House approves US$700b rescue Bill

House approves US$700b rescue Bill

The amended financial package authorises the government to buy troubled assets

In this photo rendered from video, the final vote tally is shown on the floor of the House of Representatives in Washington.

WASHINGTON: The US House of Representatives passed the eagerly-awaited US$700 billion (S$1 trillion) financial market rescue package yesterday (early this morning Singapore time), sending the Bill to President George W. Bush to be signed into law.
Needing 218 votes to pass, Congress passed the Bill by a majority of 263 votes to 171.

The legislation, a bipartisan effort to restore confidence in the nation’s banking system, authorises the government to buy troubled assets from financial institutions reeling from a record number of home foreclosures.

The measure also contains a US$149 billion package of tax breaks, a higher limit on federal bank-deposit insurance and changes in securities law.

It also restates securities regulators’ authority to suspend asset-valuing rules that corporate executives blame for fueling the crisis.

Some of these features were added to the Bill after it failed by a dozen votes to gain passage through Congress earlier this week. Mr Bush made more than a dozen phone calls to Republican lawmakers to lobby for the Bill.

The Bill’s defeat on Sept 29 caused a 778-point drop in the Dow Jones Industrial Average, prompting dozens of lawmakers to reverse their vote on the legislation, the government’s largest intervention in the markets since Franklin Roosevelt’s New Deal.

The Senate approved the revised Bill on Wednesday by an overwhelming majority of 74 votes to 25.

Before the tally began, vote counters said there was enough support for the plan to clear Congress. More than two dozen House members said they were dropping their earlier opposition to the plan.

‘I don’t like this at all,’ said Tennessee Republican Zach Wamp, who now supported the measure. ‘As a matter of fact I hate it. But we’re out of options. Congress has to act.’

‘The issue is stopping the panic,’ said Mr Adam Posen, deputy director of the Peterson Institute for International Economics in Washington.

‘The plan’s not perfect, but it’s certainly better than doing nothing. Now Treasury has to be very aggressive about purchasing a wide range of assets very quickly.’

Indicating its expectation that the Bill would pass, the Dow Jones Industrial Average pared early gains of more than 250 points immediately after the passage of the Bill. At 1.45am Singapore time, the Dow was up 120 points.

Even as US lawmakers sew up legislation to aid the financial markets, their counterparts in Europe are just starting the process of coming to grips with the current credit crisis.

France will hold a summit of European leaders today, amid sharp disagreement over how to respond to the crisis.

French President Nicolas Sarkozy will host a meeting in Paris of counterparts from Britain, Italy and Germany, in addition to the European Central Bank president Jean-Claude Trichet and Luxembourg Prime Minister Jean-Claude Juncker to prepare a European position on the financial crisis.

Mr Sarkozy’s office said the summit would help European members coordinate positions before next week’s meeting of rich world finance ministers in Washington.

Mr Sarkozy will ‘propose Europe secure its banking systems, unfreeze credit’ and coordinate its economic and monetary strategy, French Prime Minister Francois Fillon told lawmakers yesterday.

The build-up to the Paris talks, meanwhile, has revealed deep divisions between the European powers on how to protect the banking sector, with Germany dismissing calls for a joint European fund to bail out failing banks.

On Thursday, the Dutch government said it had come up with the idea, while France angrily denied that it had ever suggested such a plan, as had been claimed Wednesday by a European official in Berlin.

Many media commentators blamed France for the confusion, suggesting Mr Sarkozy was so keen to take credit for leading Europe’s response to the crisis that he had forged ahead with summit plans without consulting his partners.

Paris has been keen to develop a European response to the credit crisis but its European partners have so far preferred unilateral and bilateral measures to protect their own institutions and are looking forward to the G7 meeting of world finance ministers in Washington next week.

Separately, South Korean President Lee Myung Bak proposed yesterday that his country’s Finance Minister meet counterparts from China and Japan to discuss their response to the crisis.

‘It would be beneficial to seek a meeting of finance ministers of South Korea, China and Japan in order to strengthen regional cooperation,’ Mr Lee said at a meeting of economic ministers, according to his spokesman.

