The US Treasury’s divestment of AIG is proceeding rapidly:
American International Group (AIG), the bailed-out insurer/ex-pyromaniac at the epicenter of the global financial meltdown, just posted a $1.86 billion quarterly profit, compared with the $4 billion loss it registered last year. The stat that most matters: Uncle Sam now owns just 16 percent of the company, with a complete disposal of its stake likely by the end of the year. The U.S. Treasury Department has recently been offloading hundreds of millions of shares—it sold $20.7 billion worth in September—after having owned as much as 92 percent of AIG in the wake of a government bailout that ballooned to $182 billion, including aid from the Federal Reserve Bank of New York.
If you’re to believe Treasury’s math—no small controversy there—taxpayers actually are in the black from the bailout. The U.S. profits off anything sold above its stated bailout per-share cost basis of $28.73, according to bank Drexel Hamilton. AIG stock now changes hands at $33, having surged 43 percent this year. That is less than half its book value (a measure of its assets minus liabilities) of just under $70 a share. The more of itself AIG repurchases from the government—and the more its business evolves back into bread-and-butter property-casualty, life insurance, and investing—the more it is thought its stock will approximate that book value. “The government ownership has been a real overhang for the company,” said Josh Stirling of Sanford Bernstein (AB), ahead of the quarterly earnings report.
Mind you, there are significant gimmicks in the numbers:
One point of contention is Treasury’s decision to allow AIG—along with TARP recipients Citigroup (C) and Ally Financial—to use operating losses from previous years to eliminate taxes on current income. The allowance, which typically does not apply to bankrupt or acquired companies, added $17.7 billion to AIG’s fourth-quarter earnings and will allow the company to shield profits from taxes for many years to come. “It’s important to remember that a substantial portion of AIG’s recent earnings were attributable to Treasury’s unilateral decision to preserve AIG’s net operating losses,” says J. Mark McWatters, a law professor at Southern Methodist University who was a Republican appointee to the TARP oversight committee.
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Barofsky calls the price [that Treasury quotes as its acquisition cost] “a political manipulation of numbers.” He argues the calculation shouldn’t include 563 million AIG shares that Treasury received from the Federal Reserve in January 2011 because the shares were not acquired as part of the TARP program. Removing those shares from the calculation would lift Treasury’s per-share cost to $43.53, which means TARP would show a $16 billion loss if Treasury sold the rest of its holdings at $29.
Still, even if we give full weight to the carping, the AIG bailout has been much less expensive than Government Motors:
U.S. taxpayers kept the nation’s largest auto maker by sales afloat with a $50 billion bailout in 2009 and now own 26.5% of the Detroit company.
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Earlier this summer, GM floated a plan with Treasury officials to repurchase 200 million of the roughly 500 million shares the U.S. holds in the auto maker, according to people familiar with the discussions. Under the plan, Treasury would sell the remaining shares through a public stock offering.But Treasury officials aren’t interested in GM’s offer at the current price and aren’t in a rush to offload shares, according to people familiar with the matter. The biggest reason: A sale now would leave the government with a hefty loss on its investment.
At GM’s Friday share price of $24.14, the U.S. would lose about $15 billion on the GM bailout if it sold its entire stake. While GM stock would need to reach $53 a share for the U.S. to break even, Treasury officials would consider selling at a price in the $30s, people familiar with the government’s thinking have said.
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Last month, the Obama administration increased the estimated loss on the $85 billion auto industry bailout, which also included aid to crosstown rival Chrysler Group LLC and auto parts suppliers, by $3 billion to more than $25 billion. That amount is still smaller than the government’s initial estimate of a $44 billion loss. Chrysler is already free and clear from its government bailout after taking out a loan to pay back what it owed.
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The U.S. is still in the red on its investments in Fannie Mae and Freddie Mac, which have received $188 billion in taxpayer support.
How’s this for bad management? Rochdale Securities levered up 300:1 on Apple common:
Rochdale Securities LLC, the brokerage that employs bank analyst Dick Bove, is in advanced talks to save the firm after unauthorized trades in Apple Inc. (AAPL) went sour, said two people with knowledge of the negotiations
The potential deal to recapitalize Stamford, Connecticut- based Rochdale would be a merger or investment and may be announced as early as today, said the people, who requested anonymity because the talks are private. The deal for the 37- year-old firm could still fall apart, one of the people said.
