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AIG Bonuses in Question – Analyst Blog

Zacks Market Commentaries — Wed, 14 Oct 2009 17:27:09 +0000

According to an overseer's report released on Tuesday, the U.S. Treasury Department is pressing the bailed out insurer American International Group Inc. (AIG) to reduce $198 million in scheduled retention payments after the government missed the opportunity to defend against controversial bonuses to AIG employees last year.

The special inspector general of the government’s $700 billion bailout program, Neil Barofsky, said that Treasury official Kenneth Feinberg has not specified the amount by which retention payments should be reduced.

Feinberg is supervising pay practices at seven companies, including AIG, which received extraordinary government assistance. Though all the firms that received bailout money are subject to limits on their compensation practices, for these seven firms the situation is critical due to the special assistance they received from the Treasury.

The seven firms whose compensation plans are under scrutiny are American International Group, Citigroup (C), Bank of America (BAC), Chrysler Financial, Chrysler Group LLC, General Motors and GMAC Inc. (GJM).

After AIG was rescued with more than $180 billion of government money last year, it became a focal point for congressional and public anger over pay practices at government-supported financial firms when it was revealed earlier this year that it was offering millions of dollars in retention payments to its employees.

However, AIG is currently trying to repay its $85 billion loan from the government by selling off some of its assets.

In the course of the review of the aptness of the richest pay packages, the U.S. pay czar Kenneth Feinberg is planning to cut the annual cash salaries for many of the top executives whose firms accepted bailout funds.

As an alternative to paying large cash salaries, the pay czar is planning to shift a large portion of an employee's annual salary to stock that cannot be accessed for several years. The percentage of salary to be diverted to stock is not yet clear, but it could be above 50% in some cases.

We think that the full repayment of government money will enable bailed-out firms to protect their executive compensation packages. Restrictions on pay rules as a result of using government money are a major competitive disadvantage for these firms in retaining talented employees.
Read the full analyst report on "AIG"
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Read the full analyst report on "GJM"
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RBA Raises Rates!

Contrarian Profits — Tue, 06 Oct 2009 18:33:59 +0000

pPandora#8217;s Box of rate hikes is opened! Is the dollar being removed from oil trades? Deficits do matter, eh? Gold heads toward its all-time high#8230;And Now#8230; Today#8217;s Pfennig!/p pGood day#8230; And a Terrific Tuesday to you! A Tuesday morning that is seeing a HUGE currency rally VS the dollar on the news that the Reserve Bank of Australia (RBA) opted to go ahead and hike rates now, and not wait for November#8217;s meeting, as I had thought they would do! WOW!/p pThe first hike#8230; It has opened Pandora#8217;s Box of interest rate hikes around the world#8230; For, if the RBA went this soon, then we can expect Norway#8217;s Norges Bank to push their rate hike earlier on the calendar, maybe even later#8230;/p

Citigroup Faces TARP Audit – Analyst Blog

Zacks Market Commentaries — Thu, 20 Aug 2009 18:46:07 +0000

Neil Barofsky, the U.S. special inspector general for the Troubled Asset Relief Program (TARP) plans to audit a federal guarantee granted last year to protect Citigroup Inc. (C) from potentially massive losses.

The U.S. special inspector general is in charge of keeping a check on bank bailouts and will convene a team to audit the Citigroup guarantees. The appointed team will examine why the guarantees were given, how they were structured and whether the bank’s risk controls are adequate to prevent government losses.

The Federal Reserve, the Treasury and Federal Deposit Insurance Corporation (FDIC) in November 2008 guaranteed a $306 billion pool of Citigroup mortgage assets aiming at preventing the collapse of the U.S. banking system amidst a global financial crisis. Citigroup’s guarantees came on top of $45 billion of bailout funds obtained last year through TARP.

