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With so many economists explaining so knowingly in recent days how we got into our current predicament, I keep having a quote from Michael Milken going through my head.
You get full points for telling me things before they happen, not afterward.
-- Michael Milken (to Nobelist Myron Scholes at 2008 Milken Conference)
The Federal Reserve held a conference call for reporters tonight, and here (via Dow Jones) are some bullet points on the AIG bridge/bailout:
In the wake of recent events, this AIG commercial -- market risk? liabilities as nightmare? the strength to be there? -- comes across as considerably more blackly comedic than likely intended. On the other hand, we could hire the kid for Paulson's financial SWAT team.
AIG released a somewhat disordered and incoherent statement late tonight about its just-received Fed bridge/bailout:
The AIG Board has approved this transaction based on its determination that this is the best alternative for all of AIG's constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders. AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues.
We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis. We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets. In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG.
We commend the Federal Reserve and the Treasury Department for taking this decisive action to address AIG's liquidity needs and broader financial market concerns. We thank them for their leadership during this critical time for the global financial markets. We also thank Governor Paterson, Commissioner Dinallo, Commissioner Ario, the other state Commissioners, and the Office of Thrift Supervision for their willingness to assist AIG. Policyholders of AIG companies around the world can rest assured that AIG's commitments will continue to be honored.
Some interesting papers on housing and capital markets were presented at a Brookings seminar last week. The Hatzius, Case, and Caballero et al., papers are all particularly good.
Goldman Sachs' Hatzius argues we could lose 1.80 percentage points of GDP growth this year and next. Case says we will see bigger real estate price declines than many are forecasting given the high number of foreclosed properties. Finally, Caballero et al., make an intriguing case for unexplored linkages between oil markets, subprime, and global capital imbalances.
Sooner rather than later, Treasury and the Fed need an in-house private equity manager. Why? Because it now owns a new, large and growing portfolio of semi-public companies, including Freddie, Fannie, and AIG. And it not only has massive stakes in these companies, it is injecting more money, inserting executives, and changing/altering the board.
I'm serious. It needs to happen.
"We must walk without rhythm."
-- Paul Atreides (from Dune (1975))
People are falling out of trees saying that with AIG the Paulson team at Treasury have crossed a line. First we weren't going to assist, then we were, and now we have. Markets want certainty, so this argument goes, so we need to have hard and fast rules about what we're going to do, how companies meet that criteria, and how.
What naive bullshit. Predictability at a time like this is the kiss of death. If you tell the markets how far it needs to bend something before it breaks, it will bend things that far and break them. Period. At the same time, you can't take a hands-off stance and say you will assist with nothing, because the market will push you until you break that one rule too -- or until you become culpable in causing a systemic financial market collapse.
No, you have to walk without rhythm, like you're trying to avoid sand worms on Dune. John Carney makes a similar case here.
(My original "winning weird" post is here.)
Another great installment from the Charlie Rose show, this time with ex-AIG chair Maurice Greenberg. It was done early last night before the AIG bridge deal was announced, but it's still highly worth watching.
Slate has launched a new financial news/analysis site, called The Big Money. It seems fine, has the requisite Slate contrarianism and the design is nice, but I don't immediately see anything there that makes me think I would go back on a regular basis. Feel free to tell me I'm wrong and/or am missing something, but Kinsley-ian contrarianism bores me. I want useful analysis from people whose opinion matters to me.
Many people are irritated that the U.S. is being forced to go alone in bailing out so many broken global financial companies as the shadow banking system falls apart. I'm here to tell you they're wrong. Check the following:
Germany's Finance Ministry said it is astonished that state lender KfW transferred 300 million euros ($426 million) to Lehman Brothers (LEH.P: Quote, Profile, Research, Stock Buzz) on the day the U.S. bank filed for bankruptcy protection.
"What we have had to read today is astonishing and exasperating," Finance Ministry spokesman Torsten Albig said on Wednesday when asked about reports of the transfer.
Time zones and automated systems are a bitch, aren't they?
[Reuters via Bronte Capital]
Some quick links to things others may find interesting:
With news today that credit default swaps on U.S. government debt have risen to a record level -- essentially meaning that there is growing nervousness about U.S. creditworthiness -- it's time to take a closer look. After all, many are newly worried about U.S.'s credit rating, especially the impact on the dollar if said credit is ever downgraded.
Country credit ratings -- usually called "sovereign" ratings -- are funny things. Not necessarily "ha-ha" funny either, more like "huh?" funny. I'll return to that in a moment, but I'll start by saying that the principle is straightforward: Credit rating agencies assign ratings to countries in much the same way they they do to companies. They look at capacity, cash flows, other debt, trends in all of the preceding, and generally the likelihood that a country will ever default. The outcome of that exercise is a letter rating that you can proudly post on your wall, or, better yet, take out on the capital markets when you're raising money as a country to do stuff. It drives domestic interest rates, especially in a relative sense, and, thereby, the exchange rate of your currency.
