Property Grunt

Monday, November 03, 2008

Bust Out?

No. I am not trying to be funny.

The month of October has drawn to a close and what a month it has been. From a bulimic stock market, to a plummeting housing market that sees no bottom in sight and of course Greenspan admitting that he may have dropped the ball. Let's not forget that rate cut that did not do much.

Which brings me to AIG.

A.I.G. had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company’s accounting for its credit-default swaps and collided with Joseph Cassano, the head of the company’s financial products division, according to a letter read by Mr. Waxman at the recent Congressional hearing.
When the expert tried to revise A.I.G.’s method for measuring its swaps, he said that Mr. Cassano told him, “I have deliberately excluded you from the valuation because I was concerned that you would pollute the process.”

A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.

A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.

Through spring and summer, the company said it was still gathering information about the swaps and tucked references of widening losses into the footnotes of its financial statements: $11.4 billion at the end of 2007, $20.6 billion at the end of March, $26 billion at the end of June. The company stressed that the losses were theoretical: no cash had actually gone out the door.

“If these aren’t cash losses, why are you having to put up collateral to the counterparties?” Mr. Vickrey asked in a recent interview. The fact that the insurer had to post collateral suggests that the counterparties thought A.I.G.’s swaps losses were greater than disclosed, he said. By midyear, the insurer had been forced to post collateral of $16.5 billion on the swaps.

Though the company has not disclosed how much collateral it has posted since then, its $447 billion portfolio of credit-default swaps could require far more if the economy continues to weaken. More federal assistance would then essentially flow through A.I.G. to counterparties.

“We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss,” said Bill Bergman, senior equity analyst at the market research company Morningstar.

Why all this cloak and dagger? Why the resistance from outsiders? Why are they acting like a bunch of little girls?

1. The losses they have currently incurred are astronomical.

2. They did something very, very illegal.

3. AIG might be up to a bust out to take advantage of the ailing economy.

Ray Liotta’s description from Goodfellas will explain a bust out.

Now the guy's got Paulie as a partner. Any problems, he goes to Paulie. Trouble with a bill, he can go to Paulie. Trouble with the cops, deliveries, Tommy, he can call Paulie. But now the guy's got to come up with Paulie's money every week. No matter what. Business bad? F--k you, pay me. Oh, you had a fire? F--k you, pay me. The place got hit by lightning, huh? F--k you, pay me. Also, Paulie could do anything. Especially run up bills on the joint's credit. And why not? Nobody's gonna pay for it anyway. And as soon as the deliveries are made in the front door, you move the stuff out the back and sell it at a discount. You take a two hundred dollar case of booze and you sell it for a hundred. It doesn't matter. It's all profit. And then finally, when there's nothing left, when you can't borrow another buck from the bank or buy another case of booze, you bust the joint out. You light a match.

Maybe AIG and these other geniuses plan on pulling a series of side bets aka Credit default swaps or some type of massive short sell.

Listen folks, I have a blog, and they are just like a**holes, everyone has one. But honestly folks, something is up. And the only game in town is shorting and swapping. It is a sure thing that the economy is tanking. Therefore these meatheads are going to take every opportunity to take advantage of this situation. In other words they are engaging in the same risky behavior that f**ked things up in the first place.

If this is the case, then the follower of Warren Buffet are in for a very rude awakening. And next year I am going to tread very carefully into the stock market.