Crude Oil Rises as AIG Rescue Plan Eases Economic Slowdown Risk

By Mark Shenk

Sept. 17 (Bloomberg) -- Crude oil rebounded from the biggest two-day decline in almost four years after the Federal Reserve agreed to rescue American International Group Inc., easing concern of a further economic slowdown in the U.S.

Oil rose as the Fed bailout prevented the bankruptcy of the nation's biggest insurer and Morgan Stanley announced that third- quarter profit fell less than estimated. Prices also advanced after a U.S. government report showed that crude oil and fuel stockpiles dropped because of Hurricane Ike.

``Prices began to rise when it became clear that there would be an AIG rescue and we got word that Morgan had decent earnings,'' said Tom Bentz, senior energy analyst at BNP Paribas in New York.

Crude oil for October delivery rose $1.84, or 2 percent, to $92.99 a barrel at 11:13 a.m. on the New York Mercantile Exchange. Oil in New York has declined 3.2 percent this year and 37 percent from the record $147.27 a barrel reached on July 11.

Oil futures tumbled more than $10 a barrel in the first two days of the week on concern financial-market disruptions may weaken the global economy and cut fuel consumption.

Goldman Sachs Group Inc. cut its three-month forecast for crude oil to $115 a barrel from $149, citing the global credit crisis and demand weakness. Goldman Sachs said oil prices have ``overshot to the downside'' and the securities firm remains ``bullish'' that they will move higher.

Inventories Decline

U.S. crude-oil stockpiles fell 6.33 million barrels to 291.7 million barrels last week, according to the Energy Department. It was the fourth-straight inventory decline. A drop of 3.5 million barrels was forecast, according to the median of responses by 11 analysts surveyed by Bloomberg News.

U.S. fuel demand averaged 19.9 million barrels a day during the past four weeks, down 4.4 percent from a year earlier, the department said. Gasoline consumption averaged 9.21 million barrels a day over the period, down 2.6 percent.

Gasoline supplies declined 3.31 million barrels to 184.6 million barrels, the lowest since at least 1990, according to department figures. Analysts forecast that stockpiles of the fuel would drop 3.5 million barrels last week. Inventories have fallen 15 percent in eight weeks.

Gasoline for October delivery fell 2.48 cents, or 1 percent, to $2.376 a gallon in New York. Futures touched $2.3576, the lowest since Feb. 13.

``People are focused on the fact that demand is off by 2.6 percent rather than on inventories,'' said Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York. ``The refineries that were shut because of Hurricane Ike will be restarting soon.''

Nigerian Attacks

Nigeria's main militant group in the Niger River delta said it destroyed an oil-pumping station operated by a unit of Royal Dutch Shell Plc and a pipeline as its raids against the oil industry entered a fifth day.

The Movement for the Emancipation of the Niger Delta said it destroyed the Orubiri oil-pumping station operated by a unit of Shell, and an oil pipeline operated by units of Shell and Eni SpA. A Nigerian military spokesman confirmed the raid.

Nigeria, which sits on Africa's largest hydrocarbon reserves, has lost about one-fifth of its output since February 2006 as a result of attacks.

Brent crude oil for November settlement rose $1.33, or 1.5 percent, to $90.55 a barrel on London's ICE Futures Europe exchange. Prices dropped the past 14 days, the longest stretch since the contract was introduced in 1988.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

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Copper Declines as Fewer Housing-Starts Signals Drop in Demand

By Millie Munshi

Sept. 17 (Bloomberg) -- Copper fell for a third day after a report showed U.S. housing starts slumped to the lowest level in 17 years, increasing speculation a cooling global economy will slash metals demand.

Housing starts fell 6.2 percent to an annual rate of 895,000 from July, the fewest since January 1991, the Commerce Department said today. Builders are the biggest users of copper in the U.S. Before today, the metal had plunged 27 percent since touching a record in May on speculation financial turmoil, a slumping U.S. housing market and the credit crisis would stifle global growth.

``Copper is going to be under significant pressure during this economic downturn,'' said Frank McGhee, the head metals trader at Integrated Brokerage Services LLC in Chicago. ``The housing report is adding to bearish sentiment.''

Copper futures for December delivery fell 1.15 cents, or 0.4 percent, to $3.0775 a pound at 9:08 a.m. on the Comex division of the New York Mercantile Exchange. The metal lost 3.3 percent in the previous two sessions.

On the London Metal Exchange, copper for delivery in three months dropped $60, or 0.9 percent, to $6,810 a metric ton ($3.09 a pound). Before today, the price had declined 9 percent in the past year.

To contact the reporter on this story: Millie Munshi in New York at mmunshi@bloomberg.net

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Gold, Silver Climb as Credit Turmoil Spurs Demand for Haven

By Pham-Duy Nguyen

Sept. 17 (Bloomberg) -- Gold climbed as some investors sought safety in precious metals on concern more financial institutions will fail as the credit crisis deepens. Silver jumped almost 4 percent.

The U.S. government took control of American International Group Inc. in an $85 billion bailout to prevent the biggest financial collapse ever. The cost of borrowing dollars for three months jumped the most since 1999 as banks hoarded cash. Gold reached a record $1,033.90 an ounce in March after the Federal Reserve steered JPMorgan Chase & Co. to buy Bear Stearns Cos.

``Gold is going to be the beneficiary of a global move toward a safe haven,'' said John Licata, the chief investment strategist at Blue Phoenix Inc. in New York. ``There's a gigantic fear factor. Most people are concerned another bank is going to fail.''

Gold futures for December delivery gained $8.10, or 1 percent, to $788.60 an ounce at 9:40 a.m. on the Comex division of the New York Mercantile Exchange.

Silver futures for December delivery rose 41.3 cents, or 3.9 percent, to $10.93 an ounce.

Before today, gold fell 6.9 percent this year, while silver tumbled 30 percent.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

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U.K. Stocks Retreat, Led by Banks; HBOS, Anglo American Plunge

By Sarah Jones

Sept. 17 (Bloomberg) -- U.K. stocks pared gains, led by HBOS Plc, Britain's largest mortgage lender. Anglo American Plc led mining companies lower.

The FTSE 100 Index dropped 19, or 0.4 percent, to 5,006.6 at 2:22 p.m. in London. The measure at one point fell below the 5,000 level for a second day, having earlier rallied as much as 2 percent. The FTSE All-Share Index declined 0.2 percent, while Ireland's ISEQ Index lost 3.5 percent.

HBOS dropped 14 percent to 157.2 pence after climbing as much as 18 percent. Kazakhmys Plc, Kazakhstan's biggest cooper producer, lost 4.8 percent to 672 pence.

