Wall Street's Bomb: What's the Fallout for You?

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David Karp / ap

Patrick Kenny a Specialist of Lehman Brothers works his post on the trading floor of the New York Stock Exchange on Monday morning after Lehman Brothers filed for bankruptcy.

It was a traumatic day for financial firms — Lehman Bros. declared bankruptcy, Bank of America swallowed Merrill Lynch, and AIG scrambled to prevent becoming the next casualty. What does it all mean to you? Here are some questions worried investors and homeowners might be asking.

What if I have investment accounts at Lehman Bros.?

It's your money, not theirs. When Lehman Bros. filed for bankruptcy on Monday, it was careful to spell out that its investment management division — including Neuberger Berman and Lehman Brothers Asset Management — were not subject to the parent company's bankruptcy filing. Fully paid securities of customers of Neuberger Berman are not subject to the claims of creditors.

Later in the day, the SEC chimed in to say that its staffers would be hanging around for the next few weeks to make sure customers' accounts are protected — i.e., not mixed up with money from other parts of the business.

What if I have an insurance policy with AIG?

First things first: AIG is still in business, and rushing to save itself. The game right now, in the wake of downgrades from credit-rating agencies, is raising tens of billions of dollars in fresh capital, an effort that was bolstered on Monday when the State of New York said it would let the firm use as much as $20 billion in capital from its subsidiary companies to cover its day-to-day operating needs. But if the company doesn't gain access to much more — it could need to raise as much as $75 billion — quickly, it might be next in line for bankruptcy.

As AIG looks for a capital infusion, it is also trying to sell off certain pieces of itself, such as its annuities unit. If you are a policyholder and the unit that you do business with gets sold, chances are nothing will change. The way insurance law — which is set at the state level — usually works is that when one insurance company buys the policies of another, all the terms and conditions stay the same.

What if the worst comes to pass and AIG goes into bankruptcy?

Then it depends on what type of policy you have.

Let's start with annuities and life insurance. If you have a variable-rate annuity, your money is most likely in mutual-fund-like sub-accounts. You own those sub-accounts, as you would own stocks through a brokerage. Those are your assets — a creditor won't be able to touch them.

If you have a fixed-rate annuity, or a life insurance policy, the ruling regulator is the state where you bought the policy. This is a little trickier. The payout AIG has promised you comes from assets it holds in its general account. If the state insurance commission believes AIG can't meet its obligations to policyholders — and a bankruptcy filing might be an indication of that — the insurance commission can step in. If that happens, there's a chance you won't immediately be able to cash out your policies, at least not without incurring a penalty. That's a tactic regulators might use to prevent everyone trying to cash out at one time — like a run on the bank, says Dave Evans, a CFP and senior vice president, Independent Insurance Agents & Brokers of America.

If worse comes to worse, the goal of regulators is going to be to move AIG policies to other insurance companies. That's worked in the past, but it's never been attempted with a firm of AIG's size.

So let's assume, repeat, assume, a bankruptcy that leads to liquidation. AIG would pay off as many of its claims as it could. (The good news is that as a policyholder, you're ahead of almost everyone else in line to get paid, including bondholders) If AIG's assets don't cover everything, then state guarantee funds would kick in.

Each state runs guarantee funds for insurance policies, similar to what the Federal Deposit Insurance Corp. does for bank deposits. Every state differs in what they guarantee, but most states set basic limits of $300,000 in life insurance death benefits, $100,000 in cash surrender or withdrawal value for life insurance, $100,000 in withdrawal and cash values for annuities, and $100,000 in health insurance policy benefits, according to the National Organization of Life and Health Insurance Guarantee Associations. The state where the policy was written determines the jurisdiction.

Separate funds are kept for property and casualty insurance — things like auto and homeowner policies. Those funds again vary by state but typically cap at $300,000, according to The National Conference of Insurance Guaranty Funds. It tends to be easier, though, to get other insurance carriers to take over these policies, since the coverages are shorter-term. If the property and casualty funds do kick in, they cover existing claims and typically ones made 30 days from the time of liquidation — to give you time to get a new policy.

See photos of the troubled economy here.

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