Bailout

Can AIG pay the government back?

Jim Kim — Tue, 11 Nov 2008 09:40:52 -0500

AIG has set all kinds of records for biggest bailout in U.S. history, which raises the issue of what kind of a deal are taxpayers getting? Will the firm ever be able to make good on the loans? Article

What went wrong at AIG?

Jim Kim — Mon, 10 Nov 2008 08:07:51 -0500

People awoke this morning to the news that the government is investing another $40 million, via TARP, in troubled AIG. That brings the total bailout to $150 million, far more then the government has ever put into a single company, the New York Times notes. The move is a stark admission that not only did the initial bailout moves not work, they actually hurt the company, sticking it with high interest payments and forcing it into an asset firesale. The government also said it will spend an additional $30 billion to buy up ailing collateralized debt obligations that AIG had disastrously insured. Such securities will be shifted to off-balance sheet entities and will not require massive collateral to be put up. This is an example of how the bailout is not a slam dunk, and despite the billions of dollars, success isn't guaranteed.

For more:
- here's the article

BlackRock's role in the crisis

Jim Kim — Fri, 31 Oct 2008 11:39:06 -0400

BlackRock CEO Larry Fink is dominating the headlines like he did a few months ago, when it seemed like he was a candidate for every high-profile open CEO position. His firm is playing an active role as the bailout industry gears up. BlackRock has been hired by AIG, Lehman Brothers, Fannie Mae and Freddie Mac--not to mention the Treasury Department.

Fortune notes the irony: "Keep in mind that 25 years ago [Fink] was an early and vigorous promoter of the CMO (collateralized mortgage obligation). Today the CMO and other asset-backed securities have become the monsters responsible for the credit crisis."

In some ways, that's unfair. You can't blame him for the recent decisions at some investment banks. He has his company poised to profit from the bailout process, and that strikes some as an enviable position.

For more:
- here's the article

Lots of intrigue over AIG

Jim Kim — Thu, 30 Oct 2008 08:08:58 -0400

The New York Times reports that AIG is "rapidly running through" the $123 billion in emergency lending it has received from the Fed. It has drawn down $90 billion so far, which is prompting a lot of head scratching over accounting techniques. There seems to have been an internal conflict over how to value derivatives. An internal accountant hired by the company because of an earlier scandal has been sidelined on this issue and is now said to be in seclusion. But he has been in contact with government officials, who have his account of events. The company's external auditor, PricewaterhouseCoopers, warned of a material weakness before the government bailout. So the fear is that the company had racked up huge losses--that were undisclosed--before being bailed out. AIG has yet to provide information about how the funds have been used, but its first earnings report since the bailout may be released next week.

For more:
- here's the NY Times article

Bank CEO cash payout raising brows

Jim Kim — Wed, 29 Oct 2008 12:44:39 -0400

South Financial Group chairman, president and CEO Mack Whittle stepped down with a $12 million payday that the company intends to honor. The twist here is that the resignation came a few days after the bank said it will apply for bailout money from the TARP, which of course intends to restrict golden parachutes. He founded the company back in 1986 and deserves credit for that. Of course you have to assume that he's been paid handsomely over that period for good performance. But just recently, the credit crisis really crunched it, hence its TARP application. What do you think? Does he deserve to have his compensation agreement honored, even in this tough economic (and political) season?

For more:
-here's more from TheStreet.com

As securities industry drowns, bonuses remain unsinkable

Molly Bernhart — Tue, 28 Oct 2008 11:00:28 -0400

Stocks are plummeting, securities firms are toppling, a $700 billion government bailout is underway and Americans are furious over executive compensation. But even as financial markets flounder, bonuses are unsinkable.

Merrill Lynch, which has seen a 70 percent drop in its stock this year, is dedicating $6.7 billion to bonuses. Amazingly, some employees at now-bankrupt Lehman Brothers will get the same bonus as last year. Goldman Sachs and Morgan Stanley, both of which are still profitable, will spend $13 billion on bonuses this year. For some firms, this is an overall or significant decrease in bonus spending from previous years, but higher-level employees will most likely not feel the effects of the squeeze.

Barney Frank, chairman of the House Financial Services Committee, has been outspoken in his opposition to bonuses during such bleak economic times. He believes a moratorium should be placed on bonuses--an action that would eliminate the argument that bonuses are necessary to keep companies competitive for recruiting.

"I'm just flabbergasted that the financial community has failed to show any sense of leadership on this issue and doesn't seem to understand how angry people are at them," said Nell Minow, editor of Corporate Library, a Portland, Maine-based corporate-governance research firm. "They are just a bonus away from having the villagers come after them with torches."

For more:
- read the entire Bloomberg article

Should Lehman have been saved?

Jim Kim — Mon, 27 Oct 2008 15:11:32 -0400

We'll be debating this for a long time: Would it have made any difference if Lehman Brothers had been "saved" by regulators the way they saved Bear Stearns? Would it have prevented additional carnage? It's tempting to say the regulators got it wrong by letting it fail. The extent to which Lehman was involved in the CDS market, which has rippled far and wide, would suggest that the company was "too important to fail," as was Bear Stearns. But one could easily argue that the CDS market machinery has absorbed the bankruptcy as well as it could have, and the government had to take a stand. It had to let someone fail. This is still capitalism, after all. Morgan Stanley, most likely, would have run into issues at some point, and Goldman Sachs would have converted anyway.

For more:
- here's an interesting look at the issue from Portfolio

Another big move from the Fed

Jim Kim — Tue, 21 Oct 2008 16:28:58 -0400

This shouldn't surprise anyone: The Fed has decided to buy up commercial paper, notes and CDs of money market mutual funds, bent on preventing any more from breaking the buck. JPMorgan was selected to run the five special funds that will make these purchases. The Fed will loan enough to cover purchases up to $540 billion. This is yet another stunning move, coming just a bit too late for the Reserve Fund and others who dipped below one dollar a share. This is good news for retail customers who may have been feeling antsy. It ought to stem the outflows that have endured even after the bailout was announced.

For more:
- here's the AP article

Tech Ticker video: The bailout's seven biggest victims

Dan Bowman — Mon, 20 Oct 2008 08:41:42 -0400

Check out the video below on the seven biggest victims of the bailout.

Now they're really too big to fail

Jim Kim — Mon, 20 Oct 2008 07:52:36 -0400

The idea of a moral hazard on Wall Street is not new, but it is relevant again, as the government keeps on bailing out out the top banks. To some, this is just plain wrong, despite the deleterious economic consequences, because Wall Street banks are never forced to own up to their actions. We'll see if any real prosecutorial activity emerges. Going forward, it will be even harder to let the top banks fail. Breakingviews notes that Bank of America, Wells Fargo and JPMorgan Chase (you also might as well throw in Citigroup) are so massive now that the first three may be up against the 10 percent limit on all domestic deposits. Which is to say that, at this point, there's no way the government can let them fail. Long term, once the crisis is over, will this encourage the sort of risky behavior that helped spawn the current mess?

For more:
- here's the Breakingviews article via the New York Times