The banking system has been crumbling for over a year, but last month's collapse of American International Group (NYSE: AIG) -- which prompted an $85 billion government takeover -- suggests that insurance is not immune from the problems. As a reminder, AIG got snared in the $62 trillion Credit Default Swap (CDS) market whose growth was spurred by McCain advisor, Phil "Americans are Whiners" Gramm.
Bank of America'searnings plunged 68% to $1.18 billion, or $0.15/share -- missing by 60% analysts' forecast of 62 cents. Bank of America will raise capital by selling $10 billion of common stock and slashing its dividend in half from 64 cents to 32 cents. One analyst cut the bank's 2009 earnings estimate to $2.50 per share from $3 per share -- this is well below the $3.12 per share from a Thomson Reuters analyst poll -- and lowered his price target by $2 to $26.
National City Corp. and its National City Bank both suffered debt downgrades from Fitch. For instance, Fitch slashed the bank subsidiary's long and short-term Issuer Default Ratings (IDR) to A- from A. And it lowered the bank and holding company's Individual rating to C from B.
The shares of American International Group (NYSE: AIG) soared nearly 23% Monday and are rising fast again today on news that shareholders may band together to prevent the Federal Reserve from snapping up an 80% stake in the insurance firm. Apparently, major investors (which could include Bill Miller of Legg Mason) are hoping that the quick sale of assets will raise enough capital to pay off the Fed's $85 billion loan. However, AIG chief Edward Liddy seemed to put the kibosh on this speculation last night in a CNBC interview.
Liddy told the cable news channel he thinks the government's bailout plan is an "excellent idea," and added that he doesn't consider the Fed's intervention as a step toward nationalization. While the CEO believes that the government's loan will be fully repaid, he noted that a shareholder rescue isn't the most likely outcome. Instead, Liddy plans to prepare a list of assets for sale within seven to ten days, in hopes that the divestments will generate enough cash to stave off the feds at the door.
So, what's for sale at AIG? Well, Liddy made it clear that the firm's Asian operations are both "sacrosanct" and "unassailable." The chief executive also emphasized that he wants his company to emerge on the other side of this crisis as a leaner and more resilient version of itself. "It will look a lot like it did prior to 1998-1999, with less reliance on the financial services side," he told CNBC, noting that AIG will instead focus on its core business of property-casualty insurance.
The New York Times reports that the Federal Reserve has less reserves. Specifically, a year ago it had $800 billion in reserves and that number is down 63% to $300 billion. The other $500 billion is "encumbered" -- that's a nice way of saying that instead of being invested in "safe" Treasury bills, the Fed owns the assets of American International Group (NYSE: AIG), $29 billion worth of grubby former Bear Stearns collateralized debt obligations (CDOs) and the like through a little something it calls "Maiden Lane LLC", and tens of billions worth of the same from Lehman Brothers Holdings Inc. (NYSE: LEH) and other banks.
I raised the question of Fed solvency in July. Whether it was solvent then, it is less so now. But is there a limit to how much money the Fed can create to fund itself? With demand for Treasury Bills skyrocketing (albeit at interest rock bottom interest rates of 0.14% for the 1-month bill), it looks like now would be a great time for the Fed to replenish its coffers by issuing a trillion dollars worth to shore up its balance sheet. If it can indeed do that, the downside is that these low rates will pay it very little income.
And assuming that the Fed does not want to be in the business of owning half a trillion worth of encumbered assets, it will eventually need to get rid of them. And in so doing, it could find itself in competition with the ever- dwindling portion of the investment banking and insurance industry which the government does not own. How so? Because the Fed will be competing to get the best price for the assets it is trying to sell.
Will it use its power to put those publicly traded companies in a pickle? Or will it forgo the advantage to the taxpayer so its competitors can profit? Beats me.
The Wall Street Journal's "The Game" column speculates that one of the results of the Bear Stearns crash could be the push of investment banks and commercial ones closer together, which could result in better handling of volatility with more stability. Some observers think Merrill Lynch & Co (NYSE: MER), Morgan Stanley (NYSE: MS) or The Goldman Sachs Group Inc (NYSE: GS) could go that route by buying a commercial bank. Any move would force them to adhere to better reserve ratios, affect short term bank funding, and shrink balance sheets.
The Wall Street Journal reported that Google Inc (NASDAQ: GOOG) will soon make available a new service that measure hits on the Internet with the intent of helping advertisers decide where to buy ads online and would directly compete with comScore Inc (NASDAQ: SCOR) and Nielsen Online. Ad executives said Google's method could make targeting markets more efficient.
A Manhattan judge dismissed four claims made by American International Group Inc (NYSE: AIG) in its fight to regain control of a block of its shares held by Starr International, a company that once founded a lucrative compensation plan for AIG executives. AIG believes the shares held by Starr should continue to be used to fund employee compensation, the Financial Times reported.
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According to Scorpio Partnership, Bloomberg reported that UBS AG (NYSE: UBS) and Merrill Lynch had slower growth in assets under management last year due to losses connected to the U.S. subprime crisis.