The audit is a result of the questions raised by U.S. Representative Alan Grayson about the guarantee and what it meant for taxpayers, and whether taxpayers got a fair deal. The government bailout did help calm the crisis, but it also sparked public anger over the use of taxpayer money to save rich bankers.

The audit will take several months and a deadline hasn’t been set as of yet.
Read the full analyst report on "C"
Zacks Investment Research

China Is Through Screwing Around

Graham Summers — Fri, 07 Aug 2009 12:22:01 +0000

Starting with the re-opening of formal trade arrangements in 1971, China has undergone a near unprecedented level of economic transformations. The country’s per-capita income doubled from 1978 to 1987 and again from 1987 to 1996. In those 20 years, more than 300 million Chinese ascended out of poverty with accompanying dramatic changes in lifestyle, professions, and [...]

Beware of the Obama Stimulus Trap

Contrarian Profits — Fri, 31 Jul 2009 21:00:44 +0000

pUpbeat headlines have been everywhere in recent weeks, and they all seem to point to a single conclusion: The U.S. economy is in the early stages of a very rapid recovery./p pIn fact, when you peruse the news it’s difficult to come to any other conclusion. For instance:/p ul liA number of key earnings reports have been much better than expected, and company executives buttressed those profit figures with positive comments about the next 18 months./li liThe trading operations of Goldman Sachs Group Inc. (NYSE:a href="http://www.google.com/finance?q=NYSE%3AGS" target="_blank"GS/a) and JPMorgan Chase #38; Co. (NYSE: a href="http://www.google.com/finance?q=NYSE%3AJPM" target="_blank"JPM/a) a href="http://www.moneymorning.com/2009/07/17/jpmorgan-chase-accounting-mirage/" target="_blank"both just reported record profits/a./li liU.S. housing prices rose in May a href="http://www.moneymorning.com/2009/07/30/housing-market-bottom/" target="_blank"for the first time in three years/a. Initial jobless claims have plunged 15% since their April peak. The Conference Board’s Index of#8230;/li/ul

James Dale Davidson: “This Is a Depression”

Contrarian Profits — Thu, 30 Jul 2009 17:21:36 +0000

pWhere are we now? It’s a question we’ve been grappling with here at strongemNotes/em/strong since the bizarre events of March 9, when equities took off on a wild run. They haven’t stopped since./p pThe bull run/bear market rally has had three major phases. This from our favorite underground analyst, David Rosenberg:/p ul blockquotep1. March 9 to May 6 when financials led the way/p p2. May 6 to July 10 when it was all about defensive growth and strong balance sheets (tech and health care leading the way)/p p3. Since July 10 it’s all been about basic materials and consumer discretionary stocks./p/blockquote /ul blockquote ul/ul /blockquote pWhatever way you look at it, however, it’s clear that we underestimated the level of euphoria backing this rally./p pThe recent run-up in stocks has been closely linked#8230;/p

Some TARP Uses to Be Revealed – Analyst Blog

Zacks Market Commentaries — Mon, 20 Jul 2009 14:26:04 +0000

Is the credit issues became apparent in October 2008, much of the press with respect to the Troubled Asset Relief Program (TARP) has revolved around the nine largest financial institutions, including but not limited to Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), State Street (STT) and Goldman Sachs (GS). However, more than 600 institutions have received investments from the U.S. government.

When dealing in hundreds of billions of dollars, accountability should be expected. Unfortunately, the U.S. Treasury so far has required only 21 of the largest institutions to issue public filings on their dollar volumes of new lending monthly.

While the largest institutions have received the lion’s share of the funds, it seems a bit unfair they are the only ones being held accountable. Moreover, it appears the Treasury has been less than willing to date to collect such data. However, this may be changing.

The report by Special Inspector General Neil Barofsky due out today reveals some interesting developments. The findings were based on a survey of 360 banks that received funds though January 2009. Approximately 300 banks, or 80% of the respondents, stated that they did use at least some of the money to support new lending. About 110 or 30% had invested a portion of the funds, while 52 approximately 15% used the funds to repay debts, with 15 or 4% using the funds to buy other institutions.

