The U.S. Financial System in Serious Trouble

by Prof. Rodrigue Tremblay

Global Research,

“… a bailout of GSE (Fannie and Freddie) bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics.”Matt Kibbe, President of Freedom Works

“The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” Ernest Hemingway (1899-1961), (September 1932)

After the Bear Stearns bailout “As more firms lost access to funding, the vicious circle of forced selling, increased volatility, … and margin calls that was already well advanced at the time would likely have intensified. The broader economy could hardly have remained immune from such severe financial disruptions.” Ben Bernanke, Fed Chairman (March 2008)

In August 2007, at the very beginning of the subprime financial crisis in the U.S., and referring to the alchemy-like practice of creating artificial financial instruments, such as mortgage-backed securities (MBSs), here is what I wrote:

“Like all ‘Ponzi schemes’, such pyramidings of debts with no liquid assets behind them are bound to implode sooner or later.” I also wrote about the Fed’s intervention in such cases, that “it alleviates the ‘liquidity crisis’, for sure, but this does nothing to cure the underlying ’solvency crisis’ of institutions holding large chunks of non-performing mortgage-based assets. Sooner or later, such low-valued derivatives will have to be written off, and this will necessarily lead to an erosion of these institutions’ capital base. Bankruptcies of the most leveraged and imprudent institutions are to be expected.”

In fact, such bankruptcies of over-leveraged financial institutions become unavoidable. For a while, forced mergers between banks, initiated by the Fed or the Treasury, can soften the blow. But after a while, outright bankruptcies cannot be avoided and balance sheets have to be balanced.

What is the cause of this financial mess?

Last month, I provided a short answer:

“At the center of current financial problems is the failure to adapt standard financial regulation to new financial institutions, such as broker-investment banks, off-shore based hedge funds and large derivatives markets that remain, for the most part, outside of the traditional authority of regulators. However, when things go wrong, as they did with Bear Stearns last March, their demise threatens to destabilize the entire financial system and handy government bailouts are quickly called in.”

Today I say that this major crisis has to be placed at the very feet of the Washington establishment. This is a politico-financial establishment that has pushed to the limits its ideology of deregulation of financial markets and stretched the working of unregulated corporate market capitalism to the breaking point. Now, the system is imploding under our very eyes and financial institutions are falling like dominos. As I wrote last August, and repeated in April of this year, the U.S. financial problem is not one of liquidity, (there is plenty of liquidity provided by the Fed when banks and brokers can borrow at will newly printed dollars from the Fed’s discount window) but one of solvency, weak balance sheets, risky assets and debt liquidation. That’s a horse of a different color.

Over the last twenty-five years, beginning with the Reagan administration and culminating with the current Bush-Cheney administration, the Washington establishment dismantled piece by piece the system of protection that had been built since the 1930’s economic depression and removed nearly all government regulations that could stand in the way of greed and gouging on the part of unscrupulous market operators.

And that’s where the rubber hits the road. Short of bankruptcies is the nationalization of the over-leveraged banks by the government. And the Bush-Cheney administration took a big step in that direction when it came to the rescue of the two largest mortgage financing institutions, Fannie Mae (Federal National Mortgage Association: FNM) and Freddie Mac, (Federal Home Loan Mortgage Corporation: FRE) which were close to being insolvent. This step was initiated after foreign central banks (in China, Japan, Europe, the Middle East and Russia) threatened to stop buying U.S. bonds and debentures issued by the two shaky financial institutions.

But the Bush-Cheney administration, while providing public money to keep the two lenders in operation, stopped short of nationalizing them. Indeed, the U.S. government committed to invest as much as $200 billion in preferred stock and extend credit through 2009, to keep the two mortgage lenders solvent and operating.

But instead of taking them over by placing them into administrative receivership, in order to change their business model, as they should have done since the government is now guaranteeing their outstanding debts, (more than $5 trillion US) the U.S. government chose rather to keep the appearance that these were still two privately run banks and only appointed a legal conservator for Fannie Mae and Freddie Mac. Even when they bail out what can be called two Government sponsored enterprises (GSEs), their market ideology prevents them from doing the right thing.

