The Markets: Lehman, AIG etc etc

"First of all, let's recognize that this is a once-in-a-half-century, probably once-in-a-century type of event," Alan Greenspan, ABC News, September 2008.




My God I hope so. In Tokyo today, Lehman staff have free access to telephones and printers in order to be able to phone around for jobs and to prepare their CV's. HR departments and headhunters are buckling under a deluge of applications and senior staff at other banks are suffering from righteous paranoia as some of Lehman's top people get cherry picked for plum jobs.

Lehman are a little like the ordinary victims of the sub-prime crisis, asset rich, cash poor and going broke. Like us ordinary people, Lehman have to cover their losses and debts, but the losses made thus far this year are so massive that the cash flow dried up.

Last weekend there was much talk of Bank of America putting together a merger package to help rescue Lehman. But to no avail. A prettier girl came to the dance called Merrill Lynch and she was willing to bend over backwards for BoA. Lehman was ignored, like a soon to be bankrupt wallflower.

BoA believe that the merger can bring them back to profitability by 2010. We'll see.

"This is a crisis. A large crisis. In fact, if you've got a moment, it's a twelve-story crisis with a magnificent entrance hall, carpeting throughout, 24-hour porterage and an enormous sign on the roof saying 'This Is a Large Crisis!" Edmund Blackadder, 16th century wit and coward.

The felling of Lehman led inevitably to AIG. Earlier in September, AIG had announced $13bn in losses for the first half of 2008. As Lehman Brothers suffered a major decline in value and share price, potential investors began to compare the types of securities held by AIG to those held by Lehman, and found that AIG had valued their ALT-A and sub-prime mortgage-backed securities at rates 1.7 to 2.0 times those Lehman had used for what Lehman officials called similar securities.

On September 14, 2008, AIG announced it was considering selling its aircraft leasing division, International Lease Finance Corporation in an effort to raise necessary capital for the company.

The Federal Reserve hired Morgan Stanley to determine if there were systemic risks to a failing AIG, and has asked private entities to supply short-term "bridge" loans to the company. In the meantime, New York regulators approved AIG for $20 billion in borrowing from its subsidiaries. On September 16th, AIG's stock dropped 60 percent at the market's opening. The Federal Reserve continued to meet that day with major Wall Street investment firms to broker a deal to create a $75 billion line of credit to the company. Rating agencies Moody's and Standard and Poors, meanwhile, downgraded their ratings on AIG's credit on concerns over continuing losses to mortgage-backed securities, forcing the company to deliver collateral of over $10 billion to certain creditors. The New York Times later reported that talks on Wall Street had broken down and AIG may file for bankruptcy protection on Wednesday, September 17th.

Conversely, sources in the U.S. Federal Reserve told The New York Times that the bank intended to loan the insurer US$85 billion in exchange for an 80% stake. This would be a similar deal to that given to Fannie Mae and Freddie Mac and would be based upon a federal conservatorship.

However, unlike Fannie and Freddie there is no Federal element to AIG, however the commitment is for two years. Unfortunately some of the positions will not mature until after then. But I think that the government may pull out before two years if the market becomes more stable and Moody's and S&P see fit to raise their credit rating. I also think that former AIG CEO and Wall Street Legend, Hank Greenberg could be in the mix as a safe pair of hands.

This is not gloating. But back in June this year, I quoted a Daily Telegraph article about an RBOS report:


"A very nasty period is soon to be upon us - be prepared," said Bob Janjuah, the bank's credit strategist.

A report by the bank's research team warns that the S&P 500 index of Wall Street equities is likely to fall by more than 300 points to around 1050 by September as "all the chickens come home to roost" from the excesses of the global boom, with contagion spreading across Europe and emerging markets.

	RBS warning: Be prepared for a 'nasty' period

Such a slide on world bourses would amount to one of the worst bear markets over the last century".

I commented:

"Hopefully, you have already rigged for the financial typhoon that RBS and Morgan Stanley are now joining us in predicting. Don’t forget to warn your friends".

Since then despite being tempted by boredom and percieved inaction to 'do' something, I have held my lump sum portfolio clients investments in cash with an underweight position in the GLD etf.

Nobody knows what is happening in these markets from minute to minute. There is talk of a serious drop in the price of oil and gold; massive capital outflows in the emerging markets and further eruptions and aftershocks within the global financial infrastructure.

All of these may or may not be true. But what I do know is that once the dust has begun to settle, opportunities will begin to avail themselves to us. We just have to know where to look.