sent the stock market surging and gold prices plunging. New traders may wonder what the RTC is and how it can help the markets.
  
  The RTC is essentially a government owned asset management company that is tasked with taking over and eventually liquidating faulty assets. It was first created as a result of the Savings and Loans crisis of the 1980s. For the readers of the Wall Street Journal, former Fed Governor Paul Volcker, former US Treasury Secretary Brady and former US Comptroller Ludwig wrote an opinion piece on Wednesday calling for the current Administration to resurrect the RTC.
  
  The idea was then floated around by current US Treasury Secretary Paulson this afternoon, triggering the sharp reversal across the financial markets. USD/JPY traded as low as 104.00 just a few hours before talk of the RTC hit the newswires and afterwards, it rallied up to 105.78. However the more important question to ask is whether or not an RTC will help. The problem in the financial markets right now is not with lending but with letting money go. No one is willing to take on risk, but if the RTC is willing to do so and keep it in house for a months or even years before liquidating so as not to flood the markets with bad assets, it can help. According to the opinion letter in the WSJ, if the RTC buys the bad debts, it accomplishes the following:
  
  1. Restores Liquidity
  2. Orderly Liquidation of Troubled Paper
  3. Reduces Foreclosures because the Agency Would Manage Mortgage
  4. Can Help to Revive Banks Stuck with Troubled Paper
  
  Is the US at Risk of Losing its AAA Rating?
  
  However the big danger of inundating the US government with bad debt at a time when they have spent a tremendous amount of public funds to bailout companies like AIG is the risk of the US losing its AAA credit rating. On Wednesday, S&P said that “there’s no God-given gift of a AAA rating, and the US has to earn it like everyone else.” Although the S&P followed that statement up by saying that they are not at risk of losing their rating, we certainly believe that with the US, they will be more reactive than proactive of downgrading the government’s debt if needed. The consequences would be catastrophic if the US gets downgraded, but Americans cannot have their cake and eat it too. Not only will US tax payers have to pay for this eventually, but 15 years down the line, Medicare obligations will balloon and if the US government doesn’t get its balance sheet into shape by then, the consequences could be even more severe.
  
  Fire up the Printing Presses?
  
  This is perhaps the reason why the Federal Reserve may consider firing up the printing presses. Along with major central banks from around the world, the Fed has added $247B in a coordinated liquidity injection this morning. To pay for this, they are selling an additional $100B in short term debt, which in essence sterilizes their efforts. If that doesn’t work in stabilizing liquidity, the Federal Reserve can always print money. Printing money has its problems as well, since accelerates inflationary pressures and with inflation just beginning to trickle lower, the Fed may not want to take this gamble yet.
  
  

Bailouts And AIG's Dangerous Collapse

Two articles caught my attention this morning.

Published on CNN money, Yet another bailout - Taxpayer tally. The following passage is most interesting, for it represents a reality check on the size of the total bailouts so far.

• The Federal Reserve has backstopped the purchase of Bear Stearns to the tune of $29 billion. It will loan $85 billion to insurer AIG. It's letting banks borrow up to $150 billion using risky mortgage-backed securities as collateral. And it's letting investment banks, which it doesn't regulate, get short-term loans using the central bank's discount window.
  
  The Treasury, meanwhile, has pledged to backstop Fannie and Freddie up to $200 billion. Lawmakers passed legislation allowing the Federal Housing Administration to insure up to $300 billion in loans for troubled borrowers. They're likely to loan $25 billion to the auto industry.
  
  And the government might not be finished. Some Democrats on Capitol Hill are arguing for an expansion of the FHA program for troubled borrowers. And talk is building that the government might have to set up a fund - similar to efforts in the 1930s and 1980s - to buy bad securities clogging up the financial system.
  
  If you add up how much the Treasury and Fed have pledged or made available for loans so far, it's close to $800 billion.
  
  So what's the real cost to taxpayers for all these interventions? No one can say for sure, and probably won't be able to for some time. The Savings & Loan crisis of the early 1990s cost taxpayers a net of $124 billion in 1999 dollars, according to the FDIC - more than initially estimated but below projections made during the height of the crisis.
  
  But one thing is certain: The price tags on today's bailouts bear "no direct translation to the taxpayer cost," said Lyle Gramley, a former Fed governor now with the Stanford Group, a Washington policy research firm.
  
  Indeed, he said, "None of us knows yet if there'll be any cost to the taxpayer at all."
  
  Here's why: The bailouts are, in one form or another, loans or investments. How much they end up costing (or making) depends on a number of factors including how the economy holds up and when the real estate market recovers.
  
