Ralph E. Jones III Appointed to the Board of Directors of Everest Re Group, Ltd.

Everest Re Group, Ltd. (NYSE: RE) announced the appointment of Ralph E. Jones III to its Board of Directors, effective September 17, 2008.

Ralph E. Jones III had formerly served as Chairman and Chief Executive Officer of Arch Worldwide Insurance Group since September 2003 until retiring in July 2008. Prior to joining Arch as President of Arch Insurance Group, Inc. in July 2003, Mr. Jones held various executive level positions within the Chubb Corporation, where he began his career more than thirty years ago.

Mr. Joseph V. Taranto, Chairman and Chief Executive Officer, said "I am pleased to welcome Ralph to the Everest Board of Directors. His knowledge and experience will further enhance the strength of our Board and greatly benefit the Group. We are very fortunate to have an executive of Ralph’s caliber join our Board.”

Everest Re Group, Ltd. is a Bermuda holding company that operates through the following subsidiaries: Everest Reinsurance Company provides reinsurance to property and casualty insurers in both the U.S. and international markets. Everest Reinsurance (Bermuda), Ltd., including through its branch in the United Kingdom, provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers. Everest National Insurance Company and Everest Security Insurance Company provide property and casualty insurance to policyholders in the U.S. Everest Indemnity Insurance Company offers excess and surplus lines insurance in the U.S. Additional information on Everest Re Group companies can be found at the Group’s web site at www.everestre.com.

Endurance Specialty Holdings Ltd. to Release Third Quarter 2008 Financial Results on November 6, 2008

PEMBROKE, Bermuda, Sep 17, 2008 (BUSINESS WIRE) -- Endurance Specialty Holdings Ltd., (ENH:

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ENH 31.09, -1.20, -3.7%) a Bermuda-based provider of property and casualty insurance and reinsurance, today announced that it will issue its financial results for the quarter ended September 30, 2008 on Thursday, November 6, 2008 after the close of the financial markets.
On Friday, November 7, 2008, Kenneth LeStrange, Chairman, President and CEO, and members of senior management will host a conference call at 8:30 AM (Eastern) to discuss the financial results.
The conference call can be accessed via telephone by dialing (877) 672-9216 (toll-free) or (706) 634-9637 (international) and advising Conference ID Number 28045051. Those who intend to participate in the conference call should register at least ten minutes in advance to ensure access to the call. The public may access a live broadcast of the conference call at the "Investors" section of Endurance's website, www.endurance.bm. A telephone replay of the conference call will be available through November 21, 2008 by dialing (800) 642-1687 (toll-free) or (706) 645-9291 (international) and entering Conference ID Number 28045051.
About Endurance Specialty Holdings
Endurance Specialty Holdings Ltd. is a global specialty provider of property and casualty insurance and reinsurance. Through its operating subsidiaries, Endurance writes property, casualty, healthcare liability, agriculture, workers' compensation, professional lines of insurance and property, catastrophe, casualty, agriculture, marine, aerospace, and surety and other specialty lines of reinsurance. We maintain excellent financial strength as evidenced by the ratings of A (Excellent) from A.M. Best (XV size category) and A (Strong) from Standard and Poor's on our operating subsidiaries (other than American Agri-Business Insurance Company) and A- (Excellent) from A.M. Best for American Agri-Business Insurance Company. Endurance's headquarters are located at Wellesley House, 90 Pitts Bay Road, Pembroke HM 08, Bermuda and its mailing address is Endurance Specialty Holdings Ltd., Suite No. 784, No. 48 Par-la-Ville Road, Hamilton HM 11, Bermuda. For more information about Endurance, please visit http://www.endurance.bm.
SOURCE: Endurance Specialty Holdings Ltd.

Don't fear a hike in insurance premiums

NEW YORK (CNNMoney.com) -- With the government effectively taking over American International Group, the nation's largest insurer, there's reason to be concerned about the health of the insurance industry.

Tuesday's $85 billion rescue of AIG (AIG, Fortune 500) isn't the only problem facing the insurance industry. AIG and other insurers also have to deal with billions of dollars in damage caused by Hurricanes Gustav and Ike in the past few weeks.

But experts are quick to point out that the financial woes facing AIG shouldn't have any impact on the company's policyholders. In addition, while the hurricanes may lead some insurers to raise their premiums, or the fee you pay for insurance coverage, most industry watchers think the increases will be modest.

Insurance policies are safe

First, here's what you need to know if you're an AIG customer.

On Tuesday, AIG issued a statement to reassure policyholders that they remain fully covered by AIG subsidiaries.

"These companies are well capitalized and meet or exceed local regulatory capital requirements. The companies continue to operate in the normal course to meet obligations to policyholders," AIG said in a statement.

Insurance policies are fully backed by state guaranty associations up to a certain amount (determined on a state-by-state basis), which covers life insurance as well as property and casualty insurance.

That means that consumers should not worry that their auto and homeowner policies are in jeopardy. (For more about how AIG's bailout may effect you, click here.)

Premiums unlikely to rise by much

Experts did say, however that AIG and other insurers may have to raise their premiums in the future. But that's probably more of a byproduct of this year's hurricane season and not AIG's collapse.

"There could very well be increases because of catastrophic losses from hurricanes and things of that kind," said Joseph Belth, professor emeritus of insurance at Indiana University and editor of The Insurance Forum, an insurance industry newsletter.

Generally, increases are felt in the areas where the hurricane exposure is greatest, Belth said. But even policyholders in areas not hit by hurricanes could be asked to pay a higher premium when their policy is up for renewal, which is typically once a year.