BLOOMBERG, AGENCE FRANCE-PRESSE, ASSOCIATED PRESS

Source : Straits Times - 04 Oct 2008

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AIG keeps its Asian life insurance business

AIG keeps its Asian life insurance business

Customers in Singapore unlikely to have their policies transferred to another insurer

By Gabriel Chen

Last night’s announcement that troubled American parent AIG will not sell off its coveted foreign life insurance units offers a new measure of certainty to AIA policyholders here, after many of them besieged its offices two weeks ago to redeem policies.

AIA policyholders in Singapore are now unlikely to have their policies sold or transferred to another insurer, after their insurer’s troubled American parent said last night it will not sell off its coveted foreign life insurance units.
This announcement offers a new measure of certainty to policyholders at the end of what has been a heartstopping two weeks that began with the near collapse of American Insurance Group (AIG) in the United States.

Staff members at AIA Singapore were also jubilant last night after AIG, one of the world’s largest insurers, said in a statement that it will retain majority ownership of the lucrative Asian operations but will seek ‘minority strategic investors’ to take a slice of the business.

This will let AIG retain the jewels in its crown - the foreign insurance units - while easing some of the financial pressure by attracting new investors.

One Singapore agent, who is also a policyholder, told The Straits Times: ‘It comes as good news. For some of us, AIA is our first career, and all these events over the past few weeks have a major disruption to our lives.’

The 39-year-old said the news was well received by many of his colleagues and his clients: ‘Confidence is coming back, and we’ve been receiving new business premiums already.’

AIA president Mark Wilson said in a statement that the ‘announcement is good news for AIA, our policyholders, staff, agents and distribution partners. We are delighted to be able to draw a line under the uncertainty of the last few weeks.’

AIA Singapore has had a traumatic time of late with clients besieging its offices two weeks ago to redeem policies after AIG was bailed out by the US government to the tune of a US$85 billion (S$123 billion) loan.

There were fears that AIG was so short of ready cash that it would reduce the capital of its subsidiaries or tap into its booming Asian operations for cash.

A series of statements from AIA and the Monetary Authority of Singapore eventually calmed the panic but the mood of uncertainty remained over the firm.

That will have been relieved, but only partly, by yesterday’s announcement out of New York.

Lawyer Valerie Quek, 26, is among a group of AIA policyholders that say they feel ’safer’ now that AIA Singapore will not be sold to another insurer.

‘I like the AIA service and in this kind of environment now, I don’t want more uncertainty,’ she told The Straits Times.

Other policyholders were more nonchalant, saying they had already braced themselves for change.

‘I guess the news means that we don’t have to wonder about another insurer taking over our policies,’ said AIA policyholder Low Ee Ping, 32.

‘But I was not really worried about that, because I think the transition to another insurer would have been smooth because so many people have AIA policies,’ she added.

‘I don’t think it would have been allowed to descend into chaos.’

But Mr Ng, 35, an AIA agent and policyholder, said that despite the upbeat mood in the office, there was still caution in the air. ‘It’s good news presently, but it might only be temporary. AIG might still sell AIA later, and for some of us, that is a big cause for concern,’ he said.

Mr Ng cited another potential concern - the high interest rate AIG has to pay the US Federal Reserve. This stands at 8.5 percentage points over Libor, the rate banks lend to each other.

This rate has soared to about 5 per cent amid the financial crisis so AIG’s total interest rate has hit 13.5 per cent.

It has drawn US$61 billion on the credit facility so far.

AIA is one of the largest insurers here with 4,000 agents and 2.6 million policies.

Across Asia, AIA has over 20 million policyholders and over 200,000 agents, according to Mr Wilson.

AIG chairman and chief executive Edward Liddy said in New York yesterday that the firm is refocusing on its traditional strengths in property and casualty underwriting.

‘We have a number of remarkable businesses with leading market positions and significant competitive advantages that could not be recreated today,’ he said.

AIG plans to retain its US property and casualty and foreign general insurance business.

The sale of other units will be used to pay off the government loan, while additional funds will be used to help address the insurer’s capital structure.

Source : Straits Times - 04 Oct 2008

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Temporary dorm in Serangoon Gardens

Temporary dorm in Serangoon Gardens

THE Ministry of National Development (MND) has decided to convert a former school site in Serangoon Gardens into a temporary dormitory for foreign workers.

Following concerns raised by residents in a petition against the conversion in early September, various measures will be put in place. These include the construction of a new access road, a reduction in the site area, and sealing off of the existing entrance at Burghley Drive.