  "A lot depends on whether or not we get in a severe recession and how quickly we turn things around in housing," Gramley said.
  
  In exchange for their stepping in, the Fed and Treasury are getting assets as collateral (in some cases, income-producing assets and saleable assets) as well as majority ownership stakes in AIG, Fannie and Freddie. They've also claimed veto power for corporate decisions and a No. 1 spot among stakeholders who get paid first.
  
  In the case of the Fed's $85 billion loan to AIG, the central bank is charging what are essentially double-digit interest rates: specifically, the 3-month Libor (around 2.88% currently) plus 850 basis points.
  
  So what gains or losses the Treasury and Fed realize will depend on the performance of those assets and stocks, and the companies' ability to pay back their loans. Ultimately those performances rest on how soon confidence is restored to the markets and how the economy fares.

And the following editorial posed on FSU is most wworth reading, AIG’s Dangerous Collapse & A Credit Derivatives Risk Primer. It is written by Daniel R. Amerman, CFA September 17, 2008

• What is driving the fall of AIG – and potential government losses that may far, far exceed the $85 billion bailout announced late on September 16th - is not mortgages or real estate (directly), but fears that AIG’s huge, global credit-default swap positions will unravel. The $62 trillion dollar credit derivatives market is 50 times the size of the subprime mortgage derivatives market, and is indeed larger than the entire global economy.

Sometimes a simple chart makes things so simple and clear and Daniel has included the following chart.

WOW!!!!!!!

And the following passage explains the clear and precise danger.

• Where Assumptions Meet Reality
  
  Now here's the thing. The subprime mortgage market is tiny compared to the overall corporate market. A corporate market which has credit derivatives interwoven throughout. Let’s say in this day of highly leveraged companies, that a real recession does hit and it takes down something like $2 or $5 trillion worth of book value along with it. Those would be real losses. Staggering losses that dwarf what we have seen with subprime mortgages.
  
  Where is the money going to come from to pay for those losses? In theory, the way this works from an academic economics perspective is that you have all these hordes of incredibly intelligent people, each of whom is working for well-capitalized institutions, and they all backstop each other. They do so first by using that supposedly awesome collective intelligence to keep mistakes from being made in the first place. Next, the theory is that there will be multiple layers of protection available if there's a problem, to absorb any damage.
  
  Unfortunately what we saw actually happen in the real world with mortgage derivatives was just the reverse of the theory. The multiple layers of the so-called “smartest person in the room” became multiple layers of people making steadily worse (and more obvious) mistakes in the pursuit of short-term profits until the situation not just predictably – but inevitably – collapsed upon them.
  
  On top of that, far from the firms backstopping each other, in the real world we have a cascading series of credit losses that spread from one firm to another, as tens of billions of dollars in actual subprime losses multiplied out to become much larger hits to values of securities portfolios, nearly bringing down the industry together.
  
  Which again brings up the question of what happens if a real recession hits the $62 trillion credit derivatives market?

Do read the rest of his editorial here

Has The World Markets Gone Kaput?

The signs out there are terrible!

On CNBC website Nowhere Near Capitulation Yet ...

!!

Is this doomsday or what?

Everyone is shouting that this is the worse crisis yet, Worst Crisis Since '30s, With No End Yet in Sight and ECB doyen Otmar Issing calls crisis "extremely dangerous"

And then you have Michael Lewis commenting this on Sept 15th: This Is the Day Asian Capital Woke Up

• According to the bankruptcy papers thrown together over the weekend, the list of Lehman's 30 biggest unsecured creditors is dominated by Asian financial institutions: Aozora, Chuo Mitsui Trust, Sumitomo Mitsui Financial, Mizuho Corporate Bank, Shinkin Central Bank, Bank of China and so on.
  
  Who else did you imagine would be left holding this bag? Who else did you imagine was propping up the system?
  
  Ever since the government jumped in to bail out Bear Stearns Cos. -- and whatever else that was, it was a bailout -- the behavior of the U.S. government in the financial markets has felt like a mystery by an author who is cheating and withholding a key piece of information.
  
  In letting Lehman fail the federal government puts a fine point on an obvious question: Why didn't they let Bear Stearns go, too? This business about the markets having time to adjust to Lehman's problems is baloney. The markets didn't adjust to Bear Stearns collapse; the markets looked at what the Fed had done for Bear Stearns and assumed they'd do it for Lehman.
  
  Unfounded Fears
  
  One part of the answer is that the people who sit on top of our financial system simply didn't know what would happen if a big Wall Street firm went down. They have since studied the matter and concluded that their worst fears were unfounded.
  
