Archive for the “American International Group, AIG” Category

The basic principle of investing relies on it: diversification. In almost every instance, but especially during times of market turmoil, a diversified investment portfolio serves as a prerequisite to help limit risks and mitigate potential losses for investors. Unfortunately for those who have gone the other investing route, the lesson learned can be costly - and one that many investors are now discovering as they face severe financial losses as a result of portfolios overly concentrated in one type of investment.

A prime example is an investor’s whose portfolio is heavy in preferred stocks only. Bought and sold like common stocks, preferred stocks actually are more similar to bonds. Investors who hold preferred shares means the issuing company pays them any dividends before paying common stock shareholders. In the event a company goes bankrupt, preferred shareholders again move to the front of the line and have first rights to claim the liquidation proceeds of a company’s assets.

At the same time, investors with investment portfolios solely concentrated in preferred shares can open themselves up to significant financial risks. If a portfolio includes investments in several asset sectors versus a single one, the chances that all of those sectors will sustain losses simultaneously is relatively slim. On the other hand, the likelihood an investor might encounter financial losses by holding only one type of security or asset class certainly is not hard to fathom.

In addition, many preferred stocks come with their own set of rules and regulations - both of which can translate into more profits or extra risks.

Stories involving investors who have suffered sizeable financial losses because their brokerage firm over-concentrated their accounts with preferred stocks are becoming more and more visible. Case in point: Freddie Mac and Fannie Mae. On Sept. 8, when the federal government took control of the two mortgage giants to prevent them from going under, investors who had been sold various series of the companies’ preferred shares as “safe, stable fixed-income investments” were shocked to learn the truth. In the week following the takeover by the government, Fannie Mae’s 8.25% preferred stock dropped to $2.65 from $13.70, while Freddie Mac’s 5.57% preferred stock fell to $1.50 from $9.15.

As of late September, investors holding certain series of preferred shares in Freddie Mac and Fannie Mae have seen their investments decline in value by more than 90%. Many of these investors say they were never advised of the risks associated with preferred shares by their brokers. Moreover, some investors were holding preferred shares of Freddie Mac and Fannie Mae as their sole investment, thus leaving the doors of their portfolios wide open for potential financial disaster.

To make matters worse, some investors believed that because Fannie Mae and Freddie Mac were considered “quasi-governmental enterprises,” any defaults on their preferred shares in the companies would be covered by Uncle Sam. They came to that conclusion because that’s what they were told by their brokerage firm.

The fact of the matter is that holders of preferred shares in Fannie Mae or Freddie Mac are in no way covered or protected by the U.S. federal government. Any financial losses these investors sustain are theirs alone.

There are other examples, as well, documenting what can happen to investors whose portfolios are overly concentrated with preferred shares in a single sector or company - from Lehman Brothers’ bankruptcy filing, to the bailout of American International Group Inc. (AIG), to the acquisition of Bears Stearns by JP Morgan Chase at a fire-sale price. As in these and other cases that are coming to light this year, investors who took the advice of their investment bank and bought preferred shares as a “sure bet” and a safe, fixed-income investment are learning an entirely different story as they watch their life savings literally vanish before them.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Four of the firms at the heart of the nation’s growing financial crisis - Fannie Mae, Freddie Mac, American International Group (AIG) and Lehman Brothers - are now the subject of an investigation by the Federal Bureau of Investigation (F.B.I.) for potentially committing acts of fraud. The investigation is addition to a number of other probes being conducted by the F.B.I. in connection with the collapse of the subprime mortgage market.

Few details have been released regarding the F.B.I.’s investigation into Fannie, Freddie, Lehman and AIG, but reportedly the focus is on whether executives at those companies deliberately misled the financial markets about the health of their respective businesses.

Earlier in the month, Lehman’s chief executive officer, Richard Fuld, and AIG CEO Robert Willumstad received notice to testify before the U.S. House Oversight and Government Reform Committee in early October over the events leading up to the bankruptcy filing by Lehman Brothers and the government bailout of AIG.

Meanwhile, U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke remain embroiled in a battle with lawmakers over the government’s $700 billion emergency rescue plan for the nation’s ailing financial system. In the second day of answering questions on Capitol Hill, both men continued to meet resistance to the bail-out plan, which would give the federal government the green light to buy up billions of dollars in subprime-related debt from financial institutions.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

There will be no more curtain calls for Wall Street. On Sunday night, the era of investment banking came to a stunning and dramatic conclusion as investment icons Goldman Sachs and Morgan Stanley - Wall Street’s two remaining independent investment firms - agreed to become bank holding companies regulated by the Federal Reserve.

Abandoning their investment banking status means Goldman and Morgan Stanley will no longer rely on leveraged money and instead have access to more stable funding avenues in the future, including bank deposits from retail customers and the Federal Reserve’s Discount Lending Window. It also means they will face much stricter oversight and regulation by the federal government.

