Infinite Unknown

Pedestrians are reflected in the window of a Citibank branch in Hong Kong’s financial Central District November 18, 2008. REUTERS/Bobby Yip

(Reuters) - The U.S. financial system still needs at least $1 trillion to $1.2 trillion of tangible common equity to restore confidence and improve liquidity in the credit markets, Friedman Billings Ramsey analyst Paul Miller said.

Eight financial companies — Citigroup Inc, Morgan Stanley, Goldman Sachs Group Inc, Wells Fargo & Co, JPMorgan Chase & Co, American International Group Inc, Bank of America Corp and GE Financial — are in greatest need of capital, he said.

“Debt or TARP capital is not true capital. Long-term debt financing is not the solution. Only injections of true tangible common equity will solve the current crisis,” he said in a note dated November 19.

Currently, the U.S. financial system has $37 trillion of debt outstanding, he noted.

Combined, these eight companies have roughly $12.2 trillion of assets and only $406 billion of tangible common capital, or just 3.4 percent, the analyst said in his note to clients.

Miller said these institutions need somewhere between $1 trillion and $1.2trillion of capital to put their balance sheets back on solid ground and begin to extend credit again, given their dependence on short-term funding and the illiquid nature of their asset bases.

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Tags: AIG, Bank of America, Banks, Citigroup, debt, Economy, financial crisis, Goldman Sachs, Government, JPMorgan, Liquidity, Morgan Stanley, Politics, U.S., Wall Street, Wells Fargo & Co.

A man exits the American International Building, home to the headquarters of American International Group (AIG), in New York, Nov. 10, 2008. Photographer: Daniel Acker/Bloomberg News

Nov. 11 (Bloomberg) — The revised bailout of American International Group Inc. marks a new phase in the government’s effort to shore up financial markets: It’s the first time cash from the rescue fund Congress created last month has been committed to a failing company.

The Federal Reserve, which saved the insurer from collapse two months ago with an $85 billion loan, yesterday reduced that loan and offered lower rates, while the Treasury chipped in $40 billion from its bank-rescue fund to buy preferred shares. The new terms represent a departure for Secretary Henry Paulson, who until now has said he only wants to invest Treasury funds in “healthy” firms.

Taxpayers are “keeping the zombie alive,” said Robert Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors and former director of research at the Atlanta Fed. “We keep getting deeper and deeper into these holes.”

The shift is likely to vastly expand political demands for saving dying companies in the name of financial or economic stability. The administration of President-elect Barack Obama may soon have to consider credit or capital injections for other insurers, automakers, even retailers as the U.S. slides deeper into what could be the worst recession in a quarter-century.

“Are you going to do General Motors and Ford, and, if you do those, are going to go on and do retailers?” said William Isaac, former chairman of the Federal Deposit Insurance Corp. and now chairman of the Secura Group LLC. “ Where does it stop? That is a very difficult decision we are going to face as a country.”

AIG’s Losses

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Tags: AIG, Economy, Fed, Federal Reserve, financial crisis, Ford, General Motors, GM, Government, Henry Paulson, Politics, Recession, taxpayers, Treasury

Nov. 10 (Bloomberg) — The Federal Reserve is refusing to identify the recipients of almost $2 trillion of emergency loans from American taxpayers or the troubled assets the central bank is accepting as collateral.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would comply with congressional demands for transparency in a $700 billion bailout of the banking system. Two months later, as the Fed lends far more than that in separate rescue programs that didn’t require approval by Congress, Americans have no idea where their money is going or what securities the banks are pledging in return.

“The collateral is not being adequately disclosed, and that’s a big problem,” said Dan Fuss, vice chairman of Boston- based Loomis Sayles & Co., where he co-manages $17 billion in bonds. “In a liquid market, this wouldn’t matter, but we’re not. The market is very nervous and very thin.”

Bloomberg News has requested details of the Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit Nov. 7 seeking to force disclosure.

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Tags: AIG, bailout, Banks, Ben Bernanke, Citigroup, Economy, Fed, Federal Reserve, Freedom of Information Act, Henry Paulson, JPMorgan, Lehman Brothers, Politics, taxpayers, Treasury, U.S.

