Rebel Traders – Analysis Without The Hype

Ahead of tomorrows big show on the Hill, Tim Geithner’s written testimony has been leaked. I do not know if this was intentionally leaked or not. Nor do I know how it came to be on the net ahead of the embargo period, but it is swilling around the net now.

Tim Geithner Written Testimony

Treasury Secretary Tim (Turbo Tax) Geithner has come under a lot of fire in recent months, and with just cause I might add.

Today Tim Geithner came under heavy fire on Capital Hill for his failed policies, bailouts, and the growing deficit. The pivotal moment for me was when Tim Geithner said the following:

{I do not believe that the removal of Glass-Steagall had any impact on the current crisis}

That my friends is an outright admission that he does not work for the good of America or its citizens, but instead works for the good of Wall Street, even if it means placing the taxpayers at great risk.

It was the elimination of Glass-Steagall in 1999 that allowed banks to cross the line into non banking endeavors such as mortgage backed securities. The Glass-Steagall Act was originally enacted following the Great Depression to prevent banks from putting the financial system at risk. How Mr. Geithner thinks that this had nothing to do with the current financial disaster is simply beyond words.

Recall that before becoming Treasury Secretary he was the President of the Federal Reserve Bank of New York. The very Federal Reserve bank that was instrumental in aiding and abetting the bailouts of the insolvent banks, participated in the meetings and doings of the Bear Stearns collapse, Merrill Lynch, Lehman, and many other “investments” that we as taxpayers were forced to pay. He also allowed non-banks to acquire bank holding company status so they may be able to draw upon the Fed’s (tax payer) funds via the discount window. Something that was until this crisis only available to ‘real’ banks.

Recall that earlier this year Tim Geithner was speaking to a group of university students in China and stated that China’s investments in the United States were safe. This was followed by an outburst of laughter from the audience (some people don’t fall for lies).

Recall that Tim Geithner was instrumental in the behind the scenes arrangement that allowed Goldman Sachs to receive full payment for credit default swaps  that were tied to AIG. Those credit default swaps would normally have paid between 25 and 55 cents on the dollar in this situation. Instead Tim Geithner allowed Goldman Sachs and even some foreign banks to receive par on the default swaps and worst of all it was essentially laundered money. The money went from the tax payer to AIG, from AIG it went directly to Goldman Sachs. Everybody has to save Goldman Sachs… right? This all took place when Geithner was running the show at the New York Federal Reserve and former Goldman Sachs chairman Steve Friedman was on the board of directors of the New York fed when the money laundering operation was devised.

Mr. Tim Geithner – RESIGN NOW

Mr. Jake DeSantis, an AIG executive VP resigned this morning from the company and submitted his resignation to the New York Times.

Read full letter here

I have read what Mr. DeSantis wrote.. my final opinion is the following:

As an  owner (tax payer) of AIG I accept your resignation, don’t let the door hit you on the back side on the way out.

Did Mr. Liddy, AIG CEO lie before Congress?

Information made public today shows that the amount of money AIG employees received in the form of bonuses was actually larger. This was revealed in documents subpoenaed by the Connecticut Attorney General.

NEW HAVEN, Connecticut – Connecticut’s attorney general says documents turned over to his office by American International Group Inc. shows the company paid out $218 million in bonuses, higher than the $165 million previously disclosed.

Attorney General Richard Blumenthal’s office received the documents late Friday after issuing a subpoena.

Blumenthal says the documents show that 73 people received at least $1 million apiece, and five of those got bonuses of more than $4 million. The financially ailing insurance giant has been under fire for giving bonuses after receiving more than $182.5 billion in federal bailout money.

AIG spokesman Mark Herr declined to comment Saturday.

From the WSJ:

The House gave strong approval to legislation intended to recoup bonuses paid by American International Group Inc. and other recipients of federal aid, after a sharp-edged debate that dramatized populist outrage over the government’s sweeping efforts to prop up the nation’s financial system.

The legislation was rushed to the floor by Democratic leaders amid a storm of protest among rank-and-file lawmakers over AIG’s decision to pay bonuses to hundreds of current and former employees, while receiving more than $100 billion in taxpayer assistance. Approved on a 328-93 vote, the measure would impose a 90% surtax on the disputed payments, effective for bonuses made after Dec. 31, 2008.

The legislation would apply widely to payments by all institutions that have received at least $5 billion in taxpayer aid. The special levy would be in addition to existing income taxes, and would apply to bonuses received by individuals with at least $250,000 in adjusted gross income.[...]

[...]Under the plan, the first $250,000 of compensation including any bonuses earned by executives at the firms would be taxed at normal federal income tax rates. Any bonus over that amount would be taxed at a much higher rate of 90%.

