A.I.G. Reports 4Q Loss of $61.7 Billion as U.S. Gives More Bailout Aid

March 2, 2009 by · Leave a Comment
Filed under: Stock Market News 

Wow, that just about sums it up.  $61.7 billion loss in a single quarter.  That is some major derivative exposure and losses.  I can’t believe we are actually throwing money at this black-hole of liabilities.  There will be outrage if we actually bailout all these unregulated insurance contracts out.  It really makes me question why I am sending 1/3rd of my pay to our representatives that in turn have decided to reward greedy corrupt people, if save this flawed system, that is one thing.  But, I want to see the board, executives, shareholders and bondholders get wiped out so I know they are not profiting from this mess and we are setting a precedent that will make the next lot think twice about running these types of practices.  Here was the most scary statement of the whole article, “Although he avoided offering a forecast on the first quarter, Mr. Liddy said A.I.G.’s outlook was “very much going to be influenced by what happens to the condition of the economy and the financial marketplace around the globe.”  Well if I read this right, you have insurance that is tied to the markets going up when it looks like we are about to have Great Depression 2.0.  When do this intervention stop and we let the markets sort this out?

News:

The loss of $22.95 a share compared with a fourth-quarter loss in the period a year ago of $5.3 billion or $2.08 a share. For the year, A.I.G. lost $99.3 billion or $37.84 a share, compared with a profit of $6.2 billion or $2.39 a share for 2007.

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Warren Buffett defends the use to derivatives at Berkshire Hathaway

March 2, 2009 by · Leave a Comment
Filed under: Stock Market News 

Warren can defend these all he wants but he was also the one who coined them as “Weapons of Financial Mass Destruction”.  I am surprised that he has so much exposure ($67 billion) to these products.  I hope he has been doing the right thing and keep reserves for these insurance contracts like a normal regulated insurance product would normally be.  

I really don’t have much issue with the concept of a financial product like this, but be unregulated and a industry that did not have the foresight to self-implement some sort of reserve requirement is no good and as a important lesson, we should not bailout any of these companies that are taking losses like these, the fees were easy in the boom years so companies got greedy, now its time to instill fear back to these markets to keep the balance between fear and greed.

News:

Saying “derivatives are dangerous,” Warren Buffett defended his use of them after they played the main role in driving Berkshire Hathaway Inc annual profit to a six-year low.

Buffett devoted one-fifth of his 21-page annual letter to Berkshire shareholders to explaining how he uses derivatives to make long-term bets on stock markets, corporate credit and other factors.

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Berkshire Hathaway profits tumble 77% for fourth straight decline

November 9, 2008 by · Leave a Comment
Filed under: Stock Market News 

Even the great Warren Buffett is not immune to this broad market decline.  In the press release, they cite the falling income from the insurance businesses.  They mention that the two hurricanes that hit the U.S., it generated claims of $1.05 billion dollars.  It also mentioned that it had a loss of $1.26 billion on derivative contracts as well.  Knowing Warren, he has found the undervalued and unpopular companies and he is building his position so that he will be in a solid position when our economy finally recovers.

News:

Warren Buffett’s Berkshire Hathaway said on Friday third-quarter profit fell 77 percent, the fourth straight quarterly decline, hurt by weaker results from insurance underwriting and a big loss on derivatives contracts. 

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European Union(EU) calls for clear plan on valuing credit derivatives

October 18, 2008 by · Leave a Comment
Filed under: Global News 

Me and many other notable analysts and economist have been saying that this is the number one crisis we have to deal with in this financial catastrophe.   This is the core reason banks are not lending to each other.  Many global banks and insurance companies were big players in this market.  It has also grown to a staggering $600 trillion dollars which is 6 times the value of all equities and bonds on the plant ($100 trillion).  Banks are very afraid that their counter-party will not have the ability to pay so in a situation where a person thought they had protection is actually now taking full risk.  

I am not sure a clearinghouse is going to solve anything, in my opinion we have well past an amount of derivatives which would be manageable and at this point we should let these institutions fail to cleanse the market, set correct precedence and restore trust by doing what should happen when companies make choices that puts the company at risk and fails.  Let them fail.  Until I see some fundamental change I will not be taking on any debt or extra-ordinary risks.   

IHT News Piece:

 

European Union regulators called Friday for a clear plan on valuing some of the shadowy high-risk credit derivative investments — estimated at around US$600 trillion (€444 trillion) — that are now a key issue in easing the global financial crisis.

Billions of euros (dollars) have been wiped off banks’ balance sheets in recent months on fears that some complex investments may be based on assets that are nearly worthless — such as housing loans that may not be paid back when a recession puts people out of work.

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$1 Quadrillion dollars of Unregulated Debt At Core of Coming Derivatives Crisis

September 30, 2008 by · Leave a Comment
Filed under: Economic News 

This, in my opinion is the real crisis that is happening behind the scenes and is the elephant in the corner that no one is talking about. The real issue is when Bear Sterns, Fannie Mae, Freddie Mac and Lehman Brothers went under or were taken over this triggered by some estimates between $3-5 trillion dollars of these debt insurance contracts. That would be fine if these were regulated instruments of protection that had rules on the books for how much loss reserve you have to carry on your balance sheet against loss. But these were not those types of contracts.

They were instead unregulated insurance contracts between almost any two parties the each believe had a reasonable ability to function under the terms of the contract. They have been around since the early 1990’s, so this is how they have increased to a size of this proportion. Now with the GSE’s as the biggest real estate hedge funds (basically) in the U.S. and Bear and Lehman, who by the way was a top ten derivatives dealer so they were a counter party to many clients.

Now we have dominoes falling and no one knows what exposure other firms do so they are hesitate to lend with each other. Another problem was the fact of this being a method of generating fees for your firm, it was something that gained support and other players jumped into the game and this drove fees down and in essence under-priced risk on debt instruments that were being used in a bubble market. It is a very difficult situation and I would say it if plays out like it should then we would see many firms going out of business and the reform of the system to bring trust and prudent regulation into the markets.

Content Piece:

Despite all the blather and swearing-on-the-Bible pronunciamentos from establishment “pundits,” our house-of-cards financial system is not fundamentally sound. Expect such indices as the Dow to tumble even much lower when the Pandora’s box of derivatives is fully opened.

Believe it or not, the Dow is still not far from its all-time peaks, with a lot further to fall. The depression is still in its early stages. We are looking at $1 quadrillion of unregulated debt, with much of it at risk. (And we used to think $1 trillion was a lot.)

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