- The Washington Times - Monday, November 10, 2008

Domestic economic turbulence continued Monday as the Treasury Department handed American International Group another huge chunk of cash, Circuit City stores filed for bankruptcy and mortgage company Fannie Mae’s third quarter profits plummeted.

But global markets rose upon news of China’s $586 billion plan to stimulate its economy — one of the world’s leading economic engines.

Treasury provided American International Group (AIG) with a $40 billion cash infusion in exchange for preferred stock as part of a restructuring of the giant insurer’s September rescue package.

All told, the federal government has now given the company more than $150 billion. But Federal Reserve officials said they were confident the money would be repaid to taxpayers.

AIG executives, who were criticized in a hearing on Capitol Hill for enjoying lavish events even as they took money from the government, will be subject to stringent limits on pay under the agreement with Treasury, including no increase in bonuses or golden parachutes. They also must comply with restrictions on lobbying and corporate expenses.

The company will use the Treasury’s $40 billion to pay back some of the loans it received from the Federal Reserve in mid-September to stave off bankruptcy. The Fed also is restructuring its more than $100 billion in loans to AIG, lowering the high interest rate of 14 percent and penalty fees it originally extracted to reflect the more lenient terms the Treasury and Fed recently has been offering banks and other companies.

AIG was struggling under the previous harsh agreement with the Fed, and had been unable to sell off company assets to repay the loans.

Under the new deal, the Fed is purchasing $52.5 billion of troubled mortgage assets and dissolving the insurance contracts the company wrote on them, enabling the company to shed a key source of its financial troubles. AIG was driven to the brink of bankruptcy in September as it was forced to raise collateral to back the insurance it provided on its huge portfolios of troubled loans.

New York-based AIG said it lost $24.47 billion, or $9.05 per share, after a profit of $3.09 billion, or $1.19 per share, a year ago. Revenue declined 97 percent to $898 million from $29.84 billion in the third quarter 2007.

Circuit City Stores Inc., the nation’s second-biggest electronics retailer, filed for bankruptcy protection on Monday but plans to stay open for business as the busy holiday season approaches.

It said it decided to file for bankruptcy protection because it was facing pressure from vendors who threatened to withhold products during the holiday shopping period. The company also said it cut 700 more jobs at its headquarters, after announcing a week ago that it would close 20 percent of its stores and lay off thousands of workers.

Circuit City filed under Chapter 11 of the bankruptcy code, which will allow it to hold off creditors and continue operations while it develops a reorganization plan. Its Canadian operations also filed for similar protection.

Government-controlled mortgage finance company Fannie Mae said it lost $29 billion in the third quarter as it took a massive tax-related charge and saw mortgage defaults continue to rise.

The company, seized by federal regulators more than two months ago, posted a loss of $13 per share for the July-September quarter, mainly due to a $21.4 billion non-cash charge to reduce the value of a tax asset. That compares to a loss of $1.4 billion, or $1.56 a share, in the year-ago period.

Trading on Wall Street opened strong, with the Dow Jones index up 150 points early. But by 12:30 the Dow was down 51.93 points, or 0.58 percent. to 8,891.88. The Nasdaq dropped 20.80 points, or 1.26 percent, to 1,626.60, while the S&P 500 declined 8.89 points, or 0.95 percent to 922.10.

But many foreign markets showed modest gains Monday, as the FTSE 100 index of leading British shares was up 78.78 points, or 1.8 percent, at 4,443.74, while Germany’s DAX was 116.78 points, or 2.4 percent, higher at 5,055.24. France’s CAC-40 was 80.36 points, or 2.3 percent, higher at 3,549.48.

In mainland China, where the benchmark Shanghai Composite Index has fallen by more than two-thirds since peaking October, the index soared 7.3 percent to 1,874.80. Markets in India, Australia, Singapore and South Korea joined the region’s advance.

The global gains come in the wake of Chinese government’s unveiling of a massive 4 trillion yuan ($586 billion) stimulus package to help stave off much of the economic slowdown. The package involves a mix of spending, subsidies, looser credit policies and tax cuts.

Meanwhile, President Bush will welcome President-elect Barack Obama this afternoon into what the White House describes as a “very small club,” planning a private sit-down discussion with the Democrat who will replace him on Jan. 20.

The public agenda is simple and two-fold: First Lady Laura Bush will talk to Michelle Obama about family life in the White House and give a tour of the living quarters while the president and president-elect will have their first one-on-one discussion.

White House press secretary Dana Perino quipped she had no “crystal ball” to know what specifically the current and future leader would discuss.

“President Bush is very much looking forward to this meeting,” she said, noting the invitation was extended on Election Night and that the outgoing president is “so committed to making sure the transition is as smooth as possible.”

She stressed it is a “private meeting” and but said she would attempt to give reporters a general outline of what the men discussed following the chat.

Mrs. Perino said Mr. Bush has always “let heated rhetoric … slide off his back” and would not hold any hard feeling from a rough-and-tumble campaign where his name was invoked regularly.

“The transition of power this time around is so critically important. One in regards to the economy, and two, in regards to the threat of attack that we currently live under,” she said. “We all know that as we’ve seen in other countries, that period of transition can be one where the country is vulnerable to attack.”

Mrs. Bush and Mrs. Obama will spend their time with Rear Admiral Stephen W. Rochon, Director of the Executive Residence and Chief Usher. The first lady will show Mrs. Obama the bedrooms used by children of previous presidents.

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This article was based in part on wire service reports.

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