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moneysense.ca, 17/09/08
The Implications of AIG’s Fall
I asked Glenn Cooke, who writes the Term Life Insurance Canada blog for his comment on what happens to life insurance policies sold by AIG in Canada, in the event of the parent company declaring bankruptcy (this was before the US government provided an $85 billion bridge loan in return for a 79.9% equity stake in the company). He pointed to a press release put out by AIG Life of Canada that policies held by its Canadian customers are safe and secure because the company is a separate legal entity with no exposure to assets that caused the credit crisis. Mr. Cooke also points out in that even if AIG Life of Canada fails, consumers are likely to be mostly protected. Another subsidiary of AIG provides mortgage insurance in Canada and it is unclear what, if any, effect the crisis will have on it.
While AIG’s fall might have little serious impact on consumers, it will be of great interest to investors. There is plenty of media coverage of but I found these two quite interesting: (1) The Globe and Mail explains how credit default swaps brought down the insurance giant. (2) Money magazine on the five common questions surrounding AIG.
moneysense.ca, 17/09/08
I posted this in the previous thread, but I thought it might be worth posting one more time to ensure people don’t miss it.
Want to really know WTF is going on out there? Here’s a few links that will take some of the guess work out:
1) Mish’s blog: Updated daily, often 2 or 3 times. Outstanding quality content that quotes respected sources (i.e. bloomberg, NYTimes, etc) and offers counter-spin backed up by significant research, and more importantly a great track record of being right – even if it means questioning the statements of other bears in this bear market. http://globaleconomicanalysis.blogspot.com/
2) Charlie Rose – High quality interviews with some of the best financial experts out there. Tough questions, expert panalists that tell it like it is without bias. Sample (skip to about 13:40): http://www.charlierose.com/shows/2008/9/15/1/a-discussion-about-the-crisis-on-wall-street
3) Financial Post – Thank god we still have a newspaper that tells it like it is in Canada and which does not see the world through rose colored glasses like just about every local newspaper. Read daily, refresh 2 or 3 times a day for new content. http://www.financialpost.com/index.html
4) Globe and Mail – A great start, if you’re new, but be sure to read other sources too. http://www.financialpost.com/index.html
5) Bloomberg.com – Excellent for all the latest big headlines, and several bonus points for providing a FREE 24/7 streaming TV over the web. The streaming video quality isn’t great, but it’s great that the content is decent and that it’s free and that’s good enough for me.
6) itulip.com – Not 100% free, but I check it a few times a week as there’s always some interesting little video clip that captures the sense of what is going on. The editors have an exceptional track record of being right, WAY ahead of their time. The forums are decent quality with several regular posters that actually do in depth studies of the market and share their analysis. Overall, I’m a ‘buyer’ of their “Ka-Poom theory”.
7) Crash Course – The best 2-3 hours of FREE training videos about how the market really works that you will ever watch for free on the web. If you are new, this is the number 1 starting point. Believe me, your time is well spent here. This site really opened my eyes to certain market factors that I assumed worked differently.
http://www.chrismartenson.com/three_beliefs (video#1 of 20)
http://www.dollarcollapse.com/ – Great for reading up on the latest major eye-popping headlines from various usually reliable sources (Mish, Reuters, NYTimes, Bloomberg, etc).
Globe and mail report on business site should be this: http://www.reportonbusiness.com/
(I accidentally put the financial post link twice).
I am, frankly, quite sick of the phrase “the fundamentals have changed” … so much bs. I think people need to understand the cycle and that even when you can’t see over the top to the other side, it’s still there. So often when we’re on the Climb side of the circle, the Slip Side is IGNORED even by the people who should know better. Whazzup with that?
I must of missed that week in high school history class, because I don’t ever remember learning that the U.S.A was a socialist country and interfered with the capital markets and “saved” public companies.
It seems like the panic switch has alleviated somewhat with the US bailout plan once again – I also heard Manulife has been eying things fairly closely
Gail: It is simply mind-boggling that AIG was gone in a matter of weeks. I mean where were these high paid risk control officers?Unfortunately, that’s what was asked in the S&L crisis, the LTCM failure and now the current sub-prime/ABCP/credit crunch.
Jon: I think the US government protected its interests very well. It gets a just-shy-of-80% stake in AIG and a 8.5% premium for a loan backed by collateral. The shareholders get $2. It may be a bailout in the technical sense but shareholders in every one (maybe except Bear Stearns) got wiped out.