As a result of the survey, Mr. Barofsky called on the Treasury Department to require more regular and detailed information from institutions that received TARP funds. However, it appears that the Treasury rejected the call. The Treasury’s view is that it is impossible to track the exact use of the federal aid by these institutions.

This is a complete cop-out by Treasury, in our view. Let's say an institution received $10 billion in financial aid, and the residential home loan portfolio has not increased in the two–three quarters prior. Then, in the next two quarters, the residential loan portfolio increased by $1-3 billion. Or at another institution, management acquired two other entities and (excluding the effects of the acquisition) exhibited no increase in their residential loan portfolio.

Under these two simplified examples, is it not possible to be able to deduce where the major portion of the aid was utilized?

When the Administration lauds the importance of being transparent, it is incomprehensible that the Treasury Department can be permitted to take such an opaque tack.
Read the full analyst report on "C"
Read the full analyst report on "BAC"
Read the full analyst report on "WFC"
Read the full analyst report on "STT"
Read the full analyst report on "GS"
Zacks Investment Research

Sell REITs, Part II

Contrarian Profits — Fri, 17 Jul 2009 19:53:05 +0000

p class="MsoNormal"Investors in common stocks tend to ignore warning signs coming from the credit markets, often at their peril. Right now, the credit markets are broadcasting the following warning: The equity of overleveraged REITs is at risk of elimination or permanent impairment./p p class="MsoNormal"Yet the stocks of real estate investment trusts (REITs), which are popular among income-oriented retail investors, are still trading at high enough levels that discount just a garden-variety recession in commercial real estate. REITs were designed to invest in portfolios of rental properties, and generally pay no corporate income taxes if they distribute at least 90% of their profits as dividends to their shareholders./p p class="MsoNormal"REITs were designed to thrive in an environment of steadily rising property values and rents. But in#8230;/p

Beware of the REIT Reality

Contrarian Profits — Fri, 10 Jul 2009 22:30:44 +0000

pInvestors in common stocks tend to ignore warning signs coming from the credit markets, often at their peril. Right now, the credit markets are broadcasting the following warning: The equity of overleveraged REITs is at risk of elimination or permanent impairment./p pYet the stocks of real estate investment trusts (REITs), which are popular among income-oriented retail investors, are still trading at high enough levels that discount just a garden-variety recession in commercial real estate. REITs were designed to invest in portfolios of rental properties, and generally pay no corporate income taxes if they distribute at least 90% of their profits as dividends to their shareholders./p pREITs were designed to thrive in an environment of steadily rising property values and rents. But in#8230;/p

Grayson Challenges Feds Over $300 Billion Citi Slush Fund

Contrarian Profits — Thu, 25 Jun 2009 20:55:51 +0000

p class="MsoNormal"Representative Alan Grayson (D-Fla) is proving that Ron Paul isn’t the only one with a pulse up on Capitol Hill. Grayson is going after the “Citigroup Three” – Ben Bernanke, Tim Geithner and Vikram Pandit – in an attempt to bust up the Wall Street crony alliance./p p class="MsoNormal"Grayson is doing what any Congress member worth his or her salt should have done a long time ago. He’s calling for an inquiry into the $300 billion government guarantee extended to Pandit’s Citigroup. Put simply, he’s asking who should be held responsible for putting the taxpayer – you and me, dear reader – on the hook for ema third of a trillion/em emdollars/em of toxic Citigroup assets./p p class="MsoNormal"Here’s a quick breakdown of what Grayson is putting#8230;/p

How Risky is the Fed Balance Sheet? – Analyst Blog

Zacks Market Commentaries — Fri, 01 May 2009 20:30:11 +0000

Highlights include Fannie Mae (FNM), Freddie Mac (FRE) and AIG International Group (AIG).