That's because "the insurance company may try to spread it out somewhat," Belth said.

While it's still too early to estimate the total amount of damage caused by this year's hurricane season, it's unlikely that it will be enough to cause a dramatic rise in insurance premiums across the board.

"The property and casualty insurance industry has gone through record years of profits," said Robert Hunter, Director of Insurance for the Consumer Federation of America, "so the leverage ratios are the safest ever."

In addition, rates are calculated over an extended period of time, explained Ed Domansky, spokesman for the Florida Office of Insurance Regulation. "One particular season is not going to impact policyholders' premiums," he said.

Finally, insurance companies cannot just raise rates at will, according to Michael Barry, a vice president at the Insurance Information Institute.

"Insurers require the approval of their regulator in order to raise rates," he explained, adding that getting such approval is a long and complicated process overseen by state insurance commissioners.

Even though experts agree that the industry's woes are unlikely to affect the average consumer, those that do discover a rate increase in their next renewal notice should take that as an opportunity to shop around for a new insurer.

"Other companies may not be raising rates as much as yours," Hunter said.

Why AIG matters to you

State Plans Protect Consumers With AIG Insurance Policies

Ike's aftermath

Professor Co-Authors Critique of McCain Health Insurance Plan

Newswise — Anne Royalty, associate professor of economics at Indiana University-Purdue University Indianapolis (IUPUI), is one of four scholars who have published a critique of Senator John McCain’s proposed health insurance reform plan.

McCain’s reform package “would eliminate the current tax exclusion of employer payments for health coverage, replace the exclusion with a refundable tax credit for those who purchase coverage, and encourage Americans to move to a national market for nongroup insurance,” according to the critique abstract.

Results of the change will “tend to raise costs, reduce the generosity of benefits, and leave people with fewer consumer protections,” the researchers said.

The critique, “Cost and Coverage Implications of the McCain Plan to Restructure Health Insurance,” was published Tuesday (Sept. 16, 2008) in the online version of the policy journal Health Affairs.

Royalty’s co-authors are: Thomas Buchmueller of the University of Michigan, Ann Arbor; Sherry Glied of Columbia University, New York; and Katherine Swartz of the Harvard School of Public Health, Boston.

Arthur J. Gallagher & Co. Acquires Summit Insurance Group

ITASCA, Ill., Sept 17, 2008 /PRNewswire-FirstCall via COMTEX/ -- Arthur J. Gallagher & Co. today announced the acquisition of Summit Insurance Group in San Antonio, Texas. Terms of the transaction were not disclosed.

Established in 1997, Summit Insurance Group offers a wide range of employee benefit consultation and brokerage services for their Texas clients. They specialize in group medical, dental, life and disability insurance with an emphasis on planning, design, implementation, cost containment and plan administration for group businesses with 50 or more employees. L.P. "Buddy" Morris and his associates will continue to operate in their current location under the direction of John Neumaier, South Central Regional Executive Vice President of Gallagher's employee benefit consulting and brokerage operations.

"Our acquisition strategy is about increasing our capabilities for our clients and growing our geographic presence. The addition of Summit Insurance Group allows us to do both," said J. Patrick Gallagher, Jr., Chairman, President and CEO. "This dynamic agency's solid growth is a tribute to their entrepreneurial culture and their team-based focus on client service. They will be a wonderful complement to our employee benefits team, and we are pleased to welcome Buddy and his team to our growing Gallagher family of professionals."

Arthur J. Gallagher & Co., an international insurance brokerage and risk management services firm, is headquartered in Itasca, Illinois, has operations in 14 countries and does business in more than 100 countries around the world through a network of correspondent brokers and consultants. Gallagher is traded on the New York Stock Exchange under the symbol AJG.

SOURCE Arthur J. Gallagher & Co.

AIG woes seen benefiting insurance rivals

By Simon Challis

LONDON (Reuters) - Insurance rivals stand to reap the benefits from the woes of American International Group Inc, snapping up assets AIG is forced to sell, while gaining greater pricing power as AIG pulls in its claws.

Zurich Financial Services AG (ZFS) and other insurance rivals are possible winners, say analysts who see AIG emerging from its current troubles with less weight to throw around.

"The first consequence we see is that it should be a positive for the P&C (property and casualty) industry," said JP Morgan analysts in a research note.

"This effectively represents a withdrawal of capacity (or capital) from the marketplace ... Pricing in the P&C market is driven by capital -- the less capital, the less pressure there is for prices to fall."

The likely withdrawal of billions of dollars of AIG capital from the sector will put a brake on the slide in prices in the commercial insurance market, where premiums had been expected to fall by up to 20 percent due to intense competition.

AIG has long been a dominant player in corporate insurance, with an 11 percent share in the U.S. market, as well as for other big-ticket risks such as aviation.

Now, intermediaries predict that although AIG will continue underwriting, it is likely to lose business clients.

"In our view, ZFS is probably the clearest winner," said JP Morgan.

One senior executive at an insurance broker who spoke on condition of anonymity saw others benefiting as well. "Zurich and ACE Ltd are likely to be the beneficiaries, maybe even AXA SA. Anyone with a multinational network will be a winner," the executive said.

"It's still early days, but it's my view that AIG is a wounded animal. It will be hard for us to say to clients, 'We'll place your business with a company who we have no idea what its ownership or management structure will look like in six months' time,'" the broker added.

Among lines of business, insurers providing specialized commercial coverage, such as directors' and officers' liability, could pick up business as AIG scales back participation, said Goldman Sachs analyst Tom Cholnoky, in a note Tuesday.