Anglo American, the world's fourth-largest diversified mining company, lost 5.8 percent to 2,128 pence.

To contact the reporter on this story: Sarah Jones in London at sjones35@bloomberg.net.

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European Stocks Fall on Growth Concern; Hochtief, Anglo Drop

By Adria Cimino

Sept. 17 (Bloomberg) -- European stocks fell for a third day after a report signaled the worst U.S. housing recession in a generation will continue and the takeover of American International Group Inc. failed to ease concern credit-related losses will subside.

Hochtief AG, Germany's biggest builder, dropped 3.7 percent after the Commerce Department said builders in the U.S. broke ground on fewer houses than forecast in August. Anglo American Plc slid 7.3 percent and Xstrata Plc declined 4.6 percent on concern the economic slowdown will hurt demand for metals. Fortis and Royal Bank of Scotland Group Plc fell for a third day, leading financial shares lower.

The Dow Jones Stoxx 600 Index lost 0.2 percent to 263.10 at 2:50 p.m. in London, erasing an earlier gain of as much as 1.9 percent.

``The world economy didn't instantly recover last night,'' said Roland Lescure, who manages the equivalent of $128 billion as chief investment officer of Groupama Asset Management in Paris. ``''We remain cautious on financial stocks. There still will be damage.''

Fortis, the financial-services firm that announced plans in June to raise 8.3 billion euros, slid 5.5 percent to 7.02 euros. Royal Bank, the second-largest U.K. bank, retreated 3.4 percent to 182.7 pence.

AIG, Fed

The U.S. reversed its opposition to a bailout of the nation's biggest insurer by assets after private efforts failed and the Federal Reserve concluded that ``a disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a Fed statement.

The Fed kept the benchmark rate at 2 percent yesterday, citing risks to growth and inflation.

The bankruptcy of Lehman Brothers Holdings Inc., the biggest in U.S. history, this week roiled credit markets and pushed the Stoxx 600 to the lowest in three years yesterday.

The cost of borrowing in dollars for three months jumped the most since 1999 today as banks hoarded cash on concern more financial institutions will fail. The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said today. The London interbank offered rate, or Libor, dropped 1.41 percentage points to 5.03 percent. It was at 2.14 percent a week ago.

Hochtief lost 3.7 percent to 41.90 euros. Lafarge SA, the world's biggest cement producer, slid 2.6 percent to 79.33 euros.

Housing Starts

Housing starts fell 6.2 percent in August to an annual rate of 895,000, the fewest since January 1991, the Commerce Department said in Washington.

Morgan Stanley, seeking to reassure investors after its stock dropped 23 percent this week, rushed out a third-quarter earning report late yesterday saying profit fell a less-than- estimated 3 percent.

Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman.

Bank of Ireland Plc sank 11 percent to 4.13 euros. The country's second-biggest bank said it will cut its dividend and post a drop in first-half profit as borrowers struggle to repay loans amid slowing economic growth.

Anglo American, the world's fourth-largest diversified mining company, dropped 7.3 percent to 2,094 pence. Xstrata, the world's fourth-biggest producer of copper, sank 5.5 percent to 1,982 pence.

To contact the reporter on this story: Adria Cimino in Paris at acimino1@bloomberg.net.

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Investors Favor `Defensive' U.S. Stocks, Merrill Says

By Adam Haigh

Sept. 17 (Bloomberg) -- A record number of investors favored U.S. shares before Lehman Brothers Holdings Inc.'s bankruptcy filing and Merrill Lynch & Co. was bought by Bank of America Corp., a monthly survey by Merrill showed.

Investors turned the most negative in emerging-markets equities since 2001 and became ``overweight'' government bonds for the first time in a decade, the survey conducted Sept. 5 to 11 of money managers who oversee $641 billion showed.

U.S. stocks rose last week, ending a three-week slide for the Standard & Poor's 500 Index, on speculation the government's takeover of Fannie Mae and Freddie Mac would stabilize the global financial system. The seizure in credit markets and more than $500 billion of losses at the world's largest banks drove Lehman into Chapter 11 bankruptcy protection on Sept. 15 and also spurred Merrill's takeover by Bank of America.

``In times of fear the U.S. market tends to be treated as a defensive market,'' said Karen Olney, the London-based head of European equity strategy at Merrill, at a press conference in London.

The S&P 500 index today fell 2.1 percent to 1,186.25 as of 10:32 a.m. in New York, bringing its loss this year to 19 percent, as the worst U.S. housing slump since the Great Depression reduced earnings at financial companies and spurred speculation banks will rein in lending.

Least Favorable

On Sept. 15 the S&P 500 sank the most since the Sept. 2001 terrorist attacks in New York as Lehman's bankruptcy filing and slumping commodities prices heightened speculation credit-market losses and the economic slowdown will worsen.

Earnings for U.S. companies are the most favorable relative to other regions, according to 45 percent of respondents to the survey, up from 30 percent in August. A net 43 percent believe the dollar remains undervalued.

Profits for companies in the S&P 500 are expected to climb 25 percent in 2009, compared with a 13 percent rise forecast for earnings in the Dow Jones Stoxx 600 Index, a benchmark for European equities, according to Bloomberg data.

Emerging markets are the least favorable place to invest in equities, with the survey showing a net 14 percent of those surveyed would most like to underweight the region over the next 12 months. The MSCI Emerging Markets Index has slid 37 percent this year.

``We are still waiting for the moment to say now is a very, very good time to get into emerging markets,'' said Merrill chief emerging markets equity strategist Michael Hartnett on the phone from New York.

`Most Bearish'

Investors were overweight in bonds for the first time since 2001 as they continued to switch out of equities. Healthcare, consumer staples and telecommunication shares were favored as money managers moved out of energy, industrials and technology companies, the data show.

``It's a massive sell-off of risk,'' said Olney. ``This has to be the most bearish survey that we have ever seen.''

In the U.K., 100 percent of investors now see the economy falling into a recession in the next 12 months, which has risen from 50 percent last month.

``We are coming around to a point where a lot of that is in the price and a lot of that is in expectations,'' Olney added.

For Related News:

To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.

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Canadian Stocks Fall, Led by Manulife Financial; Nortel Plunges

By John Kipphoff

Sept. 17 (Bloomberg) -- Canadian stocks fell for a third day after Manulife Financial Corp. said it will incur costs on investments in American International Group Inc. and Nortel Networks Corp. cut its sales and profit margin forecasts.

The Standard & Poor's/TSX Composite Index fell 170.94, or 1.4 percent, to 12,056.05 at 9:35 a.m. in Toronto.

Manulife, the country's biggest insurer, fell C$1.48, or 4.1 percent, to C$34.52. Nortel, North America's biggest maker of phone equipment, dropped C$1.62, or 28 percent, to C$4.10.

