Easy go, easy come. Yesterday the weather was cold and windy here in Elwood. There was even rain in the air. It was a day, not necessarily to forget, but certainly not one to remember.

There was also bad weather on the financial markets. Many described it as a financial hurricane. Others thought it was more like a financial tsunami. No one seems to have described it as a financial vortex, which is a shame.

Yesterday must have been so bad that Australian Financial Review (AFR) dispatched three journalists to Ryan’s Bar in Sydney to get the scoop on what was happening. The result generated Pulitzer Prize winning copy.

“It was #@*!$%^ carnage. We got absolutely smoked. My head is smashed. I need a drink.” Wow! Those were the words of a 23-year old “broker” from JPMorgan. This “broker” has probably seen a thing or two in his 1 or 2 years in the markets. He’s probably been buying up bank shares at “cheap” prices all the way along.

Bank Shares Soar
They were super cheap yesterday. But a little more expensive today. Most of the banks are up by at least 5% this morning. Macquarie Bank is up over 30%. So, what has changed since yesterday?

For a start it’s a beautiful day outside. The sun is shining, the birds are inaudible above the sound of the traffic racing by on Brighton Road. On top of that governments across the world have been springing into action.

Late yesterday the UK government approved a suspension of the takeover rules that enabled LloydsTSB to acquire the UK’s largest mortgage lender HBOS (owner of BankWest in Perth). Another part of the deal is that the merged bank has to promise to lend more money to first-home buyers.

Do we really need to mention that irresponsible lending is part of the reason for the current position of world markets?

Short Selling Banned
On top of that the UK Financial Services Authority - similar to ASIC - invoked a ban on short selling the shares of banks. It doesn’t stop there because now the SEC in the US has also placed a ban on short-selling.

Another instance of ignoring the cause and attacking the effect.

The lines between so-called capitalist economies and command economies appear to be blurring by the day. After keeping quiet through all this, the Chinese government have also had to step in to support their banking system.

But we would expect that, so it shouldn’t come as a surprise. According to the China Daily, the “state-owned investment agency Central Huijin announced it would buy shares of three major Chinese banks.”

The government has also scrapped stamp duty on share purchases in an effort to encourage buying of shares.

The New Free Marketeers
Not everyone is ready to jump on the intervening bandwagon. Who could it be that is taking a firm stand against using taxpayer funds to prop up private enterprise? The Canadians maybe. Or the Germans. No, the Russians.

Russian prime minister Vladimir Putin has told the Russian news agency that his government will not use the “Reserve Fund or the National Prosperity Fund to these ends.”

Of course it hasn’t all been plain selling in Russia this week with its stock exchange closing twice and the oil price falling to under USD$100 a barrel. But apart from that, Putin seems keen to show the West how not to get involved - in financial markets anyway.

Future Fund Beefs Up Debt Investment Strategy
The only other thing we noticed this morning while flicking through the AFR was a job advertisement to work at the Future Fund as a “Senior Analyst - Debt & Alternatives.”

Apparently the Future Fund has developed its investment strategy so that it has a “need to expand the Debt and Alternatives team.” This new role would join a team that will “focus on hedge fund strategies.”

You will recall that the Future Fund was set up to retain the federal government’s remaining holding of Telstra shares. It is a quasi-government body that will predominantly be used to fund unfunded government pension funds.

Maybe when the US government decided to take over Freddie, Fannie and AIG it was merely following the Australian model of state owned funds management.

News reports yesterday reported the first runs on offices of AIG, the stricken US insurer.

One agency report said hundreds of worried policyholders, some hoping to terminate their agreements, lined up yesterday outside AIG’s Singapore office.

Lines of worried customers were reported in Hong Kong, outside the offices of the local AIG branch.

The report said the people were unmoved by the US Federal Reserve’s bailout and takeover of AIG for $US85 billion.

In Australia, our three biggest insurers, Insurance Australia Group (IAG), Suncorp and QBE said they had no exposure to AIG.

And AIG’s Australian office again said the local operations were well capitalised and within regulatory guidelines.

