I won't pontificate today. There are very simple ways to protect yourself from being caught in a classic bear trap or bear market rally. I don't know if this is one, my bet is that it is, but I don't know for certain, and no one else knows for certain either. If you listen to the pundits, the "experts" on the 3 financial channels this morning (CNBC, FOX Business, Bloomberg) its a mixed bag. Interviews of traders on the floor of the NYSE are returning answers like, "It's a bit early to tell." and "I don't know which way we are headed." It really amazes me. And frankly if I hear another softball interview done by any of these channels of Pandit, Dimon, or Lewis I may start a new anti financial media website.
Readers, it's times like these we need an expert. And unfortunately Wall Street has been defining expertise as the people who bring the most fees into the firm. Not to the people who actually have an ability to determine with reasonable accuracy which way the market or a particular issue will move over the next month. I am telling you there are no "experts" left.
So its up to you to make a decision. Are you a technical buyer of stocks or are you a fundamental buyer of stocks? Longer term readers will know that the fundamental and relative value investors are the only players that make money over the long haul. And unless you are earning a 2% carry on funds you manage plus a 20% take on profits generated, you should be doing the same.
Sharp upside moves in the markets or in particular industries that apply to all major players in an industry are almost always examples of short covering. Why would Citi move up on a percentage basis similarly to Wells Fargo this week? Are they similar companies with similar risk profiles right now? Of course not. Why would all construction machinery manufacturers share the same 5 day chart patterns? Has the outlook for new major construction projects world wide improved by 20% in the last 5 days? You know the answer. (It's "No".)
We need to remember that share prices have always and will always be valued based upon the expected quality of their future earnings. And frankly every other metric or ratio or chart analysis model is really a fancy way of justifying current prices paid for a stock that is in speculation mode. Ask yourself as an investor of your own money, After the past year, do you feel comfortable paying a price per share of any company that is equal to the estimated next 15 or 19 years worth of earnings? Because if you buy a share of a company's stock when its price is 19.0x earnings, that is exactly what you have done.
Instead start by asking yourself, do you like a particular industry. Then look at the companies in that industry. Of the 5 or 6 largest ones that have shown profits in the last 3 years, which one is trading at a lower multiple than the others. That's the one you look at, not because it has the greatest price upside potential, but because it is the greatest protector of your principal. And you can not compound your earnings in the stock market unless your protect your principal investment first.
If you think and invest like a speculator. If you believe what the Wall Street "experts" tell you, that you must always be in the market or you will miss the upside then ultimately you will participate in the downside too. Market returns over the last 5 years have been negative folks. How many times in that period have you heard buy, buy, buy from the "experts'? How many times have you heard sell? (hint: market professionals don't want you to sell before they do.)
Here's another suggestion, Turn off the TV. Spend 10 minutes with a reasonable, objective information source, (Yahoo Finance, or the SEC filings site, or with Valueline as examples). Choose an industry you like, review the top few companies in that industry, and invest in the one that appears to be trading at a discount to the group. That's how you protect yourself best from the short term swings in the general markets. Like Bear rallies.
We'll cover more on picking good companies to invest in in future editions.
Build Value Every Day.
Brad van Siclen
Friday, March 13, 2009
Thursday, March 12, 2009
Why Madoff Matters, the Value of Quality Regulation - 3 / 12 / 2009
Those of us that are forced by our selected news sources, be they financial or otherwise, to wait for the Madoff hearing results should be warmed by the fact that this matter will actually move us all closer to proper, more consistent regulation. That means the rules governing business in America will move one step closer to equality across the board. And I believe that the greatest value to regulation of business and financial practice is that it brings us closer to a truly free market environment.
Now champions of Adam Smith and his 'invisible hand", Ron Paul and Steve Forbes (both super shrewd guys) as modern day examples, would argue that government regulation and oversight is bad. What they really meant was that the current version of government regulation and oversight is bad.
Let me explain using Wall Street as an example. Most folks think that FINRA and the SEC watch the backs of independent investors. But the truth is the system is designed to protect the big guy first, and small investor second. I won't cover all elements of this statement today, but I will use the subject of standard regulatory review process as the theme.