To contact the reporter on this story: John Kipphoff in Montreal at jkipphoff@bloomberg.net.

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U.S. Stocks Drop as Lending Freezes Up Following AIG Takeover

By Lynn Thomasson and Elizabeth Stanton

Sept. 17 (Bloomberg) -- U.S. stocks tumbled as bank lending seized up in the wake of the government's takeover of American International Group Inc. and investors fled to the relative safety of Treasuries.

Goldman Sachs Group Inc. and Morgan Stanley, the two largest U.S. securities firms, plunged more than 9 percent after Oppenheimer & Co. analyst Meredith Whitney cut profit estimates. General Electric Co., the world's third-biggest company, fell 7 percent and U.S. Steel Corp., the second-largest U.S. producer of the metal by market value, slid 9 percent. Yields on three- month bills sank to a 54-year low and a measure of corporate borrowing costs surged to the highest since the crash of 1987.

``It's ugly,'' said Michael Mullaney, a Boston-based money manager for Fiduciary Trust Co., which oversees $10 billion in stocks and bonds. ``It's about the worst I've seen it in 25 years. You have to have free-flowing credit to lubricate the system. That's not happening right now.''

The S&P 500 lost 32.59, or 2.7 percent, to 1,181 at 10:52 a.m. in New York, its lowest in almost three years. The Dow Jones Industrial Average decreased 247.19, or 2.2 percent, to 10,811.83. The Nasdaq Composite Index sank 60.04, or 2.7 percent, to 2,147.86. More than 10 stocks retreated for each that rose on the New York Stock Exchange.

About $2.8 trillion of market value was erased from global stocks this week, triggered by Lehman Brothers Holdings Inc.'s bankruptcy. Russia halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the worst financial crisis in a decade.

`Protracted' Battle

Morgan Stanley slid $3.97, or 14 percent, to $24.73. Whitney lowered her fourth-quarter profit estimate to 69 cents a share from $1 and cut the 2009 earnings forecast to $4.05 a share from $4.15, citing higher borrowing costs.

``We believe Morgan Stanley, along with its peers, will battle a protracted period of negative operating leverage,'' Whitney wrote in a note to clients.

Merrill Lynch & Co.'s Guy Moszkowski reduced his fourth- quarter profit estimate for Morgan Stanley by two cents to $1.04 a share and lowered his 2009 earnings forecast to $5.15 a share from $5.93. The lowered estimates come a day after Morgan Stanley reported profit that beat estimates.

Goldman slid $12.94 to $120.07. Oppenheimer cut its fourth- quarter earnings estimate to $2.60 a share from $3.45.

Whitney wrote in a note to clients that she expects ``material'' writedowns at U.S. banks into 2009 as the collapse of Lehman and the takeover of Merrill Lynch & Co. result in ``meaningfully less liquidity.''

TED Spread

The three-month London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said.

U.S. Treasury three-month bill rates dropped to as low as 0.233 percent and the so-called TED spread, the difference between three-month Treasury yields and three-month Libor, widened 64 basis points.

AIG lost $1.64, or 44 percent, to $2.11 and extended its decline over the past year to 97 percent. The insurer, which received the $85 billion loan from the U.S. government yesterday, is most likely to repay the loan by liquidating or selling assets, central bank staff officials told reporters on the condition of anonymity. The Fed will take 79.9 percent of the New York-based company's stock and replace its management because ``a disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a central bank statement yesterday.

The S&P 500 Financials Index slumped 2.3 percent as 70 of its 86 companies retreated.

Banks and brokerages also fell after the Reserve Primary Fund, the oldest U.S. money-market fund, became the first in 14 years to expose investors to losses after writing off $785 million of debt issued by Lehman. Investor redemptions will be delayed as long as seven days, the fund said.

`Massive Retrenchment'

``There's just a massive retrenchment in risk appetite,'' said Robert Stimpson, a money manager at Oak Associates Ltd. in Akron, Ohio, which oversees $1.1 billion. ``We've seen three cornerstones of Wall Street fall by the wayside in the last six months. Is anyone safe? It's a legitimate question.''

The Securities and Exchange Commission stiffened regulations against manipulative short-selling after the routs in AIG and Lehman. The new rules force traders to borrow shares before selling them short and make it a fraud for investors to lie to their broker about locating stock to close positions.

Housing Slump

Homebuilders across S&P industries slumped 1.2 percent after the government reported a 6.2 percent drop in housing starts to a 17-year low.

The S&P 500 gained 1.8 percent yesterday as expectations grew the Federal Reserve would rescue AIG and spare financial institutions from more losses.

The benchmark index for American equities started the week with a 4.7 percent tumble after credit losses forced to file for bankruptcy protection and Merrill to agree to be taken over by Bank of America Corp.

The S&P 500 has fallen almost 19 percent this year and is poised to post its first yearly retreat since 2002 after global banks racked up $516 billion in credit losses and asset writedowns stemming from the collapse of the subprime mortgage market.

Financial shares in the S&P 500 have lost 33 percent as a group this year, led by the tumble in AIG, an 83 percent drop for Washington Mutual Inc. and a 76 percent retreat in National City Corp.

The Federal Reserve kept its benchmark interest rate at 2 percent yesterday, citing risks to growth and inflation. Hours after yesterday's meeting, the central bank agreed to the AIG loan.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

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Brazilian Stocks Drop on Credit Concerns, Risk Aversion

By Alexander Ragir

Sept. 17 (Bloomberg) -- Brazilian stocks dropped to the lowest since August 2007 as global investors resumed their selling of emerging-market equities and the U.S. government's takeover of American International Group Inc. failed to ease concerns about the health of the financial system.

Uniao de Bancos Brasileiros SA led financial shares to the lowest in five months, as global banks began to report losses related to investments tied to the collapse of Lehman Brothers Holdings Inc. Cia. Vale do Rio Doce led a retreat in metals producers on speculation demand may wane as a 6.2 percent slump in U.S. home starts signaled a worsening of the economy.

The Bovespa index fell 780.43, or 1.6 percent, to 48,448.49 at 9:45 a.m. New York time. The BM&FBOVESPA MidLarge Cap index dropped 1.4 percent, while the BM&FBOVESPA Small Cap index retreated 1.6 percent. Mexico's Bolsa Index lost 0.6 percent.

Unibanco, as the third-biggest non-state Brazilian bank is known, fell 2.4 percent to 17.71 reais. Banco do Brasil SA, Latin America's biggest bank, dropped 3.1 percent to 21.15 reais.

