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Archive for December 1st, 2009
Goldman Sachs Arming Itself? :->
December 1st, 2009 | 
Author: Posted by Karl Denninger
Goldman Arming Itself? :->
This is a riot (well, ok, I might be a week – or a month early on that):
Dec. 1 (Bloomberg) — “I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.
Let me give those fine bankers from Goldman Sachs (and the other big banking and trading houses) a few pieces of advice. And yeah, it’s unsolicited and free, so you figure out whether it has value.
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A handgun is a close-quarters defensive weapon. The FBI says that of shootings involving a handgun, most happen at something like 7 feet (yes, feet) of range or less. Oh, and you’d be surprised at how many people miss at that same seven feet. No, guns in real life don’t work like in the movies where each bullet has a GPS in it and directs itself to its target, and when shot people don’t go flying backward through windows. Guns simply make holes in things, wherever they are pointed when they go “bang” is where the bullet will travel, and all the energy that goes into the target also goes into your body (Newton’s laws of motion and all.)
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There are, by some estimates, more firearms in America than there are people. Americans bought something like 20 billion rounds of ammunition this year alone. Indeed, there are shortages of many sorts of ammunition and have been all year. While some of that lead undoubtedly was expended at the practice range, an awful lot of it is being stockpiled. Everyone who is stockpiling it in various amounts is doing so for different reasons, and most would self-declare it as protection against “zombies.” Definitions of “zombie” differ.
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There are a lot of hunting rifles in America. Most hunters can easily hit a deer-sized target at well beyond 100 yards with said rifle. I’m willing to bet that Mr. Investment Banker can’t hit the broadside of a barn at 100yds with his brand new pistol that he’s probably never fired, and probably never will.
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Don’t bother with soft body armor. It’s useless against rifles. It is effective against pistols, which is why cops wear it (see that FBI stat about most handgun battles happening within seven feet.) But again, a hunter can easily hit a deer-sized target at well beyond 100 yards, common hunting rifles are legal almost literally everywhere, even in places like NYC, and a person armed with a handgun doesn’t have a prayer in hell defending against a person with a rifle 100 or more yards away that has drawn a bead on them.
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Unless you’re prepared to practice with that weapon on a regular basis, and unless you have personally been in a life-threatening situation (a real one, not some mock-up or fake “game” run at some “weekend commando” class you were undoubtedly sold to make you feel macho with that shiny new handgun) there is at least a 50% chance that if you really do wind up confronted by some crazed nutball at close range you will either miss or worse, freeze – and the “bad guy” will simply take your gun from you and then kill you with your own weapon. Go ask the military about this – studies have shown that despite putting new soldiers through a grueling “basic training” course a very significant number of them will, when first confronted with an enemy shooting at them, intentionally fire high – that is, they miss on purpose in their first firefight. It turns out that most people have a hard-wired aversion to killing other humans. That’s probably a good thing but psychopaths seem to be missing that inhibition. If someone really does come after you they’re pretty much by definition one of those psychopaths.
Finally, if you’re a “big banker” and concerned about your safety you might want to consider that in the 1800s there were lots of guns too, and yet they were both unnecessary and inadequate. Bankers during the panic of 1873 were simply hauled out of their offices bodily and hung from the lamp posts. We don’t have lamp posts any more in Manhattan, so you have an advantage there, and I’ve not noted a run on boiled rope.
Yet.
A better strategy for your self-protection is to turn state’s evidence and rat out someone else. Like your boss, for instance.
Get on the side of the people and help them. You folks in those tony executive suites (and suits) know full well that this entire bubblelicious line of BS you ran on middle-class America for more than two decades was an out-and-out fraud. It is impossible to argue otherwise – after all, it really is just fifth grade math on the nature of exponential functions, and unlike most of America it has to be presumed that if you got a Harvard MBA you passed. Therefore it can also be assumed that claims of ignorance will not serve you.
Let’s face it – the economy isn’t going to recover. All the stories I hear (and now Bloomberg is willing to print, which is surprising) in the anecdotal department are that you folks have your Gulfstreams fueled up and your bug-out bags packed and sitting by the door.
Most of you have figured out the math – there’s simply too much debt that you created and sold off into the market, and you’ve all patted yourselves on the back as you walked out of Treasury smug in the “knowledge” that you’d be bailed out. Remember this picture?