  But in Lehman's list of creditors we have another part of the answer, I'll bet. It wasn't merely instability the U.S. Treasury and the Federal Reserve feared. It was the loss of the good opinion of the people who supply the U.S. with the capital it no longer generates itself. For 25 years Asian financial firms have been amazingly indulgent of U.S. investment bankers.
  
  What do you think they're saying about them -- and us --now.

And it's no wonder that Asian markets are being hit bad, especially Hong Kong. This morning Raw Fear Slams Stocks, Hong Kong Plunges 7%

And the Russians aren't doing so good either. Russia's Stock Market Woes

• STRATFOR - The Russian markets plunged on September 16 before government authorities halted trading on the exchange an hour early; the MOSCOW Interbank Currency Exchange fell 17 percent, and the dollar-denominated Russian Trading System (RTS) fell 12 percent.
  
  The carnage built upon ongoing losses in the Russian economy that have now seen the RTS fall by nearly 60 percent since its mid-May highs. The Russian ruble has recently become the world’s worst-performing major currency.
  
  Russian government officials insist that this is simply a passing storm that has nothing to do with the August invasion of Georgia. While obviously an overstatement, there is something to the claim. Western financial institutions — and investment houses specifically — currently are engaged in a flight to quality investments. Russia, despite its ongoing impressive energy and minerals exports, simply never made the list of the top tier of reliable assets.
  
  But the fact remains that investors — and especially foreign investors — are scared. They were already nervous about the Kremlin’s flagrant targeting of foreign assets, and now the Russian willingness to invade its neighbors is most certainly a factor, as is the falling price of oil (Brent crude pushed below $90 a barrel Tuesday). Yet while the Russian stock markets are suffering because of the uncertainty, Russia is not necessarily suffering.

Chris Perruna's charts comparison of Shanghai and Nasdaq is most interesting, Shanghai is a Nasdaq Déjà vu

And the following webpage on NYTimes shows the extend of the damages: http://www.nytimes.com/interactive/2008/09/15/business/20080916-treemap-graphic.html

So is Wall Street kaput?

• Wall Street as we know it is kaput. It is not just that Merrill Lynch agreed to be purchased by Bank of America or that the legendary investment bank Lehman Brothers filed for bankruptcy or that the insurance giant AIG is floundering. It is not even that these events followed the failure of the investment bank Bear Stearns or the government's takeover of Fannie Mae and Freddie Mac, the largest mortgage lenders. What's really happened is that Wall Street's business model has collapsed.
  
  Greed and fear, which routinely govern financial markets, have seeded this global crisis. Just when it will end isn't clear. What is clear is that its origins lie in the ways that Wall Street -- the giant investment houses, brokerage firms, hedge funds and "private equity" firms -- has changed since 1980. Its present business model has three basic components.
  
  First, financial firms have moved beyond their traditional roles as advisers and intermediaries. Once, major investment banks such as Goldman Sachs and Lehman worked mainly for their clients. They traded stocks and bonds for major institutional investors (insurance companies, pension funds, mutual funds). They raised capital for companies by underwriting -- selling -- new stocks and bonds for the firms. They provided advice to corporate clients on mergers, acquisitions and spinoffs. All these services earned fees.
  
  Now, most financial firms also invest for themselves. They use partners' or shareholders' money to place bets on stocks, bonds and other securities -- so-called "principal transactions." Merrill and other retail brokers, which once served individual clients, have ventured into investment banking. So have some commercial banks that were barred from doing so until the repeal in 1999 of the Glass-Steagall Act of 1933.
  
  Second, Wall Street's compensation is heavily skewed toward annual bonuses, reflecting the profits traders and managers earned in the year. Despite lavish base salaries, bonuses dominate. Managing directors with 15 years' experience can receive bonuses five to 10 times their base salaries of $200,000 to $300,000.
  
  Finally, investment banks rely heavily on borrowed money, called "leverage" in financial lingo. Lehman was typical. In late 2007, it held almost $700 billion in stocks, bonds and other securities. Meanwhile, its shareholders' investment (equity) was about $23 billion. All the rest was supported by borrowings. The "leverage ratio" was 30 to 1.
  
  Leverage can create huge windfalls. Suppose you buy a stock for $100. It goes to $110. You made 10 percent, a decent return. Now suppose you borrowed $90 of the $100. If the price rises to $101, you've made 10 percent on your $10 investment. (Technically, the price has to exceed $101 slightly to cover interest payments.) If it goes to $110, you've doubled your money. Wow.
  