After years of irresponsible public deregulation and private mismanagement and irresponsible, pyramiding risk taking, the American financial system is now in serious trouble, and it may draw the U.S. economy further down with it in the months and years to come.

In the coming weeks, however, as other American financial institutions teeter on the brink of bankruptcy, the U.S. government will have to consider creating a Bank Resolution Trust under the model of the 1989 Resolution Trust Corp. which took over the savings and loans banks that were then in financial difficulties. For example, as recently as February 16 of this year, the British government did not hesitate to nationalize the Northern Rock bank and rescued this large British bank with about £55 billion ($107 billion) in public loans and guarantees. Sooner or later, the American government will have to do the same, in order to stabilize the financial system, because the financial problems in the U.S. are systemic and much more serious than elsewhere.

By the same token, maybe the U.S. government should correct an anomaly of the 20th Century, that is the semi-private status of its central bank. Indeed, the American Federal Reserve, is a semi-public and semi-private central bank organization that is as much responsible to large private banks as it is to the U.S. government and the population. This creates an unhealthy conflict of interests that is not fair to the American public. Indeed, the American practice of privatizing profits and socializing losses would be considered unacceptable in most other democracies.

What we are witnessing these days in the U.S. is a massive wealth transfer from taxpayers, savers and retirees to banks, their creditors and their managers. On the one hand, the Fed has pushed real interest rates deep into negative territory to help troubled banks, and, on the other hand, the American taxpayers have foot the bill for bailing out very large financial institutions.

I wonder what the two presidential camps, the Obama and the McCain camps, have to say about that! They both want to increase the federal deficit and add significantly to the already high national debt.

Rodrigue Tremblay is professor emeritus of economics at the University of Montreal and can be reached at rodrigue.tremblay@yahoo.com

He is the author of the book ‘The New American Empire’

Visit his blog site at:
www.thenewamericanempire.com/blog.

Check Dr. Tremblay’s forthcoming book “The Code for Global Ethics” at:

En français:
http://www.LeCodePourUneEthiqueGlobale.com/

http://www.globalresearch.ca/index.php?context=va&aid=10232

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Protocols For Economic Collapse In America

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Three of the most famous US rap stars,

Mos Def, Immortal Technique and Eminem

composed a song to denounce the September 11th lie :

 “ Tell the Truth, Nigga ! ”.

 _________________________________________________

Three US rap stars denounce the September 11th lie

Song’s lyrics:

Man, you hear this bullshit they be talkin’
Every day, man
It’s like these motherfuckers is just like professional liars
YouknowwhatI’msayin? It’s wild
Listen

Bin Laden didn’t blow up the projects
It was you, nigga
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga

Bin Laden didn’t blow up the projects
It was you, nigga
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga
(Bush knocked down the towers)

I pledge no allegiance, nigga fuck the president’s speeches
I’m baptized by America and covered in leeches
The dirty water that bleaches your soul and your facial features
Drownin’ you in propaganda that they spit through the speakers
And if you speak about the evil that the government does
The Patriot Act’ll track you to the type of your blood
They try to frame you, and say you was tryna sell drugs
And throw a federal indictment on niggaz to show you love
This shit is run by fake Christians, fake politicians
Look at they mansions, then look at the conditions you live in
All they talk about is terrorism on television
They tell you to listen, but they don’t really tell you they mission
They funded Al-Qaeda, and now they blame the Muslim religion
Even though Bin Laden, was a CIA tactician
They gave him billions of dollars, and they funded his purpose
Fahrenheit 9/11, that’s just scratchin’ the surface

Bin Laden didn’t blow up the projects
It was you, nigga
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga

Bin Laden didn’t blow up the projects
It was you, nigga
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga

