AIG and the USA

A couple of important things to note about this report on the $9 Billion loss that AIG experienced in the 4th Quarter of 2009:

• The loss that they experienced in the 4th quarter of 2008 was a little over 7 times larger than that amount.   That would create a pretty solid case for the fact that the world is no longer coming to an end, at least not as far as AIG is concerned.
• AIG had actually generated a profit in the 2nd and 3rd quarters.   The fact that it’s switched to a loss in the 4th quarter isn’t a good sign.

So, a big company, a big “investment” by the US, and a mixed bag in terms of the results.

AIG posts $9 billion loss – Feb. 26, 2010

AIG posts $9 billion loss
By David Goldman, staff writerFebruary 26, 2010: 9:47 AM ET

NEW YORK (CNNMoney.com) — AIG reported a substantial fourth-quarter loss Friday, largely due to costs associated with selling off large stakes in its insurance businesses to reduce the debt it owes to taxpayers.

The New York-based insurance company said it lost $8.9 billion, or $65.51 per share, during the three-month period ended Dec. 31. A year earlier, AIG lost $61.7 billion, the largest quarterly loss in history.

But recently, the company had begun to turn its financial situation around. Prior to the past quarter, AIG had recorded two profitable quarters in a row.

The fourth-quarter loss was due to billions of dollars in restructuring costs that AIG logged in the last three months of 2009.

In December, AIG sold large stakes in Alico and AIA, two giant foreign life insurance businesses, to the U.S. government. In exchange for those transactions, the Federal Reserve reduced the amount AIG has to repay taxpayers by $25 billion. AIG said it took a $5.2 billion charge for that sale last quarter.

Technorati Tags: AIG, Bailout

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Is the Bailout Over?

Not so fast…..

Remember last fall, when our government explained that the reason we needed to give $800 billion to Wall Street was so the banks could lend it back to us and shock the economy back to life again?

That was a happy story!

And we fell for it.

What happened, of course, was that the banks took the money, stopped lending, and used it to pay themselves and their shareholders through the nose.

Twelve months later, the banks still aren’t lending, and we’re still bailing them out hand over fist.

By lending the banks money at zero interest rates, the FT’s Martin Wolf says, the Fed is helping the banks recapitalize themselves.  The banks aren’t lending because they’re still trying to recover from all the lousy loans they made three years ago (and because there aren’t all that many folks to lend to).  So there’s nothing else to do with the money other than hoard it, buy safe Treasuries, and pay huge bonuses.

It’s annoying to watch banks that would have collapsed a year ago now minting money at taxpayer expense.  But that’s the way monetary stimulus always works.

Technorati Tags: Bank Bailout

Could this meltdown have been avoided?

Obama vs. Geithner – Stimulus vs. TARP II

Daniel Gross has an interesting article outlining the difference between Obama’s view on the Stimulus package and Geithner’s view of TARP II.   Not pretty reading, but I think it’s necessary……

Excerpts below….

Tom Vanderwell

The economic and financial crises are even worse than Obama admits. – By Daniel Gross – Slate Magazine

From the rhetoric surrounding the stimulus bill, you’d think the American economy is already stabilized, able to breathe on its own, and ready to get up and start walkingThe patient he diagnosed is nowhere near ready for ambulatory care or physical therapy. Rather, it’s struggling to breathe without life support. Worse, it is still in danger of infecting the whole hospital. For Geithner, the plan is more about stabilization and triage rather than recovery. The takeaway: The financial sector is still in meltdown. The best we can hope for is that these hundreds of billions of dollars in new spending and support will help stabilize things. Obama’s rhetoric about recovery may be reassuring, but, at this point, Geithner’s pessimism is more credible.

Geithner, Obama, Bailout, Stimulus

Government preparing more help for banks – reports – Jan. 16, 2009

The deepening financial crisis, which is undermining the government’s rescue efforts so far, is prompting federal officials to revisit its original bailout measures. These include taking toxic assets off institutions’ balance sheets by moving them into a so-called “bad bank”, according to published reports.

Government preparing more help for banks – reports – Jan. 16, 2009.

Tom here….

Do you remember the events of September and October?

That’s the time where the investment banking world literally melted down…..?

Lehman filed for bankruptcy and the others fled into the the commercial banking world?

