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A Virtual Smorgasbord

Posted by Larry Doyle on March 2, 2009 4:24 PM |

On the heels of the news about AIG, Berkshire, and HSBC, the equity markets have found no support today and are down 4%. While the malaise of the markets has much of the focus, let’s review a few other items that I see on today’s menu:

1. In regard to AIG, current CEO Edward Liddy and former CEO Hank Greenberg have started some public feuding over the nature of AIG’s problems. Greenberg is trying to make the case that the risks underwritten at AIG occurred after his departure. Liddy responded that the culture, the compensation system, and the division housing the bulk of AIG’s risk all developed under Greenberg.  Wow!! When our country is screaming for leadership, we have senior executives playing the blame game and pointing fingers. How pathetic!!

2. In regard to compensation, I spoke with a senior analyst on Wall Street today and he shared that he was asked to prepare a presentation on the overall nature of the problems in the market and consumer finance specifically. He responded that all he needed to prepare were a few brief remarks. In his opinion, all of the problems from point of origination to end investment were centered on a compensation system that front loads reward and backloads risk. Senior management and boards were both negligent and complicit in the process. The individual requesting the presentation from this analyst informed him that those comments would not work for his audience.

The truth hurts but ultimately we need the truth. Dare I say the compensation model in Washington seems to have similar characteristics.

3. My friends at 12th Street Capital shared with me that a 90 Day Moratorium in California for housing foreclosures has been proposed.  The expert review of this proposal is that there are a number of loopholes so it will not have its fully desired effect.  Another well intended proposal with unintended consequences. Seeing lots of those these days!!

4. In the realm of personal finance, another friend shared with me that he was offered an 80% discount on an upscale hotel room for a 5 day stay.  My Mama Told Me….. you better shop around!! There are some fabulous deals out there. That sort of discount is an indication as to the degree of pain in the hotel industry. This type of deal is also an indication as to why a lot of commercial mortgages (and the securities backed by them, CMBS), are trading at such discounts. The hotels will be severely challenged to service their debt.

5. I mentioned in last night’s show that I have serious concerns about the bond market. In today’s trading, stocks are down 4%, corporate bonds are down 1-2%, mortgage bonds are down 1-2%, municipal bonds are close to flat on the day, and government bonds are up approximately .25%.  Cash remains king.

6. In an indication as to expectations for economic activity globally, the coal, metals, and paper industries are down 10-15% on the day. There is one industry group up on the day as of 30 minutes ago. What is it? Brewers are up 1%.  You can get all of this information plus so much more on the Sense on Cents Market Data tab (located at the top of the page, directly underneath the header).

7. Back to stocks. The fact that we have taken out the 750 level on the S&P 500 and also the 7000-7100 level on the DJIA without as much as a breather or a decent bounce is decidedly bearish. Those levels were considered to be major support in the markets.  Having taken them out  and closing below them, those levels now become resistance levels.

8. One piece of news that does have a positive bent to it is the fact that the RSI (Relative Strength Index) is now in the high 20s. This index is not dissimilar to the psychological barometer we shared last week. The RSI index does not often get below 25% but it can correct either by an uptick in price or by the market merely marking time. This is obviously of little solace to everybody who owns stocks, but it is worth mentioning.

LD

  • fiscalliberal

    Larry – I wonder if AIG is still writing CDS and are they holding the insurance type reserves and pricing them right? Also are they writing them for people who have a stake on the entitiy being insureed or are they writing them to dis interested parties.

    More over – is there any effective regulation gong on in the CDS Market?

    • Larry Doyle

      Fiscal…I believe that AIG is trying to unwind a fair amount of their exposure so I think they woudl be trying to buy back contracts that they have written as opposed to writing more contracts. Additionally I would have to think that any counterparty that would transact with AIG would force AIG to post so much margin (collateral) that it would be prohibitive for AIG to do this business.

      AIG has been very busy in other business units and has been very aggressive in their pricing. Many market participants feel that they are mispricing risk in an attempt to generate biz and revenues. How would you like to be the salesman at Northwetern Mutual, for example, going after a piece of biz and competing with the govt (AIG) that has a different motivation. This development is a major concern.

      I am not currently aware as to the regulation or oversight within the CDS space. I will make it a point to raise this question with former colleagues.

      Greenberg ran AIG with an iron fist. AIG Financial Products had a base of operations in London but also a major operation in Westport, CT.

      It is not difficult to make the case of self dealing on a lot of business and political fronts.

      Emanuel is a dyed in the wool politician straight from the Chicago school. After the Clinton adminsitration, he came to Wall Street at the turn of the century for a few quick years and generated multiple millions at the private equity shop, Blackstone.

  • fiscalliberal

    Regarding Greenberg of AIG, in her book “Dear Mr Buffet”, Janet Tavakoli says Greenberg was well connected directly into the White House and a lot of this stuff was set up under his tenure. I wonder who set up the London Office who did all the writing of the CDS instruments in Europe. I wonder how much the AIG board changed from Greenbert to Liddy.

    Interesting in how Rahm Emanual was Nancy Pelosi’s direct connection to K Street. Now he serves as the controlling door to the president. More over, finance covered both sides of the political domain with election funding. So – do we belive that some exectutives do not have direct access?

    • Larry Doyle

      More color on AIG from a recent report,

      Why is AIG still so important? Let’s go straight to the fourth paragraph of the AIG statement released by the Fed a short time ago: ‘Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high. AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities, 401(k) plans, and Fortune 500 companies who together employ over 100 million Americans. AIG has over 30 million policyholders in the U.S. and is a major source of retirement insurance for, among others, teachers and non-profit organizations. The company also is a significant counterparty to a number of major financial institutions.’

      ….that is the definition of systemic risk!!

  • Andy

    LD: slightly off in the sense that’s about BoA; but have you heard Lewis saying
    asking the Gov. for aid with Merrill Lynch aid was a mistake?

    It’s in the Financial Times and the reporter was just interviewed by NPR. Here’s the link:

    http://www.ft.com/cms/s/0/50000286-074f-11de-9294-000077b07658.html?nclick_check=1

    http://www.ft.com/home/us

  • Larry Doyle

    Andy,

    I had not heard this but it does not surprise me.

    It does get to the point where how much can one person bear? Aside from the challenging environment, Merrill’s losses, the government pressure, and the fact that 2009 and likely 2010 will be ery chellenging, Lewsis must have moments where he wonders if this is really worth it. He strikes me as a decent person although I have no experience and do not know anybody who knows him.

    Thanks for the links.

  • getfitnow

    OT-LD, have you heard that the chairperson of Freddie Mac or Fannie Mae (cant’ remember which) is resigning?

  • Larry Doyle

    Yes, David Moffett was in the role of CEO at Freddie Mac for all of 6 months. He resigned becaue he did not want to be a government employee working for govt wages and with massive government second guessing.

    They will be very hard pressed to find a seasoned professional to fill that role.






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