Yeah, it was all good, right? Uh, well it was – for you. But for the rest of America, it sucked. You took the “CARD” act (the Credit Card reform act) and used the delay in its implementation to ram down Americans throats 29.9% interest rates and huge reductions in credit lines – even for those who had never been late. The Fed (one of you folks – banksters all) could have told you to cut it out and in fact demanded that you do so, but of course didn’t.
The supposed “zero interest rates” are great for your bonuses – record bonuses, right? But nobody in America is getting the benefit except you. We the people are all paying more to borrow – when we can borrow at all. Bank Credit is contracting at a record rate. The stock market is on a tear, gold is on a tear, oil has more than doubled since March.
But if you go to Harlem in NY City you don’t see “economic recovery.” Nor do you if you step outside of the enclaves in Washington DC where everyone sucks on the government tit. No, what you see is both the NY and California State Governments on the verge of insolvency, property and other taxes heading to the moon to try to keep the states from having to fire police officers for lack of funds, and the crumbling of our infrastructure - along with the hiss of an overpressurized “social safety net.”
The vampire squid sucked too much blood (debt service requirements) and now the host is dying from volumetric shock, all the while screaming not for whole blood (all gone!) but anything – even an injection of saline simply to make up the volume.
Now please don’t get me wrong – I happen to think that you should not lend more. After all, we’re here because we got drunk on credit, and you can’t drink yourself sober, despite what CNBS keeps screaming about and calling for (including “The Donald” this morning, who’s one of those folks who I suspect is going to wind up with all of his so-called “wizard deals” in the pine box of Chapter 7.)
No, we as a society need to go through the DTs and detox. Some of us will go bankrupt. That’s ok. Indeed, if you as a citizen were imprudent – if you lied about your income to get a mortgage, if you played the HELOC game to pay off a credit card you ran to the sky (and then did it again – and again!), if you put yourself into a debt hole from which you cannot reasonably climb out, you should declare bankruptcy and get it over with. Discharge that which you can, take the hit to your credit and reputation, and learn from the experience.
Frugality isn’t a sin, it’s a virtue. It is, indeed, the first step of true capital formation – which is how, ultimately, we create jobs - and true prosperity.
In this vein you need to come out and tell the truth – you lent too much and you’re NOT going to do it any more – no matter how loud people scream. We need reality in this country, not more fantasy.
But you folks who stole all this money?
You need to give it back.
Yeah, we know you can’t give it all back since you blew some of it on Netjets to various exotic vacation destinations and high-priced hookers. We understand that.
What America doesn’t understand and is increasingly unwilling to tolerate is the smug grin you folks have on Wall Street, having not only run Americans into bankruptcy but when your imprudent lending threatened to bankrupt you instead of sucking it up you extorted Congress to the tune of more than $12 trillion in direct support and guarantees.
That is you forced the bankrupt consumer to go broke twice and cover your imprudent acts, as all that money to cover up your insolvency is now being forcibly extracted from Main Street by the government through taxes!
Here’s the problem, in a nutshell: If we don’t get the debt out of the system – really get it out, not just shuffle it around and shift who’s balance sheet it sits on - we can’t restart true economic growth.
Without true economic growth we cannot regain the lost jobs, and people cannot regain their ability to earn an honest living and support themselves and their families.
You and I both know that The Government cannot continue to run $1.5 trillion deficits for very long. Indeed, it might be able to do it for even one more year. Ultimately Uncle Sam’s credit card will come back declined just like the subprime homeowner, and when it does the thin veneer that has papered over the bankruptcy you have served up on the American people and her government will be ripped away like a bandage that has adhered to a scab.
That’s when the riots start and both you and I know that too. It’s why you’re buying those guns.
But the guns won’t save you if ugly times come.
Only preventing the riots will save you, and preventing the riots means we must stop bankrupting the country.
That in turn means we must stop ladling on more and more debt – HERE AND NOW!
Getting that bad debt out means that both borrowers (who are already going bankrupt) and lenders (who are thus far being protected) need to go bust.
That’s reality.
This is beyond politics, wishes, dreams or desires - it is mathematics.
Justice, on the other hand, demands that the frauds and abuses not stand. No, ripping off Jefferson County Alabama is not acceptable, and paying a fine is not enough. People need to go to prison. Ditto for the other cities and states where these scams were run – and that’s a huge number.
