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Tuesday, June 30th, 2015


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AIG, Lehman, and Merrill Lynch: How do they affect you?

Three of the nation’s largest financial institutions are in serious trouble. Lehman Brothers declared bankruptcy, Merrill Lynch is being absorbed by Bank of America, and AIG is trying it’s hardest not to be next on the firing line.

Lehman Brothers
On Monday morning, Lehman brothers (formerly the nation’s Number 4 Securities Firm), filed for bankruptcy, making it the largest bankruptcy in history. Even so, you may not know how this will affect you. You may not deal with Lehman Brothers, but most of our banks and pension funds do, and if not with Lehman, then with firms that traded with Lehman. This means that many banks won’t know how much they have suffered until the Lehman financial web is untangled and everything is completely figured out –which may take years. This means that the money these banks have tied up in Lehman deals may not be freed up until that’s done. And this may mean less credit. Your pension fund may be shaky, your employer may have problems (which could mean the loss of current jobs and even less new jobs), and you may have trouble getting loans, a mortgage, or credit.

AIG
If you have an insurance policy with AIG, a loan, or a mortgage, you may be scared. First, don’t give up on AIG yet. They aren’t quite down for the count. They need to raise $75 billion dollars—and quickly. To do this, they may have to sell off parts of themselves, such as their annuities unit. If your policy is sold, nothing should change. State law provides protection—the law states that if one insurance company buys the policies of another all of the terms and conditions remain the same.

If AIG does declare bankruptcy, the insurance regulators may try to move policies to other insurance companies. However, this has never been done to a company of AIG’s size. If you have a life insurance policy with AIG you may not be able to immediately cash out your policy—or you may incur a stiff penalty if you do. This is to prevent everyone from cashing out at once (similar to the way everyone took their money out of the bank during the Great Depression). 

Let’s say AIG does file for bankruptcy and has to liquidate. First, they would pay off as many claims as they can—and policyholders would be first. If AIG can’t pay it all, then the state would have to pay because they have guaranteed the funds.  It depends on which state the policy was written in, but most states have limits that they will pay in insurance benefits.

If you have property or auto insurance, the state will also cover these, and also typically have a cap. Again, it varies by state. However, these policies are short-term and therefore it’s usually easier to get other insurance companies to pick them up.

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The crumbling of a cornerstone
Millions of companies and consumers deal directly with AIG – an insurance behemoth, and a cornerstone of the U.S. financial system. Every major bank has significant exposure to AIG, as it has pretty much been the insurer to the U.S. financial system. AIG is also snarled in a web of financial deals, their failure will hurt the entire financial system as it again takes time to untangle each of these deals. It also means that almost every bank and insurer is hurting, which directly affects the entire stock market. Banks may be more afraid to lend to each other, which means that mortgages probably won’t be getting any cheaper.

Banks

If the bank that holds your mortgage goes bankrupt you will not lose your home and you will still have to pay your mortgage. All of the loans will become assets in the bankruptcy and some other bank will most likely buy these loans. This means you will simply have to pay the new bank.

The Federal Deposit Insurance Corp. (FDIC) insures bank deposits up to $100,000, and IRAs and other retirement accounts (held at FDIC-insured banks) up to $250,000. If you have over $100,000 you may want to spread it around between banks, mergers (such as Bank of America) can put you over the FDIC limit.  You might also want to switch to a more solid bank. If enough banks fail, the FDIC bail-out fund could become depleted. However, certain banks, such as Citigroup, and now Bank of America, may be too large and the government may not allow them to fail.

Merrill Lynch

If you have a Merrill Lynch brokerage account most likely nothing will change. Your broker will probably stay the same—at least for a while. Bank of America plans on keeping the Merrill Lynch name and organization the same. However, these are huge firms, and the transition may not be as seamless as people hope.

The bottom line
These companies are giants. They employ thousands and thousands of people worldwide. This means that the number of people looking for jobs (especially in the investment and insurance industries) will be greater than the jobs available.

The bottom line is that right now we don’t know what’s going to happen. It could affect you through the stock market, the job market, or it may severely limit the amount of credit available.  For many students it may have no effect. But students, or anyone, who wants to borrow money from a bank to start a business may have problems—this could be seen as a risky loan and banks are now less likely to make risky loans. However, loans that aren’t risky could possibly be cheaper. For people well-qualified to borrow money, interest rates may actually get lower on home mortgages. In short, people who don’t have money or who are deep in credit card debt will have problems getting a loan. And it might be harder to borrow money for a school loan unless it has a government guarantee.

The federal government and treasury are taking steps to offset some of the reactions in the market place, if they are successful there may not be an overall effect to the economy, but you never know. The Federal Reserve took steps this morning to inject money to the financial system to add to liquidity, and that offsets some of the fear in the marketplace. And the Federal Reserve may lower another interest rate. But I’ll say it again, we just don’t know what’s going to happen. We don’t know how bad things are going to get, and there is still a chance it may just blow over.

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