The Senate is working on its own plan to try to recoup the bonuses. Lawmakers there have yet to roll out their legislation, although according to Sen. Max Baucus ( D., Mont.), the chairman of the Finance Committee, a bill will be introduced later Thursday.

The Senate bill is much broader than the House version — taxing bonuses at any company that received federal assistance, not just the largest ones. It would tax bonuses at 70%, split evenly between the company paying the bonus and the employee receiving it.[...]

I will have commentary on this issue in tonight’s video update.

It has been said over and over that AIG represents a “systemic risk” to the global economy. This has been used not only for AIG but for Citigroup, and many others.

What is it that the U.S. Government is so afraid of? What is systemic risk anyway?

When we hear the term ’systemic’ we often think of medical conditions which are very severe. A ’systemic infection’ to the financial sector is the equivalent of a lymphatic cancer. But is the diagnosis of a systemic risk as it pertains to these individual companies really warranted? Or is is simply an ‘excuse’ to garner public support for actions that actually have other objectives?

Today AIG released its counterparty obligations. Those obligations were essentially obligatory payments that AIG was responsible to make good on to other companies, governments, and states that were for the most part linked to losses on securities linked to U.S. mortgages and were sold by AIG.

So who was it that a failure of AIG would have resulted in severe losses to?

From AIG Counterparty disclosure statement:

AIG Chairman and Chief Executive Officer Edward M. Liddy said that the counterparty and collateral information show that billions in government assistance flowed to dozens of financial counterparties and municipalities during a time of acute stress in the economy.

Mr. Liddy emphasized that AIG’s disclosure of the counterparties does not change AIG’s commitment to maintaining the confidentiality of its business transactions. “Our decision to disclose these transactions was made following conversations with the counterparties and the recognition of the extraordinary nature of these transactions,” Mr. Liddy said.

Payments made by AIG after September 16, 2008, the date on which AIG began receiving government assistance:

• Societe General (FRANCE)  – $11.9  Billion
• Deutsche Bank (GERMANY)  – $11.8 Billion
• Goldman Sachs   – $12.9 Billion
• Merrill Lynch  – $6.8 Billion
• Calyon (FRANCE)  – $2.3 Billion
• Barclays (U.K.)  – $8.5 Billion
• UBS (Switzerland)  – $5.0 Billion
• DZ Bank (GERMANY)  – $700 Million
• Wachovia  – $1.5 Billion
• Rabobank (HOLLAND)  – $800 Million
• KFW (GERMANY)  – $500 Million
• JP Morgan  – $400 Million
• Banco Santander (SPAIN)  – $300 Million
• Danske (DENMARK)  – $200 Million
• HSBC Bank (U.K.)  – $3.5 Billion
• Morgan Stanley   – $1.2 Billion
• Bank of America  – $5.2 Billion
• Bank of Montreal (CANADA)  – $1.1 Billion
• Royal Bank of Scotland  – $700 Million
• BNP Paribas (FRANCE)  – $4.9 Billion
• Credit Suise (SWITZERLAND)  – $400 Million
• ING  (HOLLAND)  – $1.5 Billion
• Deutsche Zentral (GERMANY)  – $1.0 billion
• Dresdner Bank (GERMANY)  – $2.6 Billion
• Citigroup  – $2.3 Billion

There is what the Government claims is a ’systemic risk’. The failure of AIG would have resulted in many billions of of dollars in losses for numerous other banks and financial institutions, but none of them should have been anything near a ’systemic’ collapse. Instead the U.S. taxpayer money was immediately transferred to bailout and protect the losses in other institutions and countries.

So the bailouts of AIG amounted to nothing more than a conduit for distributing tax payer funds around the world in this authors view with the threat of ’systemic failure’ only to gain public support, to ‘justify’ their bailouts.

Is AIG a systemic risk capable of bringing the entire financial system to a ‘crashing’ halt… not in my view.

But what the U.S. Government is doing by providing bailout after bailout IS a systemic risk to the entire financial system.

—–

In other news tonight AIG announced they will be paying nearly $1.2 Billion in bonus and retention payments to employees. Many of which are those who were directly responsible for the catastrophic failure and reckless risks that AIG put themselves in.

Mr. Liddy, AIG CEO, said in a statement that it was important to retain the top talent needed to unravel the mess the company was in. And to be able to continue attracting top talent.

Why are those who had their hands in creating the largest financial disaster since the Great Depression being considered ‘top talent’? And why is it important to keep them?

I say that AIG must fail. This company is an embarrassment to the United States, the tax payers, and to the financial community. AIG is ‘too big to be allowed to survive‘. It is time for this company to be put out of ‘our misery‘.

AIG reported a $61.66 billion loss for the fourth quarter, the largest corporate loss in United States history.