They say the rebels in Iraq still fight for Saddam
But that’s bullshit, I’ll show you why it’s totally wrong
Cuz if another country invaded the hood tonight
It’d be warfare through Harlem, and Washington Heights
I wouldn’t be fightin’ for Bush or White America’s dream
I’d be fightin’ for my people’s survival and self-esteem
I wouldn’t fight for racist churches from the south, my nigga
I’d be fightin’ to keep the occupation out, my nigga
You ever clock someone who talk shit, or look at you wrong?
Imagine if they shot at you, and was rapin’ your moms
And of course Saddam Hussein had chemical weapons
We sold him that shit, after Ronald Reagan’s election
Mercenary contractors fightin’ a new era
Corporate military bankin’ off the war on terror
They controllin’ the ghetto, with the failed attack
Tryna distract the fact that they engineerin’ the crack
So I’m strapped like Lee Malvo holdin’ a sniper rifle
These bullets’ll touch your kids, and I don’t mean like Michael
Your body be sent to the morgue, stripped down and recycled
I fire on house niggaz that support you and like you
Cuz innocent people get murdered in the struggle daily
And poor people never get shit and struggle daily
This ain’t no alien conspiracy theory, this shit is real
Written on the dollar underneath the Masonic seal

(I don’t rap for dead presidents
I’d rather see the president dead
It’s never been said but I set precedents)

Bin Laden didn’t blow up the projects
It was you, nigga
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga

Bin Laden didn’t blow up the projects
It was you, nigga
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga
(Bush knocked down the towers)
Tell the truth, nigga

(Shady Records was 80 seconds away from the towers
Some cowards fucked with the wrong building, they meant to hit ours)

http://www.voltairenet.org/article144998.html

America ’s Financial Apocalypse Heralds Decade Long Depression

By: Mike_Stathis

Despite attempts made by Greenspan and Bernanke, there is no way to avert the payback period that has been building for over two decades. Over this stretch, America has consumed much more than it has produced. As a result, both consumer and federal debt have ballooned to record levels. And now, the payback period is upon us. The bailout buffet won’t end with Fannie and Freddie. There’s a lot more where that came from because the “Fed’s food court” remains open, as does that of the U.S. Treasury. In fact, the autos are in the process of being bailed out with $50 billion in “loans.” I expect the airlines to also receive some form of a bailout as well.

Washington ’s Three Stooges

But Greenspan and Bernanke have not been alone in what will surely be remembered as America ’s Financial Apocalypse – the eventful period ushering in a decade-long depression, as predicted in my 2006 book by the same title. Certainly, President Bush did not create these trends. But his financial irresponsibility has accelerated their magnitude. In less than eight years, he has managed to increase the national debt by 90%. As the data shows, not only has he led the worst recovery since the post-WWII era, he has also positioned his successor with budget shortfalls for many years to come due to Part D Medicare, the Iraq War, and his tax cuts for the wealthy.

Combined with the staggering deficits for Medicare and Social Security , America ’s economy will be in the gutter for many years to come even after the banking and real estate troubles cool down. No one else is talking about these issues because they’re wrapped up in the daily drama. But save this article and others I’ve written because I’ve been mentioning the longer-term problems ever since writing my book. In a few years, more people will begin to address these issues once they are transformed into daily drama.

President Bush’s attempts at a recovery have been so horrendous they’ve actually led to the current recession, which will turn out to be the worst in decades. I would venture to guess he is desperately pleading with officials to come up with even more gimmicks to hide the full realities of the economy so the worst will be reported only after he leaves office. But I will guarantee you if Washington and the Fed continue this reckless game of applying band aids instead of letting things play out, we will see a much bigger crisis down the road, similar to what happened after Greenspan tried to mitigate the dotcom collapse. You can bet this is going to happen because Washington does not understand the meaning of preemption.

Altogether, we have had eight years of no gains in real median wages, flat stock market returns, and minimal net new jobs. Despite what you have heard, after adjusting for debt spending, population growth and realistic adjustments to the GDP deflator, there have only been 3 or 4 quarters of GDP growth since 2005. If you adjust for military, government and minimum wage positions – i.e. jobs funded by tax payers and jobs that don’t pay anything – there have been absolutely no net new jobs. Bush’s largest gains have been with inflation, oil and food prices, debt, trade deficits, bankruptcies, foreclosures, and healthcare costs. If an assembly of the world’s leading economic strategists were to design the most destructive economic disaster possible, they could not match the results of Bush’s tenure. Even the most loyal Bush supporters will admit he has been an absolute disaster – that is if they’re being honest. America is now more dependent on foreign nations than ever – not only for oil, but also credit and manufactured goods.