The Federal Reserve said yesterday it will lend as much as $85 billion to AIG, giving the government a 79.9 percent stake in the company. A ``disorderly failure'' could compound declines in financial markets, lead to higher borrowing costs and dent economic growth, the Fed said. AIG's collapse would have threatened more financial companies and cost them $180 billion in losses, according to RBC Capital Markets. AIG shares dropped 43 percent today.

Credit concerns prompted investors to flee global stocks to the relative safety of U.S. Treasuries, driving the yield on three-month bills to the lowest in 54 years.

BRICs

Russia, one of the so-called BRICs, halted stock trading for a second day and poured $44 billion into its three biggest banks in a bid to halt the biggest financial crisis since its devaluation and debt default a decade ago. China's stocks fell to the lowest in almost 21 months after China Merchants Bank Co. said it held $70 million of debt issued by bankrupt Lehman Brothers Holdings Inc.

Investors turned the most negative in emerging-markets equities since 2001, a monthly survey by Merrill Lynch & Co. showed. Emerging markets are the least favorable place to invest in equities, with the survey showing a net 14 percent of those surveyed would most like to underweight the region over the next 12 months. The MSCI Emerging Markets Index dropped 0.7 percent today for a 37 percent loss this year.

Vale dropped 2.7 percent to 33.93 reais. Usinas Siderurgicas de Minas Gerais SA, Brazil's second-biggest steelmaker, fell 3.6 percent to 39.82 reais.

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net;

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Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Sep 17 08 07:48 GMT |
Danske Daily

* The FOMC kept its key rate unchanged at 2% and the Fed has now moved to a neutral stance
* The US government has calmed the markets (for now) by seizing control over AIG. US stocks rose on the news, and we are likely to see some relief today
* Today we are looking for quarterly earnings from Morgan Stanley. Other key data are US housing starts at 16.00CET

Markets Overnight

Last night the Federal Open Market Committee (FOMC) decided to keep its policy rate unchanged at 2%, thereby disappointing markets which had priced in a 90% probability of a rate cut. The statement reveals that the Fed has now moved to a completely neutral stance, leaving the door open to any policy action depending on how circumstances evolve. The decision was unanimous, as Dallas Fed Governor Richard Fisher refrained from voting for an increase at this meeting.

The initial market reaction was a flattening of the curve with 2-year treasury yields rising 10-12bp and 10- year treasury yields up 6-8bp. Equities responded negatively to the disappointment, but moved higher later in the session on rumours that the US Treasury is considering taking over the insurance company American International Group (AIG) under conservatorship. S&P500 ended 1.8% up and Dow Jones Industrial gained 1.3%.

Then a couple of hours after the US markets had closed the Fed announced that it will give AIG a USD 85bn loan and take a 80% stake in the company. This led to big rises in US treasury yields. 2yr yields are now at 1.92% coming from as low as 1.60% yesterday afternoon. 10yr yields currently trade at 3.52% - almost 30bp higher from its low point yesterday.

EUR/USD has been relatively stable overnight around 1.415 despite a big movement in bond yields. However, USD/JPY has risen by roughly 2 big figures since prior to the Fed meeting, and the cross now trades just below 106.

Commodities have rebounded, especially gold and oil. Crude oil rose by USD 3 a barrel to roughly USD 94 per barrel. Asian equities are a bit mixed this morning, Nikkei225 gaining roughly 1% as we speak, while Hang Seng has dropped 1.6% thus far. Australian markets tumble and AUD/USD falls as Macquarie Group, Australia's top investment bank, was down 7% at AUD 34.23 after touching a four-year low on concerns that the company would struggle to refinance AUD 5bn in debt soon.
Global Daily

Today the market is likely to trade on relief over the rescue of AIG. This points to increases for risky assets and higher bond yields as the fear of a total financial meltdown has dampened for now. Focus should quickly turn to the earnings report from Morgan Stanley today - one of the two investment banks left (the other one is Goldman Sachs) after Lehman Brothers, Bear Sterns and Merrill Lynch have folded or been taken over.

On the data front the most interesting numbers should be US housing starts (16.00CET). Housing starts are expected to fall a bit further from 965k to 950k. If the recent stabilisation in home sales continues we should start to see a bottoming in housing starts - and hence residential construction spending - in early 2009. The great uncertainty is of course whether the flare-up of the financial crisis will lead to another leg down in housing activity.

Other data out is unemployment and CBI industrial trends in the UK. Also the Minutes from the Bank of England are released, which should give us more insight into the thinking about the trade-off between high inflation and low growth.
Scandi Daily

Today we will receive more details on the reasoning behind the Riksbank's decision to hike rates by another 25bp at the policy meeting in early September. It is no wild guess that the rift between the 'old' members (or doves, if you prefer) and the 'new' members (or hawks), with Governor Ingves holding the decisive vote, remains - and should have widened further. To us, it will be most interesting to see if the rhetoric among the hawks has changed, and if so, in what way. In any circumstances we still believe that the Riksbank will pay dearly for its high focus on spot inflation and lagging inflation expectations instead of being forward-looking. By this time next year, we would not be surprised to see a policy interest rate some 100 bp lower than currently.

Danske Bank
http://www.danskebank.com/danskeresearch

Disclaimer

This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.



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Bridge Loans to ... Everywhere

Daily Forex Fundamentals | Written by Ashraf Laidi | Sep 17 08 07:52 GMT |

Now that the Fed has assumed 85% of AIG in return of an $80 bln bridge loan, the central bank has relegated monetary policy to near irrelevance as far as market impact of future measures. Repo purchases of $70 billion on Monday and $50 billion on Tuesday as well as $85 billion loan for AIG is equivalent to as many as three 25-bp rate cuts as far market reaction and magnitude of liquidity creation are concerned in terms of Fed's historical forays. Given the increasingly short duration of resulting market rallies following Federal (Treasury and Fed) interventions, the US central bank is progressively re-writing the rules and making history as the only effective way to create some type of lasting market reaction. This announcement risks further desensitizing markets at the next major intervention or buyout by the "authorities". While on one hand the Fed is attempting to stick to the rules of attaining price stability by not cutting interest rates, it has broken all rules of bailout and moral hazard. Finally, this is a deja vu situation of the Fed's disappointing Dec 11th announcement to cut rates by only 25 bps, only to be forced by markets the next day to provide record liquidity alongside European central banks. Will the Fed now take over Ford or GM? FOREX REACTION Risk Appetite Pendulum swings back to the upside, boosting high yielding currencies against the yen, while the dollar is falling against all currencies except the yen, suggesting the market interpretation of the AIG bailout is not a dollar positive story but rather positive for risk appetite. Gold hits new session high at $785 per ounce. The next question is how short-lived will the latest surge in appetite be? Ashraf Laidi http://www.ashraflaidi.com