  Once assembled, these components created a manic machine for gambling. Traders and money managers had huge incentives to do whatever would increase short-term profits. Dubious mortgages were packaged into bonds, sold and traded. Investment houses had huge incentives to increase leverage. While the boom continued, government remained aloof. Congress resisted tougher regulation for Fannie and Freddie and permitted them to run leverage ratios that, by plausible calculations, exceeded 60 to 1.
  
  It wasn't that Wall Street's leaders deceived customers or lenders into taking risks that were known to be hazardous. Instead, they concluded that risks were low or nonexistent. They fooled themselves, because the short-term rewards blinded them to the long-term dangers. Inevitably, these surfaced. Mortgages went bad. The powerful logic of high leverage went into reverse. Losses eroded firms' tiny capital bases, raising doubts about their survival. This year, Lehman lost nearly $8 billion in "principal transactions." Otherwise, it was profitable.
  
  How Wall Street restructures itself is as yet unclear. Companies need more capital. Merrill went to Bank of America because commercial banks have lower leverage (about 10 to 1). It seems likely that many thinly capitalized hedge funds will be forced to reduce leverage. Ditto for "private equity" firms. In time, all this may prove beneficial. Financial firms may take fewer stupid and wasteful risks -- at least for a while. Talented and ambitious people may move from finance, where they were attracted by exorbitant pay, into more productive industries.
  
  But the immediate effect may be to damage the rest of the economy. People have already lost their jobs. States and localities, particularly New York City and New Jersey, that depend on Wall Street's profits and payrolls will face further spending cuts. Banks and investment banks may tighten lending standards again and impede any economic recovery. The stock market's swoon may deepen consumers' pessimism, fear and reluctance to spend. There may be more failures of financial firms. It's hard to know, because financial crises resemble wars in one crucial respect: They result from miscalculation.

Worried Over AIA Insurance Policies?

With the rumblings on AIA's holding company, AIG, many are worried about their insurance with AIA.

For example, the following news article was posted two days ago.

• Queue forms at AIA branch at Raffles Place as policy holders seek answers
  By Channel NewsAsia Posted: 16 September 2008 1542 hrs
  
  SINGAPORE: Some Singaporeans are concerned that AIG, one of the world's largest insurers could be the next financial giant to fall after Lehman Brothers.
  
  They have formed a queue at AIA Singapore's customer service centre at Raffles Place.
  
  AIG is the parent of AIA Singapore.
  
  Some long term AIA policy holders told Channel NewsAsia that they wanted to surrender their policies, even though there was a penalty for that.
  
  Some have waited for up to three hours to be attended by staff who have been overwhelmed by requests since the office opened this morning.
  
  Others said they have turned up at the AIA office to find out more.
  
  AIA Singapore has yet to comment.
  
  It has five buildings at Robinson Road, Alexandra, Changi, Tampines and Tanjong Pagar, and has over two million policies in force.
  
  Singapore's Monetary Authority (MAS) has said that AIA Singapore, as a registered insurer, is required to maintain sufficient financial resources to meet all its liabilities to policyholders at all times.
  
  It added that AIA Singapore currently meets these regulatory requirements.
  
  MAS said it has the legislative power to establish the policy owners' protection fund, under the Insurance Act.
  
  However, it said that it is unable to comment on parent company AIG, which is the "ultimate parent" of AIA as it is not regulated by MAS.

Here are couple of interesting postings which should help one understand better.

1. Why AIG matters to you

This article is good for it explains things in a rather simplistic but yet precise manner.

• I have insurance through AIG. How worried should I be about the problems at the company?
  
  At least in the short term, you probably don't need to be worried at all. The problems are with the AIG holding company, not the individual insurance company subsidiaries that you do business with, according to a source with New York State's insurance regulator.
  
  Even if AIG's holding company is forced to file for bankruptcy court protection, there's a good chance that the subsidiaries will continue to operate normally with no disruption in claims payments. That has happened in the case of other insurance holding companies' bankruptcies in the past, such as Conseco (CNO).
  
  What guarantees that my claims will be paid?
  
  Typically, if an insurance company falls into financial distress and is at risk of having claims that exceed the assets it holds to make those payments, the insurance regulator in its home state will take control of the firm and make payments.
  
  The state regulator will not only use the firm's own assets to make those payments but, if necessary, can also make payments out of a state fund into which all insurers in the state are required to pay.
  
  This guarantee applies not just to traditional insurance policies but also to retirement products that have a promised payout, such as annuities.
  
