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Mo’ Money…

Posted by Larry Doyle on March 3, 2009 2:48 PM |

There are a string of events in the market today that all highlight the need for entities to refinance debt and raise capital.  Given the tightness of credit and the onerous terms being exacted within the bond market, many firms are massively capital constrained. These issues are global in nature. From our friends at Bloomberg, I offer the links to a number of these situations. In light of these types of situations, one does not need to be in a hurry to buy stocks.  Additionally, given the demands for capital, I still maintain that rates are headed higher.

I will share with you some of the current problem situations getting serious attention:

1. GE Falls Below $7 on Concern Finance Unit May Need More Capital

2. Corporate Bond Losses Drive Investors ‘to the Bunker’

3. Metlife, Lincoln Sink as U.S. Stock Rout Increases Capital Need

4. German Real Estate Firms Owe Billions, Face Deadlines


  • fiscalliberal

    Larry – Krugman had this question on his blog – I must say that if we are bailing out mainly European Banks and or Goldman, I would have some reservations

    ——————-From Krugman ——————————
    All your downside are belo ng to us
    AIG is much in the news these days. But I’m not sure, even now, if people are getting the ultimate message.
    AIG is in trouble because it wrote many credit default swaps, in effect guaranteeing others against losses it lacked the resources to cover. We, the taxpayers, are now covering those losses, for fear that not doing so would cause a financial catastrophe. But this means that US taxpayers have now assumed the downside risks for all of AIG’s counterparties.
    In effect, then, we’ve already nationalized a large part of the financial industry’s potential losses.
    So at the very least, we have a right to know who the counterparties are: who are we subsidizing, here? And beyond that, shouldn’t there be some quid pro quo? Shouldn’t the US government get something in return for taking on so much of the risk?

    • Larry Doyle

      Fiscal…there are a number of different angles to this situation. One could make a very strong case that it is the CDS that were written by AIG that has caused their effective failure. Thus whomever is on the other side of those contracts are the beneficiaries of the government bailout. I would venture to say that every other firm on Wall Street likely has exposure to AIG in this space. Those respective Wall Sreet firms kept some of that coverage and passed along some coverage to a number of money managers, funds, insurance companies, et al.

      Should the government get something for taking the risk? Again, you could make a very compelling case that the govt should get something. However in a system that is currently capital constrained the government exacting further remuneration may actually further harm the entity that they are trying to nurse back to life. Perhaps the benefit could be written as some sort of warrant in the future, that takes no capital currently.

      There is another angle to this. One could also make the case that all of AIG’s counterparties are benefitting from the govt bailout. Who are these counterparties? A wide array of individuals, small, medium, and large business units. Literally entities of every shape and size. Is it plausible or even possible that the government could engage this customer base and define a benefit. I doubt it.

      Great question.

      • fiscalliberal

        To take this step further, lets say the CDS is like a insurance policy. What would happen to the counterparty if the insurece was just canceled. Like a car, the asset is still whole, problems only happen if their is a accident or a default. Furthermore, the owner of the car or asset could go to another company to get it insured. Hopefully that company would have adequate capital or reserves to cover the losses, although that scenario might have a higher fee.

        Fee’s are cheap is you can get the goverment to cover you.

  • fiscalliberal

    Another comment on CNBC – Darin Radigan is calling AIG an out right fraud. I think he is aluding to their CDS operations where the London Office wrote 500 Billion notional with no reserves for default. I would agree, that is fraud and we are bailing it out.

    I had heard, but cannot verify that the Brit Government determined the AIG CDS operation a fraud. Possibly you could check with the Brit friends in the market.

    • Larry Doyle

      Where were the regulators? How about some indictments?

      Again, this is a valid point. Who was signing the annual reports? What about Sarbanes-Oxley?

      Another great point. You’re all over it.

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