AIG: What A Country

The Federal Reserve and the U.S. Treasury Department have announced a restructuring of the AIG rescue package. As with the original plan (and most of the other rescues), the authority to take these actions is granted under Section 13(3) of the Federal Reserve Act.

http://www.federalreserve.gov/aboutthefed/section13.htm


There are several moving parts:

- The original $85 billion loan will be reduced to $60 billion. The interest rate will be dropped from 3 month LIBOR + 850 basis points to 3 month LIBOR + 300 basis points. AIG will have 5 years from the original date to pay off the facility, instead of the original 2 years.

- The supplementary loan (10/8/08 collateralized borrowing) of $37.8 billion will be repaid.

- The U.S. Treasury will purchase $40 billion of preferred shares in AIG. These funds are part of the Troubled Asset Relief Program (TARP), but will not reduce the $250 billion dedicated to supporting financial institutions. The $40 billion is a part of the $100 billion that will be authorized by President Bush. The shares will pay a 10% dividend.

- The remainder of the new funds will be used to acquire assets to support AIG's balance sheet and credit default exposure. Two limited liability companies will be formed to house the assets. (This is similar to the method used to purchase those Bear Stearns assets on behalf of JP Morgan: Maiden Lane, LLC. The details of the LLC can be monitored weekly in the Fed's H.4.1 release.):

----- One facility will acquire residential mortgage backed securities that are currently held by AIG. $22.5 billion will be provided by the Fed and $1 billion will be funded by AIG. The Fed's loan will be secured by ONLY the holdings of the LLC. AIG will absorb the first $1 billion of losses.

----- The second facility will acquire collateralized debt obligations (CDOs). $30 billion will be provided by the Fed and $5 billion will be funded by AIG. The Fed's loan will be secured by ONLY the holdings of the LLC. AIG will absorb the first $5 billion in losses. The purpose here is to decrease the exposure AIG has to credit default swaps (CDS). AIG, in essence, sold insurance to protect owners of CDOs. As the the CDOs declined in price, the CDS would increase in value. So, if the new LLC acquires the CDOs, the owners would be able to unwind the CDS that they purchased and reduce AIG's liability.

In review:

Old deal: $122.8 billion

New deal: $152.5 billion

Wow. First, AIG needs some bucks to stave off failure. Next, they need a little bit more cash. Then, they need to restructure the whole thing because they can't pay their bills. It would be nice if the citizens who actually make all of this possible with their tax payments could participate was well.

Good Day, Sunshine

- Circuit City files for bankruptcy

http://newsroom.circuitcity.com/releasedetail.cfm?ReleaseID=346614


- General Motors equity & debt downgraded to laughable proportions

http://www.marketwatch.com/News/Story/Story.aspx?guid=%7b5BBC7AEE-1D84-40F6-95E2-241FB03C17EC%7d&siteid=yhoof2


http://www.businessweek.com/investor/content/nov2008/pi2008117_477694.htm?campaign_id=yhoo


- AIG is re-rescued

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoj_ojzEcu9w&refer=home

Spin That Wheel Bernanke !!!

From the Federal Reserve statistical release H.4.1 (11/06/08):

-- The Federal Reserve System holds $50.44 in assets for each dollar of capital

-- Their holdings of U.S. Treasury securities have decreased by $303 billion in 1 year

-- Other loans (this includes broker/dealer loans, the asset backed commercial paper liquidity program and the initial AIG loan) total $347 billion

-- Commercial Paper Funding Facility has provided $243 billion in liquidity

-- Other assets stand at $570 billion, a $529 billion increase from 1 year ago

-- The U.S. Treasury has now supplied the Fed with $559 billion via the Supplementary Financing Program (unchanged versus last week). Please check the 10/8/08 post "Some Bullet Points" for Program details.

Banks #19 & #20

Two more banks were shut down on Friday, bringing the 2008 total to 20 closures. I know it sounds like a broken record, but take a peek at the loss ratios. If it is not crystal clear that bank regulators were not doing their job.........

Market Cap

A snapshot of stock market values and capital infusions:






So, almost 25% of this group's market cap is the govenment's bucks...........

Jobs Report

Wow, I was off on that one...

The economy lost 240,000 jobs in October.  Initially, the BLS estimated that 73,000 jobs were lost in August and 159,000 jobs were lost in September.  Those numbers were revised to losses of 127,000 and 284,000 respectively.  The U.S. economy has lost jobs every month this year, a total of 1,179,000.  The unemployment rate rose to 6.5%, the highest since early 1994.

Fannie Mae Follow Up

By the way............

As of 9/30/08, Fannie Mae guaranteed $2.592 trillion in mortgage loans.  In addition, their debt totaled $1.446 trillion.  Total mess: $4.038 trillion

For good measure, Freddie Mac guaranteed $1.834 trillion in mortgage loans and had $815 billion in debt outstanding.  Total mess: $2.649 trillion

Grand total mess: $6.687 trillion

Standard & Poor's RMBS Downgrades

http://http://www2.standardandpoors.com/spf/pdf/media/subprime_alt-a_rmbs_110508.pdf

Check the report for some amazing downgrades.