The simple answer to this question is, "No one knows." The Central Bank's balance sheet now stands at $2.2 trillion -- more than doubled since September, 2008. In all, the Fed has created 11 lending programs to combat the credit crisis, but few details of the collateral backing these loans are available.

Historically, the Fed's balance sheet mainly comprised of the Treasuries, but now only about one fourth of the assets are Treasuries and the rest are securities like commercial paper, Central Bank liquidity swaps and mortgage-backed securities etc.

In the recent FOMC statement, the Fed reaffirmed that it will purchase up to $1.25 trillion of agency mortgage-backed securities (MBS) and up to $200 billion of agency debt by the end of the year in order to support the mortgage lending and housing markets, and to improve the conditions in the credit markets.

We agree that without the unusual methods employed by the Fed, we would have been in a much worse situation than we are in today. Mortgage rates are now at record low levels, resulting in a surge in refinancing and the credit markets -- which were virtually frozen late last year -- are functioning again.

But the Fed now has an unprecedented degree of credit risk. Central Banks are not expected to assume any credit risk, but these are unusual times which require unusual actions. Most of the actions have been initiated under section 13(3) of the Federal Reserve Act, which permits it to extend credit "in unusual and exigent circumstances" to "individuals, partnerships and corporations that are unable to obtain adequate credit accommodations."

As Dirk Van Dijk mentioned in his recent blog, the Fed does not anticipate any credit risk in MBS purchase as "the paper is guaranteed by Fannie Mae (FNM) and Freddie Mac (FRE)" though "FNM and FRE happen to be on life support from the Treasury -- to the tune of $200 billion each"

After the collapse of Bear Stearns and the near-collapse of AIG International Group (AIG), the Fed had purchased $74 billion in sub-prime securities backed by assets such as home loans in Florida and California. These assets now have unrealized losses of $9.6 billion.

The Central Bank holding sub-prime securities? Seems unthinkable!! But again, these are unusual events. The details of these purchases can be seen here.

Also, there is high risk in the TALF program being implemented by the Fed. The Treasury was planning to expand the program from $200 billion to $1 trillion and from purchase of new auto, student and small-business loans to include commercial mortgage-backed securities and residential MBS. Further, under the Public-Private Investment Program (PPIP), TALF will be used to purchase legacy securities (the new name for toxic assets). The details can be seen here.

Special Inspector General for the TARP, Neil Barofsky, also criticized the TALF for relying on the credit-rating agencies to determine if securities are safe enough for taxpayers. Going by the recent record of the rating agencies, we would totally agree with him.

It was earlier reported that the Treasury Department had pledged up to $100 billion from TARP to cover losses that might arise from the TALF. In the latest details for TARP funds, it has reduced that estimate for TARP losses to $35 billion.

So does the Treasury anticipate lower losses as it expands the program to include CMBS, RMBS and toxic assets, or it does not want to expand the program now in view of lukewarm response to the TALF so far? Or was the estimate reduced just because there are not enough funds remaining in TARP?

With the Fed being the "lender of last resort" and the Treasury willing to the "guarantor of last resort," the programs can continue for a long time, but ultimately the risks are borne by the taxpayers.

Read the full analyst report on "FRE"
Zacks Investment Research

Top News

José Pérez — Tue, 21 Apr 2009 13:26:50 +0000

Top Stories Businesses worry U.S. money to bring rules, regulations Companies in the U.S. are concerned that the government’s push for improved accountability and transparency in stimulus spending will bring with it additional rules and regulations, a study by auditing and consulting firm Deloitte found. Of the executives responding, 58% said they do not think it is [...]

Watchdog Agency Says TARP Overpaid $78 Billion for Bank Assets

Money Morning — Fri, 06 Feb 2009 21:32:43 +0000

By Don Miller Associate Editor Money Morning The watchdog agency overseeing the Troubled Asset Relief Program (TARP) said Friday that the Treasury Department paid banks $78 billion more for... Money Morning is here to help investors profit ha...