November 10, 2008

Today’s big news, such as it was, was the new and improved bail-out of AIG. The Fed announced:

  • Treasury will buy $40-billion more prefs
  • The rate on the Fed Loan (formerly $85-billion, now $60-billion) will be reduced to LIBOR+300 from LIBOR+850 on funds drawn, and the fee for undrawn funds will be reduced to 75bp from 850bp. Term of the facility extended from two years to five
  • Two new external companies will be created:
    • RMBS buyer, funded up to $22.5-billion by the Fed, AIG to take $1-billion first loss
    • CDO buyer/CDS unwinder, funded $30-billion by Fed, $5-billion by AIG, AIG takes first loss.

The last is kind of interesting. It would appear that AIG is unable to unwind its CDSs on CDOs at anywhere near intrinsic value. They want to get out of the CDSs, but want to retain the exposure, so this little company is going to buy the CDOs themselves while AIG buys back the CDSs; retaining exposure while neatening the books. At least, that’s how I interpret the paragraph!

The Treasury release shows how this whole process is degenerating into populist political theatre. There’s not a word about the economic terms of the $40-billion senior preferreds Treasury is buying; only executive compensation, lobbying expenses and corporate governance side-agreements are discussed.

On the unwinding front, expensive progress is being made:

The first rescue plan wasn’t sustainable, Liddy said during a conference call today. AIG’s third-quarter loss equaled $9.05 a share and compared with profit of $3.09 billion, or $1.19, a year earlier, AIG said in a statement. Losses in the past year erased profit from 14 previous quarters dating back to 2004.

The insurer guaranteed about $372 billion of fixed-income investments as of Sept. 30, compared with $441 billion three months earlier. AIG booked more than $7 billion in writedowns during the quarter on the value of the swaps.

Circuit City, parent of the 750-store The Source in Canada has petitioned for Chapter 11 bankruptcy:

“It’s very incongruent for retailers to file bankruptcy before Christmas,” Burt Flickinger, managing director of consultant Strategic Resource Group in New York, said in a Bloomberg Television interview. “You’re gong to see a record number of retailer bankruptcies and closings.”

The chain, with 721 stores in the U.S. and 770 in Canada, has said competition hurt sales, especially at older locations in lower-income neighborhoods. Inc. and other Web-based retailers of computers, televisions and music also have lured customers away.

Fannie Mae recorded appalling results:

Fannie Mae posted a record quarterly loss as new Chief Executive Officer Herbert Allison slashed the value of the mortgage-finance provider’s assets by at least $21.4 billion and said it may need to tap federal funds next year.

Fannie slashed its net worth, or the difference between assets and liabilities, to $9.4 billion on Sept. 30 from $44.1 billion at Dec. 31. The company said today it may fall to negative net worth by the end of next quarter, requiring it to seek government funding. Fannie said today that it hadn’t tapped any federal aid through Nov. 7.

But at least HSBC did OK:

HSBC Holdings Plc, Europe’s biggest bank, said third-quarter profit rose even as it set aside a more- than-estimated $4.3 billion to cover bad loans in the U.S. and forecast “further deterioration.”

The U.S. unit “declined markedly” because of consumer and corporate loan defaults, the London-based company said in a statement today. Pretax profit in the quarter was helped by lending in Asia, $3.4 billion in accounting gains on its debt and the sale of assets in France.

The bank takes in more customer deposits than it lends out, enabling it to avoid the funding shortages that forced Royal Bank of Scotland Group Plc, HBOS Plc and Lloyds TSB Group Plc to sell as much as 37 billion pounds of stock to the U.K. government to increase capital.

And there is a certain amount of … justified? unjustified? I don’t know … bureaucratic muscle-flexing in Sweden:

D. Carnegie & Co. AB, Sweden’s largest publicly traded investment bank, was seized by the country’s national debt office and will be sold off in parts after it took “exceptional risks” with loans.

The debt office assumed control of Carnegie Investment Bank AB and Max Matthiessen Holding AB, the two units that make up Stockholm-based Carnegie, which had been used as collateral for a 5 billion-krona ($640 million) loan made by the government last month. Carnegie will keep operating under new ownership.

Nortel got smacked:

Nortel Networks Corp., North America’s largest maker of phone equipment, posted its biggest net loss in seven years and announced plans to cut 1,300 jobs as customers scale back budgets.

The third-quarter loss was $3.4 billion, or $6.85 a share, Toronto-based Nortel said today. That included a $3.2 billion expense to write down the value of deferred tax assets and its Ethernet and enterprise businesses. Nortel also is firing at least four top executives, including its technology chief.

Note that these indices are experimental; the absolute and relative daily values are expected to change in the final version. In this version, index values are based at 1,000.0 on 2006-6-30.
The Fixed-Reset index was added effective 2008-9-5 at that day’s closing value of 1,119.4 for the Fixed-Floater index.
Index Mean Current Yield (at bid) Mean YTW Mean Average Trading Value Mean Mod Dur (YTW) Issues Day’s Perf. Index Value
Ratchet N/A N/A N/A N/A 0 N/A N/A
Fixed-Floater 5.01% 4.98% 70,071 15.64 6 +2.5896% 1,045.8
Floater 7.02% 7.14% 51,933 12.31 2 +0.2014% 496.9
Op. Retract 5.25% 5.85% 134,182 3.98 15 +0.0707% 1,007.1
Split-Share 6.30% 10.70% 57,574 3.94 12 -0.2941% 937.5
Interest Bearing 7.88% 13.49% 57,687 3.26 3 +0.8322% 900.0
Perpetual-Premium N/A N/A N/A N/A N/A N/A N/A
Perpetual-Discount 6.80% 6.87% 177,548 12.74 71 -0.3067% 802.4
Fixed-Reset 5.35% 5.09% 987,869 15.18 12 +0.3366% 1,088.0

Leave a Reply

You must be logged in to post a comment.