Wild and hitherto unimaginable events are now happening daily ... overnight AIG was bailed out by the US banking regulator, the Federal Reserve, after what appears to have been a couple of days squabbling between the private sector and the Treasury over just who's responsibility AIG was. What had been sold as a liquidity issue didn't convince the likes of Goldman Sachs, JPM, Allianz JC Flowers who had been party to the negotiations. So it was decided that although the Fed had no real insurance expertise they were better pladed than the Treasury to lend the money. Afterall, they're the ones with the printing presses.
To be fair, if AIG is merely illiquid as opposed to insolvent, the Fed is doing what it's supposed to as a lender of last resort. The $85bn 24m facility is at a distressed 3m LIBOR + 850bp in return for the option to take a 79.9% stake in the company. The board remain but senior management are replaced and will be charged with selling off assets to repay the loan. Amid all the hooting about tax payers money being used to bail out the Maserati-driving AIG guys that's likely to follow, the tax payer could end up making a decent return on the loan ... if AIG is solvent ... but what if it's not? The private sector's involvement apparently stalled because the parties couldn't agree on the value of the collateral suggesting it was more than just a liqiuidity issue ...
But who cares - cue the rally!! ... sort of ... Asian markets rose sharply at the open, as the dollar weakened, only to drift back. As I write, they are now largely in negative territory, as the dollar is where it started ... I'd expect this episode to mark a near term bottom in the equity markets, but credit markets have been far better predictors of the future than their equity cousins throughout this whole crisis and they're still frozen. Maybe the markets have been so utterly spooked by the last few weeks it's going to take a little longer for people to feel safe going back in. Maybe they're wondering how many of their counterparties will be around this time next week ...
... speaking of which ... WaMu was downgraded to junk status yesterday too. GS were rumoured to be looking at them for their deposits but that was subsequently denied. Meanwhile, Those Who Walk On Water announced their earnings yesterday and - who'd a thunk it - managed to BEAT net income estimates. I sure am relieved they have all those clever guys working there ... net income was down 70%, trading revenue was down 67%, advisory was down 56% and Investment Banking was down 40% but they still made money and what's more, more money than all those clever analysts expected. One slight problem - there was no cash flow statement ... still - great numbers eh?
Maybe having branched out into insurance the Fed didn't have time to think through the demand implications of the removal of half of the financial system in the space of a couple of weeks. They kept rates unchanged at 2%, arguing that it is already pumping as much liquidity into the banking system as it can. Maybe, but all the interest rates I look at are higher than they were a few months ago, or even last year and only rate cuts would get them down. But they're scared of zero aren't they? I'd be scared of a heart transplant, but if it was the only think that might save me ...
Barclays look as though they've bought Lehman's US assets for $1.7bn . Apparently some of the LEH guys were complaining that this was a terrible option because the cultures were so different, Barclays being an English bank! Amazing. Surely there's more of a culture overlap for those guys with Barclays than there is at the local dole office??
HBOS fell 40% yesterday too, while UBS was down 20% ... I'm becoming numb to these big numbers, but the crisis has been a bit US centric so far. Isn't it about time some non-US banks went down?
... and as if this wasn't enough excitement for one day, the Russian market yesterday fell a mind-bending 17% ... and that came after a 50% fall in three months leaving the RTS down 58% from its May high. Now that's what I call a crash ... none of this 4% in day, 20% from the highs amature stuff we've been fretting about ... falling oil prices were cited as the cause but the FT reported yesterday that there are "few oligarchs who do not have $500m to $1bn in loans backed by shares." Those loans came from the banks, but the banking system relies on the wholesale market for 75% of its funding and that market is now closed. While Russian Standard banks struggles to raise a relatively paltry $200m from the market, Standard and Poors estimate that $45bn of loans need to be financed before the end of the year. But no one knows how many loans are collateralised by shares! Estimates range from $40bn to $140bn. Oleg Deripaska and Vladimir Potanin, the two guys fighting for control over Norilsk have a combined $4bn in margin loans outstanding ...
Medvedev said in yesterday's FT before the 17% decline:
"Despite all the global economic problems there are today, the situation in our economy is on the whole completely stable. We definitely have no crisis or pre-crisis situation.”
Does this now qualify? The Russians' sovereign wealth fund has $570bn. Wonder how much will be left after they've bailed out the banks so they can bail out the billionaires so they can bail out the Premiership and the high-end London housing market? More interestingly, Putin has the oligarchs right where he wants them ... what pound of flesh does he extract in return?
The Minerals Management Service said yesterday that while guys like Transocean and BP go looking for their lost rigs, 97% of oil production and 84% of nat-gas output in the GoM (worth about 26% of US oil production) was idled after Ike. Oil prices rebounded last night on the AIG deal (??) but Libya and Iran have both said they have no plans yet to call an emergency OPEC meeting.
Monsanto said it's full fiscal year profit likely rose more than it had earlier forecast, with ongoing profit running at $3.58-$3.60 compared to $3.37 previously. Can farmers afford these record GM prices, or record potash prices, or record ammonia prices? I'd have thought not, which will surely lower yields over the next few years until more supply can come on stream ... Dell also warned that it was now seeing a widespread slowdown in its business. Not to worry though, HP said the opposite. Cue Nasdaq rally.
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