America ’s “Resilient” Economy

Many of the pundits flood the propaganda networks with repeated denials of the problems, boasting how resilient the U.S. economy is. You know who they are. I’m not quite sure what they’ve been smoking. But it appears to be some sort of hallucinogen because they seem to expect Superman to bend the economy back into shape. Ladies and Gentlemen, in case mommy never told you, there is no Santa Claus and there is no Superman. And if you think Bernanke’s printing presses have an endless supply of ink and paper, just wait until the real crisis appears. So you had better get ready because it’s coming. It is virtually inescapable. And it’s going to cause devastation around the globe. Of course I’m taking about the likely implosion of the CDS market.

Let’s take a look at America ’s “resilient economy.” Let’s see…the entire financial system is in the process of blowing up. Already there have been over $500 billion in bank losses, with over $1 trillion more to come. Over one dozen banks have failed, with hundreds on deck. A handful of large hedge funds have blown up, with hundreds more on the way. Already, over $1 trillion has been transferred from the Fed to the banking cartel. But I estimate another $1.5 trillion will be needed to maintain liquidity as banks de-leverage over the next few years. Unemployment is now over 6% and inflation is over 5%, even with Washington ’s manipulation of the data. Virtually every metric in the housing market is at multi-decade lows, except for foreclosures which are hitting new highs.

Taxpayers are now on the hook for billions of dollars of potentially worthless debt held by Fannie and Freddie. It’s now official. America ’s free market economy is really a socialist system for corporations. One could argue this to be a form of Fascism. My best estimate for losses due to the Fannie and Freddie taxpayer bailout are between $200 to $500 billion. The worst case scenario would be $800 billion. If this economy is resilient, I can’t wait to see how it magically bounces back. When Superman fails to show up, Washington might consider giving David Copperfield a call. But this would be one illusion he won’t be able to pull off. Get the popcorn ready.

The Economy Under a Microscope

Let’s take a closer look at the economy. America imports oil, credit, and manufactured goods, while exporting jobs, junk bonds and inflation (via the dollar-oil link – see http://www.marketoracle.co.uk/Article5414.html for an explanation). That doesn’t sound like the type of trade policy that would support claims of a superpower, unless you’re only counting the number of nukes. Surely Washington is beginning to wonder how much longer Asia and Europe will continue fueling America ’s credit bubble. They’ve already faced massive losses from sub-prime securities with much more carnage to come.

China holds about $1.4 trillion in U.S. Treasuries, but only due to their its surplus with the U.S. It can’t dump Treasuries yet because the Yuan remains greatly undervalued. China pegged it to the dollar back in 2001, knowing the dollar would plummet so they’d lure dollars from U.S. consumers looking for bargains. What most people don’t realize is that China ’s support for U.S. Treasuries helps finance Bush’s irresponsible spending sprees. By financing up to 90% of each annual deficit, China helps keep interest rates low in the U.S., which facilitates credit expansion for consumers to buy more imports – mainly from China (due to the low cost items created by China’s currency peg).

Hidden Imports

Keep in mind when you buy that Dell computer or Fossil watch, you’re really buying imports. Dell and Fossil actually resemble distributors more than manufacturers because virtually all of their products originate overseas. The same is true for most U.S. companies that sell branded goods. In many cases, the same is also true for the service segment of the economy. Many American IT and software development firms outsource projects to India , Canada , and other nations so they can escape the costly retirement and healthcare benefits Americans expect.

By no means does it end there. For several years, U.S. banks, tax providers, telecommunications and several other industries have outsourced to Asia – so much for the “strength” of America ’s service economy. If this service economy is so “strong” someone explain to me how Asia has been able to increase its living standard by leaps and bounds in such a short period. Before you answer, keep in mind that income and wealth are finite over short periods since they are limited by human and natural resources. Make sense? If not, let me know and I’ll do a write-up explaining it next time.

Corporate America ’s new trend is to outsource even lower on the food chain to nations like Argentina , as a way to find more desperate workers to enslave at a lower cost. While these jobs seem like a Godsend, foreign workers will soon see the longer-term effects of corporate globalization. Already, many U.S. corporations have finessed themselves into the hip-pocket of foreign politicians and other officials to discourage unions, ensuring wages remain low and benefits never materialize.