American International Group (NYSE: AIG) shares are trading higher today after Citigroup upgraded the stock to "Buy" from "Hold," adding in a note that AIG is poised for well over 35% upside within the following year. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on AIG.
After hitting a one-year high of $72.75 last June, the stock hit a one-year low of $31.05 yesterday. AIG opened this morning at $32.38. So far today the stock has hit a low of $31.97 and a high of $32.52. As of 12:00, AIG is trading at $32.37, up 0.85 (2.7%). The chart for AIG looks bearish and steady, while S&P gives the stock a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a July bull-put credit spread below the $25 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.2% return in just four weeks as long as AIG is above $25 at July expiration. AIG would have to fall by more than 23% before we would start to lose money.
AIG hasn't been below $31 at all in the past year but has broken below support levels recently. This trade could be risky if the financial markets continue to nose-dive, but even if that happens, this position could be protected by the fact that its next earnings are not scheduled until August, which is after expiration of the trade above.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in AIG.
Investors are taking their money out of hedge funds more now that at any time over the past 10 years, according to the Wall Street Journal. Firms are bracing for the end of June when the next big wave will hit.
First it was a demand for management changes, and now shareholders, including one time director Eli Broad and fund managers Shelby Davis of Davis Selected Advisors and Bill Miller of Legg Mason Inc (NYSE: LM), are again upset with American International Group Inc (NYSE: AIG) and want changes in the boardroom as well, the Wall Street Journal reported.
Spotlight Capital is increasing pressure on Chico's FAS Inc (NYSE: CHS) and said it has been in touch with 25 major shareholders in order to oust CEO Scott Edmonds and unseat board member John Burden, who are accused of having a conflict of interest, the New York Post reported.
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Advanced Micro Devices Inc (NYSE: AMD) denied reports certain of its new dual-core chip, code-named Kuma, have been canceled, according to CNet. A spokesman for the company said that the launch of Kuma, scheduled for the second half of 2008, remains on track.
The banking unit of National City Corporation (NYSE: NCC) recently entered into a "memorandum of understanding" with federal regulators, the Wall Street Journal reported. The banking unit has bad loans, and the agreement basically means that the bank is on probation, as the government pressures financial institutions.
The Wall Street Journal also reported that Justice Department criminal prosecutors and its U.S. attorney's office in Brooklyn, NY are investigating American International Group Inc (NYSE: AIG) to see if they overstated the value of contracts tied to subprime mortgages.
OTHER PAPERS:
Lehman Brothers Holdings Inc (NYSE: LEH) is thinking of releasing its Q2 results a week earlier than planned, and announcing a capital raising plan at the same time, according to the New York Post, in order to reduce negative speculation about its future.
Future crude oil supplies may be a lot tighter than thought. That is what the International Energy Agency in Paris is expected to find when it releases its assessment of the world's 400 major oil fields in November, according to the Wall Street Journal, a reversal from previous reports and is based on a lack of investment and aging oil fields.
The Institute for Safe Medication Practices, a nonprofit safety organization, found serious side effects linked to Pfizer Inc's (NYSE: PFE) Chantix, a smoking cessation drug. Chantix, which has been banned by the FAA for use by pilots and air-traffic controllers, is already tied to psychiatric issues, including depression and suicide, according to the Wall Street Journal, and the report also points to heart trouble, seizures and diabetes.
OTHER PAPERS:
The New York Times reported that the Jacksonville Police and Fire Pension Fund has accused American International Group Inc (NYSE: AIG), along with several of its executives, of inflating its stock price artificially by understating the company's exposure to the subprime mortgage crisis. According to the lawsuit, AIG's Q1 loss of $7.8B shocked investors because the insurance giant assured them that any losses on credit insurance "would be limited".
Following speculation a Chinese entity would look to take a stake in Australian miner BHP Billiton Limited (NYSE: BHP), Huang Tianwen, the president of Sinosteel Corp, said the company has not formed a bid for the firm. The Australian reported that Chinese steel mills may look to buy into iron ore miner Fortescue Metals Group.
Former American International Group (NYSE: AIG) CEO Hank Greenberg has received a Wells Notice from the SEC, indicating that the commission may file civil charges against him. The lawsuit, if filed, would center around fraudulent transactions the company conducted with General Re in an effort to artificially inflate its earnings.
Greenberg's lawyer said in a statement that the Wells Notice "is a step in the process....We remain confident of our position on the merits, and we believe that none of the remaining issues are material to AIG's financial statements. When the commission has had the opportunity to consider all the facts, we believe that they will agree."
A lawsuit from the SEC involving securities fraud would likely make Greenberg's efforts to exert more influence over the company he ran for more than 30 years difficult. He has been increasingly critical of AIG's management in recent months.
Our own Doug McIntyre recently commented that Greenberg is fooling himself if he thinks he's the company's savior. Referring to the company's first quarter loss of $7.8 billion, he wrote that "Greenberg dreams that things would have been different if he had stayed as CEO, but it is only a dream that he cannot support with any reality."