I understand your fear, Wall Street. If I robbed Main Street America of trillions of dollars I’d be afraid too.
Main Street is angry, and with good cause – and the “moguls” who claim that happy days will return if we can all start charging up our credit cards and HELOCing our houses again are not only wrong they’re poking sticks into a hornets nest. That’s right out of “Dumb and Dumber.”
Arming yourselves won’t solve the problem you created, and it also won’t protect you should the mood in America turn truly ugly.
Do the right thing Wall Street.
Not only will it be good for your soul, it will be good for Main Street.
Bankruptcy: Country by Country
The new Iceland? The likelihood of Greece becoming the next Iceland and plunging into bankruptcy looms over a meeting of EU finance ministers in Brussels today as the Greeks prepare to take another pasting from their colleagues.
After years of profligacy, hosting the costliest Olympic games ever in 2004 and failing to rein in its spiralling public debt, the country was on the brink of defaulting on loans, according to some seasoned commentators.
And the uncomfortable prospect of the eurozone member being unable to pay its debts was one that investors were pondering in the wake of the Dubai crisis that has sent markets falling around the world.
Link Here
At midnight last night, the United Kingdom ceased to be a sovereign state
We woke up in a different country today. Alright, it doesn’t look very different. The trees still seem black against the winter sun; the motorways continue to jam inexplicably; commuters carry on avoiding eye contact. But Britain is no longer a sovereign nation. At midnight last night, we ceased to be an independent state, bound by international treaties to other independent states, and became instead a subordinate unit within a European state.
LINK HERE
SocGen On Life, The Universe And The Impending Burst Of The Biggest Central Bank Created Bubble In History
Albert Edwards and Dylan Grice’s latest must read slideshow:
We have just had the worst decade’s performance for equity investors on record. Relative to government bonds, equities have been an even bigger disaster. Surely after such a terrible decade for equity investors things can only get better?
On a ten year view, equities may indeed prove to be a good investment. On a 1-2 year view, however, we still see much pain to come. After what we have been though so far, where the bulls? optimism has been crushed in 2001/2 and in 2007/8 surely there must be a heavy weight of self-doubt yoked onto the shoulders of the bulls ? but apparently not!
The lesson from Japan is that while de-leveraging plays itself out, the global economy will remain extremely vulnerable. The Great Moderation is dead. It was built on a super-cycle of private sector debt. We know from Japan, we now return to what was before, i.e. highly volatile and unpredictable cycles. Recession will quickly follow recovery.
US equity valuations did not reach revulsion levels in March this year. After some 15 years of gross overvaluation do we really believe that this valuation bear market that has been in place since 2000 will finish with equities looking cheap for only three months? Long term-valuation measures suggest equities will fall substantially below March lows.
Government bonds are now an extremely poor investment. On a 10-year view, the insolvency of government finances will surely end in substantially higher inflation. Yet on a 1-2 year view, we believe the key threat remains deflation. Markets will react aggressively to this as the cycle stalls in 2010. Expect sub-2% bond yields to accompany new lows on the equity market next year. Thinking the unthinkable has paid off over the last decade and should continue to do so.
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| Edwards Slideshow.pdf | 1.39 MB |
Posted in Albert Edwards, Bear Market, bonds, Corruption, Debt, Deflation, Economy, Equities, Financial System, Global Economy, history, Inflation, Insolvency, Japan, Markets, Performance, Recession, SocGen, valuation | 
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Arming Goldman With Pistols Against Public
Commentary by Alice Schroeder
Dec. 1 (Bloomberg) — “I just wrote my first reference for a gun permit,” said a friend, who told me of swearing to the good character of a Goldman Sachs Group Inc. banker who applied to the local police for a permit to buy a pistol. The banker had told this friend of mine that senior Goldman people have loaded up on firearms and are now equipped to defend themselves if there is a populist uprising against the bank.
I called Goldman Sachs spokesman Lucas van Praag to ask whether it’s true that Goldman partners feel they need handguns to protect themselves from the angry proletariat. He didn’t call me back. The New York Police Department has told me that “as a preliminary matter” it believes some of the bankers I inquired about do have pistol permits. The NYPD also said it will be a while before it can name names.
