Thursday, September 30, 2010

AIB and AIG Again, With Some Details

The Central Bank of Ireland has finally put a price tag on the total cost of bailing out the state-owned Anglo Irish Bank, Ireland's equivalent to AIG. The bank was nationalized in January 2009 and has put on a real damper on Ireland's ability to borrow in the international bond markets. The losses have been capped at $46.75 billion in a worst-case scenario. In US-terms this sounds like chump change. But the government sponsored bailout of its financial sector will cause the budget deficit to rise to 32% of Irish GDP. Sure, the Irish plan to cut the deficit to 3% to make the bond market happy again, but that will be a bitter pill to swallow for the country's citizens.

Meanwhile, in the US, where $150 billion government bailouts are de rigueur, the US government and AIG have agreed in principle on a plan for the government's exit. The details are as follows:
  • The government converts its $49.1 billion of preferred into common to increase its ownership stake to 92.1%.
  • The conversion will take place in early 2011 if AIG can repay $20 billion to the Fed, which it can only do if it can IPO its Asian unit successfully.
  • Current shareholders, who really really love this plan, will receive 75 million warrants with a $45 strike price (still out of the money as we speak, despite the inexplicable rally in the shares.)
  • The Treasury takes over the NY Fed's interests in two SPVs that will theoretically recoup $26 billion from sales of AIG's overseas assets.
  • The Treasury will commence gracefully puking 1.655 billion shares over some period of time to complete its exit.
Assuming everything goes according to plan, the US will recoup its money. Count me among the skeptics, of course. Alot of things have to go right for this hare-brained scheme to work. AIG needs to pull off a monster IPO. The stock market has to remain in its chipper mood where no economic number, no matter how bad, gets it down. Investors actually have to get involved in AIG's stock, instead of all the day traders that like to play on the limited float. And we have to avoid a double dip, without discouraging the Fed from purchasing every asset in sight to keep markets going higher. Given how the Fed is eagerly offloading its stake in AIG to the Treasury, it seems you can count the Fed out on purchasing anymore AIG assets.

Wednesday, September 29, 2010


Ireland is set to unveil yet another tax-payer funded recap of Anglo Irish Bank. The restructuring is being cobbled together as Ireland's cost of borrowing hits record levels and the expiry of Ireland's two-year blanket guarantee for bank liabilities looms. With any luck, this particular European black hole will be plugged and we can go back to worrying about Greece again.

Speaking of black holes, perhaps the Irish can take some solace from the US government's handling of AIG. Or rather, the US government's optimistic plans for exiting the financial debacle that is AIG. AIG's board is set to finalize a restructuring plan that would increase the US Treasury's stake in the insurer to 90%. The Treasury will be converting its preferred stake to common, thereby increasing its stake and diluting the bejesus out of shareholders yet again. The shareholders, mind you, think this is GREAT NEWS, as the stock is actually rallying today. I mean, everybody loves dilution. Right? To compensate shareholders for this particular kick in the groin, they get the pleasure of receiving warrants in AIG to buy MORE shares in the future at a discount to the current price. According to the genius quoted in the FT article "This would give other people the chance to buy shares on the cheap as well." Because, you know, the stock is definitely still gonna be trading at this price in the future, so the warrants are a real bargain. Also, since this is being called a "Government exit plan" and not an "entry plan," the government will be cleverly and sneakily off-loading its 90% stake (i.e. dumping large quantities of stock onto the market) which won't have any effect on the price, I'm sure. The stock can only go higher. So, you know, free money for everybody.

Friday, September 24, 2010

Markets Rip on Lackluster Data

Equities rallied this morning on the heels of some relatively lousy data. Durable goods orders were down 1.3%, slightly worse than the 1% decline the average economist was expecting. Sales of new homes remained at a 288,000 annual pace, also worse than expected and the second-worst month of new home sales data going all the way back to 1963. So what gives? Why are equities in such a good mood today? Can it really be excitement over German business confidence numbers? Has anyone involved in the US markets ever cared about German economic numbers until today?

Perhaps the truth is that the data was pretty bad. Bad enough for the Fed to want to keep the monetary spigot open. But not so bad that we're scared the economy is collapsing again. Not so bad that we're worried the European Union is going to fall apart again and create another credit crisis. Maybe the new Goldilocks is just limping along with virtually zero growth, just enough to keep the Fed involved, but not enough to fall off a cliff. After all, the market doesn't care if unemployment is at 10%. It wants interest rates at zero. It wants the Fed to keep buying securities. And as long as some people are shopping at Walmart, that's enough to keep us going.