Madoff Securities was permitted by the SEC and the NASD to fool the system for two reasons. The first is that he was a founder and former head of NASDAQ. Secondly, he had a seperate clearing / trading operation (seperate from Madoff Securities the culprit of the ponzi) and it was compliant with SEC disclosure regulations.
Now in my former capacity of Managing Director of investment banking at a 500 man Broad Street based investment bank, and in my consulting roles for other broker dealers, I have ample experience in the way the SEC and the NASD deal with financial institutions of different sizes and reputation. Here is their standard review process. To put it simply, each group, upon entering the premises for a special or annual review presents the firm's head compliance officer with a list of document requests that include investment banking transactions, trading and sales runs, and research examples. A random sampling is then selected from the information provided, and this sampling becomes the basis for the audit process.
Think about how easy, in the case of Madoff Securities, it would have been to pull one account's trading history and run an audit (trace the trades and monetary flow with the clearing institutions) and immediately see that there was a problem. When SEC and NASD professionals find a problem, they then look for a repetition of that same problem in the account being reviewed and then for the same problem in other accounts as well. This first step is done via the internet and can be effected in 20 minutes. 20 minutes. So the only explanation for the NASD and SEC both missing this simple and required process is that they didn't miss it at all. They made an internal decision to allow Madoff Securities to pay fines for 'inaccurate' or lax reporting standards and moved on. Madoff Securities likely had very few if any customer complaints, so why would these regulators want to openly audit Madoff Securities? Madoff securities would simply pay a fine, which is common practice, and move on.
I will tell you that smaller firms generally keep much better records and abide by rules more stringently because they do not have the spare cash available to pay the fines levied by the regulators as a penalty for findings of lax standards or violations. But it is also true that smaller firms, in my experience, are inevitably going to be fined for lax standards. The larger firms, former bulge bracket firms, are so well capitalized that they have their internal legal team monetarily settle out any violations as quickly as possible without admitting or denying the event ever took place.
Special treatment would be afforded the titans of industry, AIG, Citigroup, and Madoff as examples. They, on the outside, would have appeared to be disclosing accurately. These are highly talented and experienced institutions who are big parts of the financial industry. They know what regulators want and they deliver it, whether accurate or not.
And inevitably, this system which grants passes to industry giants while appearing to actively enforce regulations on small and mid sized financial institutions created an environment which allows for Madoffs, Citibanks, and AIGs to take advantage of institutional and individual market participants for decades without real penalty. The more these implosion events occur, the more the SEC and NASD will be required to treat all participants equally. And that consistency creates a foundation for a level playing field and maybe even a "free" market that Paul and Forbes would be pleased with.
Knowledge is value too - Build Value Every Day.
Brad van Siclen
Now champions of Adam Smith and his 'invisible hand", Ron Paul and Steve Forbes (both super shrewd guys) as modern day examples, would argue that government regulation and oversight is bad. What they really meant was that the current version of government regulation and oversight is bad.
Let me explain using Wall Street as an example. Most folks think that FINRA and the SEC watch the backs of independent investors. But the truth is the system is designed to protect the big guy first, and small investor second. I won't cover all elements of this statement today, but I will use the subject of standard regulatory review process as the theme.
Madoff Securities was permitted by the SEC and the NASD to fool the system for two reasons. The first is that he was a founder and former head of NASDAQ. Secondly, he had a seperate clearing / trading operation (seperate from Madoff Securities the culprit of the ponzi) and it was compliant with SEC disclosure regulations.
Now in my former capacity of Managing Director of investment banking at a 500 man Broad Street based investment bank, and in my consulting roles for other broker dealers, I have ample experience in the way the SEC and the NASD deal with financial institutions of different sizes and reputation. Here is their standard review process. To put it simply, each group, upon entering the premises for a special or annual review presents the firm's head compliance officer with a list of document requests that include investment banking transactions, trading and sales runs, and research examples. A random sampling is then selected from the information provided, and this sampling becomes the basis for the audit process.
