There was only one thing that AIG was wishing for before it went to sleep on Tuesday. A Bailout.
And a bailout was what it got as the Federal Reserve just announced that indeed they will be granting AIG it's wish. Why? The same old same old. The Fed decided that AIG is too big to fail.
In short the terms of the deal are that:
The Federal Reserve Board on Tuesday, with the full support of the Treasury Department, authorized the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) under section 13(3) of the Federal Reserve Act. The secured loan has terms and conditions designed to protect the interests of the U.S. government and taxpayers.
The Board determined that, in current circumstances, a disorderly failure of AIG could add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth, and materially weaker economic performance.
The purpose of this liquidity facility is to assist AIG in meeting its obligations as they come due. This loan will facilitate a process under which AIG will sell certain of its businesses in an orderly manner, with the least possible disruption to the overall economy.
The AIG facility has a 24-month term. Interest will accrue on the outstanding balance at a rate of three-month Libor plus 850 basis points. AIG will be permitted to draw up to $85 billion under the facility.
The interests of taxpayers are protected by key terms of the loan. The loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries. These assets include the stock of substantially all of the regulated subsidiaries. The loan is expected to be repaid from the proceeds of the sale of the firm’s assets. The U.S. government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.
In this globally interconnected world, everything effects everything. And those Hedge Funds loyal enough to trust Lehman and stick with them through uncertain times are now getting thrown under a dead 500lb gorilla.
About 100 hedge funds that used Lehman Brothers as their prime broker had positions held via the failed bank frozen on Monday as administrators took charge of the London business and the US holding company filed for bankruptcy.
“Lehman makes us worry about prime brokers that don’t have a commercial bank with deep pockets standing behind them,” said one hedge fund manager.
But many of the hedge funds have switched to prime brokers which are part of bigger banks, a series of former clients said on Monday. “In the last two to three weeks everybody ran for the doors,” said one hedge fund which retains small balances with Lehman. “I don’t think this is a systemic risk issue, as lots of people had taken precautionary measures.”It's amazing how much our financial system relies on confidence and trust. There's almost the consensus now that dealing with an independent investment bank is inherently riskier than dealing with one owned by a commercial bank.
-Via the Financial Times
I ran across this old quote from Treasury Secretary Henry Paulson from April 20, 2007. Rather hilarious:
U.S. Treasury Secretary Henry Paulson said on Friday the housing market correction appears to be at or near its bottom and that troubles in the subprime mortgage market will not likely spread throughout the economy.Read / Discuss >>
"We've clearly had a big correction in the housing market. Retail housing was growing for some time at a level that was not sustainable," Paulson said in a speech to The Committee of 100, a business group in New York promoting better Chinese relations.
"I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained," he added.
Despite what many professors will tell you (okay maybe one in particular that I didn't agree with), a recession is not defined as 2 successive quarters of negative GDP. And it shouldn't be.The latest 3.3% GDP growth in Q2 should be enough to tell you that mode of thinking is horrendously wrong.From the National Bureau of of Economic ResearchThe NBER does not define a recession in terms of two consecutive quarters of decline in real GDP. Rather, a recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.
And to think, that professor was an economist..Here's an old joke for you guys:A recession is when your neighbor loses his job.--Via the Big Picture
A depression is when you lose your job.
Terrific piece from Joseph Stiglitz entitled: Falling Down - No manufacturing. No new ideas. What's our economy based on?
Stiglitz is a Columbia University Professor and won the Nobel Memorial Prize in Economics in 2001.
Too much energy has been spent trying to make an easy buck; too much effort has been devoted to increasing profits and not enough to increasing real wealth, whether that wealth comes from manufacturing or new ideas. We have learned a painful lesson, both in the 1930s and today: The invisible hand often seems invisible because it's not there. At best, it's more than a little palsied.
Even with federal intervention, I have estimated the cumulative gap between what our economy could have produced--had we invested in actual businesses, rather than, say, mortgages for people who couldn't afford their homes--and what we will produce over the period of our slowdown to be more than $1.5 trillion
We live in a knowledge economy, an information economy, an innovation economy. Because of our ideas, we can have all the food we can possibly eat--and more than we should eat--with only 2 percent of the labor force employed in agriculture. Even with only 9 percent of our labor force in manufacturing, we remain the largest producer of manufactured goods. It is better to work smart than to work hard...
The task of unraveling all that went wrong in our financial system is a difficult one, but in essence the financial system's latest innovation was to devise fee structures that were often far from transparent and that allowed it to generate enormous profits--private rewards that were not commensurate with social benefits.
A Citi analyst cut their price target on Bunge (BG) from $130 to $95--a 27% drop. Despite the drop, they maintain a "hold" rating. But, I would take their "ratings" with a grain of salt.
Citi analyst says, "Given what our Citi (Invtmt Research) Emerging Markets Economist team views as the possible beginnings of a potential slowdown within the emerging markets, we believe that the risk of moderating demand growth has increased and thus future earnings at Bunge could come under pressure...Adding to the risk profile surrounding 2009 earnings at Bunge is the recent decline in commodity prices which has been led by crude oil, which is down approximately -25% from its July peaks. At this point we don't know for sure that events will unfold to reduce commodity demand and thus prices, but the signs seem to be forming, as several of our fellow analysts have reduced their price forecast for different commodities such as our commodities strategy analyst who on Monday reduced his forecast on aluminium, copper, and nickel prices by -10% to -27%, due to concerns of a slowdown in industrial activity."
A lot has been made over Bill Miller's love affair with Freddie Mac. I feel for the guy I really do. I'm sure many of you have been in similar situations where you see that the shares of a company have dropped by nearly half.... only to drop by another 50% later.
If you thought it was cheap then, it must be cheaper now right? "Good investing is all about consistency!" "Be true to your beliefs!"
Well, even if you do want to really believe in your previous calculations on the valuation of the company, if you really want to average down you need to buy way more shares at the lower price than you did before...
In Felix Saloman's words: While, I won't go as far as discrediting Mr. Miller's investment mind, his latest actions have been questionable. His Value Trust fund (LMVFX) has gone from $68 at the beginning of the year to $47. In all truth, this isn't that far of a deviation from most other value funds these days.
Still, it's sad that a little less than a year of bad performance (dropping ever since the market topped out in October) could wipe out 5 years of gains. His 5-year annualized now stands at -0.64%.
Watch out for those value traps!
The odd thing is, on the Legg Mason website, it describes the Value Trust fund as being of the "Large Cap Growth"
Via LA Times Land Blog
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