“The company continues to face significant challenges, driven by the rapid deterioration in certain financial markets…. The additional resources will help stabilize the company, and in doing so help to stabilize the financial system,” the Treasury and Federal Reserve said in a statement.

The new deal, the government’s fourth for AIG, represents a nearly complete reversal from the one first laid out in mid-September. Back then, federal officials acted as a demanding lender, forcing the insurer to pay a steep interest rate for what was expected to be a short-term loan. Now the government is relaxing loan terms by wiping out interest in hopes of preserving AIG’s value over a longer period.

Tax payers have been on the ‘expendable’ list as the Government now appears to have no desire whatsoever to protect taxpayer interest any longer.

AIG CEO: CEO: COMPANY WAS IN MUCH DIRE CONDITION THAN EXPECTED
- Deal with the government keeps difficult economic situation from deteriorating further by making sure company survives.

Today’s Bailout highlights:

US GOVT TO EXCHANGE $40B IN CUMULATIVE PREFERRED SHARES FOR NEW COMMON SHARES

- In agreement with US government for $30B equity capital facility
- AIG to issue convertible preferred stock representing 77.9% of shares to US Treasury trust
- US Gov’t ready to support AIG further if markets do not stabilize
- Fed to make new loans of up to $8.5B to AIG Life Subsidiaries
- Fed states AIG continues to face “significant challenges”
- The restructuring components of the government’s assistance begin to separate the major non-core businesses of AIG, as well as strengthen the company’s finances.
- The long-term solution for the company, its customers, the U.S. taxpayer, and the financial system is the orderly restructuring and refocusing of the firm.
- As required by the credit agreement governing the Revolving Credit Facility, AIG has agreed to issue on March 4, 2009, shares of convertible preferred stock representing an approximately 77.9% equity interest in AIG to an independent trust for the sole benefit of the United States Treasury.

The Wall Street Journal has some additional details on the upcoming announcement of another bailout for American International Group (AIG).

American International Group Inc. will receive up to an additional $30 billion in federal assistance as part of the latest revamp of its government bailout, according to people familiar with the matter.

The new funding is intended to support AIG as it absorbs $60 billion in quarterly losses and operational and competitive upheaval. Under the plan, the insurer will repay much of the $40 billion it owes the Federal Reserve loan with equity stakes in two AIG units overseas — Asia-based American International Assurance Co. and American Life Insurance Co, which operates in 50 countries.

Repayment was originally supposed to be in cash with interest. In addition, AIG will securitize $5-$10 billion in debt, backed with life insurance assets, to further reduce its debt burden.

Following these moves, the $60 billion Federal Reserve credit facility AIG received in November will be reduced to $25 billion. AIG has already drawn down $40 billion of those funds.

The plan reflects the deepening exposure of the U.S. taxpayer to the embattled insurer. The assets AIG is transferring to the government in lieu of cash repayment are difficult to value. A recent auction for AIA, for example, failed to draw any bids. The goal of the original AIG rescue in September was to achieve repayment within two years. The latest version will likely leave the U.S. government entangled with AIG for years to come.

AIG’s board was meeting Sunday to vote on the plan and was expected to give its approval.

Major credit rating agencies have already signed off on the deal. Without the support of the credit rating agencies, AIG would have faced crippling cuts to its ratings. The downgrades would likely have forced it to post billions in collateral on an array of financial contracts. It would have also triggered the termination of many corporate insurance policies, costing AIG billions more.

Details of what the next Government (taxpayer) bailout of American International Group (AIG) will look like are beginning to surface this Sunday morning.

AIG’s Board of Directors are being called to a special Sunday night meeting to vote on another rescue for the company.

Information coming off the wires…

BOARD TO VOTE ON NEW BAILOUT PACKAGE THAT WOULD EASE THE TERMS OF THE BAILOUT
- The revised AIG agreement is expected to include an additional equity commitment of about $30B, more lenient terms on an existing preferred investment, and a lower interest rate on a $60B government credit line
- The new equity commitment would give AIG the ability to issue preferred stock to the government at a later date
- AIG will also give the Federal Reserve ownership interests in American Life Insurance (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt
- AIG may also securitize some U.S. life insurance policies and give them to the government to further reduce its debt.

AIG will ’securitize’ life insurance policies? Securitizing mortgages is what contributed to the global financial mess to begin with. Now AIG wants to securitize life insurance policies…

When will the financial madness ever end?

Reminder: Is is expected that AIG will be announcing the largest corporate loss in United States history Sunday evening or Monday.

It is being reported that AIG may be set to report the largest corporate loss in the history of the United States. AIG is a company that recently required over $150 billion of tax payer money to ‘rescue them’. Hank Paulson said back in December that the American tax payer would make a profit on the ‘capital injections’.