I predict that we are heading into Round 2 of the mess and it’s going to be in the commercial banking sphere.

What’s been happening with Citibank and Bank of America re merely the tip of the iceberg…..

Stay tuned.

Tom Vanderwell

Agency Raises Concerns About Car Makers’ Pensions – WSJ.com

“An awful lot of people seem to think these plans are well funded or overfunded,” Mr. Millard said in an interview. “Each of these plans is significantly underfunded [and] in three years I don’t want people coming back and saying, ‘How come the PBGC never told us that?’”

This concern adds fodder to an ongoing debate over what the government’s role should be in helping the struggling auto makers from collapsing as the trio face a difficult road in 2009. Some people argue a bailout for Detroit would be a good use of taxpayer money, and that holding back financial aid would result in a collapse, and force the government to spend billions shoring up the companies pension plans.

Mr. Millard estimates that the three auto makers only have enough money in their pension funds to cover only 76% of the pension obligations they have made, if they terminate the pension plans. GM’s plan is estimated to be $20 billion, or about 20% underfunded, while Chrysler’s plan is 34% underfunded, leading to a $9 billion-plus shortfall, the agency said. Ford’s funded ratio is not publicly available, but the company’s pension plans are likely running at a $12 billion deficit.

About $13 billion of the estimated $41 billion shortfall would be covered by the PBGC, Jeffrey Speicher, an agency spokesman, said. The remainder represents benefits that PBGC could not pay because of limits set by Congress, and those benefits would be lost by employees and retirees.

Agency Raises Concerns About Car Makers’ Pensions – WSJ.com.

Don’t think we’re done hearing about the Big Three and their financial problems……

Tom

Auto Industry Duress to Take Toll, Worsen Unemployment (also called – Why did the stock market rally over a bailout of the Big Three?)

So, the stock market seems to be feeling pretty good about the fact that the Big Three are going to get their bailout.   But does that mean that all is well?   Nope, it really doesn’t.

Yves lays out a very convincing case for the fact that even though the auto industry will be kept alive, it’s going to need to be a rough recovery and a lot of people who are currently in the auto industry are not going to be when this is done.    Read on…..

Be careful what you wish for. Even a successful auto industry restructuring will involve substantial headcount cuts, deepening the recession underway. A Bloomberg story tallies the likely damage;

While the loans may spare General Motors Corp., Ford Motor Co. and Chrysler LLC from collapse, shrinking their workforces would sap an already weak economy, said Paul Ballew, chief of consumer insight and analytics for Nationwide Mutual Insurance Co. in Columbus, Ohio, and an adviser to the Federal Reserve.

“The degree of restructuring is much broader and much deeper than people assume,” said Ballew, a former GM sales analyst….

Because the industry’s employees are among the best-paid in the U.S., the elimination of one auto worker amounts to erasing 1.7 jobs because of the loss of purchasing power, [economist Robert] Scott said…

GM told Congress it projects trimming its workforce by as many as 30,000 employees by 2012, or 33 percent. Dealers for the biggest U.S. automaker would fall to 4,700 from about 6,500.

Job losses at the dealerships might be 100,000, Scott said…..

Television stations and advertising agencies likely would suffer from GM’s strategy to focus on just four of its eight brands and Ford’s push to emphasize its namesake nameplate.

“If the dealers go out, that is the biggest local advertiser in virtually every market, with nothing obvious to replace it,” said Kip Cassino, research director at consulting firm Borrell Associates in Williamsburg, Virginia.

Local television stations get 25 percent or more of their advertising from automakers, dealers, and dealer associations…

Fewer brands and models will translate into more pressure on suppliers’ employment, which fell 18 percent through June to 590,000, according to the Motor & Equipment Manufacturers Association. Ford, the second-largest U.S. automaker, wants to pare its global purchasing base to about 750 companies from 1,600….

Cutbacks already are being felt at railroads such as Norfolk Southern Corp., the biggest U.S. carrier of vehicles and parts. Auto shipments by rail are down 20 percent in 2008.

naked capitalism: Auto Industry Duress to Take Toll, Worsen Unemployment.

Word of the Year: Bailout | The Big Picture

The word “bailout,” which shot to prominence amid the financial meltdown, was looked up so often at Merriam-Webster’s online dictionary that the publisher says it was an easy choice for its 2008 Word of the Year.

