AIG's Municipal Counterparties

Image via Wikipedia

Municipalities listed on Attachment C received a total of $12.1 billion from AIGFP between September 16, 2008 and December 31, 2008 in satisfaction of Guaranteed Investment Agreement (GIA) obligations. GIAs are structured investments with a guaranteed rate of return. Municipalities typically use GIAs to invest the proceeds from bond issuances until the funds are needed.

Related articles by Zemanta

• Are AIG Counterparties Waiting for the Fire Sale? (firedoglake.com)
• Letter From AIG Chairman Ed Liddy to Timothy Geithner: We Have To Pay $100 Million Bonuses (firedoglake.com)

AIG CEO Letter to Geithner

Image via Wikipedia

Letter from AIG's government appointed Chairman and CEO Edward Liddy to US Secretary of the Treasury Geithner:

In the first quarter of 2008, prior management took significant retention steps at AIG Financial Products. These arrangements were designed at a time when AIG Financial Products was expected to have a significant, ongoing role at AIG, and guaranteed a minimum level of pay for both 2008 and 2009. (Due to losses at AIG Financial Products, a senior manager will receive about 43% of his 2007 expected level for 2008.) Some of these payments are coming due on March 15, and, quite frankly, AIG’s hands are tied. Outside counsel has advised thatthese are legal, binding obligations of AIG, and there are serious legal, as well as business, consequences for not paying. Given the trillion-dollar portfolio at AIG Financial Products, retaining key traders and risk managers is critical to our goal of repayment. This is all discussed in more detail in the attached “white paper.”

Related articles by Zemanta

• Bailed out AIG plans to pay out millions in bonuses (slate.com)
• Letter From AIG Chairman Ed Liddy to Timothy Geithner: We Have To Pay $100 Million Bonuses (firedoglake.com)
• AIG Posts $61.7B 4Q Loss, Bailout Is Restructured (abcnews.go.com)
• AIG, Begone! (talkingpointsmemo.com)

Help! What is a Derivative?

Image by Getty Images via Daylife

Derivatives are financial contracts (financial instruments) whose values are derived from the value of something else (known as the underlying). The underlying on which a derivative is based can be an asset (e.g., commodities, stocks, residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index (CPI) — see inflation derivatives), or other items (e.g., weather conditions). Credit derivatives are based on loans, bonds or other forms of credit.

Derivatives can be used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect. This activity is known as speculation.

Because the value of a derivative is contingent on the value of the underlying, the notional value of derivatives is recorded off the balance sheet of an institution, although the market value of derivatives is recorded on the balance sheet.

Three major classes of derivatives:

1. Futures: Contract to buy or sell an asset on or before a future date at a price specified today. It is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold. (Similarly, but with an important difference, a forward contract is a non-standardized contract written by the parties themselves.)

2. Options are contracts that give the owner the right, but not the obligation, to buy or sell an asset. (A call option is an option to buy, a put option is an option to or sell). The price at which the sale takes place is known as the strike price and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. If the owner of the contract exercises this right, the counterparty has the obligation to carry out the transaction.

3. Swaps are contracts to exchange cash (flows) on or before a specified future date based on the underlying value of currencies/exchange rates, bonds/interest rates, commodities, stocks or other assets.

Wikipedia is criticised for being unreliable and suceptible to manipulation. But say what you will about Wikipedia, if you want to get a feel for what Financial Derivatives are then take a look at this: Wikipedia - Financial Derivatives

1997 article by Cato Institute seemingly arguing for less regulation of Financial Derivatives: 10 Myths about Derivatives

Related articles by Zemanta

• Krugman: How The Global Debt Crisis Happened (crooksandliars.com)
• When innovation turns (economist.com)

PIMCO - IO Feb 2009 Gross Beep Beep

Image by cathleenritt via Flickr

PIMCO - IO Feb 2009 Gross Beep Beep: "The current financial and economic crisis is difficult to appreciate, not only for the drop in elevation, but because of the swiftness of the declines. It’s been a Wile E. Coyote 12 months – straight down like a dead weight. A year ago, global equity prices were nearly twice today’s levels and recession was only a whisper on the lips of the gloomiest of economists. Today, descriptions drawing parallels to the Great Depression make it obvious that a major shift in economic growth and its historic financial model, as well as policy prescriptions for its revival, are underway. Most of the world’s connected economies and its citizens are in shock, conscious but not fully aware of the seismic shifts that will unfold in future years.

PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a “shadow banking” system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels. But, with U.S. housing prices as its trigger, the delevering process did a Wile E. Coyote and headed over the cliff in"

Related articles by Zemanta

• Bankers get paid too much but please let's fix the bigger problems (telegraph.co.uk)
• Judith Ellis: Embracing Insanity in this Crisis (huffingtonpost.com)

PIMCO - IO Feb 2009 Gross Beep Beep

Image via Wikipedia

PIMCO - IO Feb 2009 Gross Beep Beep: "Stressing the importance of the shadow banks is not the same thing as suggesting that they should be next in line for government largesse and bailouts. Lord knows, the Obama Administration is not going to bail out hedge funds, CDOs, private equity firms (Cerberus?), or Donald Trump. There are levered risk takers that will be, and should be, allowed to fail. But in permitting failure, policymakers must still be cognizant of the need to support asset prices – hopefully by inducing confidence and trust in private investors, as pointed out by Robert Shiller in a recent Wall Street Journal op-ed, but if need be by the financing or purchase of assets themselves. It’s not so much that the stock market needs to go back to 10,000. That would be nice for millions of 401(k)s that have been cut in half over the past 12 months, but it is not likely. Rather, asset prices securitizing commercial real estate and credit card receivables, as well as plain old-fashioned municipal bonds, must stop going down if the real economy has any chance to revive by 2010."