The WSJ has an interesting article about how frustrated stock pickers are in this market. Correlations remain high, at roughly 66% in recent weeks, lower than the 80% during the European debt crisis, but still much higher than the 27% average between 2000 and 2006. How are you supposed to pick good stocks if everything just moves in lockstep for no apparent reason? Like ripping higher on lousy economic data? Further proof that nobody really cares about fundamentals. Only about the Fed's next move. Unless you're Bill Gross and you get to tell the Fed what to do, what's the point of investing in a market like that?

Wednesday, September 22, 2010

Larry Summers Out, Next Up: A Woman???

Larry Summers is stepping down from his post as the head of the President's Economics Council and returning to all of his female fans on the faculty at Harvard. According to the WSJ's account of his resignation, his departure is driven partially by a desire to return to Harvard before January so that he won't lose his tenure. You see, you never want to lose that tenure because outside of academics, it is impossible to be completely ineffective without eventually losing your job. Tenure guarantees the ability to do nothing, keep your paycheck, and occasionally run off at the mouth about something that offends a bunch of people, all while continuing to look either peeved or fast asleep in every single newspaper stock photo next to articles detailing your gaffes.

Moving on to the next question: Who's going to replace Mr. Summers in that ever crucial role of continuing to pour all kinds of stimulus down the drain? Or making sure the banking sector isn't truly reformed but just continues to siphon off money from the public sector? A few candidates: Anne Mulcahy, formerly of Xerox? But, um, she's a woman. How about Diana Farrell, the Deputy National Economic Council Director? Ack!! Another woman. The third candidate? OMG, Laura Tyson, an economist from UC Berkeley! What is with all these women? How are they ever going to do Larry's job? Everybody knows they are not that smart. Well at least back in the comfy confines of academia, Mr. Summers won't have to read the WSJ to find out who replaced him.

Wednesday, September 8, 2010

Mark Hurd Gets New Job at Oracle, HP Miffed

Those who have casually followed the HPQ-Oracle-Mark Hurd-sexual harassment imbroglio may be interested to hear it has taken an even more amusing/bizarre turn. Here's a quick recap of the history:
  • Everybody Loves HPQ's CEO Mark Hurd.
  • Mark Hurd settles a sexual harassment claim with a former HPQ consultant/employee whose job description was at best murky.
  • HPQ board gets mad because, um, this is a bit embarrassing. Why is our CEO sexually harassing our employees? Wait, what did she do for us? What are these "expenses"? She used to be an actress? On reality TV??? Then she worked in real estate? Oh right, we hired her to be a greeter/escort at our fancy parties. Because we need one of those to sell our lousy printers.
  • Mark Hurd "resigns" (aka given boot by board) and given massive severance payment.
  • Everyone is shocked that CEO is fired, especially the harassee (didn't mean to get the guy fired, thought it would be all hush hush)
  • Except for Larry Ellison who apparently doesn't care if his employees sexually harass (or whatever) other employees, as long as they "create shareholder value."
  • Mark Hurd gets job at Oracle.
Which brings us to present day: HP's board is now really pissed off and is suing to block Mark Hurd from joining Oracle. I mean he's going to bring all of those trade secrets over to Oracle. And now Oracle is going to start making lousy printers too and it's going to eat into our monopoly and we won't be able to get away with selling printers that run out of ink a week after purchase, then charging $50 a cartridge for another week's worth of ink! Oh No!

Here are a few thoughts I'd like to share with HPQ's board:
  • Next time you fire someone for cause, don't pay them a $35 million severance. Trust me, you'll feel better when they immediately go to a competitor.
  • According to the FT, there was no non-compete clause, but something about not releasing trade secrets to competitors. Nonetheless, suing will likely be as big of a waste of money as his severance.
  • Hire someone who will figure out why my two week old printer keeps giving me error messages instead of printing.

Tuesday, September 7, 2010

Whistle-Blowing Gets More Lucrative

With the economy double-dipping, bank profits screeching to a halt, and unemployment hovering at record high levels, where can enterprising folks look to make the big bucks? And fast? How about a job at the SEC? Not a salaried position. But how about as a consultant working for a contingency fee? One of the nifty new parts of the new Dodd-Frank financial law passed in July is the ability to net as much as 30% of the penalties and recovered funds collected by the SEC in fraud cases. Since the legislation passed in July, there has been a surge in tips from whistle-blowers looking to tip off the SEC to all that fraud that has been operating under its nose since the beginning of time.

"We've gotten some very high-quality tips," said SEC official Stephen Cohen.

Hopefully, it won't take the next financial crisis to unveil the next wave of ponzi schemes that build up during the proceeding bubble. And there will be a bubble. Because you can't have zero interest rates and QE without another bubble somewhere. And you don't have bubbles without hidden ponzi schemes and fraud. But maybe this time, with adequate incentives to folks looking to collect a bounty, the SEC will catch them before they morph into $65 billion ponzi schemes, or $8 billion frauds, or $650 million...well, you already know the story.