Insurance Australia Group (IAG) told the market in a statement: “We wish to advise that Insurance Australia Group has no material exposure to American International Group Inc.”

The Federal Reserve said in a statement it was making the huge loan to AIG because it “had determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

QBE Insurance Group Ltd has no direct exposure through its investment portfolio to American International Group, Lehman Brothers or Merrill Lynch.

QBE has “immaterial” exposure to reinsurance recoveries on paid, outstanding and incurred claims to AIG, mainly through the US insurance giant’s subsidiaries Transatlantic Re and Lexington, the Sydney-based company said in a statement.

There is no exposure to reported claims, QBE said. QBE shares jumped 89 cents to $24.30, or 3.8%, in a market that swung from gain to a late 0.6% loss.

IAG shares also firmed in the same market, up 7 cents at $4.17, which is sharply up from the levels around the insurer’s final year loss and revamp announcements.

Suncorp said that “Following a number of market enquiries, Suncorp today advised it has no material exposures to Lehmann Bros or AIG.”

However, its shares fell 3.1%, or 29 cents to $8.86. That was despite Standard and Poor’s maintain its credit rating.

The local businesses of AIG operate in life and general insurance and have around 1.3 million policyholders in the life business.

The other is a property and general insurer, AIG Australia.

It said in a statement that local business continued as usual.

“The liquidity of AIG Australia remains strong and our ability to pay claims and its commitment to writing challenging risks is undiminished,” said Chris Townsend, CEO of AIG Australia in a statement.

“More than 80% of AIG Australia’s investments are held in fixed interest securities with the remaining 20% in realty, equities and cash.”

The company said AIG Australia has assets of more than $1.6 billion, and employs 500 people around Australia.

It was a very busy day for the US Federal Reserve yesterday: it didn’t cut interest rates; instead it bailed out AIG with a two year loan of $US85 billion ($A106 billion).

At one stage this year, in fact only a few months ago, AIG was the biggest US insurer by assets and a major global force.

It had a market value earlier in the year of close to $US95 billion ($US180 billion a year ago): yesterday morning its shares traded at $US3.50 ($US2.60 in after hours trading).

That compares with the peak over the past year of more than $US70 a share. Its value at the close of trading was just over $US10 billion, but for all intents and purposes, it was worthless.

The Fed offered the insurer a one way form of insurance (it will be terminal for AIG) to underwrite the global financial system. It is larger than anything so far attempted in the credit crunch and far more complex.

In the space of three days Lehman Brothers has failed with debts and other claims of $US613 billion (but less one claims are netted out), Merrill Lynch has been forced into the arms of Bank of America in a all share offer worth around $US50 billion, and now this incredible bailout of AIG.

It’s a highly expensive deal; the Fed will take a margin of 8.50% (850 basis points) over the relevant London Interbank Offered Rate, according to its statement. Seeing LIBOR jumped to over 6% Tuesday night, it’s going to be an expensive loan.

The Fed said under the two-year facility the US government will receive a 79.9% equity interest in AIG and has the right to veto payment of dividends to common preferred shareholders in the deal, which had the full support of the Treasury Department.

“The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,” the Fed said in the statement.

“The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.”

In Australia, the Reserve Bank flooded the financial system with over $4 billion in cash this morning as it sought to keep cash rates steady while the fate of American International Group (AIG) was being sorted out in New York.

After adding $A2.1 billion on Monday and $A1.895 billion Tuesday to meet a system deficit of $A1.39 million over the two days, the RBA added $A4.285 billion today to meet a system deficit of $2.18 billion. 

That was after the Exchange Settlement Account was left flush Tuesday night with over $4 billion in cash and nervous Australian banks wanted quick cash overnight in case AIG or some other big problem got worse.

The size of the cash injection yesterday morning ($A2 billion above what was needed, after two days of extra funding of $1.3 billion a day), means the level of liquidity support by the central bank is now back to levels seen when Bear Stearns was rescued in March, and earlier in the latter months of 2007.

