Systemic risk of life insurance company failure

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From AIG's website, a whitepaper on the Systemic Risk in the insurance industry. Certainly, AIG is wrapping themselves in the cover of their industry by speaking of the industry's Systemic Risk. But whether it is the entire industry at risk or just AIG and some others, the acknowledgment of systemic risk in such a direct way is striking:

"A significant rise in surrender rates – inspired by consumers’ needs for cash or because of rumored or real failure of insurance companies – could be disastrous. Because of widespread loss of liquidity, the industry would struggle to raise adequate cash to meet surrender requests. A “run on the bank” in the life and retirement business would have sweeping impacts across the economy in the U.S. In countries around the world with higher savings rates than the U.S., the failure of insurance companies like AIG would be a catastrophe."

Read the full March 6 Draft whitepaper titled: AIG: Is the Risk Systemic?

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FT.com / China - China lost billions in diversity drive

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FT.com / China - China lost billions in diversity drive: "China has lost tens of billions of dollars of its foreign exchange reserves through a poorly timed diversification into global equities just before world markets collapsed last year.

The State Administration of Foreign Exchange, the opaque manager of nearly $2,000bn (€1,547bn, £1,429bn) of reserves, started making huge bets on global stocks early in 2007 and continued this strategy at least until the collapse of the US mortgage finance providers Freddie Mac and Fannie Mae in July 2008, according to analysts and people familiar with Safe’s operations.

By that point Safe had moved well over 15 per cent of the country’s $1,800bn reserves into riskier assets, including equities and corporate bonds, according to people familiar with its strategy.

Safe never discloses its holdings except to the top Chinese leadership so it is impossible to know exactly how much it has lost from diversifying before markets crashed.

But judging from the subsequent fall in global stock prices and a conservative estimate that Safe held about $160bn worth of overseas equities, Chinese"

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Economy Strains Under Weight of Unsold Items

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Economy Strains Under Weight of Unsold Items - washingtonpost.com: "'In China, during the boom, there was huge over-capacity in various lines of activity ranging from shoes and clothing, light manufacturing -- all of that stuff. So that is why from the perspective of U.S. companies, we have found it so important to be on the innovative edge,' said Harvard business professor Joseph L. Bower. 'The only way to create value is to be on the innovative, high-tech, fashion-forward side.'

If the credit crunch in the United States persists, 'companies will find it difficult to invest in technology for a while, and then once the financial markets are back on track and demand recovers, companies will find themselves in difficult position,' Comin said. 'Productivity growth will be declining for a while. They will have a hard time catching up."

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How The World Almost Came To An End At 2PM On September 18

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Zero Hedge: How The World Almost Came To An End At 2PM On September 18: "On Thursday (Sept 18), at 11am the Federal Reserve noticed a tremendous draw-down of money market accounts in the U.S., to the tune of $550 billion was being drawn out in the matter of an hour or two. The Treasury opened up its window to help and pumped a $105 billion in the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks. They decided to close the operation, close down the money accounts and announce a guarantee of $250,000 per account so there wouldn't be further panic out there.

If they had not done that, their estimation is that by 2pm that afternoon, $5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed. It would have been the end of our economic system and our political system as we know it."

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The Darkest Hour

Image by artemuestra via FlickrFrom economy.com, Marc Zandi gives his upbeat look ahead to the national economy in 2008. Among the highlights:

• The coming year will be the worst in decades for the U.S. economy as millions of jobs are lost across nearly all industries, occupations and regions.

• Although the crisis began with excesses in the financial system, it was exacerbated by policy missteps that led to financial panic.

• Despite their past errors, only concerted action by policymakers can end the panic and prevent the forecast from turning darker.

• Even if the recession ends this year, recovery will be slow, with GDP not reaching its pre-recession peak until late 2010.

• The current episode, while painful, could lead to needed reform of the financial and regulatory system.

This will likely be the worst year for the U.S. economy since the end of the 1930s. The recession that began 13 months ago will plague much of 2009, particularly during the first half of the year.

Real GDP is expected to fall 3% peak to trough, and close to 5 million jobs will be lost. The unemployment rate will surge to 9%. The drop in manufacturing will be especially severe, but the hallmark of this downturn will be its breadth across industries, occupations and regions. More than 300 of the nation's 381 metropolitan areas will be in recession; unlike in past recessions, which were regionally concentrated, there is no obvious place to move for better prospects in this downturn.

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Worldwide Bankruptcy Wave About to Hit

Image via WikipediaA recently released report by Paris-based Euler Hermes, the world's largest credit insurer, concludes that Europe and the U.S. will experience a significant increase in business failures in 2009.

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CFOs are pessimistic

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According to a new study by Duke University and CFO Magazine.

Executives say they expect the recession to last for another year. They also say that earnings, capital spending and employment all will drop in 2009.

Duke says that this quarter’s study, which asked 1,275 CFOs around the world about their expectations for the economy, finds CFOs at their most pessimistic in the survey’s more than 12-year history. Some 81 percent of U.S. CFOs are more pessimistic about the economy now than they were a quarter ago, and almost 60 percent say the U.S. economy won’t recover until the fourth quarter of 2009 or later – with 39 percent saying recovery won’t start until 2010.

CFOs say employment should fall by 5 percent in the U.S. and Europe in 2009. Capital spending will fall by 10 percent in all regions.

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Home Sales Fall, Record Drop in Prices

Image via WikipediaBloomberg.com: U.S.: By Timothy R. Homan

Nov. 24 (Bloomberg) -- Home resales in the U.S. dropped in October and prices fell by the most on record, signaling a deepening housing recession going into 2009.

Purchases of existing homes slid to an annual rate of 4.98 million, lower than forecast, a National Association of Realtors report showed in Washington. The median price fell 11.3 percent from a year earlier, the most since the group began collecting data in 1968.

Today’s figures indicate a renewed downturn in an industry that showed signs of stabilizing this year, hurt by the credit squeeze and record mortgage foreclosures. That may raise pressure on President-elect Barack Obama to aid homeowners and potential buyers as he assembles a record stimulus package.

“Home sales will continue to fall over the next few months because of tightening credit conditions,” said Sal Guatieri, senior economist at BMO Capital Markets, which had the closest estimate for the sales level among 67 forecasts in a Bloomberg News survey. “Underlying demand appears very weak” because “many sales are coming from cheap prices on foreclosed properties,” he added."

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Still Holding Back - Barrons.com

Still Holding Back - Barrons.com: Interview with Jeremy Grantham, Chairman, GMO

"What about some other trades [that might provide opportunity in this falling market]?

I'm speaking for the asset-allocation unit at the firm. We have been substantially long the safe-haven currencies. We have been very long the yen and somewhat long the Swiss franc and short sterling, which is one of our favorite bets. We have been short the euro for three months, and slightly long the U.S. dollar. One of the paradoxes is, if the world is worse than people expect, the U.S. dollar will outperform."

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Bloomberg.com: U.S.

Bloomberg.com: U.S.: "Wachovia CEO Robert Steel, 57, stands to benefit from any improvement in bids for Wachovia. Recruited from the Treasury department in July to rebuild the lender's credibility with investors, he bought 1 million shares of Wachovia stock for about $16 million two weeks after arriving at the company.

Wells Fargo's bid won endorsement from stakeholders including Davis Selected Advisers LP, the Dodge & Cox mutual fund group and the Sandler family, according to a statement. The Sandlers sold Golden West Financial Corp. to Wachovia in 2006 for about $24 billion, when Wachovia was run by CEO Kennedy Thompson. The unit's option ARM home loans have since been blamed for contributing to Wachovia's record quarterly losses and Thompson lost his job."