He named Ace, Travelers Cos Inc and XL Capital Ltd among the biggest and likely beneficiaries.

However, reinsurers could be worse off, seeing less business if AIG's gross premium volumes decline, Cholnoky added.

Many of AIG's chief competitors would likely highlight their own credit ratings and financial stability as a major selling point in an effort to attract business that was belonged to AIG, Citigroup analyst Joshua Shanker said in a note Tuesday.

FIRE SALE?

AIG's rescue calls for the U.S. Federal Reserve to lend it up to $85 billion for two years in exchange for a 79.9 percent equity stake.

AIG will pay interest at a steep 8.5 percentage points above the three-month London Interbank Offered Rate, equal to about 11.4 percent. That gives AIG a big incentive to embark on a massive asset sale program to pay back the loan quickly.

Insurance rivals are set to jostle to pick up attractive parts of the AIG empire, including profitable aircraft leasing arm International Lease Finance Corp (ILFC).

AIG's stake in reinsurer Transatlantic Re, its market-leading operations in Central and Eastern Europe and Asia would also be enticing, analysts say.

Munich Re has registered its interest in picking up AIG assets, but it is likely to face stiff competition, with Japan's well-capitalized and acquisitive insurers and Australia's QBE also seen as potential bidders.

Analysts say Canadian life insurance company Manulife Financial Corp, the biggest in North America by market value, might consider acquiring AIG's U.S. variable annuity business. Manulife executives have said they would like to enter the Japanese and Chinese wealth-management markets.

"If you take out all the financial services business, AIG had a classic life and property/casualty insurance business, and it was very profitable. They made good money," said Thomas Noack, insurance analyst at WestLB.

"This ... represents an opportunity for those companies either with cash, or with access to cash (via leverage), to build out their portfolios," said JP Morgan.

"AIG has some attractive assets in our view. We are now undoubtedly in a buyer's market in our opinion, although we expect a lot of competition for the assets."

(Additional reporting by Lilla Zuill in New York; editing by Jason Neely/Jeffrey Benkoe)

Texas may be stuck with $2.1B insurance tab from Hurricane Ike

AUSTIN – The state could be on the hook for as much as $2.1 billion because of the massive property damage caused along the Texas Coast by Hurricane Ike.

Officials with the Texas Windstorm Insurance Association said today that claims paid by the so-called wind pool – which provides the bulk of coverage on the coast – could reach as high as $4 billion in residential and commercial property losses.

Although insurance companies will initially have to pay most of the claims through mandatory assessments by the state, they will be able to recover those payments through deductions in their state premium taxes. Insurers can generally deduct about 20 percent of their assessments each year.

That means a substantial loss in state revenue over the next several years that could total as much as $2.1 billion, forcing the Legislature to adjust its spending priorities depending on the total state revenue situation.

Five insurance companies will have to pay the lion’s share of the mandatory assessments to cover the wind pool’s losses. In order, based on size of their assessments, they are Allstate, State Farm, Travelers, Farmers and USAA. The assessments are based on market share in Texas, with companies given credit for selling wind policies in coastal areas.

Insurance Commissioner monitors AIG impact in Golden State

California Insurance Commissioner Steve Poizner said Wednesday his department is closely monitoring the fate of troubled insurance giant AIG and the impact its $85 billion federal bailout may have in the state.

Poizner said two dozen companies under New York-based American International Group’s (NYSE: AIG) corporate umbrella are licensed to sell insurance in California. According to the California Department of Insurance, those AIG-owned companies cumulatively held 7 percent of the auto insurance market in California last year ($1.5 billion in 2007 premiums), 8 percent of the state’s workers’ compensation market ($725 million), and 1.5 percent of its homeowners market ($98 million).

“I have made monitoring the AIG issue the No. 1 priority of my department,” Poizner said Sept. 17, adding that the federal bailout “offers maximum protection for AIG insurance customers in California and elsewhere … (and) does not create any lien obligations on any of the AIG insurance assets, ensuring that their claims-paying capacity remains strong.”

Even before the $85 billion bailout, pulled together late Tuesday as giant AIG appeared headed for bankruptcy, Poizner said its subsidiaries in California “had the risk-based capital required to operate in the California market.”

The infusion of taxpayer funds will give the U.S. government an 80 percent stake in the giant insurer, and the right to remove senior management, according to an Associated Press story Wednesday.

But Poizner said AIG’s financial woes are concentrated in the parent company, “not its subsidiary insurance companies. The AIG-affiliated insurance companies remain solid. We will continue to closely monitor these companies for any changes in their financial condition.”

Poizner, who in mid-September announced plans to form an exploratory committee to raise funds for a potential gubernatorial run in 2010, added that he’ll continue to monitor the situation closely. If AIG decides to sell any insurance units based in California or doing business here, he said, “I will closely scrutinize those proposed sales to ensure that consumers receive the protections they deserve.”

Dennis Cusack, an insurance specialist and partner at San Francisco’s Farella Braun and Martel law firm, said clients, both nationally and in California, are watching the AIG situation, “to see how it plays out.”

Already, however, he’s seen significant changes both in the giant insurer’s behavior and how customers are viewing AIG in recent days, Cusack told the San Francisco Business Times. Not surprisingly, “clients have been very reluctant to sign up for new policies with AIG,” he said. At the same time, there are signs that AIG insurance entities are becoming “more proactive at settling claims and (are) moving to resolve claims sooner, (presumably) because AIG feels it needs to buy good will in the marketplace.”

Cusack said other insurance companies are moving aggressively to “snap up AIG’s market share,” which explains why AIG is taking steps to protect its turf, despite its internal difficulties.