Think about how easy, in the case of Madoff Securities, it would have been to pull one account's trading history and run an audit (trace the trades and monetary flow with the clearing institutions) and immediately see that there was a problem. When SEC and NASD professionals find a problem, they then look for a repetition of that same problem in the account being reviewed and then for the same problem in other accounts as well. This first step is done via the internet and can be effected in 20 minutes. 20 minutes. So the only explanation for the NASD and SEC both missing this simple and required process is that they didn't miss it at all. They made an internal decision to allow Madoff Securities to pay fines for 'inaccurate' or lax reporting standards and moved on. Madoff Securities likely had very few if any customer complaints, so why would these regulators want to openly audit Madoff Securities? Madoff securities would simply pay a fine, which is common practice, and move on.
I will tell you that smaller firms generally keep much better records and abide by rules more stringently because they do not have the spare cash available to pay the fines levied by the regulators as a penalty for findings of lax standards or violations. But it is also true that smaller firms, in my experience, are inevitably going to be fined for lax standards. The larger firms, former bulge bracket firms, are so well capitalized that they have their internal legal team monetarily settle out any violations as quickly as possible without admitting or denying the event ever took place.
Special treatment would be afforded the titans of industry, AIG, Citigroup, and Madoff as examples. They, on the outside, would have appeared to be disclosing accurately. These are highly talented and experienced institutions who are big parts of the financial industry. They know what regulators want and they deliver it, whether accurate or not.
And inevitably, this system which grants passes to industry giants while appearing to actively enforce regulations on small and mid sized financial institutions created an environment which allows for Madoffs, Citibanks, and AIGs to take advantage of institutional and individual market participants for decades without real penalty. The more these implosion events occur, the more the SEC and NASD will be required to treat all participants equally. And that consistency creates a foundation for a level playing field and maybe even a "free" market that Paul and Forbes would be pleased with.
Knowledge is value too - Build Value Every Day.
Brad van Siclen
Tuesday, March 10, 2009
Current Problems in Mark to Market Accounting - 3 / 10 / 2009
We are in what some consider to be the worst financial crisis in US History. Many elements previously discussed on this site would be classified either the causes or effects of this crisis. But as we continue to peal back the layers of this crisis, there is one certain phrase that continues to appear, "Mark - to - Market" accounting. What does this actually mean?
FASB and the SEC state that a company must value and state its assets at current or "fair" market value. These changes in asset value must be reported quarterly and audited annually. However, the highest value you are able to report during the entire ownership of the asset is the purchase price. Gains can only be reported after a sale.
So if you have an office building (in a good market of course) that you purchased in 1995 for $2.0 million whose current fair market value if sold would be $10.0 million, that increase in value can not be applied to the assets on your balances sheet. BUT should the value, by fair market accounting standards, reduce at any time during its holding, that unrealized loss, say $500,000 must be expensed through your income statement.
For most companies, this is not an issue because they depreciate the asset over time and therefore can argue that they have expensed the declining asset value sufficiently to guide investors as to the true value of their shareholdings.
But for Banks and Investment Banks that bought speculative asset backed financial instruments that were paying them higher interest payments than they otherwise could have earned with less speculative investments, a down market and a requirement to write down those assets to fair value can be catastrophic. Why? Because as the assets on the balance sheets of banks erode, they reduce the overall net capital (or liquid equity) required to be in place by the US Government in order to be considered "solvent". Equity is determined by Assets - Liabilities. If assets are written down dramatically, you can see how a bank moves closer to or becomes insolvent very quickly.
You can now understand why banks want a suspension of mark to market accounting. Essentially they are asking the government to not recognize bad investment decisions or bad balance sheet management decisions. This way they are able to continue to do business while ignoring their asset values in declining markets making additional government solvency loans (TARP and BAILOUTS) not as necessary, and ultimately allowing them to further leverage their balance sheets in extending business and consumer loans.
Recently, Roubini of NYU Business fame stated that by traditional standards, the top 4 US banks were insolvent. The solution to this insolvency offered by our current banking officers, suspend mark to market accounting.
I hope this strikes you the same it strikes me, the banking officials greatly responsible for the current credit market crisis due to over leveraging of risky assets in an attempt in increase profitability, are now suggesting that the answer is more of the same.
You operate your business and personal lives recognizing that there are risks inherent in assuming debt that future cash flows must cover. You are required to report your losses from investments as they occur. You are the owner, and you recognize that insolvency means total loss of all that you have built. So you are sure that you manage your risks appropriately. Officers of Publicly traded banks it would seem do not have to manage their risks appropriately.