Related articles by Zemanta

• U.S. Bank Bailout to Rely in Part on Private Money (nytimes.com)
• Recession: We need private equity to weather the storm (telegraph.co.uk)
• Troubles With Trump: Just one month ago, Donald Trump... (curbed.com)

PIMCO - IO Feb 2009 Gross Beep Beep

Image via Wikipedia

PIMCO - IO Feb 2009 Gross Beep Beep: "Similarly, municipal yields are now trading at nearly twice their Treasury counterparts, implying that municipal bonds are trading at 80 cents on the dollar instead of 113 cents like the average Treasury. To enable states and cities to return to normal functioning, those bonds must return to par. Modern day capitalism depends on the successful refinancing and issuance of securities at a price and yield level not significantly divorced from past experience. That is the same thing as saying that current yields must come close to matching the economy’s embedded cost of debt if default is to be avoided. Not only municipalities, but the efficient operation of hospitals, nursing homes and even universities depend on the leveling and returning of municipal bond prices to higher levels. Similar arguments can be made for corporate bonds as well."

Related articles by Zemanta

• Infrastructure Investment Bank (seattletransitblog.com)
• Green Municipal Bonds - Economic Crisis Solved (inspiredeconomist.com)
• 5 New Investing Rules for Retirement (usnews.com)

PIMCO - Gross Beep Beep

Image by Getty Images via Daylife

PIMCO   Beep Beep: "The current financial and economic crisis is difficult to appreciate, not only for the drop in elevation, but because of the swiftness of the declines. It’s been a Wile E. Coyote 12 months – straight down like a dead weight. A year ago, global equity prices were nearly twice today’s levels and recession was only a whisper on the lips of the gloomiest of economists. Today, descriptions drawing parallels to the Great Depression make it obvious that a major shift in economic growth and its historic financial model, as well as policy prescriptions for its revival, are underway. Most of the world’s connected economies and its citizens are in shock, conscious but not fully aware of the seismic shifts that will unfold in future years.

PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a “shadow banking” system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels. But, with U.S. housing prices as its trigger, the delevering process did a Wile E. Coyote and headed over the cliff in"

Related articles by Zemanta

• US suffers biggest job losses since 1974 (telegraph.co.uk)
• Dear Mr. Buffett: What an Investor Learns 1,269 Miles From Wall Street (wileyptnews.com)

Fed Has Already Adopted Quantitative Easing

Image via WikipediaPer the latest Market Watch from Barclays Capital:

"In recent weeks, there has been a rather odd debate over whether the Fed will adopt Japanese-style quantitative easing: that is, flood the banking system with reserves to induce more lending. In our minds, the Fed has already gone well beyond anything the Japanese ever did. It has already dramatically expanded bank reserves, and unlike the Japanese, it has used these funds to intervene aggressively in many parts of the capital markets. This is quantitative easing on steroids.

If our baseline forecast is correct, it could mean a broad-based shift in the capital markets as a variety of risk aversion trades unwind. Once the markets believe policy-makers are succeeding in containing the capital markets and economic crisis, we would expect a rally in risky assets such as credit spreads and equities; a bear steepener in the treasury market, as the Fed holds down the short end and budget deficit concerns push up the long end; a weakening of the dollar as safe-haven inflows ease; and a rally in commodity markets as investors price in an eventual recovery in global demand."

Related articles by Zemanta

• Bank rates head to zero
• Lower mortgage rates aren't the answer

Blackstone loses $500 million

... but claims to be in good shape.

Like just about all other private equity firms, Blackstone Group LP (NYSE: BX) reported a horrible Q3, with losses of $502.5 million, or $0.44 per share. However, the firm was fairly optimistic on the overall value of its sprawling portfolio of companies. That is, the writedown was only about 7%. As a result, some investors were naturally skeptical – and the stock price of Blackstone continued to slide."

See article at: BloggingBuyouts

Related articles by Zemanta

• KKR to go public through merger with KKR fund
• Blackstone Group Reports $500 Million 3rd-Quarter Loss
• K.K.R. Delays Move Needed to Go Public

Insider's Perspective on the Credit Crisis

Amid a deepening international credit crisis and a rapidly decelerating global economy, global real estate markets are feeling the real-time effects of a tightly interlinked world that remains increasingly vulnerable. The markets have shifted from a virtuous cycle to a vicious cycle. The dramatically changing environment began with the U.S. subprime mortgage meltdown 18 months ago and then spread rapidly through the global financial system and now into all aspects of the economy.

Jones Lang LaSalle's capital markets experts share their insights and predictions on the current state of the global economy. Click here for a full report.

For additional information contact

Jack Minter Investment Sales jack.minter@am.jll.com
Kenneth Rudy Corporate Capital Markets kenneth.rudy@am.jll.com
Bart Steinfeld RE Investment Banking bart.steinfeld@am.jll.com

Related articles by Zemanta

• How to come out on top in a tough market
• An expert opionion on the credit crisis