Back in October they warned the market that hundreds of billions of downgrades were coming.

Some issues went from AAA to B, 15 notch drop.

Some issues went from AA+ to CCC, 16 notch drop.

Needless to say, these bonds dropped from investment grade to junk.

Big Day Tomorrow

The grand-daddy of economic numbers will be released @ 8:30 am: Non-farm Payrolls.

- September change was (159,000)

- The average of the last 3 months is (100,000)

- Based on the ADP number, estimate would be (143,000)

- Bloomberg survey of estimates: (200,000)

- My guess: (170,000)

Don't worry, I am not becoming optimistic.  I think the seasonal adjustments and trend will snap this number back before we see a really bad string of numbers.

In addition, Fannie Mae may be posting their 3rd quarter earnings report tomorrow.  A few things to focus on:

-    Level III Assets: $56.6 billion last quarter, comprised of mainly Alt-A & sub-prime

-    Loan Loss & Reserve: Provision of $5.35 billion in 2nd quarter, $1.48 billion in charge-offs

-    Deferred Tax Assets: This is my favorite.  Since they have been losing money, they have been counting their potential tax write-offs versus income as assets.  The problem is, they are not making money.  This accounted for $20.6 billion in assets last quarter, it might be written down by as much as $18 billion.  By the way, stockholder equity stood at only $41.2 billion last quarter.

Rate Cuts in Europe

The Bank of England cut their benchmark rate from 4.5% to 3.0% and the European Central Bank cut to 2.75% from 3.25%. The U.K. is experiencing their slowest economic growth rates in almost 20 years and the ECB obviously feels that they can finally lower their inflation vigilance.

On another note, this is post # 100. I hope that this has been a useful resource. Please leave a comment or drop me a line to let me know how this forum can be more helpful. Thank you.

markafz@gmail.com

Election Hangover

Nothing changes on Election Day....well, some things don't.




ADP released their monthly estimate for changes in payroll. Using a simple regression, it points to a drop of 143,000 for the non-farm number on Friday.

Also, the ISM Non-Manufacturing number was released: 44.4 for October. New orders down, employment down, inventories too high, this was a bad report.

Election Night

Dark Blue - Democrat in last 4 elections

Light Blue - Democrat in 3 of last 4

Black - Split

Magenta - Republican in 3 of last 4

Dark Red - Republican in last 4 elections

Election Day Equity Rally

.....well almost everything rally I guess (USD moved much lower):

S & P 500 + 4.08%

Oil up over $6.00

Gold up $40.00

10 year Treasury up over a point

I have often said that it is extremely difficult to read anything material into one day's worth of trading. Today was a low volume day, not to mention an Election Day in which the bias was to rally on finally having a political outcome. However, when all asset classes rise in a single session, I am compelled to investigate.

The U.S. dollar was smacked around, pointing to an end of the carry trade unwind. Risk assets, equities included, may have found a bottom as liquidity driven sales abated. Oil and gold moved higher on the back of the dollar, in addition to the Saudi production cuts. That leaves us with Treasuries. Why did they rally?

- Dollar was down, bearish for Treasuries

- Commodity prices higher, bearish for Treasuries

- Risk trade unwind slows (short covering of Treasuries slows), bearish for Treasuries

- Details of Quarterly Refunding tomorrow, could be either bullish or bearish (hardly a reason to buy today though)

Hmmmm. My best guess is the following: the Treasury market is not fooled by the last few weeks' rally. If deflation is on the horizon, real interest rates are poised to move higher. Remember, nominal rates are bound by zero. The ability of the Fed to control policy is hampered by losing this important tool. If monetary policy and fiscal policy prove ineffective, the growth rate of the economy will slow dramatically. So much perhaps that it would offset the increase in the amount of Treasury securities and the result would be lower nominal Treasury rates.

In review:

- deflation leads to higher real interest rates: if the Fed wants to keep the economy running, nominal rates need to be lowered or quantitative easing need to be increased

- nominal rates are bounded to the downside by zero

- if financial institutions are conservative, the easing will not have the desired multiplier effect

- companies have no incentive to produce if this occurs. Why pay interest on borrowed money if the sale price keeps dropping?

So, which market is right ????????

Funding Largesse

The U.S. Department of the Treasury announced its marketable borrowing estimates for the next 6 months. $550 billion of Treasury debt will be issued this quarter, followed by $368 billion in the first quarter of 2009. Additional details will be provided this Wednesday with the Quarterly Refunding Announcement.

Monthly Auto Sales

Auto sales continue to crumble worldwide in October:

32% drop in the U.S.

40% drop in Spain

19% drop in Italy

U.S. Sales by car maker:

G.M. 45% drop

Chrysler 35% drop

Nissan 33% drop

Ford 30% drop

Honda 25% drop

Toyota 23% drop