Like Poizner, Cusack suggested that AIG’s insurance subsidiaries are “very solid companies” and that risk managers may find compelling opportunities to do business with them after the short-term crisis is past.

Published reports indicate that Zurich Financial Services, ACE, AXA and other multinational carriers could benefit from AIG’s woes. Cusack said Chubb, XL Insurance Co. and Liberty Mutual are others that could move to take advantage of the turmoil at AIG.

AIG owns more than two dozen companies licensed to offer insurance in California, according to the DOI. They include 21st Century Casualty Co.; 21st Century Insurance Co.; AIG Casualty Co.; AIG Centennial Insurance Co.; AIG Premier Insurance Co.; AIU Insurance Co.; American General Indemnity Co.; American Home Assurance Co.; American International Insurance Co. of California Inc.; Birmingham Fire Insurance Co. of Pennsylvania; Commerce And Industry Insurance Co.; GE Auto & Home Assurance Co.; GE Indemnity Insurance Co.; Granite State Insurance Co.; Hartford Steam Boiler Inspection and Insurance Co.; Insurance Co. of the State of Pennsylvania; Landmark Insurance Co.; National Union Fire Insurance Co. of Pittsburgh, Pa; New Hampshire Insurance Co.; Pacific Assurance; Putnam Reinsurance Co.; Transatlantic Reinsurance Co.; United Guaranty Commercial Insurance Co. of North Carolina; United Guaranty Credit Insurance Co.; United Guaranty Residential Insurance Co.; and Yosemite Insurance Co.

Chris Rauber wrote this story for the San Francisco Business Times, an affiliated newspaper.

New York State offers lifeline to insurance giant AIG

NEW YORK: Governor David Paterson of New York said on Monday that the state would allow the American International Group, one of the world's largest insurance companies, to lend itself $20 billion to bolster its capital as it faces potentially disastrous credit downgrades.

Shares in AIG tumbled more than 60 percent early Monday as investors grew concerned that the firm lacked capital to withstand cuts to its debt rating. But Paterson reiterated the state's support of the company and declared AIG "financially sound."

The company approached the state for help, Paterson said, and government officials worked closely with AIG throughout the weekend. He vocally supported AIG's efforts to seek help from the Federal Reserve.

AIG has sought a $40 billion bridge loan from the Federal Reserve as a lifeline, as the three-part rescue plan it had devised appeared to crumble, a person briefed on the matter said.

Paterson argued that New York taxpayers would not be put at risk by the state's involvement.

The announcement appeared to help arrest the decline in AIG's stock. Trading below $4 shortly before noon, the shares recovered to about $6 in the following half-hour - still a loss of almost 50 percent from their Friday close.

Ratings agencies had threatened to downgrade the insurance giant's credit rating by Monday morning, allowing counter-parties to withdraw capital from their contracts with the company. One person close to the firm said that if such an event occurred, AIG might survive for only 48 hours to 72 hours.

AIG has already raised $20 billion this year. But even that amount of capital has not averted a crisis.

The firm's sickly financial health was a prominent topic in weekend talks among Wall Street chieftains who gathered at the Federal Reserve Bank of New York to discuss the potential collapse of the investment bank Lehman Brothers. AIG had become one of the biggest underwriters of complex debt securities known credit default swaps, used as insurance for a wide range of products, including the mortgage instruments that have been the bane of Wall Street for the past year and a half.

Eric Dinallo, the New York state insurance superintendent, has been deeply involved in discussions about AIG's survival, this person said.

J. C. Flowers & Company, a buyout firm focused on financial services firms, offered $8 billion for a stake in the business that would have given it an option to buy all of AIG down the road. Kohlberg Kravis Roberts and TPG also said they would bid. But all three withdrew at the last minute, citing the company's precarious financial health.

AIG's extraordinary move of reaching out to the Fed for help may spur other nonbank lenders. Companies ranging from General Electric to GMAC have been hurting and would desperately love the liquidity that the Fed would provide.

Yet it is not clear whether the Fed would acquiesce to AIG's request.

Before seeking a lifeline, the firm had earlier been reported to be interested in selling its aircraft leasing business, the International Lease Finance Corporation. Founded in 1973, the business has nearly 1,000 planes in its fleet. But people briefed on the matter said that unit bore special tax advantages that AIG had decided would be lost on any other owner.

AIG's problems are not new. The company lost $13.2 billion in the first six months of 2008, largely owing to declining values in mortgage-related securities held in its investment portfolio and collateralized debt obligations it owns.

But the company's outlook grew grimmer last week when Standard & Poor's warned that it was considering downgrading the company's debt as a result of further write-downs it might have to take.

As the credit storm has raged in recent months, insurance companies like AIG have been better positioned than banks and brokerage firms to weather it because accounting rules do not require insurers to mark the investments held in their long-term portfolios to market. Insurance companies like AIG can hold their investments until they mature, riding out the ups and downs in the market for those assets.

But the moment it began trying to raise capital, AIG had to open its books to potential investors who were likely to take a sharp pencil to the company's portfolio values, analysts said.

Billions in Storm Damage Claims May Strain Texas Insurance Pool

Hurricane Ike caused as much as $16 billion in property damage, by some estimates, but the state-led insurance pool that will pay much of the cost has only $2.3 billion, leaving the Texas government on the hook potentially for billions of dollars in claims.

Insurance companies all but stopped offering hurricane coverage for property on the Gulf Coast after Hurricanes Katrina and Rita in 2005 cost them billions of dollars in claims and as property values soared, raising their exposure to disaster claims.

