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HomeGoldman and AIG
Posted by Larry Doyle on March 21st, 2009 5:49 AM |
There has been extensive speculation that Goldman Sachs unjustifiably benefited from the weakness at AIG over the last 6 months. While conspiracy theorists can and will have a field day with this story, at its core I think Goldman did what any well run firm should always do — protect its shareholders.
While the stock values of Merrill Lynch, Morgan Stanley, and Bank of America flirted with total disaster, Goldman Sachs traded down but bottomed out at approximately $50 a share. That price does not strike me as indicative of a firm on the brink of bankruptcy. As Goldman now reveals, it had significant exposure to AIG but it also significantly hedged this exposure to AIG via other transactions. Thus, Goldman would have been negatively impacted by an AIG bankruptcy but not fatally impacted. (more…)
Kangaroo Court . . . MUST READ!!
Posted by Larry Doyle on March 19th, 2009 4:20 PM |
The kangaroo court on Capitol Hill just passed a bill to tax bonus payments at a 90% rate for employees (with family incomes in excess of $250,000) of AIG and other firms that received $5 billion or more in government bailouts. In my opinion, 
this piece of legislation is a poorly constructed means of recapturing government funds.
I have previously stated that firms which were truly bailed out by the government should be subject to strict government compensation controls. A number of firms – such as Northern Trust, JP Morgan, Wells Fargo, and Goldman Sachs – were compelled to take government funds. If employees of these firms are subject to this tax, it will be a travesty and injustice of unprecedented proportions. I believe that Congress is unknowingly escalating class warfare amidst a facade and charade of protecting the public. I believe we will see public outrage from employees at these firms (JP Morgan, Northern Trust, Goldman, Wells Fargo) that can only be rivaled by our forefathers back in the 1770s. This tax is another means of promoting the income redistribution upon which Obama ran his campaign. Taxation without representation is tyranny!!! (more…)
AIG and LTCM
Posted by Larry Doyle on March 18th, 2009 3:50 PM |
A precursor to the turmoil roiling our economy and markets today occurred on a smaller, but certainly very dramatic, scale in 1998. The meltdown of the hedge fund Long Term Capital Management brought the market to its knees at the time. LTCM was effectively taken over by a consortium of Wall Street banks at the behest of New York Federal Reserve Chairman, William McDonough. The firms injected approximately $3 billion dollars in order to stabilize LTCM and then unwound it in an orderly fashion.
The lessons learned in the LTCM crisis were obviously not learned well enough because we are experiencing them again a multiple hundred fold. The centerpiece of our current fiasco is AIG (known here at Sense on Cents as “Ain’t It Great”).
The dramatic story of Long Term Capital Management is captured in a book I strongly recommend for anybody interested in the history of the financial markets. When Genius Failed, by Roger Lowenstein, is a great read and truly captures the intrigue, egos, and tension of that period. As the current turmoil unwinds I look forward to the books published on this period as well. (more…)
AIG: Ain’t It Great!!!
Posted by Larry Doyle on March 18th, 2009 8:54 AM |
Where can one generate billions in losses and still walk out the door with millions in compensation? Welcome to AIG, now known here at Sense on Cents as “Ain’t It Great!!”
As details leak out of Congress as to who knew what and when did they know it, the level of political posturing is soaring. Senator Charles Schumer (D-NY), who has fed at the Wall Street trough for years, offers us these pearls of wisdom: “We intend to do everything in our power to prevent the payments from being made and to recoup the payments that have already been made. We will take this back and return it to its rightful owners, the American taxpayers.” Chuck, where were you six months ago when the initial AIG loan was negotiated? (more…)
Lessons from Bear Stearns
Posted by Larry Doyle on March 16th, 2009 10:37 AM |
It was one year ago that the Federal Reserve and Treasury delivered Bear Stearns into the hands of JP Morgan for $2 a share. Bear Stearns stock had traded above $170 a share in 2006. With the passage of time, what are some of the lessons learned and what questions remain unanswered.
1. Although Bear Stearns employees and shareholders may not qualify a price of $2 a share (revised to $10 a few weeks later) as being saved, would the financial system have been better off letting Bear totally fail? Why? If Bear had failed, many people do not believe we would have had the breakdowns in our financial systems that occurred because of Lehman’s failure.
2. Did Dick Fuld, CEO of Lehman, assume that the Fed and Treasury would save Lehman much as they did Bear? Was he less aggressive in pursuing increased capital injections during the Summer 2008 as a result? Many people believe this to be the case. (more…)
AIG “Robs the Bank”
Posted by Larry Doyle on March 15th, 2009 9:07 AM |
When an entity has an 80% equity stake in a company, one may think that nothing of substance could happen there without that majority shareholder’s consent. Well, how is it that the black hole known as AIG to Pay $450 Million in Bonuses.
We may see some arm waving and loud pronouncements from Congress about investigations, but the question still begs as to how this happened. The government took this majority stake in AIG last September. Are we to believe government representatives were both unaware of potential contractual payments and that they did not approve them? How could the government approve payments within a division that brought the global markets to its knees?
Perhaps we should revisit the theme of my piece, How Wall Street Bought Washington. Embedded in that piece, we can see the insurance industry lavished $220 million in campaign contributions and $1.1 billion in lobbying dollars on Washington over the last decade. AIG was one of the primary sources of that money.
Follow the money!!
LD
Is My Insurance Insured?
Posted by Larry Doyle on March 12th, 2009 6:30 PM |
The world of insurance occupies almost every corner of our lives. Life, home, auto, disability, long term care, personal articles. Rather than addressing what is insured, an easier question may be to ask what isn’t insured.
Given the intricate web of products and accompanying risks, we clearly are not currently dealing with your grandfathers’ insurance companies.
All that said, insurance is a relatively simple business. A policy is underwritten, premiums are collected and invested, and on and on we go. In fact, with major policies incorporating outsized risks, insurers can “lay off” risk with reinsurers, such as Munich Reinsurance, Swiss Reinsurance, and General Reinsurance. One would think this should be a steady and stable, if not quiet, industry. It would be such if companies did not reach for outsized returns through ever greater risks, primarily in the products in which they invested. While The Quiet Company, Northwestern Mutual invests primarily in high quality corporate bonds, entities like AIG trafficked in esoteric CDS. Hartford Financial Services played in the lower credit sectors of the commercial mortgage space, sub-prime mortgages, and junk bonds. (more…)
Fed Releases Names of AIG’s Creditors
Posted by Larry Doyle on March 6th, 2009 9:03 PM |
Under pressure from Congress this week to release the names of AIG’s creditors, the Federal Reserve’s Vice Chairman Donald Kohn clearly got the message. The Fed has acquiesced in releasing that Top U.S., European Banks Got $50 Billion in AIG AID.
My immediate reaction to this news is how interesting that the bulk of these institutions are European. What does that tell me? These European banks were getting plowed by Wall Street with a lot of sub-prime backed CDOs and when the dam was breaking they wanted to hedge their position. Market speculation is that European institutions own twice the amount of toxic assets as U.S. based institutions. That exposure on top of their delinquent loans in eastern Europe is crushing a number of western European banks. Who are they? Start by looking at the list, included in the above-referenced article, of AIG creditors.
In providing the hedge – which is the insurance – AIG received a fat premium but has been paying for it ever since. Actually, AIG only truly paid for it up until last September . . . the American taxpayer has been and will continue to be paying for it for a long time. Where were the regulators when we really needed them?
LD