Nov. 10 (Bloomberg) - American International Group Inc., the insurer bailed out by the U.S., may get an expanded government rescue package valued at more than $150 billion that includes lower interest rates and more time to repay the debt.

The U.S. will cut the original $85 billion loan that saved the New York-based insurer in September to $60 billion, buy $40 billion of preferred shares, and purchase $52.5 billion of mortgage securities owned or backed by AIG, according to a person familiar with the matter. The funds will help AIG retire part of its credit-default swap portfolio and bolster its securities lending operations, said the person, who declined to be identified because the plan hasn’t been officially announced.

The changes may give Chief Executive Officer Edward Liddy more time to salvage AIG, which needed U.S. help to escape bankruptcy after three quarterly losses exceeding $18 billion. Liddy’s plan to repay the original loan by selling units stalled as plunging financial markets cut into their value and forced potential buyers to shore up their own balance sheets.

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Tags: AIG, bailout, Economy, Fed, Federal Reserve, mortgage crisis, Mortgages, Politics, Treasury, U.N., Wall Street

Nov. 6 (Bloomberg) — The most comprehensive report on unregulated credit-default swaps didn’t disclose bets in the section of the more than $47 trillion market that helped destroy American International Group Inc., once the world’s biggest insurer.

A report by the Depository Trust and Clearing Corp. doesn’t include privately negotiated credit-default swaps that insurers such as AIG, MBIA Inc. and Ambac Financial Group Inc. sold to guarantee securities known as collateralized debt obligations. It includes only a “small fraction” of contracts linked to mortgage securities, according to Andrea Cicione at BNP Paribas SA in London.

New York-based DTCC’s data, released on its Web site Nov. 4, showed a total $33.6 trillion of transactions on governments, companies and asset-backed securities worldwide, based on gross numbers. While designed to ease concerns about the amount of risk banks and investors amassed on borrowers from companies to homeowners, the report may have missed as much as 40 percent of the trades outstanding in the market, Cicione said.

The data are “likely to underestimate the amount of net CDS exposure,” Cicione, who correctly forecast in January that the cost of protecting European companies from default would rise, said in an interview. “A broadening of the coverage to the entire market is what investors really need.”

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Tags: AIG, Banks, Derivatives, Derivatives market, Economy, financial crisis, hedge funds

Halt Comes as New York Attorney General Reviews Insurer’s Actions Before Rescue

NEW YORK — American International Group Inc. agreed Wednesday to freeze some $19 million in payments to its former chief executive, Martin Sullivan, while New York Attorney General Andrew Cuomo reviews executive compensation and other expenditures paid out as the company neared collapse earlier this year.

The insurance giant also has agreed not to distribute any funds from its $600 million deferred-compensation and bonus pools of its AIG Financial Products subsidiary, which Mr. Cuomo has said was largely responsible for the company’s near collapse.

The company recently received credit lines of up to $122.8 billion from the federal government, helping it avoid collapse. Last week, AIG had tapped $82.9 billion of those credit lines. Some regulators, including Mr. Cuomo, are troubled by outsized compensation packages being paid to departing executives in the financial industry, particularly if those firms have sought help from the federal government.

“To be clear, it is my position that until the taxpayers are repaid with interest the more than $120 billion that has been used in the rescue financing of AIG, no funds should be paid out of these pools to any executives,” Mr. Cuomo said in a letter Wednesday to Edward M. Liddy, AIG’s chief executive. “As AIG recovers using taxpayer money, these pools should not be used to reward executives ahead of taxpayers.”

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Tags: AIG, bailout, Economy, Government, Politics, taxpayers, U.S., Wall Street

NEW YORK, Oct 17 (Reuters) - Andrew Lahde, the hedge fund founder who shot to fame with his small fund that soared 870 percent last year on bets against U.S. subprime home loans, has called it quits, thanking “stupid” traders for making him rich.

In a biting, but humorous letter to investors posted on the website of Portfolio magazine on Friday, Lahde told investors last month he will no longer manage money because his bank counterparties had become too risky.

Lahde ripped his profession in the letter. He noted another hedge-fund manager who recently closed shop and was quoted in The Wall Street Journal as saying: “What I have learned about the hedge fund business is that I hate it.” To which Lahde responded, “I could not agree more with that statement.

“The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking,” said Lahde, who according to the website birthdates.com is 37.