High risk means high return in good economic times. Their bonuses in good economic times are so large, that failure in the future is meaningless to their personal security. These officers, for the most part, have built nothing. They are the stars promoted from middle management. They rarely if ever took risks then. But in 2005 - 2007, newly promoted to executive level, they took huge risks because their personal payouts were huge for taking those risks and succeeding. Guess what, these risks were taken at the expense of their shareholder's futures. And the current crisis is the result.
And their solution is - - -Let us do it again, suspend or eliminate mark to market accounting.
They have no interest in building value. They want to leverage value. When a President or CEO begins to leverage value in order to increase current income it is the first sign that the business has stopped growing. Recognize when you are doing it with your business.
Build value every day.
Brad van Siclen
FASB and the SEC state that a company must value and state its assets at current or "fair" market value. These changes in asset value must be reported quarterly and audited annually. However, the highest value you are able to report during the entire ownership of the asset is the purchase price. Gains can only be reported after a sale.
So if you have an office building (in a good market of course) that you purchased in 1995 for $2.0 million whose current fair market value if sold would be $10.0 million, that increase in value can not be applied to the assets on your balances sheet. BUT should the value, by fair market accounting standards, reduce at any time during its holding, that unrealized loss, say $500,000 must be expensed through your income statement.
For most companies, this is not an issue because they depreciate the asset over time and therefore can argue that they have expensed the declining asset value sufficiently to guide investors as to the true value of their shareholdings.
But for Banks and Investment Banks that bought speculative asset backed financial instruments that were paying them higher interest payments than they otherwise could have earned with less speculative investments, a down market and a requirement to write down those assets to fair value can be catastrophic. Why? Because as the assets on the balance sheets of banks erode, they reduce the overall net capital (or liquid equity) required to be in place by the US Government in order to be considered "solvent". Equity is determined by Assets - Liabilities. If assets are written down dramatically, you can see how a bank moves closer to or becomes insolvent very quickly.
You can now understand why banks want a suspension of mark to market accounting. Essentially they are asking the government to not recognize bad investment decisions or bad balance sheet management decisions. This way they are able to continue to do business while ignoring their asset values in declining markets making additional government solvency loans (TARP and BAILOUTS) not as necessary, and ultimately allowing them to further leverage their balance sheets in extending business and consumer loans.
Recently, Roubini of NYU Business fame stated that by traditional standards, the top 4 US banks were insolvent. The solution to this insolvency offered by our current banking officers, suspend mark to market accounting.
I hope this strikes you the same it strikes me, the banking officials greatly responsible for the current credit market crisis due to over leveraging of risky assets in an attempt in increase profitability, are now suggesting that the answer is more of the same.
You operate your business and personal lives recognizing that there are risks inherent in assuming debt that future cash flows must cover. You are required to report your losses from investments as they occur. You are the owner, and you recognize that insolvency means total loss of all that you have built. So you are sure that you manage your risks appropriately. Officers of Publicly traded banks it would seem do not have to manage their risks appropriately.
High risk means high return in good economic times. Their bonuses in good economic times are so large, that failure in the future is meaningless to their personal security. These officers, for the most part, have built nothing. They are the stars promoted from middle management. They rarely if ever took risks then. But in 2005 - 2007, newly promoted to executive level, they took huge risks because their personal payouts were huge for taking those risks and succeeding. Guess what, these risks were taken at the expense of their shareholder's futures. And the current crisis is the result.
And their solution is - - -Let us do it again, suspend or eliminate mark to market accounting.
They have no interest in building value. They want to leverage value. When a President or CEO begins to leverage value in order to increase current income it is the first sign that the business has stopped growing. Recognize when you are doing it with your business.
Build value every day.
Brad van Siclen
Monday, March 9, 2009
AIG a Passthrough for Goldman, Merrill 3 / 9 / 2009
Well readers, there is really not much value to report concerning AIG. I am not a conspiracy theorist, but this one makes me wonder. Last week the US government put an additional $85 Billion into the ailing company. That brought their total pledged amount to $160 Billion. These amounts were originally to satisfy balance sheet liquidity requirements. Indeed in AIG's testimony to congress, "federal liquidity requirements" were used as the rationale for the loan. (and let's face it, this is no loan, in its best year (2006) the company reported 23.0 billion EBITDA, but 2007 and 2005 show a more likely 12.0 billion Edita. So in 13 years (at previous solvent balance sheet levels) the government will make its principal back. Anyone care to bet on that happening?