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Market Overview | Written by ActionForex.com | Sep 17 08 07:13 GMT |

Daily Report: Yen Crosses Rebounds Further on AIG Bailout Yen crosses rebounds strongly following the news of AIG's bailout. Fed will take a 79.9% stake and will lend up to $85billion to AIG. Fed said in the statement that a "disorderly failure" of AIG could magnify the strains on financial markets, lead to higher borrowing costs and reduce household wealth. The loan is expected to be repaid with the proceeds from the sale of AIG's assets. Indeed, stock markets were unaffected by the disappointment that Fed held rates unchanged at 2.00% on anticipation of the bailout of AIG and ended up higher overnight. Yen's selling started with stocks rebound after FOMC decision. Defying the drastic change of market expectation this week, Fed left federal fund rates unchanged at 2.00% overnight and issued a rather neutral statement. In the accompanying statement, Fed acknowledged that "strains in financial markets have increased significantly and labor markets have weakened further." Several factors, including tight credit conditions, ongoing housing contraction and slowing in export growth will "weigh on economic growth" over the "next few quarters". But the fed is still confident that the "substantial easing" and "measures to foster market liquidity" will promote moderate economic growth. Regarding inflation, Fed expects inflation to moderate later this year and next even though outlook remains highly "uncertain". The more important point to note is that this decision was done by the first unanimous vote in nearly a year. Fisher, who dissented by preferring a hike last time, also voted for no change. Fed is moved to a neutral stance on current uncertainty in the financial markets. BoJ left rates unchanged at 0.5% as widely expected. In the accompanying statement, BoJ noted that energy prices and weak experts is keeping the economy sluggish but growth will return to a moderate path once commodity price stabilize and global economies improve. Inflation will remain high for months before moderating. UK data will take center stage in European session today. BoE minutes is expected to reveal a three way split in voting to keep rates unchanged in last meeting. Employment data is expected to show claimant count rising to 22.3k in Aug. Unemployment rate is expected to be unchanged at 5.4% in Jul. Housing data will be the main focus in US today with building permits and housing starts both expected to drop further in Aug. USD/JPY Daily Outlook Daily Pivots: (S1) 103.98; (P) 105.18; (R1) 106.83; More. USD/JPY's strong rebound from 103.54 and touching of 106.40 turns outlook neutral again. Nevertheless, note that USD/JPY is still kept below 4 hours 55 EMA. 4 hours MACD and RSI are still trending down. Hence the bearish case is still in favor. Below 105.14 minor support will turn intraday bias back to the downside for 103.54 low first. Sustained break of 103.76 will confirm that whole medium term rebound from 95.77 has completed at 110.66. Further decline should then be seen ed to retest this low. however, a break above 107.97 will invalidate this case and bring stronger rise towards 110.66 high. In the bigger picture,whole medium term rebound from 95.77 should have completed with at 110.66 with bearish divergence condition in daily MACD. Sustained break of 103.76 support will confirm this case. Also, note the three wave structure of the rise from 95.77 to 110.66 argues that it's merely a correction in the larger down trend. Hence, in such case, deeper medium term decline should be seen to retest this 95.77 low. On the upside, though, above 107.97 resistance will invalidate the bearish view, indicating firstly that correction from 110.66 has completed, secondly, whole medium term rally from 95.77 is still in progress despite the brief break of trend line support. In such case, retest of 110.66 high should be seen first.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
0:30	AUD	Australia Westpac leading economic indexJul	0.20%	N/A	0.10%
4:00	JPY	BOJ rate decision	0.50%	0.50%	0.50%
8:30	GBP	BOE MPC Vote outcome(C-U-H)		1--7--1	1--7--1
8:30	GBP	U.K. Claimant count Aug		22.3K	20.1K
8:30	GBP	U.K. Avg. earnings 3m Y/Y Jul		3.40%	3.40%
8:30	GBP	U.K. ILO unemployment rate Jul		5.40%	5.40%
9:00	CHF	Swiss ZEW index Sep		N/A	-79.6
9:00	EUR	Eurozone Trade balance (euro) Jul		-3.0B	-0.1B
10:00	GBP	U.K. CBI industrial trend Sep		-13	-13
12:30	USD	U.S. Current account (usd) Q2		-180.0B	-176.4B
12:30	USD	U.S. Building permits Aug		0.93M	0.94M
12:30	USD	U.S. Building permits M/M Aug		N/A	-17.70%
12:30	USD	U.S. Housing starts Aug		0.95M	0.97M
12:30	USD	U.S. Housing starts M/M Aug		N/A	-11.00%
14:35	USD	Crude Oil Inventories		-3.5M	-5.9M

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Singapore's August Non-Oil Domestic Exports: Summary

By Marco Babic

Sept. 17 (Bloomberg) -- Following is a summary of Singapore's external trade figures for August released by International Enterprise Singapore.

==============================================================================
                               Aug.   July   June    May  April  March   Feb.
                               2008   2008   2008   2008   2008   2008   2008
==============================================================================
Non-oil Domestic Exports
YoY% change                  -13.8%  -5.8% -10.6% -10.5%   5.3%  -5.9%   6.2%
MoM% (sa)                      2.0%  -2.3%   4.2%  -9.8%   1.5%  -2.7%  -1.4%
                             --------------------- YoY% ---------------------
Total trade                    10.5%  20.6%  14.6%  15.5%  21.2%  10.8%  18.9%
Exports                        7.7%  15.2%  10.9%  12.4%  16.4%   4.4%  17.7%
 Electronics                 -19.4% -14.1% -14.7%  -8.5%  -0.5%  -8.5%  -2.4%
Imports                       13.7%  26.8%  18.7%  19.0%  26.7%  18.4%  20.2%
                             ------------------- MoM% (SA) ------------------
Total Trade                    -5.3%   1.6%   5.4%  -4.8%   6.0%   0.3%  -4.5%
Non-oil Retained Imports        4.3%  -0.1%  12.5%  -8.9%  -7.0%   2.2%  12.8%
------------------------------------------------------------------------------
==============================================================================
                               Aug.   July   June    May  April  March   Feb.
                               2008   2008   2008   2008   2008   2008   2008
==============================================================================
                            ------------------ S$ billion -------------------
Total Trade (sa)              79.796 84.239 82.943 78.674 82.608 77.922 77.714
Non-oil Domestic Exports (sa) 13.366 13.105 13.409 12.874 14.274 14.060 14.443
Non-oil Retained Imports (sa)  5.904  5.660  5.664  5.036  5.525  5.940  5.813
==============================================================================

Note: Figures are in nominal terms unless otherwise indicated.

