Kevin Depew at Minyanville comments briefly on AIG, outrage (where is it?), icebergs, jobs, and a secular shift in social mood.
Five Things: AIG Meets its Maker… Again
Courtesy of Kevin Depew at Minyanville
1. AIG Meets its Maker… Again
American International Group (AIG) has long been seen as too big to fail but that perception took on a more focused reality with the news this morning that the federal government is providing the company with an additional $30 billion.
The Financial Times late last week floated the idea that AIG could potentially be splintered into three government-controlled divisions, with the government also promising to backstop $300 billion of AIG’s credit default swaps (CDS) liabilities.
What would that mean? That the government would essentially be paying the people who have been betting (correctly, I might add) against our own financial system.
But here’s the deal. One risk of betting, and doing so with massive leverage, on the potential collapse of the financial system is something called counterparty risk. Think of it this way: if the bookmaker (in this case AIG) that you are betting with goes under because you win too much, you won’t get paid. Those who placed these bearish bets knew this going in. In other words, the risk was that they win the battle, but lose the war. [My emphasis – Ilene]
2. Where’s the (Real) Outrage?
Last week a television reporter for CNBC made headlines after delivering a hyperbolic rant (which may have been planned well in advance) from the floor of the Chicago Mercantile Exchange against the possibility that some homeowners might receive a government bailout. Traders on the floor cheered as the reporter piled on the populist rhetoric, decrying a government that is “promoting bad behavior.”
But where is the real outrage? 
The potential bailout of AIG CDS liabilities, which is probably more an inevitability than a potentiality, dwarfs any government bailout that could potentially go to homeowners.
3. Tip of the Iceberg?
Far be it for me to be the bear(er) of bad news (ok, actually, that’s not true… very, very close be it for me to be the bearer of bad news), but it appears we may be nearer the beginning of this banking crisis than the end.
First, the good news. According to data from the Federal Deposit Insurance Corporation (FDIC), through year-end 2008 a mere 10% of financial institutions classified as “troubled” have failed compared to more than twice that in the early 1990s.
Now, the bad news, between 1988 and 1993, total assets of failed FDIC-insured financial institutions totaled a little more than $700 billion. But in 2008 alone, total failed assets came to nearly half that six-year total, at $348 billion. Meanwhile, home prices continue to deflate, delinquencies for a variety of consumer credit products continue to rise and all that in the face of rising unemployment, which is very closely correlated with consumer credit defaults.
Looking back at the Great Depression, someone who lived through that experience noted that, “Just when we thought it was over, it was really only beginning.” Indeed.
4. Jobs Report
Speaking of rising unemployment, this Friday we’ll be watching the jobs report. Consensus estimates call for the unemployment rate to come in at 7.9%. According to raw government statistics though, one out of every 10 of you reading this doesn’t have a job right now.
But remember, those are government figures. The reality may be even worse. Counting those who are “underemployed” due to cutbacks in the number of hours worked the unemployment rate is actually closer to 14%.
5. When the Tide Recedes
An article last week in the New York Times took a look at the Los Angeles, CA suburb of Eagle Rock, which at one time was a model for gentrification and suburban renewal. Now, thanks to a deepening recession, something unexpected is happening. “The tide of gentrification that transformed economically depressed enclaves is receding, leaving some communities high and dry.” Gone are the cafes, boutiques and gastropubs.
But, the article asks, is that really such a bad thing?
“The problem is this,” D. J. Waldie, a historian of Southern California, told the newspaper, “if we truly believed that patronizing these places enlivened our neighborhoods, why aren’t we there — eating the omelets or shopping at the boutique?”
I believe a long-term consequence of the secular shift in social mood against consumption will be the devaluation of “retail therapy” and the revaluation of intangibles – family, time, physical experiences – that over-consumption suppressed.