This scenario is akin to me asking my 12 year old to insure my losses with her liquid assets. Not one financial group that had its losses insured by AIG looked past the AAA rating. These are the experts who built their financial future on AIG's balance sheet and Moody's / S & P's ratings.
So where did this 160 billion loan "pledged" by the government go? The AIG CFO said, " the vast majority of tax payer funds have passed through AIG to other financial institutions." Those institutions include Bank America and Goldman Sachs. Bank America and Goldman Sachs. These are the same banks that lobbied the government back in the Fall to halt the short selling of financial stocks for 30 days. This after their traders (Merrill Lynch in the case of BofA) had earned huge profits shorting Bear Sterns and Lehman. Then the market's turned on them and they were able, under Paulson (the former Goldman chief, then Treasury Secretary), to stop the shorting of financial stocks (including their stock). Oh, and to take advantage of TARP funds and Government stimulus they switched their businesses licenses from Investment licences to Commercial banking Licences.
So the AIG bailout is really just a way to conduit MORE funds to BofA and Goldman. (yes that's an over simplification.) But these are firms that did NO homework on the liquidity of the AIG balance sheets when they paid AIG to insure certain of their key investment risks. These so called experts are permitted to take advantage of the system every where they turn to protect or off set their bad investment decisions. WE do not.
Is it a conspiracy? No. Unfortunately, our current government has neither the experience, nor the guts to pull off that kind of maneuver. Was there favoritism, most certainly. Is this a problem? In a free market, yes. It says to investors that there is no level playing field. That the rules can and will change to suit the big boys. So why then would any one invest in stocks? Scary thought.
So what value can we take from this? Your financial partners (AIG was to Goldman and BofA) must be highly scrutinized. If you need to insure your business risk, other than act of God insurance, the risk in the transaction is too much. And finally, do your own homework and use some common sense.
Build value every day.
Brad van Siclen
This scenario is akin to me asking my 12 year old to insure my losses with her liquid assets. Not one financial group that had its losses insured by AIG looked past the AAA rating. These are the experts who built their financial future on AIG's balance sheet and Moody's / S & P's ratings.
So where did this 160 billion loan "pledged" by the government go? The AIG CFO said, " the vast majority of tax payer funds have passed through AIG to other financial institutions." Those institutions include Bank America and Goldman Sachs. Bank America and Goldman Sachs. These are the same banks that lobbied the government back in the Fall to halt the short selling of financial stocks for 30 days. This after their traders (Merrill Lynch in the case of BofA) had earned huge profits shorting Bear Sterns and Lehman. Then the market's turned on them and they were able, under Paulson (the former Goldman chief, then Treasury Secretary), to stop the shorting of financial stocks (including their stock). Oh, and to take advantage of TARP funds and Government stimulus they switched their businesses licenses from Investment licences to Commercial banking Licences.
So the AIG bailout is really just a way to conduit MORE funds to BofA and Goldman. (yes that's an over simplification.) But these are firms that did NO homework on the liquidity of the AIG balance sheets when they paid AIG to insure certain of their key investment risks. These so called experts are permitted to take advantage of the system every where they turn to protect or off set their bad investment decisions. WE do not.
Is it a conspiracy? No. Unfortunately, our current government has neither the experience, nor the guts to pull off that kind of maneuver. Was there favoritism, most certainly. Is this a problem? In a free market, yes. It says to investors that there is no level playing field. That the rules can and will change to suit the big boys. So why then would any one invest in stocks? Scary thought.
So what value can we take from this? Your financial partners (AIG was to Goldman and BofA) must be highly scrutinized. If you need to insure your business risk, other than act of God insurance, the risk in the transaction is too much. And finally, do your own homework and use some common sense.
Build value every day.