The Fed moved to give the financial system time to work out the winners and losers from all those credit and other derivatives that AIG had written: that’s why there’s no moral hazard because there are huge claims to come.

Some of those will be triggered by the rescue of Fannie Mae and Freddie Mac, some by the failure of Lehman Bros, some by AIG’s own problems.

In another deal British bank Barclays, which had been an early suitor for Lehman Brothers last weekend, but walked when the US Government would provide guarantees, has picked over the Lehman carcass.

In a statement in London it said it had reached an agreement to acquire Lehman’s North American investment banking and capital markets businesses.

The Financial Times put the price at around $US2 billion.

“The board of Barclays announces that Barclays has agreed, subject to US Court and relevant regulatory approvals, to acquire Lehman Brothers North American investment banking and capital markets operations and supporting infrastructure,” said the bank, Britain’s third largest.

Barclays said it would acquire trading assets with an estimated value of $A89.66 billion and trading liabilities worth billion $A85.17 billion. It will also acquire Lehman’s New York headquarters.

No word if it intends to buy the Lehman operations in countries like Australia or Japan, or London where Lehman employed 5,000 staff.

News reports yesterday reported the first runs on offices of AIG, the stricken US insurer.

One agency report said hundreds of worried policyholders, some hoping to terminate their agreements, lined up yesterday outside AIG’s Singapore office.

Lines of worried customers were reported in Hong Kong, outside the offices of the local AIG branch.

The report said the people were unmoved by the US Federal Reserve’s bailout and takeover of AIG for $US85 billion.

In Australia, our three biggest insurers, Insurance Australia Group (IAG), Suncorp and QBE said they had no exposure to AIG.

And AIG’s Australian office again said the local operations were well capitalised and within regulatory guidelines.

Insurance Australia Group (IAG) told the market in a statement: “We wish to advise that Insurance Australia Group has no material exposure to American International Group Inc.”

The Federal Reserve said in a statement it was making the huge loan to AIG because it “had determined that a disorderly failure of AIG could hurt the already delicate financial markets and the economy.

QBE Insurance Group Ltd has no direct exposure through its investment portfolio to American International Group, Lehman Brothers or Merrill Lynch.

QBE has “immaterial” exposure to reinsurance recoveries on paid, outstanding and incurred claims to AIG, mainly through the US insurance giant’s subsidiaries Transatlantic Re and Lexington, the Sydney-based company said in a statement.

There is no exposure to reported claims, QBE said. QBE shares jumped 89 cents to $24.30, or 3.8%, in a market that swung from gain to a late 0.6% loss.

IAG shares also firmed in the same market, up 7 cents at $4.17, which is sharply up from the levels around the insurer’s final year loss and revamp announcements.

Suncorp said that “Following a number of market enquiries, Suncorp today advised it has no material exposures to Lehmann Bros or AIG.”

However, its shares fell 3.1%, or 29 cents to $8.86. That was despite Standard and Poor’s maintain its credit rating.

The local businesses of AIG operate in life and general insurance and have around 1.3 million policyholders in the life business.

The other is a property and general insurer, AIG Australia.

It said in a statement that local business continued as usual.

“The liquidity of AIG Australia remains strong and our ability to pay claims and its commitment to writing challenging risks is undiminished,” said Chris Townsend, CEO of AIG Australia in a statement.

“More than 80% of AIG Australia’s investments are held in fixed interest securities with the remaining 20% in realty, equities and cash.”

The company said AIG Australia has assets of more than $1.6 billion, and employs 500 people around Australia.

But the local businesses are an asset for the companies and other advisers who will divide up the AIG carcass and sell it off after the problem derivatives are accounted for.

That will create opportunities for IAG and QBE, if they are of a mind to, although QBE, being bigger and better capitalised, might be more interested in AIG’s US and other international insurance businesses.

It was a very busy day for the US Federal Reserve yesterday: it didn’t cut interest rates; instead it bailed out AIG with a two year loan of $US85 billion ($A106 billion).

At one stage this year, in fact only a few months ago, AIG was the biggest US insurer by assets and a major global force.