The pullout of commercial insurance carriers forced most property owners on the coast to turn to the state-run insurer of last resort, the Texas Windstorm Insurance Association, or the wind pool, as it is called.

Tens of thousands of owners of homes and businesses have bought storm coverage through the state insurance pool in the last few years. It now has about 225,000 policyholders, up from about 68,000 in 2001. Property in the hurricane risk zone was worth about $895 billion in 2007, an increase of 24 percent since 2004, according to the Insurance Information Institute.

Fiscal watchdogs in Texas, which has had budget surpluses, have been warning for some time that the insurance pool’s exposure was growing much faster than its finances, and that a major adjustment had to be made before a disaster like Hurricane Katrina wiped out the fund. Measures in the Legislature failed because lawmakers could not agree on how much of the cost should be borne by people with homes and businesses on the coast.

Now a significant storm has hit, forcing the issue.

“It’s clear now that the Legislature is going to have to do something, because it’s no longer a hypothetical,” said Jim Oliver, chief executive of the Windstorm Insurance Association, a private company chartered by the state. “This could happen again next week, for crying out loud.”

Although Hurricane Ike did not send a 20-foot surge of water up the Houston Ship Channel, which some officials thought was possible, it did batter big hotels, high-rise condominiums and other residences and businesses on Galveston Island and along the coast.

Because the insurance industry had pulled out of the coastal market, an estimated 60 percent of the insurance cost in Galveston will be borne by the insurance pool.

But insurance companies did not pull out of the Houston area, other than a small slice along the water, so the insurance pool faces less exposure there. Just how much the insurance pool will have to pay will depend on how much of the hurricane damage is concentrated on the coast.

Risk Management Solutions, a company in Newark, Calif., that estimates the effects of disasters, is predicting that the cost of Hurricane Ike’s damage from wind and the storm surge will be $6 billion to $16 billion. That estimate does not include the cost of inland flooding, a type of damage not covered by conventional insurance policies.

Insurance companies are not completely out of the picture in Galveston and the coastal counties. All carriers licensed to sell property insurance in Texas are required to participate in the state insurance pool and pay assessments based on their market share in the rest of the state. The wind pool also has rights on a $500 million state catastrophe reserve fund and reinsurance worth $1.5 billion.

These resources, plus customer premiums, have given the state insurance pool a total of $2.3 billion to cover all of this year’s claims. But smaller storms this year have reduced the total to $2.1 billion.

When that money is depleted, the insurance pool can impose unlimited assessments on insurance companies. They, in turn, can recover the money through state tax breaks, spread over several years. The resulting decline in tax revenue could drain millions from the state’s general revenue fund.

“While it’s definitely a burden, because they’ll have to find ways of shifting the money around, it’s not a crisis,” said Mr. Oliver, the wind pool’s chief, noting that the state’s huge oil and gas industry has kept its budget flush.insurance pool,

Mr. Oliver is scheduled to provide estimates of the insurance payouts Wednesday in a public meeting, which will probably raise anew the questions over the wind pool’s finances that the Legislature could not answer before.

“The real rub is, who pays?” Mr. Oliver said.

Sept 11 - Who would have known?

It was seven years ago that I watched the spectacle on TV in horror, disbelief, and compassion for the families of the victims.

I am Canadian - not an American, so I will not try to replace the millions of comments that have already been said, from eulogy to DC conspiracy. Instead, I offer an out of the box perspective, which is how my mind works, and why I prosper in my business. No disrespect is intended to the victims, my views relate to current economic, and credit crisis events that have their historic origin connected by that day seven years ago, and relevant to the thinking traders here at Forex Factory with a global perspective.

The last thing that anyone watching the Twin Towers collapse on September 11, 2001, would have thought would result - was the greatest - housing boom in the history of the world. But this terrible event spurred a sequence of events that ultimately led to a tremendous rise in home prices. It arose from a positive feedback.

First, the federal government cut taxes and sent rebates to all Americans. Then the Federal Reserve, led by Alan Greenspan, cut the discount rate to 1 percent. Government officials urged Americans to spend in order to defeat terrorism. Alan Greenspan told everyone that adjustable rate mortgages were a good thing. Congress and President Bush believed that everyone should own a home and pressured lenders to provide mortgages to low income people.

Wall Street responded by creating new investment vehicles that allowed mortgages to be packaged and sold to investors throughout the world with investment grade ratings provided by Moody’s and S&P, for a price. Mortgage companies and lenders developed ARMs, Option ARMs, teaser rate loans, no-doc loans, negative amortization loans and 100% financing loans. Low income people started buying homes, with these exotic mortgage products, from middle income people. Middle income people started to buy larger houses from rich people, boosting demand for new homes. Rich people bought mansions and second homes. Bidding wars for houses were commonplace. The demand caused by this influx of new home buyers drove prices skyward, with home prices doubling in five years. This price rise brought in the speculators/flippers. They began to buy multiple houses with nothing down, pre-construction, with plans to sell them for a profit without ever moving into them.

Average Americans who saw their paper wealth growing rapidly as their home value increased took advantage of the new housing realities by refinancing their mortgages. They systematically extracted the equity from their homes and spent it. Americans sucked $800 billion from their homes in 2004 and by a similar number in 2005. This immense sum was spent on such things as granite kitchen counters, 6000 pound SUVs, Plasma TVs, and vacations.

Homebuilders throughout the U.S., but particularly in California, Arizona, Florida and Nevada, went on the biggest building binge in the history of the U.S. These builders simply did not understand the aging demographics, or just decided to ride the wave as far as it would take them. This binge led to 8.5 million total home sales in 2005, about 3.5 million more than what would have been expected based on historical rates.

