2008 October 26 | money blog

26 10 2008

Will AIG run low on money again? It’s burning through its $123 billion fast

Posted by: admin in Stocks Money News

Filed under: Amer Intl Group (AIG), Federal Reserve, Financial Crisis

AIG (NYSE: AIG) is borrowing even more money from the Federal government. As of October 23, it had tapped into $90 billion of the $123 billion the government has made available. The insurance giant was set up with the massive credit line on concerns that if it fails, it could bring the global financial and credit system down with it.

According to The Wall Street Journal, the weekly total of AIG’s draw-down remains large. “The new total is $7.4 billion, or nearly 9%, more than AIG had tapped as of a week earlier,” the paper said. On Oct. 22, AIG’s chief executive said the current bailout loan might not be enough.

Since it is a real possibility that the amount of capital available to AIG may be inadequate, the important question to ask now is, what happens if AIG needs more money?

For starters, common shareholders will probably see the value of their holdings go to zero. AIG’s shares are already down to under $2 a share — a sign traders think it will go bankrupt — compared to a 52-week high of $64.25 (a full year ago). The government owns 80% of the firm now. For people in the stock, it is probably a good time to take whatever money you have left and run.

The more difficult question is how far does the government go in providing funds? The answer is that the amount of capital may have to go much higher. The credit crisis is not getting better. AIG’s credit derivative swaps and mortgage-backed paper are falling in value almost every day. If the government still believes that propping up AIG is the key to averting a true global financial meltdown, it will have to extend more credit to the company.

Economists could debate whether AIG had to be saved. But now that the government has set itself up as a savior, it can hardly back down. If AIG were to go bankrupt it could spark a catastrophe which might be bigger than the one caused by the failure of Lehman. That’s a risk the country can’t take right now.

Douglas A. McIntyre is an editor at 24/7 Wall St.

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Continue reading More insurance bailouts on the way

26 10 2008

More insurance bailouts on the way

Posted by: admin in Stocks Money News

Filed under: Amer Intl Group (AIG), Financial Crisis, MetLife Inc. (MET)

The Treasury has decided that just bailing out American International Group (NYSE: AIG) to the tune of $122.8 billion and counting is not going far enough. Now it’s time to use our money to bail out more insurance companies. As it turns out, the insurers that are likely to get the money are the same ones that took a blood bath earlier this month. The companies seeking a bailout include Met Life (NYSE: MET), Hartford Financial Services (NYSE: HIG), and Prudential Financial (NYSE: PRU).

You may be wondering, what crime did I commit that makes it socially acceptable for my money to be used to bailout the insurance industry? Aren’t my home, auto, and life insurance premiums up to date? If so, what gives the insurance industry the right to use my taxes to pay for their investment mistakes? Because that is exactly what the insurance companies are doing.

How so? Their books are loaded down with asset-backed securities such as mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) that vastly exceed their shareholder’s equity. These securities are not worth much — in fact, a recent report suggested that CDOs were worth 10 cents on the dollar at best. If the insurers have these stated on their books at 60 cents on the dollar, the mark to market process could wipe out a significant portion of their capital.

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Emerging Economic Trends: Housing Swaps, Frugality, and Selling Homes in Lower Priced Areas.

26 10 2008

Emerging Economic Trends: Housing Swaps, Frugality, and Selling Homes in Lower Priced Areas.

Posted by: admin in Real-estate news

The selling pressure on Fannie Mae and Freddie Mac has been heavy this week after a Barron’s article published on the weekend made the case that both government sponsored entities would require a full fledged bailout. This was made clear even prior to the Housing and Economic Recovery Act of 2008 being signed into law. […]
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Sometimes people forget what these two companies stand for. Part of their mission is of creating liquidity on the secondary mortgage market. Yet with a struggling housing market these large institutions have to contend with a faltering portfolio that is seeing more and more losses. Now it is very likely that current shareholders would be wiped out in the event of a bailout. The question becomes why would foreign investors purchase bonds or preferred shares in the company if the likelihood of failure is around the corner. Certainly they will be made whole but not at premium rates. The well is drying up quickly.

There are a few emerging trends in the housing market. It is rather clear that housing still remains in a precarious situation. We are nearing the end of the summer selling season and the boost that was expected unfortunately did not materialize. Record inventory is still on the market and questionable mortgages such as pay option ARMs still loom on the balance sheets of many lenders. One of the trends that is emerging is people engaging in housing swaps. That is, people exchanging homes normally without a broker or agent. In many cases, it is a barter trade. Another trend is towards frugality. Now some would argue that this isn’t a trend more than the economic situation forcing the hand of many to face the grim reality. Yet there should be little doubt that prudence is making a comeback. Also, we will examine the hidden housing numbers embedded in the Southern California housing market. Are we really approaching some sort of market bottom?