While we wait, Goldman has wrapped itself in the flag of Warren Buffett, with whom it will jointly donate $500 million, part of an effort to burnish its image — and gain new Goldman clients. Goldman Sachs Chief Executive Officer Lloyd Blankfein also reversed himself after having previously called Goldman’s greed “God’s work” and apologized earlier this month for having participated in things that were “clearly wrong.”
Has it really come to this? Imagine what emotions must be billowing through the halls of Goldman Sachs to provoke the firm into an apology. Talk that Goldman bankers might have armed themselves in self-defense would sound ludicrous, were it not so apt a metaphor for the way that the most successful people on Wall Street have become a target for public rage.
Pistol Ready
Common sense tells you a handgun is probably not even all that useful. Suppose an intruder sneaks past the doorman or jumps the security fence at night. By the time you pull the pistol out of your wife’s jewelry safe, find the ammunition, and load your weapon, Fifi the Pomeranian has already been taken hostage and the gun won’t do you any good. As for carrying a loaded pistol when you venture outside, dream on. Concealed gun permits are almost impossible for ordinary citizens to obtain in New York or nearby states.
In other words, a little humility and contrition are probably the better route.
Until a couple of weeks ago, that was obvious to everyone but Goldman, a firm famous for both prescience and arrogance. In a display of both, Blankfein began to raise his personal- security threat level early in the financial crisis. He keeps a summer home near the Hamptons, where unrestricted public access would put him at risk if the angry mobs rose up and marched to the East End of Long Island.
To the Barricades
He tried to buy a house elsewhere without attracting attention as the financial crisis unfolded in 2007, a move that was foiled by the New York Post. Then, Blankfein got permission from the local authorities to install a security gate at his house two months before Bear Stearns Cos. collapsed.
This is the kind of foresight that Goldman Sachs is justly famous for. Blankfein somehow anticipated the persecution complex his fellow bankers would soon suffer. Surely, though, this man who can afford to surround himself with a private army of security guards isn’t sleeping with the key to a gun safe under his pillow. The thought is just too bizarre to be true.
So maybe other senior people at Goldman Sachs have gone out and bought guns, and they know something. But what?
Henry Paulson, U.S. Treasury secretary during the bailout and a former Goldman Sachs CEO, let it slip during testimony to Congress last summer when he explained why it was so critical to bail out Goldman Sachs, and — oh yes — the other banks. People “were unhappy with the big discrepancies in wealth, but they at least believed in the system and in some form of market-driven capitalism. But if we had a complete meltdown, it could lead to people questioning the basis of the system.”
Torn Curtain
There you have it. The bailout was meant to keep the curtain drawn on the way the rich make money, not from the free market, but from the lack of one. Goldman Sachs blew its cover when the firm’s revenue from trading reached a record $27 billion in the first nine months of this year, and a public that was writhing in financial agony caught on that the profits earned on taxpayer capital were going to pay employee bonuses.
This slip-up let the other bailed-out banks happily hand off public blame to Goldman, which is unpopular among its peers because it always seems to win at everyone’s expense.
Plenty of Wall Streeters worry about the big discrepancies in wealth, and think the rise of a financial industry-led plutocracy is unjust. That doesn’t mean any of them plan to move into a double-wide mobile home as a show of solidarity with the little people, though.
Cool Hand Lloyd
No, talk of Goldman and guns plays right into the way Wall- Streeters like to think of themselves. Even those who were bailed out believe they are tough, macho Clint Eastwoods of the financial frontier, protecting the fistful of dollars in one hand with the Glock in the other. The last thing they want is to be so reasonably paid that the peasants have no interest in lynching them.
And if the proles really do appear brandishing pitchforks at the doors of Park Avenue and the gates of Round Hill Road, you can be sure that the Goldman guys and their families will be holed up in their safe rooms with their firearms. If nothing else, that pistol permit might go part way toward explaining why they won’t be standing outside with the rest of the crowd, broke and humiliated, saying, “Damn, I was on the wrong side of a trade with Goldman again.”
(Alice Schroeder, author of “The Snowball: Warren Buffett and the Business of Life” and a former managing director at Morgan Stanley, is a Bloomberg News columnist. The opinions expressed are her own.)
To contact the writer of this column: Alice Schroeder at aliceschroeder@ymail.com.
Last Updated: November 30, 2009 21:00 EST
Zombie Capitalism: Bernanke "Marching Ignorantly Forward"
Australian economist Steve Keen has another blockbuster post on the dynamics of debt deflation and the Great Financial Collapse. Please consider Debtwatch No 41, December 2009: 4 Years of Calling the GFC.