Source: International Enterprise Singapore

To contact the reporter on this story: Marco Babic in Singapore at mbabic@bloomberg.net

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Housing Starts in U.S. Probably Fell to 17-Year Low in August

By Bob Willis

Sept. 17 (Bloomberg) -- U.S. builders broke ground in August on the fewest new homes in 17 years, signaling the worst housing recession in a generation will continue to weigh on growth in coming months, economists said before a report today.

Housing starts fell 1.6 percent in August to an annual rate of 950,000, according to the median forecast in a Bloomberg News survey of 74 economists. Building permits, a sign of future construction, probably fell 1 percent to a 928,000 pace.

Builders will probably keep scaling back as stricter lending and record foreclosures swell the number of properties on the market. The housing and credit meltdowns that led to the collapse of Lehman Brothers Holdings Inc. may continue to subtract from economic growth for the rest of the year and into next.

``Starts need to drop further to work off that excess inventory,'' said Nigel Gault, chief U.S. economist at Global Insight Inc. in Lexington, Massachusetts. ``Credit will become tighter again.''

The Commerce Department's report on starts is due at 8:30 a.m. in Washington. Estimates in the Bloomberg survey ranged from 893,000 to 1.04 million units.

Another report from the Commerce Department at the same time may show the current-account deficit in the second quarter widened to $180 billion from $176.4 billion in the previous three months, according to economists surveyed by Bloomberg.

The credit crunch spawned by the subprime mortgage crisis forced Lehman Brothers this week to file for bankruptcy, just a week after the government took over Fannie Mae and Freddie Mac, the two biggest buyers of mortgages.

Fed Policy

Federal Reserve policy makers yesterday left the benchmark interest rate unchanged at 2 percent for a third consecutive meeting. Chairman Ben S. Bernanke and his colleagues signaled they will continue to address market turmoil with emergency lending.

As banks tighten borrowing rules and confidence slumps, consumer spending is faltering. Retail sales in August dropped for a second month, Commerce reported last week.

Homebuilders remain gloomy. A report yesterday from the National Association of Home Builders/Wells Fargo showed confidence among U.S. homebuilders in September held near the lowest level since records began in 1985.

As home prices continue to fall, more and more Americans are forced into foreclosure as they owe more than their homes are worth. Stricter lending rules also limit opportunities to refinance out of adjustable-rate mortgages before they reset higher.

Foreclosure filings rose to a record in August, RealtyTrac Inc. said Sept. 12. One in 416 U.S. households got a default notice, was warned of a pending auction or was foreclosed upon.

Toll Brothers Inc., the largest U.S. luxury homebuilder, on Sept. 4 reported a fourth straight quarterly loss.

``Explosive energy price increases, rising unemployment and severe mortgage and credit'' conditions cut demand, Chief Executive Officer Robert Toll said on a conference call. ``Weak consumer confidence has kept many potential buyers from taking advantage of the current buyers' market.''

                         Bloomberg Survey

================================================================
                          Housing Building  Current
                           Starts  Permits  Account
                           ,000's   ,000's   $ Blns
================================================================

Date of Release              09/17    09/17    09/17
Observation Period            Aug.     Aug.       2Q
----------------------------------------------------------------
Median                         950      928   -180.0
Average                        951      926   -180.8
High Forecast                 1040      960   -169.0
Low Forecast                   893      885   -188.1
Number of Participants          74       49       44
Previous                       965      937   -176.4
----------------------------------------------------------------
4CAST Ltd.                     950      920   -186.5
Action Economics               950      950   -179.0
Aletti Gestielle SGR           948      940   -178.0
Allianz Dresdner Economic      940     ---      ---
Argus Research Corp.           970     ---      ---
Banc of America Securitie      950     ---    -179.0
Bank of Tokyo- Mitsubishi      955      916   -177.4
Bantleon Bank AG               960      937     ---
Barclays Capital               950     ---    -183.0
BMO Capital Markets            940      910   -180.0
BNP Paribas                    950     ---      ---
Briefing.com                   950      930     ---
Calyon                         945      928   -188.1
CFC Group                      955      930   -180.0
CIBC World Markets             920      900   -180.0
Citi                           925      925   -179.0
ClearView Economics            950     ---      ---
Commerzbank AG                 950      900     ---
Credit Suisse                  950     ---      ---
Daiwa Securities America       900     ---    -182.0
Danske Bank                    946      937     ---
DekaBank                       960      930   -179.3
Desjardins Group               940      930   -180.0
Deutsche Bank Securities       950      950   -180.0
Deutsche Postbank AG           960     ---      ---
Dresdner Kleinwort             945     ---    -178.0
DZ Bank                        950      945     ---
First Trust Advisors           961     ---    -182.2
Fortis                        1000     ---      ---
FTN Financial                  950      930     ---
Global Insight Inc.            893      891     ---
Goldman, Sachs & Co.           989     ---    -182.5
H&R Block Financial Advis      955      930     ---
Helaba                         980      932   -180.0
High Frequency Economics       925      900   -183.0
HSBC Markets                   970      950   -181.0
IDEAglobal                     955      925   -180.0
Insight Economics              950     ---    -178.0
Intesa-SanPaulo               1000      900     ---
J.P. Morgan Chase              930      910   -180.0
Janney Montgomery Scott L      945      921     ---
JPMorgan Private Client        930      920     ---
Landesbank Berlin              950      920     ---
Landesbank BW                  940      915     ---
Lehman Brothers                920      900   -176.5
Lloyds TSB                     960      930   -183.2
Maria Fiorini Ramirez Inc      925     ---      ---
Merk Investments               985      920   -179.7
Merrill Lynch                  900      885   -184.3
Moody's Economy.com            950      930   -181.6
Morgan Stanley & Co.           920     ---      ---
National Bank Financial        960      935     ---
National City Corporation     1040      940   -186.2
Natixis                        940     ---    -185.0
Nomura Securities Intl.        985      925     ---
Okasan Securities              975     ---      ---
PNC Bank                       965     ---      ---
RBS Greenwich Capital          930     ---      ---
Ried, Thunberg & Co.           935      925   -186.0
Schneider Trading Associa      970      946     ---
Scotia Capital                 960     ---      ---
Societe Generale               980     ---    -178.0
Standard Chartered             940      920   -180.0
Stone & McCarthy Research      950     ---    -188.0
TD Securities                  960      950     ---
Thomson Financial/IFR          958      942   -182.0
UBS Securities LLC             925     ---    -179.4
Unicredit MIB                  950      950   -169.0
University of Maryland         970      960   -179.5
Wachovia Corp.                 960     ---    -181.0
Wells Fargo & Co.              950      950   -183.0
WestLB AG                      950      925   -178.0
Westpac Banking Co.            930      890   -175.0
Wrightson Associates           930      920   -182.0
================================================================

To contact the reporter on this story: Bob Willis in Washington bwillis@bloomberg.net.