AIG is now poised to report the largest corporate loss in this nations history and all the money the tax payers were ‘forced’ to inject into this company can be assumed to be gone. And now AIG needs even more money from the tax payers otherwise they will go bankrupt within days as it is being reported.

The market is now at levels not seen since 1997, the tax payers are being forcefully squeezed for every penny to keep ‘bailing out’ the failing financial institutions, and today the AIG news shows that the ‘bail outs’ are falling apart.

I will have a full market wrap up video later this evening.

From Bloomberg…

Dec. 23 (Bloomberg) — American International Group Inc.’s first sale of an entire insurance unit since its $150 billion bailout signals the company’s divestiture plan may not raise enough money to settle its debts with the U.S. government.

AIG, which is auctioning about 70 percent of the company to repay a $60 billion federal loan, agreed yesterday to sell Hartford Steam Boiler, an insurer of factories and power plants, to Munich Re for $742 million. That’s about a third less than the New York-based firm paid for the unit eight years ago.

“If that is at all representative of the market opportunities out there, the value of a lot of other things AIG is selling will be fairly discounted,” said Gary Ransom, an analyst at Fox-Pitt Kelton Cochran Caronia Waller. “It’s bad news for the American taxpayer.”

(emphasis added)

Full article

Over the past few months we have heard from the likes of Hank Paulson and Ben Bernanke that the ‘bailouts’ will in the end be a ‘win win’ for the tax payers. I did not agree with those statements then… and I still don’t today.

(read more…)

Keeping up with recent events has been an exhausting task. The days of holding stocks in short or long term trades, with your only worry being Google’s earnings report, or worrying about the impact of a surprise “earnings miss” on your favorite stock, are gone. Those types of concerns have been replaced with companies becoming insolvent overnight, bankruptcies, credit market implosions, housing market declines, and bank failures. We even added one more worry to the list: entire nations becoming insolvent. This morning we learned that Iceland essentially went into default, as their currency lost most of its value in 24 hours and was no longer being accepted as a valid form of payment in some places.

Yep, the good old days of just worrying about a bad earnings report are gone, for now.

The rapid growth witnessed in almost all sectors of our economy are gone. Most of the growth was an illusion based all on credit. Everything grew quickly,from home prices to iPods and big screen television sales, all because of the free flow of credit.

The big lie being put to the American people, is that the heart of the credit implosion is due to individuals getting in over their heads and no longer being able to pay their mortgages. The truth is that it was Wall Street investment firms that sought to capitalize on the free flow of credit and rising housing prices, by securitizing mortgages. They created numerous forms of investment securities (based on mortgages) that were so highly leveraged, that when the underlying asset (mortgages) began to weaken just a bit, the leverage ratios came crashing down hard. And, it did not stop there. The very same firms that created these exotic investment securities, sold them to everyone from pension fund managers to foreign governments, with very little (if any), warning of real risk potential.

Do you want to know an even bigger lie? Our government telling the American people that they will get their money back. That’s right, it is a lie. The US government will use our tax dollars to buy the toxic assets from anyone who was duped into buying them.  Then, they promise to sell them later, at a profit. Remember, these toxic assets are all tied to the housing market in one fashion or another.  So, in order for their plan to work, there must be a demand for these assets at later date.  Demand will ONLY exist if the rapid rise in housing prices returns. This will not happen, because it was the credit bubble that created the housing bubble, and credit is evaporating rapidly and will never return to the likes of what it once was. These toxic assets will end up being nuclear waste on the US balance sheet and will eventually have to be buried, along with the $700 Billion that we paid for them.

The events of the past year have created a generational shift in the way our markets will behave for a very long time. It could be as many as 10 years before we ever see new highs again in the Dow or the S&P 500 indices. One only has to look at the Nasdaq to see what happens when a bubble explodes. Following the bursting of the “dot com” bubble in the late 90’s, the Nasdaq traded in a subdued fashion, never coming close it’s previous highs. This is what we have to be prepared for once this current crisis has passed.

A buy and hold strategy for making money in the markets will likely be a futile exercise for many years to come. The real money to be made will come from getting in and out of the right stocks and at the right time. That, we will help you do.

We are at the precipice of a bear market rally or a hard crash. Even the global rate cut announcement this morning was not enough to get the market going. Those who bet heavily in the morning, thinking the market would go skyward, ended up in the loss column by the end of the day. These remain very dangerous and treacherous times in the markets. The Financial Times reported tonight that the stress in the credit markets is even higher now than in recent months, and that was after the global rate cuts were enacted. When the time comes for the next bear market rally, know that we will play accordingly. We still expect the bear market to last well into 2009. Long term outlook for the economy and the markets remains bearish.