During a debt-driven financial bubble, which is the obvious precursor to a debt-deflation, rising levels of debt propel aggregate demand well above what it would otherwise be, leading to a boom in both the real economy and asset markets. But this process also adds to the debt burden on the economy, especially when the debt is used to finance speculation on asset prices rather than to expand production–since this increases the debt burden without adding to productive capacity.When debt levels rise too high, the process that Fisher described kicks in and economic actors go from willingly expanding their debt levels to actively trying to reduce them. The change in debt then becomes negative, subtracting from aggregate demand–and the boom turns into a bust.
So could the global economy get out of the global financial crisis the same way it got out of the 1990s recession–by borrowing its way up? That’s where the sheer level of debt becomes an issue–and it’s why I stuck my neck out and called the GFC, because I simply didn’t believe that we could borrow our way out of trouble once more. Debt did continue rising relative to GDP for several years after I called the GFC, but it has now reached levels that are simply unprecedented in human history.
For the “borrowing our way out” trick to work once more, we would need to reach levels of debt that would make today’s records look like a picnic. What are the odds that that could happen again?
Australia and US Debt to GDP
Debt has little impact on demand when the debt to GDP ratio is low–such as in Australia in the 1960s, or the USA from the start of WWII till the early 60s. But whenever the debt to GDP ratio becomes substantial, changes in debt come to dominate economic performance, as can be seen in the next two charts.
Debt vs. Inverted Unemployment Australia
Debt vs. Inverted Unemployment US
A “schoolboy error”?
In 2008 I spoke at a seminar in Adelaide that was also addressed by Guy Debelle, an Assistant Governor (Financial Markets) of the RBA. After my talk he commented that he couldn’t understand why I compared debt to GDP, since that was comparing a stock to a flow.
In dynamic terms, the ratio of debt to GDP tells you how many years it would take to reduce debt to zero if all income was devoted to debt repayment. That is an extremely valid indicator of the degree of financial stress a society (or an individual) is under.
I find that members of the general public understand this easily. Only economists seem to have any trouble comprehending it–not because it is difficult but because their own training pays almost no attention to dynamic analysis, and therefore they don’t learn–as systems engineers do–that stock/flow comparisons can be extremely important indicators of the state of a system.
Marching Ignorantly Forward
With such ignorance about the dynamics of debt, academic economists and Central Banks around the world are hoping that the crisis is behind them, even though the cause of it–excessive levels of private debt–has not been addressed. They are recommending winding back the government stimulus packages in the belief that the economy can now return to normal after the disturbance of the GFC.
In fact “normal” for the last half century has been an unsustainable growth in debt, which has finally reached an apogee from which it will fall. As it falls–by an unwillingness to lend by bankers and to borrow by businesses and households, by deliberate debt reductions, by default and bankruptcy–aggregate demand will be reduced well below aggregate supply. The economy will therefore falter–and only regular government stimuli will revive it.
This however will be a Zombie Capitalism: the private sector’s reductions in debt will counter the public sector’s attempts to stimulate the economy via debt-financed spending. Growth, if it occurs, will not be sufficiently high to prevent growing unemployment, and growth is likely to evaporate as soon as stimulus packages are removed.
The only sensible course is to reduce the debt levels. As Michael Hudson argues, a simple dynamic is now being played out: debts that cannot be repaid, won’t be repaid. The only thing we have to do is work out how that should occur.
Since the lending was irresponsibly extended by the financial sector to support Ponzi Schemes in shares and real estate, it is the lenders rather than the borrowers who should feel the pain–which is the exact opposite of the bailout mentality that dominates governments around the world.
Robbing the Poor to Bailout the Rich
Although that is a lengthy snip I left out many charts and further analysis. Inquiring minds will want to read Steve Keen’s entire article.
I certainly agree with Keen on the cause of this crisis (I have been harping about the same thing for years) as well as the solution: winding down debt and letting bondholders take their share of the hit.
Instead we bailed out Fannie Mae, Freddie Mac, Citigroup, and Bank of America bondholders while raping the GM bondholders (the latter so that Obama could appease the unions). In other words, Paulson, Geithner, Bernanke, Obama, and Congress effectively conspired to rob the poor to bail out the wealthy.