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Hong Kong's Yam Says Next Few Days Crucial for Crisis

By Nipa Piboontanasawat

Sept. 17 (Bloomberg) -- Hong Kong Monetary Authority Chief Executive Joseph Yam said ``the next few days'' will be crucial to restoring health to the global financial system, ravaged by the credit crisis and failure of Lehman Brothers Holdings Inc.

Yam, who led a HK$118 billion ($15 billion) intervention to prop up Hong Kong markets 10 years ago, also backed the Federal Reserve's decision to leave its key interest rate unchanged yesterday, rebuffing some calls for a reduction in borrowing costs.

``The financial crisis development cannot effectively be handled by monetary policy such as interest rates only,'' Yam told reporters in Hong Kong today. ``The next few days will be key'' to how the crisis unfolds, he said.

Yam's comments came hours before the U.S. government agreed to take control of American International Group Inc. and provide as much as $85 billion to avert the failure of the nation's biggest insurer. Hong Kong's markets have been buffeted by the crisis, sending the Hang Seng Index down about 35 percent this year on concern at credit risks and slowing global growth.

The U.S. government's action will ``mitigate broader disruptions and at the same time protect the taxpayers,'' U.S. Treasury Secretary Henry Paulson said in an e-mailed statement released in Washington.

Hong Kong has a ``healthy'' regulatory system for stocks, banking and insurance, Yam said today, adding there are no structural problems in the city's financial system.

The Hang Seng index fell 0.9 percent to 18148.71 at 11:33 a.m. in Hong Kong.

Hong Kong interest rates track those of the U.S. because the city's currency is pegged to the dollar. The HKMA kept its base rate unchanged at 3.5 percent today, tracking the Fed's decision to leave its main interest rate at 2 percent.

In refraining from cutting rates, Fed Chairman Ben S. Bernanke and his colleagues noted that financial strains have ``increased significantly.'' The Fed signaled it will continue to address the turmoil with emergency lending and aim monetary policy at a longer-term economic forecast.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net

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BOJ May Inject More Cash After Keeping Rate at 0.5%

By Mayumi Otsuma

Sept. 17 (Bloomberg) -- The Bank of Japan said it's ready to provide more cash after pumping 5.5 trillion yen ($51.8 billion) into money markets unsettled by the U.S. financial crisis.

``The bank will continue to strive to ensure smooth settlement of funds and maintain market stability,'' it said in a statement after Governor Masaaki Shirakawa and his colleagues left the target for the overnight lending rate at 0.5 percent.

Central banks from Frankfurt to Sydney added more than $200 billion this week to make sure banks keep lending to each other following the collapse of Lehman Brothers Holdings Inc. and rescue of American International Group Inc. World market turmoil may crimp global growth, reducing demand for Japan's exports and weakening an economy that's on the brink of a recession.

``The BOJ is sending a message that its best approach to the market turbulence is to provide as much liquidity as needed, not to change interest rates,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. ``The bank is trying to figure out how badly the external shocks will affect the economy at home.''

Global stock markets have rebounded since reeling from Lehman's bankruptcy this week. The Nikkei 225 Stock Average advanced from a three-year low today after the U.S. government said it would take over New York-based AIG, the country's largest insurer, to save the firm from collapse.

Market `Tensions'

``Economic growth has been sluggish against the backdrop of higher energy and material prices and weaker growth in exports,'' the Bank of Japan said, repeating language introduced last month. ``Tensions in global financial markets have increased and there are downside risks to the world economy.''

The yen traded at 105.88 per dollar at 4:03 p.m. in Tokyo from 105.99 before the announcement. The Nikkei rose 1.2 percent.

The Bank of Japan injected 3 trillion yen into the banking system today after the overnight rate surged to 0.65 percent, and yesterday added 2.5 trillion yen. ``Japan's money market has been functioning well,'' the central bank said.

The policy board may want more evidence that weakening global growth will derail the world's second-largest economy before deciding whether to cut borrowing costs, already the lowest in the industrialized world. The bank today reiterated that prolonging a low-rate policy could hamper the nation's prospects for sustainable growth in the long term.

Focus on Damage

``We think the Japanese economy is already in a recession and now the focus is on how much damage the latest external shock will cause,'' said Yoshimasa Maruyama, a senior economist at BNP Paribas Securities Japan Ltd. in Tokyo. Still, ``a rate cut isn't among the bank's options because BOJ policy makers have said monetary conditions are already very accommodative.''

Protracting low rates may ``lead to swings in economic activity and prices,'' the bank said. Shirakawa made similar remarks in speeches in August and this month.

Japan will recover as commodity prices ease and other economies improve, the central bank repeated today, adding that it will implement policy flexibly.

Recent reports show resilience in Japan's economy even after it shrank an annualized 3 percent last quarter, the sharpest contraction since 2001. Exports, production and housing starts all rose in July, and crude oil has plunged 35 percent since exceeding $147 a barrel for the first time on July 11.

``With commodity prices tumbling, the Japanese economy should be among the first to recover as the global inflation shock recedes,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. ``Japan has avoided the fundamental economic and financial imbalances now undermining so many Western economies.''

Unanimous Decision

Today's rate decision was unanimous, and predicted by all 33 economists surveyed by Bloomberg News. Of 29 who gave predictions through June, 24 said there will be no move by then. Four estimated higher rates and one forecast a cut.

Inflation will hover around a decade high in coming months before moderating, the central bank said. Consumer prices excluding fresh food rose 2.4 percent in July, the fastest rate since 1997, outpacing wage growth.

The bank said it's watching ``inflation expectations of households and the price-setting behavior of firms in addition to developments in energy and materials prices.''

``Commodity markets are going through an adjustment, but core consumer prices will hover around 2 percent because companies continue to pass on food and energy costs,'' said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. ``The BOJ won't cut rates to spur growth nor raise them to contain inflation for the time being.''

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

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ECB's Bini Smaghi Says AIG Rescue `Essential' for Markets

By Andrew Davis

Sept. 17 (Bloomberg) -- The U.S. government bailout of American International Group Inc. to avert the worst financial collapse in history was ``essential'' to restore confidence in financial markets and protect millions of consumers, European Central Bank Executive Board member Lorenzo Bini Smaghi said.

``Avoiding the turbulence spreading to a big insurer was a critical element,'' Bini Smaghi said today in an interview with Italian television station Canale5. ``You couldn't let a big insurer go under because it would have impacted on millions of consumers. The intervention was essential to restore confidence.''