According to the Wall Street Journal, former American International Group Inc (NYSE: AIG) CEO Maurice R. "Hank" Greenberg is pressing the troubled insurer to turn the company around. He says that he and other major shareholders have "deep concern about the persistent and seemingly endless destruction of value at AIG."
Hybrid Capital Second, a Morgan Stanley (NYSE: MS) investment vehicle, increased its stake in internet start-up Livedoor to 18.15% from 12.76% in March, the Financial Times reported, superseding the company's founder, Takafumi Horie.
OTHER PAPERS:
After it incurred $3.2B of bad debts in the first three months of the year, the Telegraph reported that Knight Vinke, an HSBC Holdings Plc (NYSE: HBC) shareholder, has renewed calls for the bank to shed its U.S. consumer finance business.
According to people familiar with the matter, the Wall Street Journal reported that American International Group Inc's (NYSE: AIG) airplane-leasing unit is considering a split from the company. The people said International Lease Finance Corp have grown "increasingly concerned" the company will be hurt by AIG's financial troubles.
Royal Dutch Shell Plc (NYSE: RDS.A) and Spain's Repsol YPF SA (NYSE: REP) are pulling out of one of Iran's biggest gas projects, the $10B-plus development of phase 13 of South Pars, the world's largest gas field, the Financial Times reported.
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Bloomberg reported that HSBC Holdings Plc (NYSE: HBC) set aside a smaller-than-forecast $3.2B for bad loans in the U.S. The bank also said its Q1 profit was higher than Q107.
TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.
AIG's (NYSE: AIG) (Cramer's Take) making everyone's life difficult today. That's in part because AIG had been the biggest proponent of "super senior," meaning they repeatedly said that their collateralized debt obligation (CDO) exposure was of the kind that was intelligent, measured and thoughtful. They talked endlessly about how their due diligence made the difference and that unlike all of the other buyers, they kicked the tires three times and never bought the plain ol' CDOs. Then they brought in professors from Wharton to be sure that even if all heck broke loose and they were being too aggressive, they would be hedged.
They also were the first to give you the percentages of how much could go bad and that even in the worst-case scenario, they were overcapitalized. And, most important, they were insurers, no need to mark to market, they can play it all out.
Plus, they touted their own struggles. They made the point that because of the turmoil at the top, they hadn't bought any bad stuff and stopped buying residential real estate products after 2005. What they did buy -- they assured us in that big teach-in dog-and-pony show in December -- was the extra-special nature of their particular buys and that, unlike everyone else, risk officers scrutinized every single piece of paper that went into their super senior insurance, meaning only the top-top part of a CDO-squared, the part where everything had to default ahead of it; they made a point of how impossible that would be.
AIG reported a $7.81 billion first-quarter loss and announced plans to raise $12.5 billion.
Bank of America says: "1Q: The downside of high leverage and risk taking."
AIG May option implied volatility is at 63; June is at 48; above its 26-week average of 44 according to Track Data, suggesting larger near term price movement.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com
After hitting a one-year high of $72.97 in May, the stock hit a one-year low of $38.50 in March. This morning, AIG opened at $47.05. So far today the stock has hit a low of $46.38 and a high of $47.49. As of 1:30, AIG is trading at $47.43, down 10 cents(-0.2%). The chart for AIG looks neutral and improving, while S&P gives the stock a neutral 3 Stars (out of 5) Hold rating.
For a bearish hedged play on this stock, I would consider a June bear-call credit spread above the $55 range. A bear-call credit spread is an options position that combines the purchase and sale of call options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 4.3% return in seven weeks as long as AIG is below $55 at June expiration. AIG would have to rise by more than 16% before we would start to lose money. Learn more about this type of trade here.
AIG hasn't been above $55 since February and has shown resistance around $48 recently. This trade could be risky if the company's earnings (due out on 5/8) are a positive surprise, but even if that happens, this position could be protected by resistance AIG might find around $48, where it topped out earlier this month.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in AIG.
Markel Corporation (NYSE: MKL), insurer of specialty properties and real estate, recently acquired Specialized Insurance Inc., which focuses on insurance for service garages at car dealers and gas stations. The move is said to be in keeping with Markel's intentions to grow this sector of it's business. Specialized Insurance Inc. already acted as agent for Markel. Financial details of the acquisition remain undisclosed.
Markel has been in the business of insuring specialty properties and other niche markets since 1930. The company issues policies covering everything from archery ranges and railroads to pollution liabilities and paintball tournaments. The company has net annual cash flow from operating activities in excess of 500 million, but that figure has been in annual decline since 2004.
The banking system has been crumbling for over a year, but last month's collapse of American International Group (NYSE: AIG) -- which prompted an $85 billion government takeover -- suggests that insurance is not immune from the problems. As a reminder, AIG got snared in the $62 trillion Credit Default Swap (CDS) market whose growth was spurred by McCain advisor, Phil "Americans are Whiners" Gramm. 
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