Greenspan Says AIG Will Be Forced Into Bankruptcy If It Doesn’t Get A Loan

Vultures are circling over AIG (AIG) as even former Fed chief Greenspan said that if it doesn’t get a bridge loan or other capital infusion, there would be no alternative, and that it would be a disaster. Around the world, people have been trying to cash out their life insurance policies held with AIG or its subsidiaries; in many places long lines have formed as people tried to pull out their life savings for fear of an imminent collapse. Of course this very “run on the bank” is what could deliver a coup de grace to this already troubled company.

Since the implications of such a failure could dwarf the Lehman bankruptcy, the New York Fed is once again considering a bailout, something that gave AIG shares a temporary boost before they resumed their mass sell-off. Already New York has authorized AIG to tap into its insurance reserves by essentially lending itself $20 billion of that money.

The level of fear in the financial markets is now reaching a crescendo. Greenspan has said that this is a “once-in-a-century” financial crisis and that more banks will fail, and some analysts are saying things like “a third of global banks will fail” or “more than 1000 US banks will fail”. Already the FDIC is saying it needs more capital to insure bank deposits, and if any of these dire predictions come anywhere close to reality, it will probably need a whole lot more.

Because of this level of fear, some are once again calling for a market bottom. The main problem with this “prediction” is that the current financial crisis is largely perpetuated by falling home prices, and these home prices will continue to fall as long as there is a lack of liquidity and loans are harder to obtain.

The collapse of Lehman (LEH) and a potential collapse of AIG will only further strain market liquidity as many financial institutions will have to wait months or years to settle with collapsed institutions, and many will only get cents to the dollar on their contracts. This will of course make a housing recovery more complicated in the short term. Greenspan said he doesn’t see a recovery in the housing market till 2009. Whether this is an over-optimistic view to help boost a troubled market or whether he thinks the situation can be controlled is yet to be seen.

Even the almighty Goldman Sachs (GS) is suffering strains with earnings down 70% to $845 million, or $1.81 per share and its stock has fallen over fears that GS may not be as invulnerable as investors had hoped. Look out for Morgan Stanley’s (MS) earnings on Wednesday to see how the other of the last two US Investment Bank bastions is faring.

And while shorting financial institutions may seem a sure win, markets are now being manipulated by Fed intervention on so many fronts that it is very difficult to know how the very volatile markets will move in the short-term.

Economic Calendar For Wednesday:

Bank of England minutes, unemployment rate 0830 GMT

Eurozone trade balance 0900 GMT

US housing starts, current account 1230 GMT

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Comment by Back from Hamptons

2008-09-16 12:14:57

I think the Fed had to intervene in many cases to guarantee market stability. If Freddie and Fannie would have failed it would have been a lot worse!

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Comment by Hugh

2008-09-16 16:50:03

It is a pretty exciting time with a lot of opportunity. I agree that a 2009 housing market recovery is optimistic. The housing market moves slowly and usually in 5-8 year cycles. In spite of all the craziness, overall I don’t think the US economy is too bad shape.

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Comment by Mr. C

2008-09-17 12:19:10

Once again they have set up the board for a sure win. The Federal Reserve is a private corporation owned and run by criminals.They have the power to print money out of thin air and lend at usury rates. Now companies have their hand out for a bail out and the cost goes to the tax payer. The Feds will be taking home billions in equities and some companies will be bought at ten cents on the dollar. We’ve seen these bubbles before and we love to create them in different sectors pretending we don’t know the problem. I’m with Dr. Ron Paul quote: “Get rid of the Federal Reserve and the IRS and let the market dictate”. The same people who own the Federal Reserve own the media outlets/newspapers/exchanges and that’s why we are not being informed on what’s really going on. Thanks to the Neo Consevatives aka Zionist who influence the US Congress we will see more of this great design. We will also be involved in more “get rich wars” for the rich and the working poor will be enslaved by their debt. We’re 65% NAU and the Amero is just waiting for it’s formal introduction. This whole malfuction is one of design, it’s not by accident and that’s what makes it scary. To see the US Gov’t in bed with the leaders of these falling giants should be an eye opener. They all belong to the same associations/clubs/secret societies, but we ignore the facts. My advice to everyone is to pull your money out of the banks, these guys can just print more of it up…..you’re not allowed to.

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