Because the originators of virtually all loans to consumers were immediately selling the loans off, they had no incentive to follow any guidelines or due diligence when issuing the loans. Anyone with a pulse could get a mortgage. Unscrupulous mortgage brokers popped up everywhere, luring uneducated and willing people to join the party. Greedy appraisers went along with the scam by overvaluing houses to whatever the banks desired.

The debt-induced spending that occurred from 2001 until 2007 accounted for virtually all the GDP growth during those years. Without the mortgage equity withdrawal, the U.S. would have had less than 1 percent average GDP growth for the entire period.

The tremendous prosperity that began during the Reagan years of the early 1980’s has been a false prosperity built upon easy credit. Household debt reached $13.8 trillion in 2007, with $10.5 trillion of that mortgage debt. The leading edge of the baby boomers turned 30 years of age in the late 1970’s, just as the usage of debt began to accelerate. Debt took off like a rocket ship after 9/11 with the President urging Americans to spend and Alan Greenspan lowering interest rates to 1 percent.

As Alan Greenspan denies causing the housing crisis today, his words from November 2002 come back to haunt him. He himself said, “our extraordinary housing boom…financed by very large increases in mortgage debt, cannot continue indefinitely into the future.” After making this statement, he proceeded to slash the discount rate to 1 percent in June 2003 and left it at that level for a year.

Mohamed El-Erian, the co-chief at PIMCO, fears a negative feedback loop consuming the country. The stages are as follows: Home prices reached an unsustainable level in 2006. Prices had gone parabolic between 2001 and 2006, with the average price reaching above $225,000. In 2001, averaged prices were just above $125,000. As the pundits keep looking for a bottom in housing, the there is a long way to go on the downside. The massive overbuilding, based on false demand, has led to 3.5 million excess homes in the U.S. based upon historical trends. The most shocking fact is that there are now 1.5 million vacant homes. This oversupply can only be corrected by massive price decreases.

With the tremendous price increases in houses over the last decade, one would think that equity would be at all-time highs. But no, owner equity as a percentage of house value has reached an all-time low of 45%. People have sucked the equity out of their homes and spent it faster than the prices were rising. The problem is that house prices can and will fall, debt remains like an anchor around one’s neck until paid off or it drags the person down into bankruptcy.

The millions of exotic mortgages (subprime, alt-A, ARMs, no-doc, and negative amortization), which have started to blow up, has led to a tsunami of foreclosures. In 2005 there were less than 600,000 foreclosures in the U.S. In the 1st two quarters of 2008 there have been more than 1,350,000 foreclosures, with the pace accelerating. Approximately 15 percent of all subprime mortgages and 7 percent of all Alt-A mortgages are in delinquency. According to UBS, 27.2 percent of subprime mortgages originated in 2007 by Washington Mutual are now in delinquency.

The combination of oversupply, over-leverage, and foreclosure tsunami has now taken on a life of its own. Home prices have been spiraling downward for two years to the point where 29 percent of all households that purchased in the last five years owe more than their house is worth according to Zillow, the home valuation company. For those who bought in 2006, 45 percent have negative equity. It is now making economic sense for people to just walk away from their house and send the keys to the lender. This is referred to as ‘jingle mail’.

The bad has affected the good. The ongoing housing price decreases are now affecting prime mortgages, commercial mortgages, home equity loans, car loans, and home equity lines of credit. Prime mortgages for less than $417,000 had a delinquency rate of 2.44 percent in May, up 77 percent from last year. Prime jumbo loans over $417,000 had a 4.03 percent delinquency rate in May, up 263 percent from last year. According to the American Bankers Association, 1.1 percent of all home equity lines are in delinquency, the highest level since 1987.

Banks are doing what they usually do; they are closing the barn door after the horses have escaped. As their losses have crossed the $500 billion mark, it is getting tougher for them to convince anyone to buy their stock. For example, the FNM stock has dropped from approximately $90 at 9/11, to $9 a couple weeks ago, to $0.90 cents this week. They have such bad “assets” on and off their books at inflated values that they cannot or will not lend. The Federal Reserve reported that banks have tightened standards for all loans in record numbers. Based on the well qualified assessments of Bridgewater Associates and NYU economist Nouriel Roubini, there is still $1.0 to $1.5 trillion in losses to go. Citigroup has written down $55.1 billion. Wachovia has written down $22.5 billion. Bank of America has written down $21.2 billion. Bank lending to consumers will be subdued for years.

Is Housing Near the Bottom? The one person who has been consistently right regarding the housing market is Yale Professor Robert Shiller. (He also called the top in the stock market in 2000). He has calculated that some prices are so far out of line with historical averages that there is no doubt that further decreases are in store.

Home prices have historically tracked inflation and are likely to over-correct first, then revert to the mean. Expect a Splat - not a bounce, the bottom is likely to be flat for a very long time. The latest data does not paint a pretty picture. Sale prices of existing single family homes declined by 15.8 percent in the past year, with markets in California declining by 22 percent to 28 percent. Over 10 percent of the U.S. population lives in California. Bank of America, Wells Fargo, Washington Mutual, and Wachovia have a large exposure in California. WaMu appears to be going under this week.

Many pundits have been downplaying the resetting of adjustable rate mortgages, saying that the worst is over. But there are $440 billion of adjustable mortgages resetting this year. That means that the majority of foreclosures will not occur until 2009. Banks will still be writing off billions of mortgage debt in 2009. The reversion to the mean for housing prices and the continued avalanche of foreclosures is not a recipe for a banking recovery. Home prices have another 15 percent to go on the downside. A bottom is unlikely to be reached until late 2009 or early 2010. The market will bounce along that bottom for a few years before resuming an upward trend in 2012.