The rest of the list is not exactly cheerful. It also includes “trepidation,” “precipice” and “turmoil.”

“There’s something about the national psyche right now that is looking up words that seem to suggest fear and anxiety,” said John Morse, president of Springfield-based Merriam-Webster.

Word of the Year: Bailout | The Big Picture.

I wish I could say that this surprised me, but it doesn’t.

Anyone want to venture what they think the word of the year for 2009 is going to be?   I’m going to do a post by December 15, 2008 that has what I think the top 5 choices of word of the year for 2009 are going to be and I’m going to set it to go for December 1, 2009 so we can all see how accurate (or totally off base) I was.

Tom Vanderwell

Just a little perspective for a Saturday…..

I saw this graphic from Voltage Creative that puts some perspective on how much money is being used in the bailout.    Thanks to Paul Kedrosky for directing me to it…..

Some thoughts about the eventual bill we’ll have to pay…..

I found this article at Jesse’s Cafe.   I need to let you know that article was written on November 11.  That’s 18 days ago.   What has happened in the last 18 days?

Oh, approximately $1,100,000,000,000 worth of additional spending on bailing out the financial sector.   Let’s review:

Citibank got $29 Billion in cash and the agreeement that the government will absorb up to $306,000,000,000 of Citibank’s losses on the assets that they own (assets being loans and other investments that they have).

Fannie and Freddie got notice that the Treasury is going to buy $100,000,000 of mortgages that Fannie and Freddie own and another $500,000,000 of mortgages that they have guaranteed.

The Treasury is also buying $200,000,000 worth of securitized (bundled) car loans, credit cards and student loans in an effort to get banks to start writing more loans.

So, everything that is said in the article that I’m basing this on is from 2 weeks before all of these bailout numbers…..

Now, here’s part of the article:

It may finally be catching up with Uncle Sam. That’s what the yield curve may be whispering. But some economists are too deaf, or dumb, to get it.

The yield curve simply is the graph of Treasury yields of increasing maturities, starting from one-month bills to 30-year bonds. The slope of the line typically is ascending — positive in math terms — because investors would want more to tie up their money for longer periods, all else being equal. Which it never is.

If they expect yields to rise in the future, they’ll want a bigger premium to commit to longer maturities. Otherwise, they’d rather stay short and wait for more generous yields later on. Conversely, if they think rates will fall, investors will want to lock in today’s yields for a longer period.

The Treasury yield curve — from two to 10 years, which is how the bond market tracks it — has rarely been steeper. The spread is up to 250 basis points (2.5 percentage points, a level matched only in the past quarter century in 2002 and 1992, at the trough of economic cycles.

Based on a simplistic reading of that history and the Cliff Notes version of theory, one economist whose main area of expertise is to get quoted by reporters even less knowledgeable than he, asserts such a steep yield curve typically reflects investors’ anticipation of economic recovery. (LOL, nicely phrased – Jesse)

Never mind that the yield curve has steepened as the economy has worsened and prospects for recovery have diminished. Like the Bourbons, the French royal family up to the Revolution, he learns nothing and forgets nothing.

As with so much other things, something else is happening this year.

The steepening of the Treasury yield curve has been accompanied by an increase in the cost of insuring against default by the U.S. Treasury. It may come as a shock, but there are credit default swaps on the U.S. government and they have become more expensive — in tandem with an increase in the spread between two- and 10-year notes.

Okay, Tom here.   What is it that they are talking about?

Let me try to explain it to you in simple terms:

1. The reason that long term Treasuries are higher than short term Treasuries is not because we are heading into an economic recovery (as the normal “steep” yield curve would show) but because the risk of something bad happening to US debt is increasing.

2. What’s the “something bad?”   A couple of scenarios are bouncing around:

• The foreign investors stop buying US Treasuries – that would send rates on Treasuries skyrocketing.
• Devaluation of the value of the dollar – that would create all sorts of nasty consequences, things that we can’t take enough time for here…..

So what does that mean?

Essentially this, it means that like all of the rest of us, the United States has a limited credit line and we (collectively) need to be careful how much we spend and what we spend it on.

Tom Vanderwell

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