Archive for February, 2009

AIG near deal on new terms of U.S. bailout: source (Reuters)

Saturday, February 28th, 2009 | Finance News

NEW YORK (Reuters) –
American International Group Inc is close to a deal with the U.S. government that would ease the terms of its bailout, provide a further equity commitment and help it pay down debt, a person familiar with the matter said on Saturday.

The board of the troubled insurer is due to meet on Sunday to vote on the deal, which could be announced when AIG reports its quarterly results on Monday, the source said.

The revised agreement is expected to include an additional $30 billion equity commitment from the government, more lenient terms on an existing preferred investment, and a lower interest rate on an existing $60 billion government credit line, the source said.

The new equity commitment would give AIG the ability to issue preferred stock to the government at a later date, the source said.

The London Interbank Offered Rate floor on the interest rate AIG pays on the government's credit line is expected to be removed under the new terms, which would save the insurer about $1 billion a year, the source said. The company currently pays 3 percentage points above Libor.

AIG will also give the Federal Reserve ownership interests in American Life Insurance (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, the source said.

AIG may also securitize some U.S. life insurance policies and give them to the government to further reduce its debt, the source said.

The new deal would come as the insurer struggles to sell assets amid the financial crisis and prepares to post the largest quarterly loss in corporate history.

AIG, once the world's largest insurer, is expected to post a roughly $60 billion fourth-quarter loss on Monday, produced in large part by write-downs on certain tax assets and commercial mortgage backed securities, the source said.

The loss works out to about $460,000 per minute.

AIG declined to comment.

(Reporting by Paritosh Bansal; Editing by Eric Walsh)

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HSBC looks to raise $18 billion (Reuters)

Saturday, February 28th, 2009 | Finance News

NEW YORK (Reuters) –
British banking giant HSBC will try to raise $18 billion to quell investor concerns as a worsening global economy punished famed investor Warren Buffet's Berkshire Hathaway with a 96 percent plunge in profits.

U.S. President Barack Obama stressed the severity of the crisis in an effort to get a $3.55 trillion budget through a sceptical Congress.

The stumbling economy was also foremost on the minds of top Chinese leaders, with Premier Wen Jiabao quoted by state news agency Xinhua as saying the worldwide slump had yet to reach a bottom.

Looking to stem the damage to its export-driven economies from the crisis, leaders of Southeast Asian nations agreed to ease monetary policy and resist protectionism, according to a draft statement from a regional summit.

In the United States, the collapse in profits at Berkshire Hathaway, the wide-ranging conglomerate led by Buffett, showed just how hard the corporate sector was reeling from the slump.

"The economy will be in shambles throughout 2009 and for that matter, probably well beyond," Buffett said in a letter to investors, in which he admitted to "doing some dumb things."

NO EXCUSE

British Prime Minister Gordon Brown for this part stressed the need more rigorous supervision of the global banking system, a day before EU leaders meet to thrash out ways to tackle the financial crisis ahead of an April 2 G20 summit to be held in Britain.

Brown showed little sympathy, at least in rhetoric, for bankers whose dodgy lending practices and bonus culture brought the international financial system to the brink of collapse.

"Some practices are indefensible and they have got to be cleaned up now. It's time to set new rules for the banks of all countries," he said.

In a sign of the very human toll of this crisis, local authorities in England were seeking powers from the government to use shops for community facilities in the face of an increasing number of retail premises being left vacant because of the recession.

In Germany, Chancellor Angela Merkel urged European Union states to work together to deal with the downturn.

As financial institutions grappled with tighter credit conditions, two sources familiar with the matter said Britain's HSBC would announce a share sale of up to $18 billion, the biggest ever for an British bank.

HSBC is expected to report a 22 percent fall in annual profits to $19 billion. The firm was said to have avoided many of the big credit market hits taken by rivals, but rising bad debts around the world are pressuring its bottom line.

ANOTHER WEEK OF UNCERTAINTY

The coming week was likely to bring a further barrage of bad news. Two key reports on U.S. employment and manufacturing were both expected to show a significant deterioration.

Analysts believe the U.S. economy lost a staggering 648,000 jobs in February alone. Such a reading would be the worst since World War Two, and would push the total number of jobs eliminated during this recession above 4 million.

Another source of concern over the next few days is the situation of beleaguered insurer AIG, which received a controversial bailout from the Federal Reserve last year.

The U.S. government, AIG and credit rating agencies, including Moody's, S&P and A.M. Best, are in discussions, according to a source familiar with the matter, as the firm prepares to post a quarterly loss of roughly $60 billion. That shortfall equates to about $460,000 a minute, and would be the largest in corporate history.

AIG is considered too vital a pillar to the global financial system because of its central role in the market for credit default swaps, securities that have been blamed for accelerating the pace of credit losses in global markets.

A key focus of the talks is to avoid a ratings downgrade, which could have serious ramifications on the insurer's liquidity and hurt its businesses, with possible ripple effects throughout an already fragile financial sector.

PROTECTIONIST RUMBLINGS

Amid the turmoil, governments around the world scrambled in an effort to shield their economies from the slump. Leaders of the 10-member ASEAN (South East Asian Nations), meeting in Thailand, vowed to work with the G20 developed and developing nations on reforming global financial institutions.

Yet critics argue while ASEAN leaders have argued against protectionism in world trade, they have defended their own buy-local campaigns saying they are consistent with trade rules.