Who would have known 7 years ago, that the White House, Federal Reserve, and Treasury Dept fiscal bailout response to the 9/11 attacks - easy credit - would be far worse for the economy than avoiding a recession from the terrorist attack?

Carnage continues for Washington Mutual

(09-10) 19:08 PDT -- Washington Mutual shares plummeted to a 17-year low on Wednesday, hammered by investors who fear its metastasizing home loans could inflict lethal damage.

"They are a company with fundamental problems that is getting the worst of the brunt of the market," said Jaime Peters, an analyst with Morningstar in Chicago. "That is scary because finance is all about confidence."

The worst-case scenario would be WaMu failing - or coming to the brink, if Uncle Sam swooped to the rescue a la Bear Stearns. A collapse of the nation's largest S&L would be devastating. But Peters and others said they don't think the situation is that dire yet.

While Washington Mutual has appeared troubled for months - its shares have plunged more than 90 percent the past year - recent events have brought it to the forefront of Wall Street's concerns. Since Monday, the stock price has been halved. On Wednesday it closed at $2.32 per share, down 30 percent.

Among the recent events:

CEO ousted; regulator steps in. On Monday, it took a one-two punch. It sacked CEO Kerry Killinger, replacing him with Alan Fishman, chairman of Meridian Capital Group, a New York commercial mortgage broker. While Killinger had led a dramatic expansion into a $300 billion institution with more than 2,200 branches, he also marshaled WaMu's move into subprime and other risky mortgages that has resulted in $6.3 billion in losses the past three quarters.

At the same time, the company said its regulator, the Office of Thrift Supervision, has put it under special supervision, requiring it to improve risk management and compliance procedures, and provide a multiyear business plan, including a forecast for earnings, asset quality and capital. Washington Mutual said the plan will not require it to raise capital, boost liquidity or cut products and services.

Credit-default swaps soar. On Wednesday, the cost to protect Washington Mutual's debt hit a record high, according to Bloomberg News. Credit-default swaps are a way to hedge against the risk of a borrower defaulting on its debt. Bloomberg said WaMu's credit-default swaps are trading at a price "that implies a more than 90 percent chance the company will default within five years." Protecting $10 million of WaMu's bonds for five years now costs $4.3 million up front and $500,000 per year.

Selling company becomes harder. An accounting change on the horizon makes the company a less-attractive acquisition target. Potential buyers will have to calculate an acquisition's assets at their market price, instead of using other data such as the purchase price - which means purchasers would have to cough up more capital or experience more dilution. "That diminishes the chance of having a company like JPMorgan come in and buy them," Peters said. "It's another downside."

Still, a shotgun wedding is a possibility. If the S&L's situation deteriorates, regulators "could encourage a merger with another institution, a purchase and assumption transaction, sales of branches, further injections from private equity or some other public-private partnership," wrote CreditSights Inc. analyst David Hendler.

Who are potential suitors? JPMorgan Chase, with $1.7 trillion in assets, is well positioned to absorb WaMu's $300 billion. While Wells Fargo, which has remained relatively above the mortgage fray, seems like a suitable banking partner, its $600 billion in assets might make it too small. "That would be a 50 percent increase (in size) for Wells; that's a pretty big deal," Peters said.

One plus for a purchaser: Washington Mutual's retail banking business. "Their core business is making money, which will help offset losses from loans in the future," Peters said.

Capital tightness continues. Another factor that has investors worried: Money is expensive and hard to get nowadays, most of all for a firm that is stigmatized by its association with the toxic housing market. "If they don't have enough capital right now, the credit markets are pretty closed to problem investments," Peters said.

WaMu declined to comment for this story, other than pointing to a Standard & Poor's report from Tuesday that said the thrift is well capitalized. (The same report downgraded its outlook to negative from stable.)

"The strong regulatory capital cushion of over $10 billion above regulatory capital measures is considered quite solid," S&P wrote. "Also deposit funding trends have been stable and there has been no adverse change to the holding company liquidity profile. WaMu continues to downsize its mortgage exposures and balance sheet growth has been restrained."

In April, the company raised $7.2 billion from investors, led by private-equity firm TPG Inc.; that brings to $11.2 billion the amount of equity it's raised since the fourth quarter of last year.

Home loan portfolio struggles. In July, WaMu said soured home loans could cause it to lose as much at $19 billion over the next 2 1/2 years. The company has about $180 billion worth of home loans on its books, according to Peters: $105 billion in mortgages, $60 billion in home-equity loans and $16 billion in subprime (both home equity and first mortgages). Morningstar thinks it can absorb losses of about $25 billion before it would be in serious trouble.

John Lonski, chief economist at Moody's Investors Service in New York, said Washington Mutual's battering on Wall Street reflects ongoing concerns about soured home loans.

"It's a reminder that the losses arising from mortgage repayment difficulties have yet to become fully known," he said. "As long as the housing market slides, as long as home prices decline, the ultimate cost of the mortgage meltdown remains unknown. There is not convincing evidence of an impending bottom for housing."

Lehman Bros. on the skids. Investment bank Lehman Bros., another victim of the subprime debacle, made a desperate pitch Wednesday to find a buyer. Onlookers said Washington Mutual is suffering in part because Wall Street sees it as tarred with the same toxic-loan brush as Lehman. "That's what hit WaMu so much," said Richard Welty of Welty/Solari Capital Advisors in Lafayette. "People are worried Lehman has to do a fire sale and figure WaMu (may have) a similar ration of bad loans. They probably figure it has the weakest portfolio of all banks."

