Monday, September 15, 2008

Lehman Brothers, Merrill Lynch . . . is AIG next?

Los Angeles Times - Dow Jones Index Plummets 500 Points
Wall Street Journal - AIG, Lehman Shock Hits World Markets
Bloomberg - AIG Seeks Funds from JPMorgan, Goldman After Fed Balks at Loan

The Dow Jones Industrial Average fell by the most since 9/11 as fallout from the subprime mortgage crisis crippled some of the United States' most important investment banks. Lehman Brothers filed for bankruptcy protection after a buyout deal fell through with Barclays and Bank of America. Merrill Lynch, another investment firm that was vulnerable to failure, sold itself to Bank of America.

The Dow fell by 500 points, or 4.4 percent. Each of the composite's thirty indicators fell except for Coca-Cola. International stock markets also fell, with most of the European exchanges losing between three and four percent of their value and some Asian indexes losing greater amounts.

Analysts worried that another U.S. company, AIG, might be at a dangerous risk of failing. AIG, which is the U.S.'s largest insurance company, was negotiating for a cash infusion from private companies after the U.S. government showed an unwillingness to further extend taxpayer assistance to U.S. companies caught up in the mortgage crisis. However, the state of New York has taken the step of allowing AIG to transfer money from its subsidiary in an attempt to obtain more capital.

The scramble to sell Merill Lynch and obtain private help for AIG comes after U.S. Treasury Secretary Henry Paulson stated that he never considered giving federal money to help guarantee Lehman Brothers. It is estimated that AIG would need $70-75 billion in loans, possibly with assistance from JPMorgan Chase or Goldman Sachs.

1. How did the U.S. Government-brokered assistance to Bear Stearns affect market expectations? Did it discourage changes for companies expecting a bailout?
2. How is AIG, an insurance company, affected by what began as a mortgage crisis?

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