US STOCKS-AIG fallout pushes Dow under 7,000 (AIG has most of the 401k of the teacher union)

U.S. stocks slid to 12-year lows on Monday as a record $61.7 billion loss for AIG and another government bailout for the insurer heightened concerns about the extent of damage to the financial system. *

The stocks of companies that have found themselves on the wrong side of President Barack Obama's proposed budget fell again, as biotechs dropped for the fourth straight session. * The Dow Jones industrial average .DJI slid 299.64 points, or 4.24 percent, to end unofficially at 6,763.29. The Standard & Poor's 500 Index .SPX fell 34.27 points, or 4.66 percent, to finish unofficially at 700.82. The Nasdaq Composite Index .IXIC lost 54.99 points, or 3.99 percent, to close unofficially at 1,322.85.

Folks....listen up. AIG was and is the major provider of derivitives, over-the-counter derivitives, credit default swaps. They 'secured' bets that companies such as Lehmans, Fannie Mae, Freddie, and thousands of other, mostly banks, mostly American and European. They took these companies money and 'guaranteed' if those companies took loses, they would make them whole. When Lehmans fell on Sept.16 it was the shot heard around the world. Lehmans (too large to fail) was allowed to fail. AIG (too large to fail) was handed $85 billion dollars the same day. They have been back to the trough for the 4th time and will be back again and again and again. If those derivitive claims are not payed the nuclear chain reaction will take down the entire world economies. This is a shit storm we have never seen. This is what Harvard bankers, lawyers, and congressemen have done to you and your childrens futures. It cannot be fixed. It cannot be contained if allowed to unwind. There are no good prospects.

Captain Sunshine signing off for now.

The pension gaps underscore a growing conundrum. Unfunded pension liabilities have to be subtracted from shareholder equity, weakening balance sheets at a time when it’s already tough to borrow money. Barring a reprieve from Congress, companies may be forced to make more layoffs or curb capital investments to divert cash to shore up pensions.

“There are companies out there faced with paying their pension plan or staying in business,” says Mark Ugoretz, president and CEO of the ERISA Industry Committee, a Washington, D.C., lobbying group. ERISA refers to the Employee Retirement Income Security Act of 1974, which sets standards to ensure pension plans are sufficiently funded.

The Chicago companies are symptomatic of nationwide woes. Last year, the 100 largest corporate pension funds in the U.S. saw their net assets decline by 21%, while liabilities increased 1.2%. Applying those averages to any of the region’s top funds puts almost all of them into the red by at least $1 billion.

PRESSURE MOUNTS

The situation is far worse at companies that entered 2008 with plans already in poor shape. They are now even harder-pressed to come up with huge increases in pension fund contributions to erase the gap in seven years, as federal law requires.

A Boeing spokesman says the pension deficit is “clearly a situation we don’t like,” but adds that the company’s credit rating hasn’t been affected.

Stricter federal pension-funding requirements, enacted when the stock market was riding high, threaten to undermine the economy further. Business interests are lobbying for more time to close the gaps, but with lawmakers focused on the housing and banking crises, the issue hasn’t gained much traction in Washington.

As a result, “many of the country’s largest employers are being forced to make short-term trade-offs between maintaining employment and funding long-term obligations,” Sears Holdings Corp. Chairman Edward Lampert wrote in a note to shareholders last week.

Hoffman Estates-based Sears, which announced the closings of 24 stores this year, expects its pension expense to soar as high as $175 million this year from $1 million last year due to the markets’ decline.

RIPPLE EFFECTS

Underfunded pensions also are forcing borrowing costs higher for some companies.

At Peoria-based Caterpillar, shareholder equity dropped more than 25% from the previous year after the company booked a $5.8-billion pension shortfall and its plan went from 93% funded to 61% funded.

That means Cat has to pay an additional 1.5 percentage points of interest to keep its untapped credit lines intact, according to SEC filings. Its pension assets sank 30% last year, and this year’s contribution will more than double to about $1 billion. A Cat spokesman declines to comment.

DOUBLE WHAMMY

A decline in interest rates last year also fueled widening pension liabilities, says Lynn Dudley, senior vice-president of policy for the American Benefits Council, another Washington, D.C., group lobbying for more time to fund plans.

Generally, the current value of a future obligation goes up when interest rates come down. In essence, last year’s drop in stock prices and interest rates was a double whammy for pension funds, Ms. Dudley says.

“The law kind of slams you. In extreme markets, it’s really unpredictable,” she says. Absent relief from Congress, she says, “there have been some layoffs, and there are going to be more layoffs” to save cash for pension contributions.

The most notable Chicago-area exception is Moline-based Deere & Co., which began 2008 with a plan that was 17%, or $1.5 billion, overfunded.

Deere may have escaped the worst of the 21% average decline in assets. The company’s fiscal year ended Sept. 30, before the worst of the stock downturn hit, and only 27% of its fund — far less than most — was in equities. A Deere spokesman declines to comment.

I wish it was so simple, so we could just let it fail. There is far more at stake than teacher 401Ks. I don’t even know if teacher 401Ks are more heavily invested than other pensions, which would be sacrificed as well. Investments in AIG are really just a small concern at this point.

Unfortunately, AIG credit default swaps are the only thing standing between many world wide banks and bankruptcy. There are 450 billion plus in outstanding guarantees held by AIG. They have no collateral to back them up, and no way to pay the claims. Considering that a vast majority of these guarantees are mortgage backed securities, there is a large percentage that could trigger payouts. If AIG fails, then banks holding credit default swaps with AIG will face a liquidity crisis and quite possibly fail. I am not sure of the magnitude, but it is possible that this could bring down the entire western banking system.

Both the Bush and Obama administrations have made it clear that AIG cannot fail. That does give some weight to the idea that the risk of letting AIG fail is greater than the potentially 750 billion dollars cost of keeping it afloat. This isn’t a popular bailout, and there is virtually no talk in either administration of letting AIG fail. This isn’t really my area of expertise, but I have done a lot of reading and studying on the issue. I may have some of the details wrong, but this is far greater than the money invested by teachers unions.

Consider for a moment......Paulson (Geisner) says in early Sept....after Beare Stearns..."No more bailouts for too large to fail banks", telegraphing to all hedge funds they can burn down the house of Lehman, which they promply did on Sept 16. That day, within hours AIG had $85 billion handed to it by Geilner. So much for not bailing out instituions too large to fail.

Could it be that this destruction was planned? With tens of millions of baby boomers about to retire, what better way to keep them in the work force, keep them from collecting medicare and social security, and thus take a piece of this perfect storm off of the back of the federal governent? Do you know anyone who was planning to retire and now is not. I know a lot of people...maybe because I am of that generation.

What is happening now is not serendipidy. It was planned and will bring the standard of living to that which we see in European socialist states. This is the Europeanization of America.

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