Rochdale, led by President Daniel J. Crowley, has told potential investors that a trader made an unauthorized purchase last month of $750 million to $1 billion in Apple shares, which dropped in value and depleted capital at closely held Rochdale, the people said.
The firm had $3.44 million of capital at the end of last year, according to a filing with the U.S. Securities and Exchange Commission. Crowley didn’t immediately return phone calls seeking comment on the firm’s status.
There are rumours of naughtiness:
A person familiar with the thinking of Rochdale executives said a trader at the firm received an order for stock in Apple Inc. … but bought 1,000 times the number of shares requested. The trader is saying the extra shares were ordered by mistake, the person said, but the firm is alleging the actions were intentional. The company suspects the trader was working with an outside party to execute the trade and profit at the firm’s expense, according to this person.
Despite all the sound and fury over credit ratings, it looks like the ECB doesn’t do its own credit analysis. What a surprise.
The European Central Bank is investigating claims that it used a high credit rating from a Canadian ratings agency to grant loans to Spanish banks at a sweetheart rate that was not offered to another struggling euro zone country.
An ECB spokesman on Frankfurt, Philippe Rispal, said the bank is “currently investigating this matter” and that the probe would determine whether “the correct haircut has been applied” to the Spanish sovereign bonds that were used as collateral for ECB loans.
The term “haircut” refers to varying discounts applied to the collateral based on its credit quality. On the weekend, the German newspaper Die Welt am Sonntag said that about €80-billion ($102.3-billion U.S.) of Spanish treasury bills posted as collateral received only a 0.5 per cent haircut when a 5.5 per cent haircut would have been more appropriate, given Spain’s rising sovereign risks.
The newspaper said the ECB relied on the relatively high Spanish rating produced by Toronto’s DBRS in determining its collateral requirements. DBRS has assigned an A-low rating, with “negative trend” on all of Spain’s public sovereign debt. The other three ratings agencies – Fitch, Standard & Poor’s and Moody’s – have a lower single-B rating on the 18-month T-bills that were posted as collateral by the Spanish banks (DBRS rates the country, not the individual securities).
DBRS’s rating for Ireland is the same as its rating for Spain. Yet Die Welt said the Irish bonds used as ECB collateral were subject to a 5.5 per cent haircut, meaning the ECB apparently considered them much riskier than the Spanish collateral in spite of the identical country rating.
DBRS has released a new methodology titled DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (Excluding Financial Institutions). Not much of interest, but there are a few nuggets:
Rate Reset Preferred Shares
Cumulative redeemable preferred shares featuring rate reset provisions are prevalent in Canada. While having no stated maturity, these securities feature a rate reset mechanism, combined with the option to redeem (both typically occurring every fifth year). The redemption option and rate reset are not viewed as impediments to garnering high levels of equity treatment if (1) the reset spread, set at the time of initial issuance, is not viewed as onerous on a basis relative to market, and would therefore not be expected to be a major incentive to redeem (while this is subjective, as an issuer’s credit spread will change over time due to both market- and company-specific factors, DBRS will compare an issuer’s reset spread to its peer group to assess its potential to impact future actions) and (2) DBRS has a high degree of confidence that the securities will remain a permanent part of the issuer’s capital structure.Preferred Share Default
A preferred share is only assigned a “D” rating (for default) when the security is in default according to the legal documents. As such, the non-payment of a dividend does not necessarily give rise to the assignment of a default rating. When preferred dividends are not declared, the preferred share rating will likely be downgraded by a minimum of one notch to refl ect the non-payment situation. Further downgrades may occur, should the overall ratings for the organization be downgraded as a result of a negative situation that relates to the decision not to pay preferred share dividends. In addition, DBRS may consider additional downward notching of the preferred share rating to refl ect concerns related to either (1) the expectation that non- payment of dividends may continue for several more quarters or (2) the probability of a future default, as defined in the legal documents, which could occur without any defaults of higher rated securities, including coercive exchange offers.Cumulative vs. Non-Cumulative
Whether a security is cumulative or non-cumulative does not generally have a large impact on treatment and has no impact on ratings. While a non-cumulative security is more beneficial for an issuer, in that missed payments to do not have to be made up in the future, DBRS views this as a modest factor for equity treatment, as an issuer may be more hesitant to miss a payment on a non cumulative security given potential consequences, as already noted.Additionally, the rating itself is generally rather indifferent to cumulative vs. non-cumulative, given the minimal difference in expected recovery.