Lehman Bros. loses nearly $4 billion, struggles to survive by offering portions of the company for sale. C3

E-mail Carolyn Said at csaid@sfchronicle.com.

This article appeared on page C - 1 of the San Francisco Chronicle

Building a Backyard Oasis with a Home Equity Line of Credit

In years past, my wife and I have planted a few trees, purchased some so-so patio furniture and tossed a kiddie pool and Slip ‘n’ Slide in the backyard for the kids. But now that our kids are a little older and our time together includes multiple family barbecues and casual get-togethers each summer season, we have finally decided to make our ramshackle backyard into an outdoor retreat that really suits who we are and how we live.

Since we’ve been in our home for several years and housing prices in our neighborhood have skyrocketed recently, we thought it was time to take out a home equity line of credit (also known carpet restoration HELOC). By using the equity we have built up in our home over the years, we were able to create the backyard we’ve always dreamed of.

The home equity process was quick and simple. All we had to do was find out how much our home was worth, what our payoff was and provide a few other bits of information – and in no time we were off and running! upholstery cleaning kansas city home improvement line of credit application took just a couple of minutes to complete – and within seconds of completing our online application, our HELOC loan was approved.

After a few short days we received our home equity line of credit Visa Cards (one in each of our names) from Chase Home Equity. Making purchases could not have been easier; all we had to do was use our Visa Cards to purchase the things we needed to make the most of our HELOC funds.

Being a do-it-yourselfer, I took on the task of landscaping my new backyard, but I hired contractors for the built-in barbecue area for our summer get togethers and our big, new pool and spa to replace the kiddie pool and Slip ‘n’ Slide.

While I was a installing brick borders and planting the fruit and shade trees for our new summer oasis, my wife took her home improvement steam cleaners of credit Visa to purchase the perfect patio furniture so we could replace our weathered and splintering wooden furniture. She also managed to buy some outdoor dinnerware and a few fun pool accessories for all our summer parties.

The pool and barbecue are nearly complete now – and with a couple of months before summer officially begins. Because of the quick turnaround on our home improvement line of credit from Chase, we’ll be able to enjoy the entire summer by the pool.

If you’re faced with another summer of barren backyards and sub-par patio furniture yourself, it’s not too late to have the backyard retreat of your dreams completed upholstery cleaning system summer begins. Just apply for a home equity line of credit and your perfect backyard could be well within your reach – and at a better interest rate than you would get using a regular credit card.

Minyan Mailbag: Home Equity Line of Credit Put Play

Mish,

One of my co-workers told me he received a letter from Wells Fargo (WFC) this week that his Home equity line of credit has been effectively reduced immediately.

He was upset about this and the fact that reduction was immediate. My co-worker said he would have taken the maximum loan had it not been immediate. I was perplexed.

Do people like to borrow money if their collateral doesn't cover the loan?

Minyan KT

Inquiring minds might be wondering if that's a philosophical question of some sort with no real answer. The answer is it's a very legitimate question with answers that vary by circumstance. Let's consider a few hypothetical possibilities.

Case #1:

Consider someone who has an extremely large equity position in their house. Such a person probably would not be upset in the least.

Case #2:

Consider someone who has a HELOC just because it came with the mortgage loan at no cost. I had one of those at one point. It did not cost anything, and it had no annual fee. Although I have a huge equity position, it was a free option so I took it. Why not? I never used it and never intended to.

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If I was offered $200 to close the HELOC as did National City (NCC) (See National City Pays Customers To Cancel Credit Lines) I would have taken the $200 gladly. Then again, I never would have entered into the arrangement in the first place if it had a $350 exit fee as did NCC.

Case #3:

Now consider the plight of someone worried about the loss of a job or someone with possible large unknown expenses (medical tests coming up), or someone worried about college education expenses or whatever. Suppose that person did not have a lot of equity in the house (between 10,000 to $50,000 depending on the appraiser) and a $50,000 line of credit.

That line of credit, while open, for someone who just might be predisposed to walk away from the house if times got tough enough, is like a free PUT option on the house. However, that PUT option lasts only as long as the line of credit.

Once canceled (or reduced), the PUT option is canceled (or reduced). That is one possible reason why your co-worker was upset. All or part of a "free option" was reduced. Had he known in advance, he could have taken the $50,000 and parked it in a CD.

If you assume his HELOC was at 6.5%: He could have parked that in a CD at 5% or so and his annual cost would be 1.5% or $750.

For someone whose job was in potential jeopardy, or whose spouse's job was in jeopardy, or who faced possible huge medical expenses, $750 just might have been considered "cheap insurance" for unrestricted access to $50,000 in one second's time.

Flight To Cash

The type of mentality described in Case #3 above is not only rampant, it's perfectly logical. Indeed, it's one of the reasons M3 has been soaring.

Inquiring minds may wish to consider MZM, M3 Show Flight to Safety for more on this subject.

Some people (and businesses) are tapping lines of credit, while they still can, and parking the money in CDs or high yield savings deposits. Ironically, some misguided souls point to a soaring M3 as a sign of hyperinflation when in fact it is a flight to the safety of cash!

Now consider things from the point of view of the bank. Those tapping credit lines have exactly the wrong risk profile that the bank wants. Is it any wonder that banks are cutting back and even paying customers to close those lines of credit?

The Home Equity Line of Credit PUT Play will soon be history. Those who absolutely need it better get it while they still can.