Housing Swaps

I happened to stumble upon housing swaps on Craigslist. For those two of you who haven’t heard of Craigslist, this is one of the most visited sites on the internet with some 20,000,000 visits per month in the United States alone. You can consider this a dynamic classified section where you can find pets, look for employment, trade cars, get rid of unwanted furniture, and now swap your home with someone else. Now I’ve used housing swaps when traveling for a temporary living arrangement. For example, you need a place to stay and you find someone in your desired location who is looking to travel as well, and you come to an agreed upon trade. Now this I used during college and was amazed at how many people are out there and the ability of technology to shrink the world.

That isn’t the new trend. But what I am noticing is postings from people looking to permanently swap their place with others. That is something that is new. There were the unique postings in the past but now everyday you can find a person looking to trade their home with your home. Here is an example:

The person above is looking to exchange their Chicago home with a home out here in Burbank either temporarily or permanently. Now why would someone do a housing swap as opposed to selling their home? There are actually many good reasons. First, you may be an area with depressed sales and can’t sell your home. For many corporate careers, if you are in a junior position you may need to go where the company sends you. This may translate into you relocating but if you own your home and cannot sell, then you are stuck. What if you absolutely love your career? Then most would do anything they can to find a way to move to their new location.

Another reason people would do a housing swap instead of selling is they may be in a negative equity position. Say you bought a home for $350,000 and the home is now “worth” $250,000. A large number of people do not (or don’t want to) come to the table with $100,000 simply to sell their home. There is a large portion of the population that can manage the housing payment but is simply stuck in this position of limbo. They would like to sell their home but cannot. There only other option is to ruthlessly default and some are going down this path as well.

Finally, this may workout for people who are on the margins. If you have say a 4 or 5 percent equity position in your home, it may cost you $10,000 or $30,000 simply to sell your place. Why not contact someone and save yourself that amount? You can hire a real estate attorney for a few hours, get the paperwork drawn up and finish the deal. This may work for cases like the person that needs to relocate and doesn’t really care if they get a profit on their home. They are simply looking to sell the home.

It’ll be interesting to see if more and more of these cases pop up on Craigslist.

Frugality

There is a definitive emerging trend in frugality. There is a fountain of wealth with Google. You can use Google Maps and have access to technology that only a few years ago was accessible by the highest level government officials. You also have the luxury of searching for information from a variety of sources. One of the features I enjoy from Google is their Google Trends search feature. In this, you can see the amount of search queries for any phrase or word. Since Google dominates the search world, this is an excellent view of what people are searching for at any given time. Take a look at this search phrase:

As you can see from the above chart, not many people are searching for “real estate investing” anymore which shouldn’t come as a surprise. Ironically, in times where people should be more financially educated they tend to steer away from this. They ramp up their investments at the worst time, near a peak, and face rapid problems. Is it any wonder that California has now seen a drop of 38 percent in one-year for a median priced home?

This trend can also be seen perfectly by comparing two stocks for the year. That of Family Dollar Stores and Best Buy:

For the year Family Dollar Stores are up 24 percent while Best Buy is down 15 percent. So what does this mean? What it means is that people are focusing on things they “need” and avoiding things they “want.” It is interesting to note that consumer and producer inflation is running at decade highs. Now why is this? Clearly housing prices collapsing and credit tightening is wealth destruction so you would think that we would be seeing possibly deflation. The problem however is items that people need such as food, fuel, and healthcare are not growing exponentially. These remain fixed while the U.S. Dollar declines and purchases less and less of these items. In addition, many Wal-Mart goods are produced in China which is facing its own inflation. The workforce is slowly getting more educated and is demanding slightly higher wages which find their way into the price of the goods that people consume.

With budgets getting tight “want” stores like Best Buy are facing the brunt of the economic contraction. We saw this with Mervyn’s filing for Chapter 11 bankruptcy in July. Another clear example is looking at a low cost food source such as McDonald’s and comparing it to P.F. Chang’s China Bistro:

Over the past year McDonald’s is up 29 percent while P.F. Chang’s is down 27 percent. Frugality is becoming a way of life because money is tight and this is being reflected in the spending behavior of Americans.

Census Selling

Much to the chagrin of many the housing market won’t see a bottom at least in California until 2011. There is some positive aspects to this including more affordable housing for many. It will also lighten the debt load for households in the future. It may also give people the incentive to purchase homes in areas they plan on staying in and investing their time in creating a better community.