Supposedly this was done so that banks would start lending, and the economy would get the Fractional Reserve benefit (using the word benefit loosely) of debt expanding 10-1.
It did not work that way, nor will it because consumer and corporate debt remain, unemployment is high and rising, debt levels are intolerable, and consumer (and bank) attitudes towards debt and credit reached a secular peak and the pendulum to deleveraging has begun.
Why Consumers Won’t Borrow
Cash strapped boomers headed into retirement are finding they do not have enough money on which to retire. They are traveling less, spending less, and have too much o
f their assets tied up in illiquid real estate investments. Moreover, banks will not lend because there are too few qualified borrowers.
Peak Credit is in. The Effect of Household Deleveraging on Housing, Consumption and the Stock Market is massive.
Moreover, please note that the Fed cannot control sentiment of either borrowers or lenders. The Fed can merely encourage.
There is virtually no evidence consumers want to borrow. Likewise, there is virtually no evidence, none, that banks are about to go on a lending spree. Moreover, there is no evidence the Fed is attempting to force banks to lend. And finally, there is no evidence the Fed is considering charging banks a fee to keep excess reserves with the FED, or that if they did, that it would accomplish anything other than a deflationary collapse.
Bernanke’s Flawed Model
The idea that excess reserves will lead to increased lending is flawed from the beginning.
What actually happens is that lending occurs and the Fed expands money supply fast enough to match reserves. Please see Fiat World Mathematical Model for details.
Factors Affecting Banks’ Unwillingness To Lend
- Rising unemployment will cause …
- Rising credit card defaults
- Rising home equity loan defaults
- Rising mortgage loan defaults
- Rising commercial loan defaults
On top of that there is an increased demand for money by cash starved boomers headed into retirement who finally realize they do not have enough savings.
Excess Reserve Mirage
Factor in all of the upcoming defaults and much of those so called excess reserves are pure fantasy!
Bernanke Pleads For His Job
The Fed is powerless to stop this even as Bernanke is bragging about preventing another depression. Meanwhile, please consider (if you have not yet done so) Ben Bernanke Pleads For His Job; My Response to Bernanke
Bernanke: The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.Mish: Ben, you sound like an arsonist taking credit for helping put out a fire, before the fire is even out, after you lit the match and tossed on the gas in the first place. For all the problems you have caused, don’t you at least have the decency to show a little humility?
Stop Bernanke
Bernanke is incompetent and his self-serving whining is simply further proof of it.
Email From Yves Smith
Yesterday evening I received an Email from Yves Smith at Naked Capitalism. Yves writes:
Mish,Your post on Bernanke last night was terrific.
FYI, Bernanke’s confirmation hearing is this week. Rallying your readers could make a difference. The Internet effort that opposed the Watt amendment (which would have neutered the Paul/Grayson bill) worked. The Watt amendment would have passed otherwise.
Tell Your Senator No On Bernanke has links to the committee members and a site that has a petition. Please encourage your readers to call their senators.
Cheers,
Yves
Thanks Yves.
Please do as she suggests. Her post has a list of the members of the Senate Banking Committee.
At the very least, please PHONE your own senators ASAP.
Here is the Online Directory For The 111th Congress. Please contact your Senators! They are the ones who decide Bernanke’s fate, not the House of Representatives.
I encourage you to fax them, as well. Please see Speak Out – Audit the Fed, Then End It! for a list of fax numbers for every senator.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.
Will AIG Be Able to Pay Your Insurance Claim If Needed?
30 November 2009
“Sanford Bernstein analyst Todd Bault said AIG is facing an $11 billion shortfall to cover potential claims in its property and casualty insurance business, according to media reports Monday.”
The public has been reassured repeatedly that AIG’s troubles with exotic financial instruments written by its London division at the behest of some of the Wall Street banks could not affect its personal and commercial insurance business which is regulated by the states.
We have raised the issue in the past that corporations such as AIG, with its exposure to individual and small business insurance claims and annuities, have no business engaging in raw financial speculation with a commingling of liabilities and risks. At one time AIG was a major speculator in the silver markets, holding enormous short positions along with a few of the Wall Street commercial banks.
Banks and insurance companies have absolutely no business engaging in financial speculation that exposes its non-qualified investors and depositors to risk of loss that has not been fully disclosed. It is the job of the government regulators to prevent this from happening in the first place as part of the corporate licensing process. Period.