Brad van Siclen
Thursday, March 5, 2009
What Wal-Mart is Really Telling Us 3 / 5 / 2009
From CNBC -"Wal-Mart, the world's largest retailer, posted a better-than-expected 5.1 percent increase in sales at stores open at least one year, sending its shares up 3 percent in premarket trading. "We believe falling gas prices significantly boosted household disposable income in February and therefore allowed for both more trips and more spending toward discretionary categories," Wal-Mart Vice Chairman Eduardo Castro-Wright said."
Still from CNBC - "U.S. consumers have suffered in the past year from job losses, tighter credit and a weak housing market -- factors that have forced them to conserve money by shopping at discount stores and sticking to basic purchases like food."
Ever been to Wal-Mart? I'll take a wild guess and say that you have. It's at least 20 minutes further away than is your local super market. And US Consumers have decided that the deals there are worth the trip.
This, contrary to Wal-Mart and some Wall Street statements, does not suggest that the Consumer is stronger than we thought. It means quite the opposite. The Consumer is trying to maintain its life style by shopping at the king of discount stores. This result to me is identical to the recent report from Pep Boys - better than expected sales - It says that Consumers are still pulling in the spending reins. Wal-Mart and Pep Boys are lagging indicators.
Do not be fooled by Wal-Mart's positive reports. When they report declining Sales or lower than expected earnings that is when we will know the economy has finally begun to recover. That will be the proof. Wal-Mart's price / earnings is 14.0x (pep boys still shows negative earnings so a P/E ratio is "Not Applicable") . That means investors are willing to value Wal-Mart at 14 years worth of current earnings. Does that seem like a great value to you? No, this is speculation in its most obvious and purest forms.
Now, I am not here to build a case against Wal-Mart. If you are a business owner then you know that Wal-Mart is hard at work building market share in products that can grow store revenues in any market environment. Remember their shift last year to Personal Electronics, a good economy indicator. There are many more.
Wal-Mart's only risk is becoming lazy in their efforts to serve their customers. Study Wal-Mart and you will see a business model which is very similar to the US auto makers. Demand better and better parts, from fewer and fewer sources, at better and better margins. Eventually this model crushes the manufacturers of your products and reduces the overall quality offered your customers.
But that scenario is at least a decade away for Wal-Mart. They are still looking at ways to build value over time, incrementally. When they start pushing Wal-Mart credit cards at their customers, that is when we should begin to think Wal-Mart's retail efforts have reached their peak.
Build Value - like Wal-Mart - Everyday.
Brad van Siclen
Still from CNBC - "U.S. consumers have suffered in the past year from job losses, tighter credit and a weak housing market -- factors that have forced them to conserve money by shopping at discount stores and sticking to basic purchases like food."
Ever been to Wal-Mart? I'll take a wild guess and say that you have. It's at least 20 minutes further away than is your local super market. And US Consumers have decided that the deals there are worth the trip.
This, contrary to Wal-Mart and some Wall Street statements, does not suggest that the Consumer is stronger than we thought. It means quite the opposite. The Consumer is trying to maintain its life style by shopping at the king of discount stores. This result to me is identical to the recent report from Pep Boys - better than expected sales - It says that Consumers are still pulling in the spending reins. Wal-Mart and Pep Boys are lagging indicators.
Do not be fooled by Wal-Mart's positive reports. When they report declining Sales or lower than expected earnings that is when we will know the economy has finally begun to recover. That will be the proof. Wal-Mart's price / earnings is 14.0x (pep boys still shows negative earnings so a P/E ratio is "Not Applicable") . That means investors are willing to value Wal-Mart at 14 years worth of current earnings. Does that seem like a great value to you? No, this is speculation in its most obvious and purest forms.
Now, I am not here to build a case against Wal-Mart. If you are a business owner then you know that Wal-Mart is hard at work building market share in products that can grow store revenues in any market environment. Remember their shift last year to Personal Electronics, a good economy indicator. There are many more.
Wal-Mart's only risk is becoming lazy in their efforts to serve their customers. Study Wal-Mart and you will see a business model which is very similar to the US auto makers. Demand better and better parts, from fewer and fewer sources, at better and better margins. Eventually this model crushes the manufacturers of your products and reduces the overall quality offered your customers.