  But there are limits to the payments that will be made to customers that vary depending on which state a particular AIG subsidiary is based, according to Joseph Belth, professor emeritus of insurance at Indiana University and editor of The Insurance Forum, a newsletter often critical of the industry.
  
  Should I be thinking about changing my policy away from AIG to another insurer?
  
  While credit rating agencies downgraded debt held by AIG (AIG, Fortune 500) on Monday, AIG's ratings are still considered investment grade and the company's insurance subsidiaries are considered to be secure, at least for now.
  
  Belth said changing insurers is not a simple decision.
  
  "A lot depends on what kind of insurance you talk about," he said. "If you're talking about life insurance, you have to think about whether you can qualify with a new insurer, if your health has changed. But it's something you have to consider if the ratings decline into the vulnerable range."
  
  Why should I care about problems at AIG if I'm not a customer?
  
  AIG is by far the world's largest insurer and its stock is found in many mutual funds, including any S&P 500 index fund. It is also a component of the Dow Jones industrial average. All by itself, it's been responsible for dragging the Dow down more than 400 points so far this year.
  
  AIG is also active in the business of credit default swaps, complicated financial instruments used by investors to protect themselves from bond defaults. Lehman Brothers (LEH, Fortune 500) was another major player in that field. If both go away, it would create a tighter credit market for consumers and businesses trying to get loans.
  
  AIG is an insurer, not a lender. Why do I keep hearing about its problems with subprime mortgages?
  
  All insurers take money they collect in premiums and invest them in different forms of assets. The idea is to make money on those investments so that the insurer can keep their premiums low and attract more clients.
  
  But AIG made a bigger investment into securities that were backed by subprime mortgages than most other insurers. As defaults and foreclosures of those loans rose, the value of those securities fell, creating big problems for the firm.
  
  In the past nine months, AIG has reported net losses of more than $18 billion, largely due to its exposure to bad mortgages.

See also States' back-up plans protect life, auto, homeowner policyholders

On the Malaysian front, AIA: Local ops strong, well capitalised

• "We are a locally incorporated insurer, with more than 96 per cent of our total assets invested in Malaysia," AIA chief executive officer Khor Hock Seng said in a statement yesterday.
  
  AIA has a long history in Malaysia and is one of the largest insurers in the country.
  
  Khor said that insurance policies underwritten by the company were direct obligations of its regulated business and subjected to local regulatory and capital requirements under Bank Negara Malaysia's Insurance Act and Regulations.
  
  He said AIA was well capitalised and maintained separate reserves in Malaysia in line with the regulations to meet obligations to policyholders.

And AIA: Turmoil in US will not hurt Malaysian ops

• Meanwhile, Bank Negara, when asked if it would scrutinise the disbursement of loans of AIA and other financial institutions, said it would “closely monitor all financial institutions under our purview and would take all the necessary actions to maintain the stability of our banking and insurance industry”.
  
  AIA started operations in Malaysia in 1948 and had grown rapidly over the past 60 years. Currently, it has 23 branches nationwide, supported by over 8,000 agents serving more than 1.5 million policyholders.

An interesting forum thread on Wallstraits: AIA

George Soros Reckons Crisis Could Worsen!

And to make it complete Financier Soros warns crisis will only get worse

• LONDON (AFP) — US financier George Soros warned in a television interview Tuesday that the turmoil in the financial markets was far from over, with Britain likely to be the economy most badly hit by the crisis.
  
  As Wall Street braced for the potential collapse of insurance giant AIG, the hedge fund pioneer told the BBC that the wisdom of letting Lehman Brothers go to the wall at the weekend would only be revealed with hindsight.
  
  "I'm afraid we are not through it at all -- in some ways we are still heading into the storm rather than heading out of it," he said.
  
  Asked whether the US government should have rescued Lehman investment bank, he said: "If the financial system survives then it was the right thing to do to let them go bust. If there is a meltdown then obviously it wasn't."
  
  "Saving the system trumps moral hazard. In the end you do whatever it takes to save the system," he added.
  
  However, he said the way US Treasury Secretary Henry Paulson was handling the situation was "very reminiscent of the way the central bankers talked in the 1930s", the time of the Great Depression.
  
  Soros said Britain's reliance on the financial industry make it especially vulnerable.
  
  "The financial industry is a major segment of the British economy and that's why I think Britain is more heavily hit by this financial crisis than most other economies," he said.
  
  More generally, he warned finance had "grown too big, it has taken up too big a share of the world's resources. Now it is shaking and I think when it becomes once again regulated it will be less profitable".