The dormitory’s capacity will be capped at 600 initially, and it should be ready within a year to serve manufacturing and services factories in the Ang Mo Kio area. If there is demand, the government may consider raising its capacity to a maximum of 1,000.

Speaking at a news conference yesterday, National Development Minister Mah Bow Tan emphasised the balance to be maintained. ‘We need foreign workers, we need to provide adequate housing. We also need to make sure disamenities created in residential areas, whether HDB or landed, are minimised.’

While permanent purpose-built dormitories are being developed, temporary ones like the Serangoon Gardens site, with a lease of up to five years, have been sought to meet the high demand.

Fewer than 10 other temporary sites are being considered and Mr Mah said assessments of these should be completed in a month’s time.

Source : Business Times - 04 Oct 2008

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AIG to morph into global property, casualty firm

AIG to morph into global property, casualty firm

It will sell non-core business units to pay off US$85b govt loan

(CHARLOTTE, North Carolina)

INSURER American International Group said yesterday that it plans to sell off its ‘non-core’ business units to pay off its massive government loan.

The plans, expected by Wall Street, drove up AIG’s shares 19 per cent in mid-day trading. But it now leaves investors wondering if the sales will be enough.

AIG, one of the world’s biggest insurers, said that it plans to retain its US property and casualty and foreign general insurance businesses. The New York-based insurer also said that it plans to retain an ownership interest in its foreign life insurance operations.

AIG, once the world’s largest insurer, will refashion itself into a global property and casualty company with a stake in an overseas unit that sells life policies in China, South Korea and India, chief executive officer Edward Liddy said in a conference call. AIG may also sell its plane-leasing unit, consumer finance division, US car insurer, a reinsurance business and asset manager, he said.

‘We won’t exactly be the AIG of old, but we’ll have a very secure position,’ Mr Liddy said. ‘This is going to be a formidable company that emerges from this.’

‘I think what the Federal Reserve has provided us has been very generous and we are going to do everything we can not to have to go back to them.’

He added that he didn’t expect a fire sale and buyers would have to assume the debt of AIG businesses they acquired.

However, he added that ‘we’ll sell as many assets as needed to repay our obligations’.

AIG shares were up 76 US cents at US$4.76 in mid-day trading.

‘We are giving AIG credit that it can use its Fed-supported liquidity to pursue a measured and deliberate asset sale programme,’ said CreditSights analyst Rob Haines in a research note.

So far, AIG has announced only one deal, a sale of its 50 per cent interest in London City Airport to its partner in the venture, Global Infrastructure Partners. It bought the stake as a joint venture with the private-equity fund in 2006 for a total price estimated around US$1.4 billion. The companies didn’t disclose the terms of the deal.

However, it may sell its remaining stake in Blackstone Group, in which it spent US$150 million in 1998 for a 7 per cent interest. AIG recorded a US$398 million gain for the second quarter last year from selling some of the shares of the company which went public last year.

Mr Liddy said that the company has been contacted by ‘numerous’ parties regarding possible sales of businesses, and AIG will try to sell its operations to ‘brand-name’ buyers who have strong ratings and balance sheets.

He added that he wouldn’t be surprised to see sovereign wealth funds providing resources to acquire some AIG businesses.

One unit that analysts have said could be sold is International Lease Finance Corp., which leases out more than 900 aircraft with asset values topping US$44 billion at the end of the second quarter.

Another unit that could possibly be sold is consumer-focused lender American General Finance Corp. Other businesses that AIG operates include life, commercial car and accident and health insurers.

On the brink of failure last month, AIG was bailed out when the government offered it a two-year US$85 billion loan to avoid bankruptcy during one of the most tumultuous times during the ongoing credit crisis that saw Lehman Brothers Holdings Inc file for bankruptcy protection and the sale of Merrill Lynch & Co to Bank of America Corp.

In return for the loan, the government received warrants to purchase up to 79.9 per cent of AIG.

As at Sept 30, AIG had drawn US$61 billion on the credit facility, of which about US$54 billion has gone towards its securities lending and financial products area. The rest of the money has been for other liquidity needs amid an ‘unprecedented’ freezing of credit markets, Mr Liddy said.

While the sale of some of AIG’s businesses will be used to pay off the outstanding government loan, additional funds will be used to help address the company’s capital structure, Mr Liddy said.