?? (See Ya’ Later) Yankee

As the economy continues its downward spiral, it remains to be seen how much longer China keeps its currency undervalued once it realizes U.S. consumers have no more money to buy their goods. Once the verdict is out, China could begin to focus on internal growth as the recession spreads globally. The global effects are already surfacing, with inflation soaring, real estate plummeting and foreign banks scrambling as they wait for the next Bear Stearns. The Chinese government could encourage its consumers to spend domestically. This would prove as a great strategy to buoy its economy since Chinese have amble savings (they save 25% of household income). Thus, once China is convinced U.S. consumers are finished, there is a good chance it will begin a gradual sell-off of U.S. Treasury securities. And this is going to be a huge problem.

The Middle East also has a huge trade surplus with the U.S. But unlike China , it has no incentive to hold U.S. Treasuries. Instead, Middle Eastern investors use their petrodollars to buy hard assets – commercial real estate like the Chrysler building, businesses and other critical U.S. assets. Yet, they still can’t seem to find enough things to buy, so many Middle Eastern cities are being gutted and turned into modern architectural wonders. In the recent past when U.S. banks have begged for mercy, Dubai , Kuwait and Saudi Arabia have handed over billions from their sovereign “oil extortion” funds. But they’ve learned their lesson, so I wouldn’t expect anymore bailout money anytime soon. Never fear! The Fed and the U.S. Treasury are here!

The Federal Reserve Disaster

The Fed needs to let a real recession run its course to clear out the trash so the economy can begin a real recovery and expansion. They’ve been playing this boom-bust game for several years now. And all we have seen are illusions of growth followed by the realities of mismanagement and excess consumption. Running the printing presses in overdrive won’t get America out of this mess. It hasn’t helped in the past and it’s not going to now. In fact, using the money supply to hold off a recession and prevent bank failures ensures there will an even more devastating crisis down the road . Greenspan tried the same move in response to the Internet meltdown. And as we all know, this led to the current real estate bubble and banking crisis.

But even shutting down the Fed’s printing presses is insufficient for a lasting and real recovery. Washington absolutely must restructure free trade so that the playing field is level for all participant nations. This implies that America structure a universal healthcare system. And America ’s badly broken free market system must be repaired, because as it stands today, it represents socialism for the wealthy.

As a result of the combined actions of Washington ’s Three Stooges, the harsh effects of this corrective period will send America into its worst recession in several decades. Thereafter, a silent depression will persist for many years as Americans struggle to keep pace with inflation, job quality continues to decline and opportunities for the working class vanish into thin air. While U.S. living standards have been in decline for over two decades, the silent depression will accelerate and make these declines more permanent.

It’s highly unlikely the rest of the world will be able to escape the pain caused by Washington ’s Three Stooges because the dollar-oil link is used to hold every nation financial hostage. China will feel the effects as will India ; and yes, even Brazil . Unlike America ’s fate, these developing nations will mount a full recovery. And the lessons learned could strengthen the pressure to dethrone the dollar as the universal currency. But don’t expect Washington to take this lying down. In fact, it might eventually lead to a major war.

Perhaps the only region that will have some insulation from the meltdown will be select oil-rich nations in the Middle East . But they aren’t likely to walk out of this completely unscathed due to contained oil demand. But let’s not forget that OPEC has control over pricing. The payback period is going to affect virtually everyone. And for those who think they will avert the payback – namely those most responsible for this mess – like Washington ’s Three Stooges and bank CEOs – their payback will last eternity because their role in America ’s Financial Apocalypse will be recorded in history books.

By Mike Stathis
mike@apexva.com

http://www.marketoracle.co.uk/Article6256.html

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AIG shares plummet as cash crisis mounts

By Lilla Zuill and Jonathan Stempel

NEW YORK (Reuters) – American International Group Inc (NYSE:AIG – News) shares plummeted after the insurer’s credit ratings were cut, heightening concerns it might file for bankruptcy and further upset the global financial system.

In late-morning trading, AIG shares were down $2.29, or 48.1 percent, at $2.47 on the New York Stock Exchange, after earlier falling as low as $1.25. The shares had fallen 60.8 percent on Monday.

The shares recovered much of their early losses after CNBC television said government money might be used in a bailout of AIG. But the shares later fell back after the network said U.S. Treasury Secretary Henry Paulson opposed using government money and that a private sector solution wasn’t likely.

