Monday, March 9, 2009

BRACE YOURSELF!! I agree with Adrianna Huffington

IMO Adrianna Huffington is a bit of a nutcase. Former Republican activist, turned Progressive psycho activist, turned Progressive psycho activist blogger. I don't agree with her on too many topics, especially economics or finance based. However, I agree with maybe 75% of her recent article. Here are some details:
While we're rewarding the risk-taking shareholders of various zombie banks -- not to mention the mysterious, unconfirmed counterparties to AIG's serial recklessness -- how about rewarding the taxpayers, if not with an actual return on our bailout investment then at least with information about what exactly is being done with our money? It's time to call in all the unknowns.
Why wiping out the common stock hasn't happened yet is a mystery to me. The share price of the Zombie banks are essentially zero. Citigroup (C) is sitting at 1.05 as of today. The only people holding this are a) people who don't understand sunk costs; b) money hoping that the U.S. of Obama will do something so drastic as to never let this company's stock be wiped out (plus, this money is sufficiently hedged on the downside so as to mitigate that dollar loss); c) people with vested interest to see this stock alive (management/B.O.D.); or d) people way smarter than I (quite possible, in fact, likely). I have a friend acquaintance that works for Citi and he is begging me to give him a shout-out on this blog. So I will. (whoop!)

As for AIG's counterparties, it sucks that AIG is taking government money and the counterparties' vulnerability may be exposed. But I see it this way: if AIG received no federal money and became insolvent and you lost 100% of your exposure (minus collateral/coverage); then, you would have needed to announce a significant write-down to your assets  (the ones exposed to AIG). That sucks, but it's the price you pay for insignificant due-diligence. The bitch of capitalism, but everyone plays by those rules. As the case stands, AIG has received federal money, perhaps limiting your losses. You need to pay for your losses being reduced, and the price you pay is that the taxpayer (AIG's lender!) gets to know who is the counterparty risk. Either way, you suffer a hit to your assets and it become publicized. May as well take the taxpayer kind pittance.

As for the bigger picture, "what exactly is being done with our money?" This is a great question. Let's pretend I am a bank. Let's pretend my friend Nitro wants to borrow money from me. Let's say $2,000 to buy a new blowup doll. Am I going to just give him the money? No. I'm going to make sure he can reasonably repay the money within a few months time and with a little interest. To assure myself of this investment, I may ask to look at Nitro's bank statements. If Nitro doesn't feel this is fair, I probably won't lend him the money. After all, it's my money; I get to set the terms. 

So, to translate that scenario to our current situation: If your company wants our money then you will be paying a hefty rate and we will have access to your books. If that is too much to ask, you don't get our money. I don't care who you are. Even if you are the queen of England (heck, ESPECIALLY if you are the queen of England), if the U.S. is giving you money, you are getting it on extremely onerous terms. IMO, it should be WAY more onerous than has been allowed so far. It really makes me angry that 1st Paulson, then Geithner have treated the bailout money as if it is their money. It is not their money; it is my money, and it is your money.

Not only do I want to know the books of the borrowing company before I hand over money, but I want to know where exactly that money is going. Huffington continues and wants to know
the final destination of the taxpayer money the government keeps funneling to AIG. The Wall Street Journal reports that around $50 billion of the $173 billion in bailout funds given to the insurance behemoth has gone to pay off financial institutions that had insured their wildly irresponsible credit default swaps with AIG.
I think this is a fair question. If you are benefiting from taxpayer largesse, then be prepared to document everything. Not fair? then don't take the money.

In the past I have found some of Huffington's claims to be suspect to reality, but if this paragraph is true, I would like to know the rationale behind it.
It's worth noting that, thanks to the industry-written 2005 Bankruptcy Bill, derivatives claims are not stayed in bankruptcy -- so the financial institutions that gambled and lost would nevertheless be the first ones paid off.
I've been looking into this claim and it seems to be true (but I haven't yet read the actual Bill). I understand that if AIG writes a credit default swap to JP Morgan to protect against the default of a Mortgage Backed Security, that JPM wants to be protected against potential AIG collapse, BUT don't all insurance policies holders want full compensation if their insurer goes kaput? Why should only holders of derivatives have access to full recompense?

Lastly, Huffington is still a little nutty even if her moments of perceived sanity. She bashes CNBC (via John Steward), but nobody should use CNBC as a proxy for investment advice. They have so many different people making so many different forecasts about so many different topics that it's easy to put together a montage celebrating CNBC's ineptitude. CNBC is good for news, good for opinions and good for interviews, it is good for an overall picture of Street sentiment. It is bad as an investment advisor. Also, Huffington would be wrong to want to completely clear house of all financial types from helping right the economic ship. It is easy to paint with a broad brush and typecast all financiers as evil men and women, looking to make an illegal buck. But to fix this problem, we need people who can read a balance sheet, and we need people with actual experience. We don't need people who have "served the public" their entire careers (i.e. politicians) to try and fix this mess. This would be the equivalent of having a renegade tractor operator drive his tractor off into a ditch, and then have an unlicensed 12 year old girl try and get the tractor back onto the road while 200 Grade-A tractor operators stand by and watch in horror.

Bottomline, when Arianna friggin' Huffington and I agree this heavily on a prescription, then something is clearly awry with the up-til-now course of action. 

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