AP, Bloomberg, AFP

Source : Business Times - 04 Oct 2008

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Smells like recession

Smells like recession

US lawmakers okay US$700b rescue plan but credit crunch knocks out economy

By CONRAD TAN

(Singapore)

THE bailout package has a nice ring to it, but economists now say that it is nowhere near enough to get the global or even the US economy out of jail.

The massive US$700 billion rescue plan aimed at saving the US financial sector returned yesterday before the House of Representatives with fresh sweeteners to sway them. It worked.

Having thrown out the plan last week and stunned stock markets across the world, the lawmakers voted yes in its latest incarnation by a margin of 263-171.

The Senate had already approved the plan earlier this week. So what happens next?

Quite simply, more trouble, economists say - with a US recession now increasingly likely. This was the case even before the rescue plan was approved. Crucial credit channels remain jammed, as banks everywhere grow increasingly nervous about lending to one another, choking the supply of credit to fund business operations and investment activity. ‘Whatever happens over the weekend, the outlook for the global economy is much dimmer,’ said Song Seng Wun, senior economist and head of research at CIMB here.

He warned that Singapore’s economy could stall or even contract in 2009, if the US slips into recession next year - a scenario ‘which now looks increasingly likely’.

‘The drag will be from lower exports as well as a significant slowdown through the economy, with perhaps the only exception being the construction sector,’ he added.

In a startling sign of how deeply the crunch was biting, nearly 100 US corporate treasurers took part in an emergency conference call on Thursday to warn one another that banks there are using any excuse to charge more to renew lines of credit, Bloomberg reported. Banks are afraid to lend even to investment grade corporate clients, who are struggling to keep credit lines open to pay employees and purchase raw materials. Some were charged an extra 75 basis points to keep credit lines open.

Meanwhile, the authorities are turning to every weapon in their arsenal - and finding it ineffective. This week, futures traders were betting heavily that the US Federal Reserve would slash its target for the federal funds rate - the rate which US banks charge one another for loans - by half a percentage point to just 1.5 per cent at its next policy meeting on Oct 29, in a bid to stimulate economic activity by reducing the cost of borrowing.

But with interbank rates already more than double the Fed’s official target rate of 2 per cent now, any cut in interest rates would be ‘more of a psychological move to boost confidence that things are being done’, said Mr Song. ‘Banks will still be fairly cautious about interbank lending and counterparty risk’ as a lot more US banks are likely to fail due to worsening economic conditions, he added.

Meanwhile, the real economy is being hit. Latest data showed that US employers slashed payrolls by 159,000 in September, the most in more than five years, a worrisome sign that the economy is hurtling toward a deep recession. Almost 760,000 jobs have disappeared this year. At a household level, that means millions of Americans will be forced to buy less ’stuff’ - bad news for an economy that relies on consumer spending for about 70 per cent of its growth. Goldman Sachs economists expect a recession worse than the ones seen in 1990 and 2001.

Treasury Secretary Hank Paulson and Fed chairman Ben Bernanke have resorted to increasingly bold and desperate measures to fight the flames. They saved mortgage finance giants Fannie Mae and Freddie Mac and insurer American International Group, and arranged rescues for Merrill Lynch, Morgan Stanley and Goldman Sachs. They guaranteed money-market funds, banned short-selling of stocks; and pumped hundreds of billions of dollars into interbank markets worldwide to bring down borrowing costs.

None of it was enough to stop the crisis of confidence sweeping through the financial sector, which has already reached European shores. Governments in Europe are desperately trying to prop up more banks crippled by a lack of short-term funding.

London interbank offered rates or Libor, the global benchmark used to price a wide variety of bank loans and debt securities worldwide, remain far above official central bank target rates for interbank lending - suggesting that the deep mistrust between financial institutions is unlikely to vanish soon.

The Singapore interbank offered rate or Sibor for three-month Sing-dollar loans - an important benchmark for housing and business loans here - remains much higher than in early September, before Lehman collapsed. This, despite coming down of late. ‘The bailout programme notwithstanding, things still could get worse,’ said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. He expects fewer new jobs to be created here in the coming months compared to the strong employment growth earlier this year, which will mean less spending by consumers and leaner times for businesses. ‘Until the last couple of weeks, I was still optimistic that things could still get back on track. But now it does seem that the whole global economy is going to weaken going into 2009.’

Source : Business Times - 04 Oct 2008

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