But that scenario is at least a decade away for Wal-Mart. They are still looking at ways to build value over time, incrementally. When they start pushing Wal-Mart credit cards at their customers, that is when we should begin to think Wal-Mart's retail efforts have reached their peak.
Build Value - like Wal-Mart - Everyday.
Brad van Siclen
Tuesday, March 3, 2009
Uncertainty, the "Great Value Killer" 3 / 3 / 2009
Look into the markets and what to you see? Hesitation. Why? The G7, while taking certain actions that may be value building, has primarily looked to the creators of our economic problems for answers and solutions. They are in no particular order, the regulatory agencies, the self regulated industries, and the corporations that gamed our economies to transfer value from shareholders to themselves. They built no value, in fact they knowingly drained value and transferred their risk to shareholders and the G7 economies as a whole.
So what is the result? Each of these enterprises, and make no mistake the regulatory agencies are enterprises too, is doing what it has done best, perpetuating the mirage of its overall value to the world economy even in current state in order justifying the need to feed them even more of our funds.
The result, beyond the general anger of the populace, is simple..the friends of these enterprises are supporting their requests, and the foes of these enterprises are calling for their downfall. No one knows which way to go here, the Fed and the Presidents of the G7 included. That creates uncertainty and uncertainty prevents investors and lenders from entering the markets.
Until these economic engines come off the sidelines, the values of all companies must continue to decline because a lack of investment and funding sources adds risk to the future of these enterprises. And since the only sources of capital seem to be the G7 governments, and their investment choices are the illiquid, no value companies, Citigroup, AIG, Car Companies, Foreign Banks, which in turn are not able to provide the capital to fuel the real businesses of the G7 nations, the overall value of the businesses and the G7 economies have no choice but to decline.
Building value in this environment is not possible. Maintaining value is difficult. The most troubling issue is the clear lack of understanding of how to build and maintain an economy by the G7 governments. How hard is this? AIG, Citi, GM, Chrysler, HSBC. If anyone of these companies goes away will we suffer more than we already have? No, in fact our economies will most certainly improve because the uncertainty surrounding their bail outs will be pulled from the funding markets.
Build value everyday.
Brad van Siclen
So what is the result? Each of these enterprises, and make no mistake the regulatory agencies are enterprises too, is doing what it has done best, perpetuating the mirage of its overall value to the world economy even in current state in order justifying the need to feed them even more of our funds.
The result, beyond the general anger of the populace, is simple..the friends of these enterprises are supporting their requests, and the foes of these enterprises are calling for their downfall. No one knows which way to go here, the Fed and the Presidents of the G7 included. That creates uncertainty and uncertainty prevents investors and lenders from entering the markets.
Until these economic engines come off the sidelines, the values of all companies must continue to decline because a lack of investment and funding sources adds risk to the future of these enterprises. And since the only sources of capital seem to be the G7 governments, and their investment choices are the illiquid, no value companies, Citigroup, AIG, Car Companies, Foreign Banks, which in turn are not able to provide the capital to fuel the real businesses of the G7 nations, the overall value of the businesses and the G7 economies have no choice but to decline.
Building value in this environment is not possible. Maintaining value is difficult. The most troubling issue is the clear lack of understanding of how to build and maintain an economy by the G7 governments. How hard is this? AIG, Citi, GM, Chrysler, HSBC. If anyone of these companies goes away will we suffer more than we already have? No, in fact our economies will most certainly improve because the uncertainty surrounding their bail outs will be pulled from the funding markets.
Build value everyday.
Brad van Siclen
Monday, March 2, 2009
What is the AIG Value? 3 / 2 /2009
At this point AIG, and frankly many more insurance underwriters, finds itself in a horrific situation. Let me try to distill this into a simple discussion and answer why. Insurance companies make money by leveraging premium payments (they call it "investing") with the knowledge that, year to year, they will pay out an average of 100% of those premiums in claims. I'll repeat that, Insurance companies make money by leveraging premium payments (they call it "investing") with the knowledge that, year to year they will pay out an average of 100% of those premiums in claims. Some companies, the more conservative underwriters (Berkshire Hathaway for example) routinely pay out in the low 90% of premium receipts annually. The idea is to invest the premiums in very very low risk investments and pocket the difference (the underwriter's operating profits) and use these profits in enhance the underwriting capabilities next year, or to launch new lines of business.
