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

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

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

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

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

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

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

• Email This
• • Stumble It!
• • Digg
• • Share on Facebook
• • Save to Delicious

Comments

• Mortgage 101
• Understand Your Credit