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Archive for January, 2009

The New York Times Test

For those who don’t know, a prospective deal passes the New York Times Test if the executive is comfortable with its details being pasted all over the NYT with some kind of worst-case garish headline. I first heard of it from Warren Buffett, but I’m sure it predates him.

I think AIG just failed this test:

American International Group Inc. said it is paying retention bonuses as
planned to employees in the unit that sold credit default swaps, the risky
contracts that caused massive losses at the insurer.

The Article goes on to say that the bonuses are averaging $1,130,000 per employee. Yikes.

I’m amazed that these various bailed-out companies seem so oblivious to the political consequences of their decisions.

An executive might think he is changing his behaviour and “righting the ship” or something but are these people actually capable of changing their behaviour sufficiently? Bankruptcy is so very good at flushing the system – you fail, you go home. Give someone new the keys and feel secure that they know precisely what happens if they screw up.

Not anymore. Now, you keep your job and try to morph into a public servant from a ball-busting bank executive. Ha.

Maybe there are good reasons for making the decisions that Citi and B of A make; the point is that it doesn’t really matter because in politics facts and expertise matter much more than soundbites like this :

Hello? They destroyed the franchise. Let’s call their bluff. Let’s see what a
great job market it is for the geniuses of capitalism who lost $15 billion in
three months and helped usher in socialism.

Indeed, bailoutees are still on a different planet. They’ve been allowed to stay there because we’ve tricked them into thinking that they’re genuinely off the hook. They’ll learn. Eventually.

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Confidence

Two interesting articles yesterday on AIG in the WSJ. The first deals with what seems like a bit of a capital shell game, whereby AIG Europe has moved capital from its subsidaries up to the entity level. From the article, it isn’t clear where this money comes from. How can a subsidiary recapitalize a parent without bringing new money in?

The second has to do with the continuing attrition in the ranks. This quote is interesting:

An AIG spokeswoman says, “Commercial insurance has a strong and deep talent pool with more than 12,000 employees in North America alone, and turnover rates are
within normal levels.”

Yeah, right. So you mean that there are just as many people in the world that want to work for AIG as there were a year ago?

This illustrates the interesting confidence game that AIG continues to play. They need to keep the wheels spinning long enough to break the thing up and the only thing that keeps whells spinning in insurance companies, like banks, is confidence.

I give it 18 months.

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Regarding the possibility of removing the onerous capital restrictions for foreign reinsurers, I read this from GCCapitalideas:

The new framework has been welcomed by the EU, Lloyd’s, and
other foreign players, but ratification and full implementation may take several
years. However, in the United States, most cedents are not happy with the
proposed changes.

I don’t understand this. Cedents should be thrilled with the increased competition, shouldn’t they? Well, here is another story that sheds some light:

“Despite the strong efforts of some regulators, the state regulatory
system is structurally incapable of representing U.S. interests effectively,
because it must defend the inefficient U.S. regulatory system and it lacks the
legal authority to bind the United States,” he said. Real progress can be made
only through negotiations by federal authorities, he said.

So it’s a bluff to hold out for a federal regulator? I still don’t really get it. Reciprocal regulatory acceptance for reinsurers is a hands-down win for cedents. Would prefer to know who GC’s sources are.

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File this under WTF

This shocked me a bit:

Buyout firms may also bid for an AIG asset-management division. That unit
may fetch 1.5 percent of assets under management, said Michael Kim, an analyst
at Sandler O’Neill & Partners in New York, putting the price tag at about
$1.7 billion.

Maybe the losses didn’t come from the asset management division, but how on earth do you buy an asset management company in this environment (ANY asset mgt company) for 1.5x book value? Who on earth trades for that kind of multiple in the risk-taking business?

You must be joking.

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More Self-Delusion

This one made me laugh

I have some sympathy for investors that get their heads blown off and I suppose the opporunity cost of selling the remaining stake in a lame duck is low, but this?

“We continue to hold shares in the belief that new management may be able
to unlock some residual value for shareholders above and beyond where the
company’s shares are trading.

I’m not sure what value is left to unlock. If AIG’s total value has declined by more than 60% (including the gov’ts stake), there’s nothing. I’d bet that it’s declined by much more. Move on, guys. Go buy a shovel.

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