The market has been in a "back and forth" pattern in this light volume August market. Many senior traders and managers are taking their last vacations for the summer.
The trading programs like to churn the market back and forth, taking down the undercapitalized speculators, probing for signs of weakness among the funds.
As we are on key support we'll see if they can bounce it tomorrow. If they cannot then things may get interesting quickly, probably next week. We'll assume that something big is boiling over behind the scenes and the calls are coming in from the watering holes in the Hamptons.
19 August 2008
Those Lazy, Hazy, Crazy Days of Summer
Will Wall Street Devour AIG?
Just the largest US insurance company, and not a bank. Ben will not feel compelled to save them unless they represent significant counterparty risk to banks.
In a discussion today on Bloomberg, Fed head Jeff Lacker of Richmond indicated that while the common equity holders of Fannie and Freddie may take a hit, the preferred shares are another matter since "they are heavily owned by the banks, and we cannot have the banks being hurt by taking losses."
If that happens, if the banks are bailed out as a part of the nationalization of Fannie and Freddie, then free markets and risk-based capitalism are a thing of the past. The Fed and Wall Street will attempt to do whatever it takes short of burning down the rest of the country to save the few big banks.
AIG Falls as Goldman Says a Capital Raise Is `Likely'
By Hugh Son
Aug. 19 (Bloomberg) -- American International Group Inc., the biggest U.S. insurer by assets, led the decliners in the Dow Jones Industrial Average after Goldman Sachs Group Inc. said it's ``increasingly likely'' the firm will have to raise more capital.
AIG may have to pay $20 billion on credit-default swaps that the company sold to protect fixed-income investors against losses, resulting in rating-firm downgrades and a ``large scale'' capital raise, analyst Thomas Cholnoky said in a note today. The company dropped $1.67, or 7.7 percent, to $19.93 at 12:06 p.m. in New York Stock Exchange composite trading.
Chief Executive Officer Robert Willumstad, 62, hasn't ruled out raising more capital after three straight quarterly losses driven by about $25 billion in writedowns tied to valuation declines on the swaps. AIG may eventually have to pay as much as $8.5 billion on the contracts, three times more than the firm previously estimated, the New York-based insurer said Aug. 7.
``Investor confidence in AIG is damaged,'' Cholnoky wrote. ``The stock may continue to drift downward as investors remain wary of the possibility of a dilutive capital raise.'' Cholnoky cut his 12-month price target to $23 from $30.
AIG has declined 66 percent this year in New York Stock Exchange composite trading, the worst performance in the Dow Jones Industrial Average. The company raised $20.3 billion in May by selling debt and equity.
The insurer hadn't made any payments on the swaps as of Aug. 7 and posted $16.5 billion of collateral through July 31 demanded by investors who purchased protection through the contracts. The swaps guaranteed $441 billion of assets at the end of June, including $57.8 billion in securities tied to subprime mortgages.
`Troubling' Risks
AIG's losses put the company at risk of losing employees and may convince potential customers to take their business elsewhere, said Cholnoky, who rates AIG ``neutral.'' Investors who believe AIG's writedowns will eventually reverse, must consider ``the important and troubling near-term risks,'' he said.
Cholnoky correctly predicted that AIG would post a loss in the fourth quarter of 2007, while the average estimate of 18 analysts surveyed by Bloomberg was for profit of 73 cents a share.
The insurer may raise $20 billion in a worst-case scenario to cushion writedowns, Sanford Bernstein analyst Todd Bault said Aug. 13 in a note. The capital would be required if Willumstad decided to stem future losses tied to the housing market by selling subprime-related holdings at a loss and buying the securities tied to credit-default swaps, Bault said.
Rating Downgrade
Willumstad, also chairman of AIG, was named CEO in June. He has promised to complete a review of AIG by Sept. 25 to help return the insurer to profitability.
Nine analysts recommend investors accumulate AIG shares, 9 say to ``hold'' and one says ``sell,'' according to Bloomberg data.
Standard & Poor's cut AIG's credit rating by one level to AA-, the fourth-highest investment grade, in May after the company posted a record $7.81 billion first-quarter loss.
Another downgrade is likely ``if earnings do not stabilize by the third quarter,'' S&P said Aug. 7.
Investors may demand $13.3 billion more in collateral if the insurer's credit rating is downgraded again, AIG said Aug. 6 in a regulatory filing. Ratings reductions ``could have a material adverse effect on AIG's liquidity,'' the insurer said.
The Worst Is Yet To Come in the US Financial Crisis
Large U.S. Banks May Fail Amid Recession, Rogoff Says
By Shamim Adam
Aug. 19 (Bloomberg) -- Credit market turmoil has driven the U.S. into a recession and may topple some of the nation's biggest banks, said Kenneth Rogoff, former chief economist at the International Monetary Fund.
``The worst is yet to come in the U.S.,'' Rogoff said in an interview in Singapore today. ``The financial sector needs to shrink; I don't think simply having a couple of medium-sized banks and a couple of small banks going under is going to do the job.''
The U.S. housing slump has triggered more than $500 billion of credit market losses for banks globally and led to the collapse and sale of Bear Stearns Cos., the fifth-largest U.S. securities firm. Rogoff said the government should nationalize Fannie Mae and Freddie Mac, the nation's biggest mortgage-finance companies, which have lost more than 80 percent of market value this year.
Freddie Mac and Fannie Mae ``should have been closed down 10 years ago,'' he said. ``They need to be nationalized, the equity holders should lose all their money. Probably we need to guarantee the bonds, simply because the U.S. has led everyone into believing they would guarantee the bonds.''
...``The only way to put discipline into the system is to allow some companies to go bust,'' Rogoff said. ``You can't just have an industry where they make giant profits or they get bailed out.''
The world's largest economy is already in a recession, and the housing market will continue to deteriorate, Rogoff said. The U.S. slowdown will last into the second half of next year, he said, predicting a faster recovery in Europe and Asia.
The Federal Reserve, which has left its key interest rate at 2 percent after the most aggressive series of rate reductions in two decades, risks raising inflationary pressures, he said.
``Rates are too low,'' Rogoff said. ``They must realize we're going to get inflation if things stay where they are. They need to raise rates but I don't think they are going to because they're way too nervous.''
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net.
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