Monday, March 2, 2009 0 comments ++[ CLICK TO COMMENT ]++

Bears partying like it's New Year's

If you are a bear, you are partying like it's New Year's. If you are a bull or a pig, well...

Ugly day across the board, with almost everything down today...

Multitude of bad news all day with possibly the $30 billion bailout of AIG being the most negative story. Earlier HSBC had also indicated a massive 16 billion (pounds) capital offering (largest in British history). Most of the news was expected but I don't think anyone realizes how bad the sitution is until it occurs.

The US government keeps saying they don't want to nationalize AIG but I think they have to nationalize it and break up the company soon. The government has been pumping tens of billions into AIG due to a so-called systematic risk. Most speculate that investments banks such such as Goldman Sachs will collapse if AIG defaulted on its CDS swaps.

I haven't looked at AIG but it's not clear to me if AIG's problems are due to poor underwriting or if it's due to collateral posting requirements. What AIG was doing is very similar to what Ambac and MBIA were insuring. However, AIG has to post collateral upon rating downgrade and I'm not sure if this is what is causing the losses. If it's simply collateral posting then the government may not lose as much money.

I think Obama is risking political capital with his plan of continuously dumping billions into AIG without any penalty to shareholders, bondholders, or even the board of directors. If I'm not mistaken, the board is still largely the same as the one that approved AIG's foray into the risky bond insurance (although I think it changed somewhat after Greenberg left.) I'm not sure how Obama is going to justify to his citizens spending tens of billions on AIG and not spending a tenth of that on industrial companies.

From a political point of view, a collapsing stock market and a deteriorating economy makes it easier for the Obama administration to do something radical. If the stock market declines another 10% to 20% over the next 6 months, the government can nationalize banks and penalize bondholders. The shock to the market will be more tolerable by then.

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