Thursday, August 20, 2009

AIG is Going to Pay Us Back and Other Fairy Tales

"Robert Benmosche, who took over as CEO earlier this month, told AIG workers he'll rebuild businesses and won't be rushed by the U.S. into dumping assets at distressed prices, Bloomberg reported Thursday, sourcing a recording of an Aug. 4 meeting for employees. "I don't liquidate things, I build them,'" Benmosche said, according to Bloomberg."

Wow, tough talk from a man sitting on a company propped up by $180 billion in taxpayer money. We wouldn't want AIG to be forced to liquidate anything under fair value. Ah, and speaking of fair value, there was a resurfacing of mark-to-market accounting talk this week. However, given the plunge to 12-year lows the last 2 times M2M was left in place, and the subsequent 6-month, 50% charge since it was lifted, I don't give it a significant chance of reappearing in its old form.

Jonathan Weil of Bloomberg wrote an article today detailing an accounting change that could effectively wipe clean the tangible assets of insurance companies. He was referring to "deferred acquisition costs." "Under a unanimous decision in May by the U.S. Financial Accounting Standards Board that has received little attention in the press... the board is scheduled to release a proposal during the fourth quarter to overhaul its rules for insurance contracts. If all goes according to plan, insurers no longer would be allowed to defer policy-acquisition costs and treat them as assets." Uh oh, what does this mean. "The impact of such a change would be huge. A few examples: As of June 30, Hartford Financial Services Group Inc. showed DAC of $11.8 billion, which represented 88 percent of its shareholder equity, or assets minus liabilities. By comparison, the company’s stock-market value is just $7.3 billion." He mentions one of my favorites again, Genworth, whose DACs are worth twice its book value.

However, our resident market insider informs me that yes, this rule will pass, there will be large one-time chargeoffs, then a return to profitability. I'm shocked anytime the FASB does something that might hurt the market, so let's wait and see what happens.

One thing that is not surprising is Congressman Alan Grayson's continued efforts to find our money. "Neil Barofsky, inspector general of the U.S. Treasury Department’s $700 billion Troubled Asset Relief Program, agreed in an Aug. 3 letter to audit the program after a request by U.S. Representative Alan Grayson. Barofsky will examine why the guarantees were given, how they were structured and whether the bank’s risk controls are adequate to prevent government losses. 'What kind of toxic assets did the Federal Reserve guarantee, and what off-balance-sheet liabilities have been pinned on us?” Grayson, a Florida Democrat who sits on the House Financial Services Committee, wrote yesterday in an e- mailed response to questions on the audit. “How much money have the taxpayers already lost? We need to know.'” Grayson is quickly becoming a hero of non-MSM sites for his constant hounding of our financial felons.

Enough blabbering, what's next? August expiration hits tomorrow and we'll see if the market runs a little further into fantasy land, shaking off news like negative consumer spending and a return to rising unemployment claims. The bounceback from Monday has put China and emerging market puts all the way to March back on the map as DIA and SPY remain expensive beyond 2-month windows. The concern with China is not it's 80% runup, it's how far will the government let it fall on the way down? They're not playing by our rules. If you're feeling lucky, however, Itulip is predicting the S&P crumbles back under 600 before year end. SPY 60s for .19 anyone?

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