Thursday, February 5, 2009

Headline Financial News 2/5/2009

  • Jobless claims jumped 35,000 to 626,000.  The total number of people collecting benefits jumped to a record 4.788 million.  Productivity rose a higher-than-forecast 3.2% in the fourth quarter, presumably because suddenly those with jobs become much more productive when trying to survive the next round of layoffs.
  • Credit card delinquencies climbed to a record high in January.  Payments at least 60 days late rose almost half a percentage point last month to a record 3.75%.  Late payments surged by 18% in the fourth quarter and charge offs were 40% higher than a year ago at 7.5%.  Late payments and defaults on credit cards are closely linked with levels of unemployment.  These numbers were produced by Fitch, the rating agency which noted that rising late payments and defaults on credit card loans would hurt the performance of securities backed by credit card receivables.  The good news is that the Fed is planning a program to lend against these securities since the market is currently frozen.  Guess who's going to bear the risk when delinquencies go higher?
  • Back in November, when AIG posted its $25 billion quarterly loss, I marveled at how on earth the insurance company lost nearly $12 billion in its securities lending unit.  Securities lending is the least complex short-term money making strategy that ordinarily generates a sliver of profit off of a large portfolio, generally with little risk.  Give me a week, and I could train a monkey to run a profitable $100 billion securities lending portfolio at a highly rated financial institution (i.e. you need cheap funding for the strategy to work.)  As long as you have a relatively smart person in charge of risk management, the strategy cannot fail.  The Wall Street Journal has a fine article detailing exactly how the boobs at AIG managed to lose so much money in securities lending.  They took a simple strategy, added a dose of subprime, mismatched the maturities (i.e. borrowed very short and invested in longer maturity highly illiquid paper), and voila! -  multiple billions in losses.  The best part is, the guy who ran the unit was paid millions and liked to write emails that said things like: "There are still a few people that do not believe in our mission...The time has come-if you do not want to be on this bus- it is a good time to get off...Your colleagues are tired of carrying you along."

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