In the European Union, a commitment to open markets and help for poorer member states also risked losing ground to pressure on governments to protect their national industries.

With President Barack Obama pumping up the U.S. budget for more spending to halt the downturn, and facing a record $1.75 billion deficit to do so, leaders such as France's Nicolas Sarkozy have said Europe should be ready to follow suit.

"If the United States defends its industry ... maybe in Europe we can do the same," he said this week, referring to certain "buy America" provisions in the president's recently passed economic stimulus bill.

(Reporting by Jonathan Stempel, Paritosh Bansal, Christina Fincher, Writing By Pedro Nicolaci da Costa; Editing by Eric Walsh)

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Berkshire net sinks; Buffett says economy in shambles (Reuters)

Saturday, February 28th, 2009 | Finance News

NEW YORK (Reuters) –
Berkshire Hathaway Inc (BRKa.N) (BRKb.N), Warren Buffett's insurance and investment company, barely broke even in the fourth quarter because of losses on derivatives contracts tied to the stock market.

Profit fell 96 percent, the fifth straight quarterly decline, and Berkshire's net worth tumbled $10.9 billion in the year's final three months. Net worth per share fell 9.6 percent in 2008, only the second decline since Buffett began running Berkshire in 1965. It fell 6.2 percent in 2001.

In his eagerly anticipated annual letter to Berkshire shareholders, Buffett also offered a gloomy economic outlook, saying "the economy will be in shambles throughout 2009 -- and for that matter, probably well beyond."

Still, despite what he called "paralyzing fear" resulting from the credit crisis and falling housing and stock prices, he remained optimistic about American resilience, and praised government efforts to avoid a "cataclysmic" breakdown in the financial system.

"Though the path has not been smooth, our economic system has worked extraordinarily well over time," he said. "It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead.

Berkshire generates about half its results from insurance, including auto insurer Geico Corp, but operates more than 70 businesses that offer such things as carpeting, ice cream, paint, real estate services and underwear.

Buffett is one of the world's most-admired investors, and Forbes magazine last year called him the second-richest American.

Quarterly net income for Omaha, Nebraska-based Berkshire sank to $117 million, or $76 per Class A share, from $2.95 billion, or $1,904, a year earlier. Revenue fell 12 percent to $24.59 billion.

Excluding $3.25 billion of investment losses, more than double the previous nine months combined, operating profit rose 43 percent to $3.37 billion, or $2,175 per Class A share, from $2.35 billion, or $1,518.

The amount in part reflected underwriting gains at Berkshire Hathaway Reinsurance Group, and investment gains and a termination fee related to an aborted effort to buy Constellation Energy Group Inc (CEG.N).

"They are doing better than many rivals in a very difficult investment and operating environment," said Bill Bergman, senior equity analyst at Morningstar Inc in Chicago. "We had a 5-star rating, the highest we have, on Berkshire, and after reading the letter I feel better than I did yesterday."

Buffett said insurance and utility results helped offset his mistakes, including a decision to buy shares of oil company ConocoPhillips (COP.N) when oil and gas prices were near their peak. He said his "terrible timing" cost Berkshire "several billion dollars." Buffett said he has also lost most of a $244 million investment in shares of two Irish banks.

Berkshire's book value, or assets minus liabilities, fell to $109.27 billion at year end from $120.16 billion at the end of September, and from $120.73 billion at the end of 2007.

DERIVATIVE LOSSES

Results were battered by $4.61 billion of pretax losses on about 251 derivative contracts largely tied to the longer-term performance of four stock market indexes and the credit quality of higher-risk "junk" bonds.

A deteriorating economy and tight credit led to steep declines in stock prices and an increase in junk bond defaults, resulting in losses for Berkshire.

While the losses exist on paper, accounting rules require Berkshire to report them with earnings.

Buffett revealed for the first time which stock indexes he has been using: the Standard & Poor's 500, Britain's FTSE 100, Europe's Euro Stoxx 50, and the Nikkei 225 in Japan.

In his letter, Buffett said he believed each contract that Berkshire owns was "mispriced" at the outset, and that the ups and downs "neither cheer nor bother" him.

Berkshire nevertheless got billions of dollars of upfront payments from parties on the other side of the contracts, which the company can invest as it wishes. This, he has said, makes the contracts different from the "financial weapons of mass destruction" that he has called other derivatives.

"The income statement understates the benefits Buffett gets by putting the upfront premiums to work," said Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, whose largest investment is Berkshire stock.

Berkshire ended the year with $25.54 billion of cash, down from $44.33 billion a year earlier. It said it made roughly $6 billion of acquisitions in 2008, and spent $14.5 billion on fixed-income securities from General Electric Co (GE.N), Goldman Sachs Group Inc (GS.N) and chewing gum maker Wm Wrigley Jr Co. Buffett sold some stocks to fund the latter purchases.

For all of 2008, profit at Berkshire fell 62 percent to a six-year low of $4.99 billion, or $3,224 per share, from $13.21 billion, or $8,548. Revenue fell 9 percent to $107.8 billion.

Berkshire Class A shares closed Friday at $78,600 on the New York Stock Exchange. They have fallen 44 percent since the end of February 2008, while the Standard & Poor's 500 (.SPX) has dropped 45 percent.

(Reporting by Jonathan Stempel; editing by Vicki Allen and Mohammad Zargham)

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