“These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.”

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Tags: AIG, Banks, Bear Stearns, Credit Crisis, Economy, Funny, Government, hedge funds, Lehman Brothers, Politics, Society, Wall Street

Government set to become biggest shareholder in top banks as Japanese weigh bid for Morgan Stanley

THE government will launch the biggest rescue of Britain’s high-street banks tomorrow when the UK’s four biggest institutions ask for a £35 billion financial lifeline.

The unprecedented move will make the government the biggest shareholder in at least two banks.

Royal Bank of Scotland (RBS), which has seen its market value fall to below £12 billion, is to ask ministers to underwrite a £15 billion cash call.

Halifax Bank of Scotland (HBOS), Britain’s biggest provider of mortgages, is seeking up to £10 billion.

Lloyds TSB, which is in the process of acquiring HBOS in a rescue merger, wants £7 billion, while Barclays needs £3 billion.

The scale of the fundraising could lead to trading at the London stock market being suspended. This would give time for the market to digest the impact of the moves.

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Tags: AIG, Bank of England, Barclays, Citigroup, Credit Crisis, credit crunch, Deutsche Bank, Economy, G7, Goldman Sachs, Government, HBoS, HSBC, JPMorgan, Lehman Brothers, Lloyds TSB, Morgan Stanley, mortgage crisis, Mortgages, Politics, RBS, Stock Market, U.K.

A woman speaks on a cell phone inside the headquarters of Lehman Brothers Holdings Inc., in New York, on Sept. 15, 2008. Photographer: Jeremy Bales/Bloomberg News

Oct. 10 (Bloomberg) — Sellers of credit-default protection on bankrupt Lehman Brothers Holdings Inc. will have to pay 91.375 cents on the dollar to settle the contracts, setting up the biggest-ever payout in the $55 trillion market.

An auction to determine the size of the settlement on Lehman credit-default swaps set a value of 8.625 cents on the dollar for the debt, according to Creditfixings.com, a Web site run by auction administrators Creditex Group Inc. and Markit Group Ltd. The auction may lead to payments of more than $270 billion, BNP Paribas SA strategist Andrea Cicione in London said.

While the potential payout is higher than 87 cents on the dollar suggested by trading in Lehman’s bonds yesterday, sellers of protection have probably written down their positions and put up most of the collateral required, said Robert Pickel, head of the International Swaps and Derivatives Association. More than 350 banks and investors signed up to settle credit-default swaps tied to Lehman. No one knows exactly who has what at stake because there’s no central exchange or system for reporting trades.

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Tags: AIG, Airport Security, Banks, Credit Crisis, credit crunch, Derivatives, Derivatives market, Fannie Mae, Freddie Mac, Lehman Brothers, mortgage crisis, Mortgages, Wall Street

Dow slides 189 points despite global interest rate cuts

Dow Jones Industrial Average falls for six successive days, losing 14.7% of its value

Specialists check a screen on the floor of the New York Stock Exchange on Wednesday. Photograph: Richard Drew/AP

A gloomy day on Wall Street ended with another plunge in stocks after the US treasury secretary, Henry Paulson, warned that financial “turmoil” will not end soon and that more banks are likely to bite the dust.

Cuts in interest rates around the world failed to provide any lasting cheer as the fell by 189 points to 9,258. The index has fallen for six successive days, losing 14.7% of its value, amid signs of weariness and capitulation among investors.

Leading US retail chains including Target and JC Penney produced poor trading figures, fuelling concerns of a high-street slowdown. America’s largest aluminium producer, Alcoa, saw its shares slide by 15% as it cut back on capital spending after a dive in profits.

At a press conference to provide details of the US government’s $700bn bail-out package, the treasury secretary said it would be several weeks before the treasury is ready to begin cleaning up banks’ balance sheets by buying distressed mortgage-related assets.

In a prepared statement, Paulson used the word “turmoil” seven times to describe the financial environment and he made efforts to limit expectations on the rescue package: “One thing we must recognise - even with the new treasury authorities, some financial institutions will fail.”

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Tags: AIG, Credit Crisis, credit crunch, Economy, Fed, Federal Reserve, Gold, Government, Politics, Standard & Poor's, Stock Market, Treasury, U.S., Wall Street