Fair enough, right? Well, it's not so simple. Credit rating at the country level is devilishly complex. For starters, it depends on the currencies in which your debt is denominated. If your debt is denominated in U.S. dollars and you don't, you know, own that currency, then you can get pinned to the wall and forced to default as your current depreciates and you run down foreign reserves. On the other side, if your debt is in your own currency you don't ever really have to default, as you can always just "print" more currency. Admittedly, bondholders don't like holding bonds of countries that have the habit of inflating their debt away, but that's their problem not yours.
So, back to the U.S. There is no doubt that the U.S. is busily upping its financial commitments across the board, from bailouts to banks to currency markets to wars. And that sort of thing catches up with you, as the widening in credit default spreads today shows. But U.S. debt is entirely denominated in U.S. dollars, so it's awfully tough to default. Granted, you could annihilate the currency, but that is different from having yours ears to pinned to the wall via debt denominated in another currency. That said, it is by no means certain that the U.S. will always get to denominate its debt in its own currency. It is plausible that we could see more Euro-denominated or even a post-floated Renminbi debt, which would change the calculus entirely.
Finally, and this is the "huh?" part of sovereign ratings. Many times, they just don't make sense anyway. The best example remains Japan, which has a lower credit rating than does Botswana, and is on par with Ukraine. Now, Botswana is a fine and improving country, and there is no doubt that Japan remains under a heavy debt load at the country level, but there is something seriously wrong with any credit model that puts Japan behind Botswana in the creditworthiness sweepstakes.
I've written before here on watching Ebay markets in failing companies, so this is in that vein, albeit from a political point of view. Here is a graph from Terapeak comparing trends in how McCain-related and Obama-related goods are doing over at Ebay in terms of their relative popularities. And McCain, it seems, is closing the junk gap.
Anyone want to hazard a guess -- assuming we still have credit rating companies after the apocalypse -- whether the credit league table of Aaa-rated sovereign nations (according to Moody's) will look the same in 12-24 months?
Here they are:
As a related aside, here are the bottom-rated nations:
Merger arbitrage funds are seemingly balking at the Bank of America agreement to buy Merrill Lynch. As a result, the difference between the MER share price and the BAC offer is stuck up around 18%, which is very high.
Why so high? Four reasons (at least):
I'm not the only one noticing President Bush's wrong-headed reluctance to say anything with respect to the current market meltdown. Check this Dow Jones story.
On Tuesday [when AIG news broke], Bush dismissed a reporter's shouted question on AIG. In a photo opportunity with General David Petraeus Wednesday, Bush focused on the attack on the U.S. embassy in Yemen. Later, after meeting Panamanian President Martin Torrijos, he called on Congress to pass a trade agreement with Panama.
"The Panamanian economy is strong," Bush told reporters.
As the press was ushered out of the Oval Office following the Torrijos meeting, one reporter noted to the president that he hasn't taken questions recently.
"I can't hear what you said," Bush told the reporter. "You've got to speak with a louder voice."
Great quote tonight on CNBC from Dennis Gartman on the AIG non-bailout:
... I’m amused that everyone is calling it a bailout. I’m sorry but AIG is borrowing money at close to 12%. You can borrow money from Nick the Knife for less that that!
In a speech tonight at Georgetown University, New York Mayor Michael Bloomberg -- a savvy financial guy -- had a few things to say about the current crisis. Here is one that caught my eye:
It's not clear who's going to be buying our debt. It may very well be that the next wave is going to come back and bite us.
And if the U.S. has to raise rates in middle of this ... let's just say it won't be pleasant.
More here.
It's predictable. Every time there is a financial crisis Warren Buffett's name gets pulled out like he's going to start buying things and save the day. This time around it's been no different, with his naming coming up during the AIG wildness, as well as various banks' names get tossed around. As this amusing Bloomberg chart shows, Berkshire stock has even become (loosely) correlated with the Ted spread, a measure of financial market risk.
It's silly, of course. Buffett is just one guy, and when faced with a systemic market unwinding he can no more sashay in and save things than you or I can. He's well-capitalized and he's liquid, but he's not that well-capitalized and liquid. 
So next time you hear Buffett's name trotted out as a savior imagine Commissioner Gordon on the roof of a Gotham City building shining the Batman spotlight. Same thing, except Buffett, unlike Batman, is a real person with real limits -- and he doesn't come on command.
Check the following spycam video of Fed Chair Ben Bernanke and Treasury Secretary Hank Paulson in disguise in a car. Market-moving moment is 2 minutes in.
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