Prior to announcing the changeover, Goldman Sachs and Morgan Stanley had been submerged with massive losses on subprime mortgages and other risky real estate holdings. Shares in the two companies have lost nearly half of their value this year.

Last week’s chaos in the financial markets only added to Goldman and Morgan Stanley’s troubles. After 158 years, Lehman Brothers Holdings was forced to file for bankruptcy; Merrill Lynch, fearing a similar fate for its future, was purchased by Bank of America; and the federal government announced an $88 billion bailout of insurance giant American International Group (AIG).

Then, in a meeting that began at 9 p.m. on a Sunday night, the Federal Reserve and the U.S. Treasury laid out the most sweeping - and expensive - rescue plan for the country’s financial system since the Great Depression. The centerpiece of the plan focuses on cleaning up the balance sheets of financial institutions with the U.S. Treasury taking on hundreds of billions of dollars in toxic mortgages. The price tag to taxpayers could be as high as $1 trillion.

U.S. Treasury Secretary Henry Paulson is urging Congress to pass the bailout plan this week.

Meanwhile, the immediate future of Goldman Sachs and Morgan Stanley is a bit brighter today, as the move to shed their investment bank status lets them steer clear of the road to disaster that overtook many of their counterparts recently - including Bear Stearns, Lehman Brothers and Merrill Lynch. Goldman and Morgan Stanley appear to be safe - for now, anyway.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Years of egregious actions on the part of Wall Street - from corporate arrogance, to incompetent accounting principles, to lax regulatory rules and oversight, to blatant criminality - are now taking their toll on the nation’s financial markets, and it’s Main Street paying the ultimate price. With the bankruptcy of Lehman Brothers Holdings, the fall of Fannie Mae and Freddie Mac, the IndyMac Bank failure, and now an $85 billion government bailout for insurance giant American International Group (AIG), investors and consumers alike are growing increasingly concerned about what lies ahead.

And they have good reason. The insanity happening on Wall Street means borrowing just went up in price. Financing a new car, paying for college, starting a business, building a hospital - all are likely to become more challenging in the months, even years, ahead.

Then there’s the psychological effect of Wall Street’s meltdown. As the financial crisis deepens and taxpayer-supported bailouts apparently becoming more commonplace, more investors - already distrustful of Wall Street and whose very existence they deem synonymous with greed and excess - will be prone to jump ship entirely, dumping their stocks, halting contributions to 401Ks and liquating mutual funds and other securities for safer investment vehicles.

Investors’ need to “do something,” anything, in the face of a crisis is warranted. At the same time, the ramifications of letting emotions guide decisions can often lead to even more uncertainty - in this case, for individual investors and the economy at large, say a number of financial experts.

“It’s like planning a road trip to California but then jumping in a car and heading east,” says one UBS broker, who requested anonymity. “Everyone is running to do something - which is understandable given the state of the markets and the 24/7 media coverage on the subject. Clearly, though, the ‘something’ that people need to do should be given much more forethought.”

Surprisingly, it’s not retirees who seem to be panicking, but rather younger 40-somethings, according to this UBS broker. “The older investors have been through this before,” she explains. “They remember the events of the past.”

Cases in point: On Oct. 19, 1987 - otherwise known as “Black Monday” - the Dow Jones Industrial Average was down 22.61% in a single day. On Oct. 26, 1987, it fell 8.04%; Oct. 13, 1989, 6.91%; Sept. 17, 2001, 7.13%.

By comparison, the Dow fell 4.4% on Sept. 16, 2008.

Still, when news that 158-year-old Lehman Brothers, one of the most established and respected investment firms on Wall Street, has filed for bankruptcy or that major money market funds - long considered to the safest of investments – are breaking the buck and falling below $1 a share, it’s almost impossible for investors not to feel powerless.

What’s Next?

Now the question on everyone’s mind is how do we get out of this mess? As reported Sept. 19 in a Wall Street Journal commentary by William Isaac, former chairman of the Federal Deposit Insurance Corporation, fixing the current financial crisis obviously will be a long-term process, but nonetheless contingent on a radical facelift for Wall Street.

Isaac contends that the financial problems gripping the country today are a direct result of something called Fair Value Accounting practices. Simply put, Fair Value Accounting means financial institutions that have financial instruments to sell - i.e. mortgage-backed securities - must mark those assets to market. “But what do we do when the already thin market for those assets freezes up and only a handful of transactions occur at extremely depressed prices,?” writes Isaac.

So far, says Isaac, the answer from the Securities and Exchange Commission (SEC) and the federal government has been to mark the assets to market even though no meaningful market exits.

Indeed, in his speech to the National Black MBA Association on Sept. 19, Bank of America CEO Kenneth Lewis strongly urged federal regulators to radically restructure the operating environment of Wall Street investment banks, instituting more of the oversight, capital requirements and business restrictions that are imposed on commercial banks today.