Foreclosures are still at historical highs. Given the recent housing report for Southern California and the modest jump in sales, I think it is important to look at the actual sales and how they played out in various regions. Let us first get a population count for the 6 major counties:

Population Count For County:

Los Angeles: 9,948,081

Orange: 3,002,048

Riverside: 2,026,803

San Bernardino: 1,999,332

Ventura: 799,720

San Diego: 2,941,454

Total Southern California: 20,717,438

So that gives us the entire population count for Southern California. The total population of California is 36,457,549 so Southern California makes up 56 percent of this amount. Now let us look at last months sales data:

Now I made the case in a previous article that the minor bump in sales was in large part by the fire sale of homes in the Inland Empire. Let us now break down the numbers to get an actual proportion:

Riverside + San Bernardino Total July Sales = 6,637 / (20,329 total SoCal Sold)

So these two counties made up 32.6 percent of all sales for Southern California. Now we should look at what percent these counties make up for the Southern California population:

Riverside + San Bernardino Population = 4,026,135 / (SoCal total 20,717,438)

Total population percentage for these two counties is 19.4 percent. So essentially these two counties are selling at twice the percent of their population representation. I was listening on the radio to someone explain the median price drop and cautioning that sales are getting skewed because “expensive” homes aren’t selling and only foreclosures and lower priced homes are selling. This in fact is true. The only thing I would caution these folks about is that distress sales are now the bulk of the market even though miraculously in some of the data, foreclosures don’t pop up in multiple listing services.

These new trends are simply a way people are coping with the economic conditions. It is very unlikely we will be seeing a second half recovery especially for housing.

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26 10 2008

Sub-prime Mess Leads to Global Summit

Posted by: admin in mortgage industry

Politics caused the global economic crisis. Can politics fix it? Doubtful.

Source [blownmortgage]

26 10 2008

John Paulson reaps billions from the financial crisis

Posted by: admin in Stocks Money News

Filed under: Rich in America

With the plunge in the markets, the hedge fund industry has gone into a tailspin. Even top hedge fund managers — such as Citadel Kenneth Griffin, Paul Tudor Jones, Steven Cohen and so on — are having troubles. In fact, there’s talk of hedge fund failures, consolidation, and increased regulation. For example, hedge funds may lose 15% of overall assets by the end of 2008. Keep in mind that the average hedge fund is down a stunning 18% this year.

Yet, there are some wily hedge fund managers that are striking fortunes. Perhaps the most notable is John Paulson, who manages Paulson & Co. His fund scored $15 billion in gains last year. Basically, he shorted a variety of complex mortgage securities.

Interesting enough, Paulson’s hot hand has continued. That is, his funds have seen increases of 15% to 25% so far this year.

In fact, if he can maintain this pace, Paulson will have personally amassed a $3.5 billion over the past two years.
Oh, and Paulson has 70% of his assets in cash right now. In other words, when the markets settle, he’ll be a nice position to capitalize on things — and make even more money for himself.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

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26 10 2008

Greenspan tries to play the ingenue

Posted by: admin in mortgage industry

A guest post from Constantine von Hoffman, veteran business journalist and author of the blog CollateralDamage.biz, a humorous look at marketing, business and his dog.

Alan Greenspan tried to mimic Michael “Heckuva Job, Brownie” Brown during his testimony before congress yesterday. Mr. Greenspan attempted to place blame squarely on anyone except himself. Mr. Brown’s performance in the same role was slightly more credible because he was utterly unqualified for the job he held, a claim Mr. Greenspan cannot make.

Mr. Greenspan claims to have been overtaken by events so rare that no one could have seen them coming. He called it a “once-in-a-century credit tsunami” that was impossible for anyone to prepare for. Mr. Brown made the same claims about hurricane Katrina and the destruction of New Orleans with every bit as little justification. The record of warnings about both disasters is substantial and undeniable.

“Those of us who have looked to the self-interest of lending institutions to protect shareholder’s equity — myself especially — are in a state of shocked disbelief,” said the former Fed Chairman. He called this “a flaw in the model that I perceived is the critical functioning structure that defines how the world works.” This statement boggles the mind. If it is true then Mr. Greenspan is a naive and gullible fool with no understanding of how business actually operates. It is also possible that this was a self-serving lie. I do not know which explanation to prefer. Either way makes me tremble at the thought he was in charge of the Fed for 18 years.

Mr. Greenspan studiously refused to accept any shred of responsibility for the crisis, pointing his fingers at investors who did not understand what would happen when home prices stopped surging upward. “It was the failure to properly price such risky assets that precipitated the crisis,” he said, making no mention of the absurdly lax regulatory environment that made these bad loans possible.

The consequent surge in global demand for US subprime securities by banks, hedge and pension funds, “supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem,” he said. “It was the failure to properly price such risky assets that precipitated the crisis.”

This was precipitated by Mr. Greenspan’s alleged inability to understand that the desire for personal profit frequently trumps fiduciary responsibility. The role of government is to — at the very least — regulate the corrosive effects of greed on how business operates. That is why there are laws and courts dedicated to the enforcement of the terms of contracts and trades.

Mr. Greenspan’s comments bring to mind the scene in Casablanca where Claude Raines closes down the Rick’s casino as he pockets his winnings. His rationale: “I’m shocked, shocked to find that gambling is going on in here!” At least Raines’ character, Capt. Renault, had the good grace to admit he was a cynical SOB.