It had a market value earlier in the year of close to $US95 billion ($US180 billion a year ago): yesterday morning its shares traded at $US3.50 ($US2.60 in after hours trading).

That compares with the peak over the past year of more than $US70 a share. Its value at the close of trading was just over $US10 billion, but for all intents and purposes, it was worthless.

The Fed offered the insurer a one way form of insurance (it will be terminal for AIG) to underwrite the global financial system. It is larger than anything so far attempted in the credit crunch and far more complex.

In the space of three days Lehman Brothers has failed with debts and other claims of $US613 billion (but less one claims are netted out), Merrill Lynch has been forced into the arms of Bank of America in a all share offer worth around $US50 billion, and now this incredible bailout of AIG.

It’s a highly expensive deal; the Fed will take a margin of 8.50% (850 basis points) over the relevant London Interbank Offered Rate, according to its statement. Seeing LIBOR jumped to over 6% Tuesday night, it’s going to be an expensive loan.

The Fed said under the two-year facility the US government will receive a 79.9% equity interest in AIG and has the right to veto payment of dividends to common preferred shareholders in the deal, which had the full support of the Treasury Department.

“The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance,” the Fed said in the statement.

“The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.”

In Australia, the Reserve Bank flooded the financial system with over $4 billion in cash this morning as it sought to keep cash rates steady while the fate of American International Group (AIG) was being sorted out in New York.

After adding $A2.1 billion on Monday and $A1.895 billion Tuesday to meet a system deficit of $A1.39 million over the two days, the RBA added $A4.285 billion today to meet a system deficit of $2.18 billion. 

That was after the Exchange Settlement Account was left flush Tuesday night with over $4 billion in cash and nervous Australian banks wanted quick cash overnight in case AIG or some other big problem got worse.

The size of the cash injection yesterday morning ($A2 billion above what was needed, after two days of extra funding of $1.3 billion a day), means the level of liquidity support by the central bank is now back to levels seen when Bear Stearns was rescued in March, and earlier in the latter months of 2007.

The Fed moved to give the financial system time to work out the winners and losers from all those credit and other derivatives that AIG had written: that’s why there’s no moral hazard because there are huge claims to come.

Some of those will be triggered by the rescue of Fannie Mae and Freddie Mac, some by the failure of Lehman Bros, some by AIG’s own problems.

In another deal British bank Barclays, which had been an early suitor for Lehman Brothers last weekend, but walked when the US Government would provide guarantees, has picked over the Lehman carcass.

In a statement in London it said it had reached an agreement to acquire Lehman’s North American investment banking and capital markets businesses.

The Financial Times put the price at around $US2 billion.

“The board of Barclays announces that Barclays has agreed, subject to US Court and relevant regulatory approvals, to acquire Lehman Brothers North American investment banking and capital markets operations and supporting infrastructure,” said the bank, Britain’s third largest.

Barclays said it would acquire trading assets with an estimated value of $A89.66 billion and trading liabilities worth billion $A85.17 billion. It will also acquire Lehman’s New York headquarters.

No word if it intends to buy the Lehman operations in countries like Australia or Japan, or London where Lehman employed 5,000 staff.

* AIG results weigh on financial sector

* Oil below $119, down around $30 from record high

* G7 recession becomes real possibility

HONG KONG, Aug 7 - Asian stocks fell on Thursday, as a sustained decline in oil prices could not shake a sense of gloom among investors about financial sector instability and the worsening global growth outlook.

European stock markets were expected to open as much as 0.5 percent lower, according to futures markets, after European insurer Allianz <ALVG.DE> warned about its profit forecast for 2009 and the world’s largest insurer American International Group Inc <AIG.N> chalked up a quarterly net loss of $5 billion.

Dealers expected Barclays Plc <BARC.L> to fall as much as 3 percent at the open after the bank said first-half profits fell 33 percent on $4 billion of write downs, though that was not as bad as expected.

The U.S. dollar slipped against the yen after jumping to a seven-month high on Wednesday. It was also slightly weaker against the euro ahead of a European Central Bank policy decision due later, widely expected to keep interest rates on hold at 4.25 percent.

