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Ichi the Killer

Bursa Malaysia stock trading portfolio of nobody really important.

Thursday, March 26, 2009

Bye-Bye AIG

1. Many people have bought into AIG, thinking that there is no way it will be allowed to fail after the Lehman fiasco. The rationale is, as long as it doesnt sink and disappear, over a period of a few years, it's stock price will definitely recover and provide thousand percent gains.

2. While this line of thinking has its merits, it is prudent to think through why the US government won't let AIG die. The main reason, to me, is the counter-party risk it poses and potential systemic fallout its failure would cause. Therefore, the concern is its potential effect on other commercial and investment banks, insurance companies, hedge funds, mutual funds, institutions, etc both in and outside of the US.

3. The interests of AIG's current stockholders are, however, a different matter.

4. Theoretically, it would seem that while AIG might not be allowed to fail, there is a possibility that it might be nationalised. Under such a scenario, current stockholders would see their holdings wiped out.

5. There are not a few Malaysian investors who have seen their holdings in Bursa Malaysia-listed companies going to zero or being seriously decimated from 150-to-1 (or such) capital reduction exercises and/or delistings. A nationalisation of AIG would have the same effect on its current shareholders.

6. This post is not meant to sound alarmist, but merely to highlight possibilities so that we can all make our own personal assessments.

7. Any ailing company undertaking a comprehensive and far-reaching restructuring exercise to rehabilitate itself needs to retain its best brains to lead the effort, ie. people who are familiar with and have intimate knowledge of its operations.

8. As AIG tries its best to unravel its burden of toxic assets and swaps and what-not, and packaging attractive divisions for sale, all with the noble intention of maximising recovery, it can least afford to lose the very people charged with spearheading this effort. Let's not forget that this business is very much a human capital business where expertise and experience are the main assets.

9. Besides, people with intimate knowledge of these assets and their true worth would be very attractive to asset vultures or even the very same companies sitting on the other side as AIG's counter-parties. This could only lead to AIG's bargaining position being severely compromised, ie. lower asset values fetched and lower recoveries.

10. The US government has currently gone into overdrive in showing its anger and disgust at any form of "goodwill" being shown to AIG and in punishing heavily "those responsible" for bringing such troubles to the innocent American public. (Including a hastily put together 90% tax on bonuses??).

11. Although this is normal coming from politicians, it looks to me like it's not such a wise thing to do if they want AIG to recover quickly. Check out the open letter below written by a real AIG Financial Products division employee to the CEO.

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Dear A.I.G., I quit

By Jake DeSantis
Published: March 25, 2009

The following is a letter sent on Tuesday by Jake DeSantis, an executive vice president of the American International Group's financial products unit, to Edward M. Liddy, the chief executive of A.I.G.

Dear Mr. Liddy,

It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

After 12 months of hard work dismantling the company — during which A.I.G. reassured us many times we would be rewarded in March 2009 — we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.

I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down.

You and I have never met or spoken to each other, so I'd like to tell you about myself. I was raised by schoolteachers working multiple jobs in a world of closing steel mills. My hard work earned me acceptance to M.I.T., and the institute's generous financial aid enabled me to attend. I had fulfilled my American dream.

I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.'s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.'s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.

Rest of article here: (http://www.iht.com/articles/2009/03/25/opinion/eddesantis.php?page=1)


/ichithekiller

Anomaly

1. This is the headline of an article in Star Biz today: "Oil prices fade as storage levels hit 16-year high". (Link: http://biz.thestar.com.my/news/story.asp?file=/2009/3/26/business/20090326075337&sec=business).

2. Upon checking, I found that oil prices were still firmly above the $51 level. This is another sentence from said article: "Oil tumbled as low as $51.86 early in the day as Japan reported February exports plunged an unprecedented 49.4 percent".

3. Another drop in exports of 49.4% ... this looks really scary after a 52.9% fall earlier in January (Source: IHT).

4. The article goes on: "(Crude) Stockpiles are now at their highest level since July 23, 1993."

5. Considering the alarm all the above news should have caused, it is amazing that crude is still firmly above $50. In fact it has been steadily climbing ever since plunging from more than $140 to $30+.

6. So what can we make of this?

7. Many people think we are still a long way from the bottom (whether economic, stock market, Malaysian, regional or global). In fact, many are dead sure there will be another round of tsunami proportion bad news and price corrections.

8. Yet others are confident the markets made their respective bottoms in Oct-Nov 2008.

9. I don't know which camp is right. I only know the legendary "PermaBear" Jeremy Grantham said "beware of falling prey to the 'terminal paralysis' that often sets in after a financial crisis".

10. He also said "If stocks are attractive and you don’t buy and they run away, you don’t just look like an idiot, you are an idiot”.

11. Given the dismal returns from our FD's and the levels to which some attractive stocks (which should survive this crisis) have fallen, it would seem foolhardy not to follow at least some of his advice.

Latest purchases: (all additions to existing held counters):

MUHIBAH: +20,000 (0.73) ... Total 40,000

RCECAP: +40,000 (0.36) ... Total 50,000


/ichithekiller