We freely admit that we do not understand the exact structure of AIG’s interwoven obligations and corporate structure, who owes what, what is safe and what is not. It is not clear to us who does understand it, except to say that it is a massive conglomerate, and that there are investments and speculations and commercial enterprises that have absolutely no business being in the same portfolio as others from a risk profile. The same goes for the money center banks. These companies look more like pyramid schemes serving their management to the detriment of shareholders and customers.
AIG ought to have been broken up and taken through a restructuring process, and the commercial business fully capitalized and separated from its speculative operations first, before anyone was paid with government funds, including enormous employee bonuses and full payments to counterparties in financial speculation like Goldman Sachs.
If the financial insiders were paid, and individuals are left high and dry on car and life insurance and retirment annuities, there will be hell to pay, of this we are certain.
AP
AIG shares decline amid reports of shortfall in insurance reserves
Monday November 30, 2009
NEW YORK (AP) — Shares of American International Group Inc. tumbled nearly 15 percent Monday after an analyst stirred concerns that the troubled insurer doesn’t have enough reserves to pay some potential claims.
AIG shares dropped $4.90, or 14.7 percent, to finish at $28.40 — their lowest close since August 19. The shares have more than quadrupled from a low of $6.60 in March.
Sanford Bernstein analyst Todd Bault said AIG is facing an $11 billion shortfall to cover potential claims in its property and casualty insurance business, according to media reports Monday. Bault declined to share the research note.
Covering that shortfall could cause problems for the New York-based insurer as it tries to repay a government bailout package it received to help stay in business.
Separately, the Financial Times reported AIG may soon get a bid for a part of its aircraft leasing unit from a group that includes the head of that business.
A spokeswoman for AIG, which is based in New York, declined to comment on either report…
NY Times
Report Cites Big Shortfall In Reserves At A.I.G.
By MARY WILLIAMS WALSH
November 30, 2009
An independent analysis of whether the insurance industry has been setting aside enough money to pay its claims estimates that the American International Group has a shortfall of $11.9 billion in its property and casualty business.
The conclusion is at odds with the often-repeated refrain that A.I.G.’s troubles can all be traced to its derivatives portfolio, and that its insurance operations are sound.
Other researchers have raised doubts about A.I.G.’s total worth since it was bailed out last year, and even the federal government has acknowledged that the company might have difficulty repaying all the money it owed taxpayers, currently about $120 billion.
In a report distributed to clients on Monday, the investment research firm Sanford C. Bernstein pointed to a big shortfall in A.I.G.’s property and casualty insurance business — which has been renamed Chartis and is intended to be the future core of the company’s operations.
The stock fell by almost 15 percent, to $28.40 from $33.30, in trading on Monday. Bernstein cut A.I.G.’s price target by 40 percent, to $12 from $20. The report’s author, Todd R. Bault, called the results “a big surprise.” He also said the inadequacy of A.I.G.’s reserves had grown in recent years — “nearly the opposite behavior that we would expect,” since the claims-paying reserves of other insurance companies had been growing…
Customers Frequently Asked Questions
1. Is my insurance policy safe?
Yes, your insurance policy is safe. Our insurance companies remain strong and well-capitalized. Regulations ensure that the assets of our insurance companies are there to back up each policy. You are protected. Your policy is safe.2. If I have a claim, will it be paid?
Yes, our insurance companies are able to pay all valid claims. As stated above, our insurance companies are financially strong and are not in jeopardy.3. Should I cancel my insurance policy?
Your insurance policy is safe. As stated above, our insurance companies are financially strong so your policies are not in jeopardy. Please be aware that some policies may contain surrender charges and/or cancellation penalties. Talk to your financial advisor before making any decision.4. Should I get out of my annuity?
Your annuity is underwritten by one of the AIG insurance companies. Our insurance companies are financially sound and well-capitalized. Please be aware that some annuities may contain surrender charges. Talk to your financial advisor before making any decision.5. I just heard that AIG is selling the company that issued my insurance policy. What should I do?
You don’t have to do anything. Your policy remains safe and intact. Your policy will be seamlessly transferred to the company that buys the subsidiary.6. Should I pay the insurance premium bill I just received?
Yes, in order for your coverage with us to continue, you will need to pay the insurance premium.
Posted in AIG, American International Group, Bailout, Banking System, Bankruptcy, Economic Crisis |
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