It was a mixed day for the Canadian preferred share market, with PerpetualPremiums off 3bp, FixedResets up 6bp and DeemedRetractibles gaining 1bp. Volatility was minimal. Volume was very low.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.4126 % | 2,461.2 |
| FixedFloater | 4.13 % | 3.46 % | 35,366 | 18.39 | 1 | -0.4329 % | 3,895.7 |
| Floater | 2.81 % | 2.99 % | 58,051 | 19.73 | 4 | -0.4126 % | 2,657.4 |
| OpRet | 4.61 % | -0.24 % | 43,476 | 0.64 | 4 | -0.0095 % | 2,576.9 |
| SplitShare | 5.36 % | 4.59 % | 63,077 | 4.46 | 3 | 0.0914 % | 2,860.0 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0095 % | 2,356.3 |
| Perpetual-Premium | 5.28 % | 1.02 % | 72,869 | 0.24 | 29 | -0.0334 % | 2,313.5 |
| Perpetual-Discount | 4.91 % | 4.93 % | 104,809 | 15.55 | 3 | 0.0000 % | 2,593.1 |
| FixedReset | 4.99 % | 2.98 % | 211,094 | 3.93 | 74 | 0.0580 % | 2,446.1 |
| Deemed-Retractible | 4.92 % | 3.55 % | 134,878 | 1.11 | 46 | 0.0051 % | 2,392.8 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRI.PR.B | Floater | -1.03 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-11-05 Maturity Price : 21.75 Evaluated at bid price : 22.00 Bid-YTW : 2.37 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.Q | FixedReset | 212,494 | Scotia crossed blocks of 100,000 and 50,000, both at 25.15. RBC crossed 50,000 at the same price. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.12 Bid-YTW : 2.99 % |
| SLF.PR.F | FixedReset | 45,604 | National crossed 45,500 at 26.50. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-06-30 Maturity Price : 25.00 Evaluated at bid price : 26.47 Bid-YTW : 2.73 % |
| TD.PR.A | FixedReset | 33,991 | National crossed 30,000 at 25.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 2.75 % |
| TD.PR.K | FixedReset | 31,546 | National crossed 30,000 at 26.83. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-07-31 Maturity Price : 25.00 Evaluated at bid price : 26.73 Bid-YTW : 2.23 % |
| IGM.PR.B | Perpetual-Premium | 17,512 | YTW SCENARIO Maturity Type : Call Maturity Date : 2014-12-31 Maturity Price : 26.00 Evaluated at bid price : 27.17 Bid-YTW : 3.54 % |
| BMO.PR.J | Deemed-Retractible | 17,416 | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-02-25 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 3.79 % |
| There were 14 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| W.PR.J | Perpetual-Premium | Quote: 25.40 – 25.73 Spot Rate : 0.3300 Average : 0.2056 YTW SCENARIO |
| ELF.PR.G | Perpetual-Discount | Quote: 24.01 – 24.25 Spot Rate : 0.2400 Average : 0.1556 YTW SCENARIO |
| BMO.PR.J | Deemed-Retractible | Quote: 25.50 – 25.73 Spot Rate : 0.2300 Average : 0.1467 YTW SCENARIO |
| TD.PR.P | Deemed-Retractible | Quote: 26.17 – 26.45 Spot Rate : 0.2800 Average : 0.1978 YTW SCENARIO |
| GWO.PR.P | Deemed-Retractible | Quote: 26.43 – 26.74 Spot Rate : 0.3100 Average : 0.2334 YTW SCENARIO |
| IGM.PR.B | Perpetual-Premium | Quote: 27.17 – 27.47 Spot Rate : 0.3000 Average : 0.2247 YTW SCENARIO |