Structured Settlements 4Real® Blog: Structured Settlements | Settlement Planning News and John Darer Reviews

Federal Reserve to Stress Test Banks: "Let's See Your Capital Plans!"

The Federal Reserve has issued guidance that will require the 19 banks that underwent stress tests during the height of the 2008 and ongoing financial crisis, to undergo another review of their capital and their ability to absorb losses under an "adverse" economic scenario.

The "Stress Test" 19	Total *(Billions)
1. JPMorgan Chase	2,175
2. Citigroup	1,947
3. Bank of America (1)	1,822
4. Wells Fargo	1,310
5. Goldman Sachs	885
6. Morgan Stanley	659
7. MetLife	502
8. PNC Financial Services	291
9. U.S. Bancorp	267
10. Bank of New York Mellon	238
11. GMAC	189
12. SunTrust	189
13. State Street	177
14. Capital One Financial Corp.	166
15. BB&T	152
16. Regions Financial Corp.	146
17. American Express	126
18. Fifth Third Bancorp	120
19. KeyCorp	105

 *2008 Q4 data

According to the guidance, all 19 banks must submit capital plans by early next year showing their ability to absorb losses under a set of conditions to be determined by The Fed, America's central bank. The new request is part of the Fed’s effort to step up supervision at the nation’s largest financial firms.

A significant number of banks have failed in the last few years compared to life insurers (which issue structured settlement annuities) which already have signifcant reserving requirments and asset/liability matching standards that must be certified annually to each state insurance department.

Federal Reserve Raises Discount Rate .25%

The move today of the Fed to raise the discount rate after markets closed has seen the yields on key bonds increase.

10 year Bond 2/18/2010   3.801%

30 Year Bond 2/18/2010   4.733%

There is still a way to go but as short term rates increase it will make shorter term structured settlements more attractive again.

AIG and Feds Reach Agreement to Clear $53.5B Per Regulatory Filing w SEC, Website

American International Group, Inc. (AIG) announced December 2, 2008 via its website that a financing entity recently created by the Federal Reserve Bank of New York (FRBNY) and designed to mitigate AIG's liquidity issues in connection with its credit default swaps and similar derivative instruments (CDS) written on multi-sector collateralized debt obligations (CDOs) has been launched. The new entity, "Maiden Lane* II, LLC", which was announced on November 10, is designed to purchase CDOs on which AIG Financial Products Corp. (AIGFP) has written CDS contracts. AIGFP has been publicized in the press as the AIG subsidiary company at the eye of the storm.

To date, the new entity has entered into agreements with AIGFP's CDS counterparties to purchase approximately $53.5 billion principal amount of CDOs. To date, $46.1 billion principal amount of such CDOs have been purchased, and the associated notional amount of CDS transactions have been terminated in connection with such purchases.

AIG has provided $5 billion in equity funding, and the FRBNY will provide up to approximately $30 billion in senior funding to the financing entity, of which approximately $15.1 billion has been funded to effect purchases of CDOs. The entity will collect cash flows from the assets it owns and pay a distribution to AIG for its equity interest once principal and interest owing to the FRBNY on the senior loan have been paid down in full. Upon payment in full of the FRBNY's senior loan and AIG's equity interest, all remaining amounts received by the entity will be paid 67 percent to the FRBNY and 33 percent to AIG.

Federal Reserve Board Press Release November 10, 2008

* for those who may be curious, Maiden Lane is major street in the New York City financial district.