Rat: Not so sure. Markets are significantly down again today.
Do you have a link for the Globe and Mail article on credit default swaps?
Paolo: Sorry. I forgot to put the link. Here it is:
http://www.theglobeandmail.com/servlet/story/LAC.20080917.RBANKSSWAPS17/TPStory/
To Gail. I am also sick of the phrase “the fundamentals have changed” when it is applied to the “new paradigm” that the Asian economies can carry the world economy. The trade numbers simply don’t reflect that thesis.
However, when you apply that same phrase to what is going on in the US economy right now, I think it’s quite fitting! I don’t think we’ve seen the entire US financial system teetering so far on the edge like it is since the Great Depression! In fact, based upon the staggering dollar figures being tossed around in the already failed Lehman Bros, Indymac, Fannie Mae & Freddie Mac – and combine them with the likes of Citigroup, National City and other institutions which are dancing on the precipice… We’re talking about countless TRILLIONS of dollars! We’ve NEVER seen that much money go “POOF!” before in the history of our financial markets…
That being said, I do agree with a previous poster on the other thread that we may be watching the sun set on the American empire and their economic dominance. Although all of my new money is getting parked in savings accounts waiting for the plummeting to stop… My regular pension plan contributions are going into a non-USA international index fund as I’m looking for the new dawn of whatever new economic empire will arise out of the ashes of the USA. I am only concerned that it MAY rise in a non-democratic, closed market in a totalitarian regime like China or Russia.
I once commented on a very old post regarding ‘recommended reading’, but I doubt anybody saw that. To understand why financial institutions are bound to experience these episodes, read Nassim Taleb’s ‘Fooled by Randomness’ or ‘The Black Swan’.
Denial: it sure looks like managing your portfolio takes a lot of frequent visits to various websites, to get the latest news hot of the press. You have been kind in providing so many references, so please allow me in turn to refer you to the same books mentioned above, where the good Dr. Taleb puts forward his views on the usefulness of the daily news.
My wife and I were walking in the forest yesterday, and I started telling her about what was happening in the financial markets around the world (she does not keep tabs on these things, and frankly couldn’t care less). It made me think about the other recent (in my adult lifetime) market upsets, i.e. the 1998/LTCM crash, and the dotcom bubble of 2001. At those times, I was still a student, and ‘liquid investments’ had a totally different meaning. The turmoil passed by unnoticed.
Had I been an investor, my oblivion would have resulted in no long lasting ill effect. I submit that oblivion is probably not a bad state of mind in the current situation either.
CC: Perhaps the most interesting thing to watch will be how the remaining “pillars” fare. With the first insurance bail-out executed, how many more might there be and if insurance goes the way of credit and investment, can banking be far behind? I see great buying opportunities, once we get all the Smart Guys out of the way.
We’re no longer just simply talking about a credit crisis. This credit crisis is now spilling across borders and increasingly we are seeing troubling signs around the world. It’s a shame that the Federal Reserve didn’t think more about the implications of 1% federal funds rates in 2003, and that the banks weren’t more risk averse than the ridiculous notion that real estate prices would go up forever.
While I say all this, everyone is still going to drink Coca-Cola, use soap and other products (from JNJ, PG, etc.) and, in fact, may eat more at home (KFT, Tyson Foods, etc.). So why are these stocks continuing to fall? These are the Rembrandts in the rubble that we should be looking for.
CC, are you increasing your index equity positions, in the middle of this quarter at all? Do you strategize for these opportunities (similar to how Swensen changed his asset allocations more frequently in 1987) by buying or reallocating your portfolio more frequently? Have you ever contemplated doing this?
Blogging about Money: I haven’t rebalanced yet but with the fall this week, bonds might go significantly over target. I did buy VEA recently using regular savings but other than that I’m staying put. It would be nice to have more cash but I’m fully invested.
Gail: It’s certainly possible that there are many more land mines out there. But apart from some Canadian stocks most of my holdings are in broad index funds, which have fallen but not as much as some stocks.
NN: I did read your recommendation to read Fooled by Randomness. I read it a while back and it might be time to borrow the book again from the library.
Phil: China, Russia or other nations are still much smaller than the US economy. And have their own issues to deal with. Still, poor US equity returns are within the realm of possibility.
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