But in the case of AIG and even Berkshire this year their investments with these premiums proved to be anything but low risk. It seems that cash and gold were the only "investments" that could be made this last year. So this requires highly liquid assets on the balance sheet to cover the shortfall. In the case of Berkshire, they had the highly liquid assets to cover the shortfall. In the case of AIG, they did not. So the government stepped in to cover their shortfall.
Why?
By this point each of us recognizes that AIG had extraordinary laxes in internal oversight. So extraordinary that many of their so called derivative strategies were in fact adding additional leverage to their balance sheets in a strategy which transferred risk to their shareholders and, as we will see to their insured, then paid big bonuses to executives and insurance salesmen.
BUT after bonuses are paid, AIG still had to pay claims. THE LARGEST OF WHICH WERE INVESTMENT AND BOND RELATED INSURANCE. Yes, AIG for a premium would insure returns on financial instruments. What do you think their exposure was in those insurance underwritings this year? And finally, when you add up all the banks, investment banks, pension plans, mutual funds, and other financial institutions that were covered in a downturn by AIG policies by AIG and its AAA rating (considered ridiculous my most industry experts) you face a systemic collapse in realized losses and redemptions in the investment world causing a ripple effect that creates immediate recession if not long term depression.
How was this mega house of cards created? Its simple, Fraudulent Accounting Practices. If value is misrepresented in order to justify a AAA rating, and that AAA rating forms the basis for the insured parties to further extend their balance sheets, the risk to the financial system grows geometrically, that's exponentially to some.
The Board members and executives of all of these companies have failed all of us, many have thrown their fiduciary responsibilities into the trash by ignoring questionable accounting practices to save their share price and save their bonuses and annual stipends.
This is criminal, not negligent. And worse, at AIG the executives in charge saw this coming 2 years ago and made little effort to stop it, in effect to insure the liquidity of their own enterprise.
So where is the AIG value - gone and hopefully gone forever. This was not value adding to our economy, this was gaming our economy for the benefit of their executives.
Build value every day - even in the face of shocking public company behavior.
Brad van Siclen
But in the case of AIG and even Berkshire this year their investments with these premiums proved to be anything but low risk. It seems that cash and gold were the only "investments" that could be made this last year. So this requires highly liquid assets on the balance sheet to cover the shortfall. In the case of Berkshire, they had the highly liquid assets to cover the shortfall. In the case of AIG, they did not. So the government stepped in to cover their shortfall.
Why?
By this point each of us recognizes that AIG had extraordinary laxes in internal oversight. So extraordinary that many of their so called derivative strategies were in fact adding additional leverage to their balance sheets in a strategy which transferred risk to their shareholders and, as we will see to their insured, then paid big bonuses to executives and insurance salesmen.
BUT after bonuses are paid, AIG still had to pay claims. THE LARGEST OF WHICH WERE INVESTMENT AND BOND RELATED INSURANCE. Yes, AIG for a premium would insure returns on financial instruments. What do you think their exposure was in those insurance underwritings this year? And finally, when you add up all the banks, investment banks, pension plans, mutual funds, and other financial institutions that were covered in a downturn by AIG policies by AIG and its AAA rating (considered ridiculous my most industry experts) you face a systemic collapse in realized losses and redemptions in the investment world causing a ripple effect that creates immediate recession if not long term depression.
How was this mega house of cards created? Its simple, Fraudulent Accounting Practices. If value is misrepresented in order to justify a AAA rating, and that AAA rating forms the basis for the insured parties to further extend their balance sheets, the risk to the financial system grows geometrically, that's exponentially to some.
The Board members and executives of all of these companies have failed all of us, many have thrown their fiduciary responsibilities into the trash by ignoring questionable accounting practices to save their share price and save their bonuses and annual stipends.
This is criminal, not negligent. And worse, at AIG the executives in charge saw this coming 2 years ago and made little effort to stop it, in effect to insure the liquidity of their own enterprise.
So where is the AIG value - gone and hopefully gone forever. This was not value adding to our economy, this was gaming our economy for the benefit of their executives.
Build value every day - even in the face of shocking public company behavior.
Brad van Siclen
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