Crude oil was trading just below $119 a barrel <CLc1>, having tumbled nearly 20 percent from July’s record high, as expectations for U.S. energy demand continue to deteriorate.

Concerns about wavering demand in China, whose economy has devoured natural resources for the last decade and pushed up commodity prices, also weighed on copper prices.

Lower oil prices could be interpreted as relief for U.S. consumers, on whom Asia depends for export demand. But inflation was still a global threat, bad loans continued to dog banks and insurers, and investors faced the prospect that all of the Group of Seven rich nations could slip into recession.

As a result, optimism was in short supply.

“Certainly the environment is one that should be positive, with the weaker yen and lower oil prices,” said Hideyuki Ishiguro, supervisor at the investment strategy department at Okasan Securities in Tokyo. “But the idea that Japan’s economy isn’t good is spreading.”

Japan’s Nikkei share average <.N225> fell about 1 percent, led by an 11 percent drop in shares of air-conditioner maker Daikin Industries Ltd <6367.T> after the company cut its earnings outlook because of sluggish sales in Europe.

Shortly after the market closed in Japan, Toyota Motor Corp <7203.T>, the world’s biggest car maker, said quarterly net profit fell 28 percent but it kept its forecasts unchanged.

Outside Japan, Asia-Pacific stocks <.MIAPJ0000PUS> were largely unchanged, but within sight of a 16-month low plumbed on Tuesday.

Hong Kong’s Hang Seng index <.HSI> rose 0.6 percent, lifted by a 1.7 percent rise in shares of HSBC Holdings <0005.HK>.

Cathay Pacific Airways <0293.HK> was the top percentage decliner on the index, down 4.6 percent, after the airline on Wednesday posted its first interim loss in five years.

CENTRAL BANK DILEMMA

South Korea’s benchmark KOSPI <.KS11> dropped 0.9 percent, weighed down by the financial sector after the Bank of Korea on Thursday raised its main interest rate by a quarter percentage point to its highest in 7-? years to battle price pressures.

“Clearly inflation is up, but there are massive growth risks for the Korean economy. The entire household sector and small and medium-sized enterprise sector are hugely leveraged. There is likely to be a downturn in economic growth,” said Frederic Neumann, Asia Pacific economist with HSBC in Hong Kong.

Other central banks around the world face the same dilemma — whether to tighten borrowing conditions now to stem inflation and risk a sharper economic slowdown.

Earlier this week, Indonesia’s central bank raised rates by 25 basis points for the fourth time this year, but the Reserve Bank of Australia kept its rates on hold.

The U.S. Federal Reserve held rates steady at 2 percent on Tuesday, expressing concerns about both the slowing economy and rising inflation. The Fed indicated it is in no rush to push borrowing costs higher.

That has helped to spur investors’ willingness to take risks, a primary driver in boosting the U.S. dollar to its highest level against the yen in seven months on Wednesday.

The dollar was down 0.1 percent against the yen at 109.50 yen <JPY=>. The euro edged up 0.3 percent to around $1.5457 <EUR=> ahead of the ECB’s meeting later in the day.

The potential for a global recession was lurking in the minds of many investors, with a steady stream of bad news out of the corporate sector and economic data indicating a recovery has not arrived yet.

“All the G7 economies are now in a recession or headed in the short run towards a recessionary hard landing,” said Nouriel Roubini, chairman of RGE Monitor, a New York economics research firm, in a blog posting on Wednesday.

“While the world will technically avoid a global recession it will get quite close to it by mid-2009 as global growth will slow down to a near recessionary 3 percent.”

Japanese government bond futures briefly hit a four-month high on concerns about the outlook for Japan’s economy and due to a fall in Tokyo share prices.

September 10-year JGB futures were down 0.08 point after earlier rising as high as 137.46 <2JGBv1>, the highest level for a lead futures contract since late April.

Gold <XAU=> was up 0.6 percent at $883.95 an ounce, but still more than $100 cheaper than in the middle of last month.