The U.S. reversed its opposition to a bailout of AIG, the nation's biggest insurer by assets, after private efforts failed and the Federal Reserve concluded that ``a disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a Fed statement late yesterday. AIG received an $85 billion loan to keep it afloat.

The unrest in financial markets will continue until the world's banks can restore confidence in markets by demonstrating that they have confidence in one another, Bini Smaghi said.

``The markets need confidence and to restore that confidence banks and financial institutions have to have confidence in each other,'' Bini Smaghi said. ``Now they don't even feel sure enough to lend each other money that is pushing interest rates up and making it harder to get credit.''

European banks are certainly exposed to Lehman Brothers Holdings Inc. and will be directly affected by the collapse of the U.S. investment bank this week. He said it would take time to know just what the potential losses are, but that they should be ``limited.''

To contact the reporter on this story: Andrew Davis in Rome at



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AIG Gets $85 Billion Fed Loan, Cedes Control to Avoid Collapse

By Hugh Son, Erik Holm and Craig Torres

Sept. 17 (Bloomberg) -- American International Group Inc. averted the worst financial collapse in history by accepting an $85 billion federal loan and giving the government a majority stake.

The U.S. reversed its opposition to a bailout of AIG, the nation's biggest insurer by assets, after private efforts failed and the Federal Reserve concluded that ``a disorderly failure of AIG could add to already significant levels of financial market fragility,'' according to a Fed statement late yesterday.

``It's an enormous relief,'' said David Havens, credit analyst for UBS AG in Stamford, Connecticut. ``Nobody really knows what it would have meant if they would have been allowed to fail, but there was an enormous amount of systemic risk. The problem was, nobody really knew how bad it could have been.''

AIG gives up a 79.9 percent stake to the government and senior managers including Chief Executive Officer Robert Willumstad, 63, will give up their jobs. Retired Allstate Corp. CEO Edward Liddy, 62, will be AIG's new leader, according to a person familiar with the plans, who declined to be identified because the change hadn't been formally announced. Allstate is the biggest publicly traded home and auto insurer in the U.S.

The two-year revolving loan gives AIG time to sell assets ``on an orderly basis,'' the New York-based insurer said late yesterday in a statement. The U.S. has the right to discontinue payment of dividends to AIG's common and preferred stockholders, who are already reeling from a 94 percent drop in common shares this year.

Global Disruptions

The agreement, supported by the Treasury Department, may avoid wider chaos in world markets that threatened to engulf more financial companies. Industry losses could have totaled $180 billion if AIG collapsed, according to RBC Capital Markets.

``This should help to calm the markets in the short-term and hopefully provides AIG some time to get their house in order,'' said Michael Cuggino, president and CEO of San Francisco-based Pacific Heights Asset Management LLC, which manages about $3.8 billion.

AIG posted three quarterly losses totaling $18.5 billion. The insurer was pushed to the brink of failure because of a business that sold credit-default swaps, the protection for debt investors that plunged in value as the securities they guaranteed declined. The company covered $441 billion of fixed- income investments for banks and other parties, including $57.8 billion in securities tied to subprime mortgages.

The insurer's survival became uncertain after credit-rating downgrades on Sept. 15 threatened to force AIG to post more than $13 billion in collateral when the company was already short on cash. AIG couldn't raise money by selling shares after the stock plunged to less than $4 a share, compared with $70.11 in October, 2007.

Loan Terms

The Fed's loan doesn't require asset sales or the company's liquidation, though these are the most likely ways AIG will repay the Fed, central bank staff officials told reporters on condition of anonymity. Interest will accrue at the three-month London interbank offered rate plus 8.5 percentage points.

The Fed doesn't have an expectation of whether AIG will be smaller, nonexistent or similar to its current form at the end of the loan's term, the staffers said.

The Fed or Treasury will end up actually holding the AIG stake, the staffers said. The Fed bailed out AIG while refusing aid to Lehman Brothers Holdings Inc., which collapsed earlier this week, because financial markets were more prepared for a Lehman failure, a Fed staff official said.

``It's extraordinary, I am floored,'' said former Treasury counsel Peter Wallison in an interview. ``No one could have possibly imagined this a few months ago. I can't imagine why the Fed would do this unless they were sure AIG's failure posed systemic risk. It does speak to the fears in the market.''

Greenberg's Redux

The rescue comes less than two weeks after the U.S. took over Fannie Mae and Freddie Mac as rising mortgage defaults threatened the companies. The Fed stepped in after JPMorgan Chase & Co. and Goldman Sachs Group Inc., which were brought in to help assess AIG, failed to come up with a solution, according to a person familiar with the talks.

Liddy is currently on the board of Goldman, the company Henry Paulson ran as CEO before becoming the U.S. treasury secretary in 2006.

Willumstad, the former Citigroup Inc. president who left the bank in 2005 to seek a CEO position, was named to AIG's top post in June. His predecessor, Martin Sullivan, was chief for three years until being ousted after two record quarterly net losses. Maurice ``Hank'' Greenberg reigned at AIG for almost four decades until he was forced to retire in 2005 amid regulatory probes.

Unit Sales

Greenberg, who remains one of the company's biggest stakeholders, said the company needed a bridge loan instead of a plan that put the company under government control. An investor group led by Greenberg said in a federal filing hours before the rescue was announced they might want to buy the company or some units or make loans to AIG.

``Why would you want to wipe out shareholders when you just need a bridge loan?'' Greenberg, 83, said in an interview before the announcement. ``It doesn't make any sense.'' Greenberg declined to comment after the Fed announcement, spokesman Glen Rochkind said.

AIG may sell its stake in reinsurer Transatlantic Holdings Inc., its consumer finance division American General Finance, its U.S. auto insurance business, and its asset manager, analysts have said.

Aircraft Leasing

AIG's aircraft-leasing unit International Lease Finance Corp. may be bought by investors led by the unit's founder, Steven Udvar-Hazy, the Wall Street Journal reported, citing unnamed people. Udvar-Hazy has been in discussions with potential investors since Sept. 14, the Journal said.

The insurer rejected a bid for a joint investment by Allianz SE and J.C. Flowers & Co. on Sept. 14, said two people with knowledge of the offer.

Allianz, Europe's biggest insurer, and Flowers, the New York-based private equity firm run by J. Christopher Flowers, proposed the cash infusion to help AIG fend off a liquidity crunch, the people said.

Sabia Schwarzer, an Allianz spokeswoman, declined to comment. Flowers and Nicholas Ashooh, an AIG spokesman, didn't return calls seeking comment.

To contact the reporters on this story: Hugh Son in New York at hson1@bloomberg.net; Erik Holm in New York at eholm2@bloomberg.net.

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