Short Selling

Another culprit behind the nation’s financial crisis: short selling, an act that until recently, the federal government has been exceedingly lax in regulating.

Short sellers make money when a company’s shares go down in price. They “borrow” shares from brokers and then resell them. When the share price on the stock becomes lower, short sellers give back the shares at the lower price and keep the difference.

While legal, critics of short selling say the method is at least partially to blame for the downfall and financial troubles of several Wall Street mavericks and other banking heavyweights in recent months, including Bear Stearns, Lehman Brothers, Merrill Lynch, Washington Mutual and Morgan Stanley.

On Sept. 18, New York Attorney General Andrew Cuomo announced that his office would be launching an investigation into the practice of short selling and, specifically, into the activities of short sellers regarding shares of Lehman Brothers and American International Group (AIG).

The SEC is cracking down on short sellers, as well. On Friday, Sept. 19, the regulatory agency issued a temporary ban on short selling in shares of 799 financial institutions. The ban will be in effect until Oct. 2, and could be extended pending market conditions.

Meanwhile, also on Friday morning, Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke unveiled a series of billion-dollar rescue plans aimed at salvaging the nation’s financial markets. Among the initiatives: creating a temporary asset relief program that would remove illiquid mortgage securities from the balance sheets of financial institutions and a federal guarantee on assets in money-market mutual funds whose values fall below $1 a share.

Officials are still working out details of the overall plan, and expect to meet with various members of Congress this weekend.

Keep in mind that Paulson’s plan - while no doubt a much-needed move in light of the current financial crisis - is a taxpayer-funded plan. Its cost doesn’t come cheap. The anticipated price tag: a whopping $1 trillion.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.

Only 48 hours after the federal government refused to be a financial backstop for Lehman Brothers, U.S. Treasury Secretary Henry Paulson announces at 9:02 p.m. EST Tuesday evening that the Federal Reserve will take over American International Group (AIG). In exchange for providing an $85 billion bridge loan to the ailing insurance giant, the federal government will receive an unprecedented 79.9% stake in the company.

The Fed’s decision to rescue a private business is nothing short of historic. Previously, Treasury Secretary Paulson had been adamant in saying Wall Street must solve its own problems. With no private-sector support forthcoming for AIG, however - and its potential bankruptcy considered too damaging for the nation’s already battered financial markets - the government had no alternative but to provide a bailout.

Its decision is a costly one. As reported Sept. 16 in the New York Times, AIG initially approached the Federal Reserve and the U.S. Treasury on Sunday, Sept. 14, seeking a $40 billion bridge loan to prevent additional downgrades to its credit ratings. The Fed’s response was a resounding “no.” Two days and two debt downgrades later, the price tag for the bail out went up to $85 billion.

AIG, which is the nation’s biggest insurer, has more than $1 trillion in assets, 74 million clients in 130 countries and 103,000 employees. Its demise potentially could have cost the financial industry $180 billion, according to Bloomberg, in that AIG provides insurance on more than $441 billion of fixed-income investments held by the world’s major institutions, including nearly $60 billion in securities connected to subprime mortgages.

As part of its deal with the federal government, AIG will sell various business assets to repay the $85 billion loan, which is due in 24 months.

In recent weeks, AIG has been caught in a downward financial spiral. With mounting losses on sales of credit default swaps and subprime mortgage-backed securities holdings, the insurer has seen its shares plummet more than 95% this year, closing at less than $4 on Sept. 16. Aggravating AIG’s financial troubles still further was a decision by Moody’s Investors Service and Standard & Poor’s to cut the insurer’s credit ratings on Sept. 15, which required AIG to post billions of dollars of additional collateral for its mortgage derivative contracts - money the insurer was sorely lacking.

Like a number of institutions to falter lately, poor management decisions played a central role in AIG’s financial issues. After two quarters of record losses from overexposure to toxic mortgages, Martin Sullivan, then-CEO, was ousted in June. The company also is the subject of an investigation by the U.S. Securities and Exchange Commission (SEC) on whether it overvalued the derivatives responsible for more than $20 billion in write-downs.

In 2005, Maurice R. Greenberg, who built the AIG empire and ran the company for nearly 40 years, was forced to retire amid an accounting scandal. The case against him is still pending.

On Sept. 11, 2008, a $115 million settlement was reached in a lawsuit by AIG shareholders against former AIG executives. Specifically, a Louisiana pension fund alleged that hundreds of millions of dollars in commissions were paid by AIG to C.V. Starr & Co., a privately held company controlled by former AIG CEO Maurice Greenberg and other AIG executives.

Now AIG’s current CEO Robert Willumstad is on his way out, and will be replaced by Edward Liddy, former CEO of Allstate Corporation. Under the terms of Willumstad’s contract with AIG, he could receive an exit package worth as much as nearly $9 million.

Meanwhile, American taxpayers now own an 80% stake in yet another company whose failings are the direct result of poor management, lack of corporate governance, and continued bad bets on highly risky investments.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.