AIG is the latest company to be convulsed by a mortgage and credit crisis that this week led to a bankruptcy filing by Lehman Brothers Holdings Inc (NYSE:LEH – News) and the sale of Merrill Lynch & Co (NYSE:MER – News) to Bank of America Corp (NYSE:BAC – News).

New York Gov. David Paterson said on CNBC television that AIG has “a day” to solve its problems.

“The Federal Reserve is the only one with the balance sheet and wherewithal to deal with AIG’s problems,” said Keith Wirtz, chief investment officer of Fifth Third Asset Management in Cincinnati. “If the government comes in, this would be a huge relief.”

The Fed declined to comment.

AIG late Sunday had asked the Fed for help, including a possible “bridge” loan to tide it over while it pursues asset sales and capital raising.

The central bank pushed JPMorgan Chase & Co (NYSE:JPM – News) and Morgan Stanley (NYSE:MS – News) to try to put together a credit facility of $70 billion to $75 billion for New York-based AIG, a person familiar with the matter said on Monday.

“It’s in our national interest that AIG survive,” said Maurice “Hank” Greenberg, a former AIG chairman and a major investor in AIG. He told CNBC there could be “systemic risks” if AIG’s trading partners try to get out of their contracts.

Asked if an AIG bankruptcy were possible, he said if the company doesn’t get a bridge loan, new capital, or relief from rating agencies, “then there’s no alternative, and that would be a disaster.”

“HEIGHTENED PROBABILITY” OF BANKRUPTCY

Monday’s rating downgrades will make it much more difficult for AIG Chief Executive Robert Willumstad to raise cash, and could trigger demands that the company come up with nearly $20 billion.

“What is so infuriating to AIG is that it is solvent but facing near-term liquidity issues that could put it out of business,” said CreditSights Inc analyst Rob Haines. “There are a lot of salable assets, but they need to be given time.”

The insurer has suffered $18 billion of losses in the last three quarters tied to guarantees it wrote on mortgage-linked derivatives. It ended June with $1.05 trillion of assets. Its failure would likely be larger than that of Lehman, which said it ended August with about $600 billion of assets.

Credit Suisse analyst Thomas Gallagher halved his price target on AIG to $3, citing a “heightened probability” of a bankruptcy filing.

“While there is a chance the company can work its way through its liquidity problems if it can secure substantial bridge financing, we think this will be challenging to execute in the current onerous credit environment,” he wrote.

AIG ended 2007 with 116,000 employees, more than four times as many as Lehman.

DOWNGRADES

Late Monday, Standard & Poor’s cut AIG’s long-term credit rating three notches to “A-minus” from “AA-minus,” citing “reduced flexibility in meeting additional collateral needs and concerns over increasing residential mortgage-related losses.”

Moody’s Investors Service on Monday cut AIG’s rating two notches to “A2″ from “Aa3,” while Fitch Ratings cut its rating two notches to “A” from “AA-minus.”

The downgrades mean that AIG’s trading partners can require the insurer to post an additional $14.5 billion of collateral, according to an August 6 regulatory filing. They could also result in the early termination of some contracts, requiring an additional $5.4 billion of payments, the filing shows.

Despite its problems, AIG has profitable businesses it could sell, including life insurance, property and casualty insurance, and aircraft leasing. Greenberg estimated the company could raise $20 billion from asset sales if given the time.

On Monday, Paterson said New York would let AIG essentially loan itself $20 billion by shifting liquid investments to itself from some of its regulated insurance units.

AIG’s 5.85 percent notes maturing in 2018 fell 10 cents on the dollar to 37 cents, yielding 22.02 percent, the Financial Industry Regulatory Authority bond pricing service Trace said.

Investors on Tuesday were paying $5.2 million up front plus $500,000 annually to protect $10 million of AIG debt against default for five years, up from $3.3 million up front on Monday, according to Phoenix Partners Group.

(Additional reporting by Jennifer Ablan, Dena Aubin, Kristina Cooke, Mark Felsenthal, Daisy Ku and Jonathan Spicer; editing by John Wallace)

http://biz.yahoo.com/rb/080916/aig.html