Posts Tagged ‘AIG’
Monday, June 15th, 2009
Learn The Stock Market Lesson - The Debate About Derivatives
The only thing we learn from history is that we learn nothing from history.
- Friedrich Hegel
In my previous post, I began an introduction on derivatives. If you are unaware about what they are, take a look at my Financial Derivatives’s post to get a better understanding about this post.
If derivatives are so risky, why haven’t we outlawed them?
There have been many arguments between the pros and cons of derivatives. The world’s smartest investor, billionaire Warren Buffett once called derivatives, “financial weapons of mass destruction.” That was in 2002 when he issued his annual letter to the shareholders of Berkshire Hathaway. He continued to say that the derivatives carried danger and, although it was latent at the time, that they are potentially lethal. Few people paid attention to Buffett’s warning and, in fact, many important financial players quickly dismissed his words.
Later that same year, Alan Greenspan, the Chairman of the Federal Reserve at the time, among a few others sent a letter to a couple of U.S. senators, declaring that financial derivatives were not a danger but, rather, they “have been a major contributor to our economy’s ability to respond to the stresses and challenges of the last two years.” They continued to declare that a Senate proposal to regulate derivatives could increase “the vulnerability of our economy to potential future stresses.”
In 2003, Alan Greenspan again defended derivatives, saying that,
“Businesses, financial institutions, and investors throughout the economy rely upon derivatives to protect themselves from market volatility triggered by unexpected economic events. This ability to manage risks makes the economy more resilient, and its importance cannot be underestimated. In our judgment, the ability of private counterparty surveillance to effectively regulate these markets can be undermined by inappropriate extensions of government regulation.”
That’s the good side of the spectrum. Let’s see the bad side: The Enron mess created clear warning signs about the danger of derivatives yet they still contributed to the collapse of Bear Stearns, Lehman Brothers, along with other financial companies. The lack of oversight on derivatives spawned a financial crisis, to which taxpayer money was then used to bail out these financial companies. Don’t forget that the corporate bosses who run these companies are often the same ones who are helping themselves to a multimillion-dollar pay and bonus. Is all of this happening due to our refusal to learn from the past?
Tags: AIG, alan greenspan, bear stearns, berkshire hathaway, chairman of federal reserve, derivatives finance, enron, federal reserve, financial derivatives, financial weapons of mass destruction, friedrich hegel, hedge, hedging, lehman brothers, warren buffett
Posted in Learn The Stock Market | Comments Off
Monday, June 8th, 2009
Learn The Stock Market Lesson - What are Financial Derivatives?
Most of us have heard about the controversial uses of derivatives, the debates between whether they should or should not be regulated, and the amount of oversight there should be on them. Derivatives are the complex financial instruments that contributed to not only the collapse of the giant insurer AIG but also 3 of the largest bankruptcies in American history – WorldCom, Enron, and Global Crossing. I will be discussing a little more in-depth about its debate in my next post.
So what exactly are derivatives?
Derivatives refer to a general class of investments, rather than a specific type of investment like stocks or bonds. As the name suggests, derivatives are investment vehicles that are derived from other types of investments. In other words, it is a security whose price is dependent upon or derived from one or more underlying assets.
They are contracts between 2 or more parties and its value is determined by the fluctuation of another underlying asset, such as a commodity, equities (stocks), loans (bonds), currencies and more. For example, the changing value of crude oil futures depends primarily on the movement and the fluctuation of oil prices.
The most common types of derivatives are futures contracts, forward contracts, options and swaps, which I will be discussing further in a later post.
How are derivatives different from stocks and bonds?
Stocks – represent shares of ownership in something tangible, such as a corporation
Bonds – also represents something tangible since they are promises of loan repayments, or IOUs from a borrower
Derivatives – hybrid investments based on these more basic investments. And because they are hybrids, investing in derivatives is more complex, and often far more risky than investing in stocks or bonds.
What’s the purpose of derivatives?
Derivatives are generally used as a financial instrument to hedge, or reduce, risk for one party but can also be used for speculative purposes. Investors sometimes purchase and sell derivatives to manage the risk associated with the underlying asset, to protect against fluctuations in value, or to profit from periods of inactivity or decline. Don’t forget that these techniques can be quite complicated and risky.
Tags: AIG, bankruptcy, bonds, chapter 11 bankruptcy, derivatives, derivatives finance, derivatives trading, enron, financial instrument, forward contract, future contracts, futures, futures trading, global crossing, hybrid investment, investment, options, options trading, reduce risk, risky, stocks, swaps, underlying assets, worldcom
Posted in Learn The Stock Market | 1 Comment »
Friday, March 27th, 2009
Finally some good news! Goldman Sachs plans to give back its TARP money, possibly even as soon as next month. This gives us something to ponder about as to why they suddenly want to give back its TARP money. Could it be that they have received an overwhelming amount of criticisms due to the fact that, being as a counter-party of risky bets, Goldman had been the largest recipient of AIG’s government money and they need to revive some reputation since the information had been revealed? Goldman received approximately $12.9 billion dollars in payments and collateral! These collaterals from Goldman and other counter-parties eventually contributed to AIG’s sudden collapse, which then led to the billions of taxpayer dollars fly into the pockets of the big financial companies.
Now, that we’ve seen where some of the criticisms are coming from, let’s focus on another reason why they have a strong urge to return $10 billion back to the government, which is simply the fact that they are able to. They currently have a balance sheet with about $100 billion of available cash, so $10 billion should be affordable and not cause a problem. Of course, if all this plays out as Goldman hopes, it is definitely good news for taxpayers.
Another issue we can focus on is: If Goldman succeeds in returning our money, will others essentially follow? If the plan follows through, it could situate pressure on other companies, specifically the stronger ones, to give back their money.
Tags: AIG, bailout funds, collateral, counter-party, current news, goldman sachs, good news, TARP, taxpayers
Posted in News Analysis | Comments Off
Sunday, March 22nd, 2009
AIG news has filled front pages of newspapers’ and internet websites for the past week! Poor Geithner. At age 47, the same age as President Obama, his day starts at 5:30 AM, gets to his desk by 6:30 AM and leaves 15 hours later, dealing with more crises than most Treasury secretaries ever had to. However, with this in mind, should we sympathize with him, remembering that he, along with Obama, come into office during one of our nation’s toughest times?
Let’s recap: According to the White House, on March 10 was the first time Mr. Geithner heard about the plans to pay out AIG’s retention bonuses. We ask, “Why didn’t Mr. Geithner know about the AIG bonuses sooner?” Back in December 2008, AIG had paid $55 million in retention bonuses in the financial products unit, which was deeply involved in complex financial transactions that led to losses of billions of dollars. Only months later does the Federal Reserve officials inform the Treasury Department of the pending bonus payments, which was about to be paid out in the following days. ONLY AFTER, is finally President Obama informed.
Here are the statistics according to the New York Times:
– 418 A.I.G. employees received bonuses
– $33.6 million (of the total of $165 million) went to 52 people who have left the company
– 73 people received more than $1 million each, most in the financial products unit
– The top 22 employees received at least $2 million each
– The top 10 employees received $42 million
– Seven employees received at least $4 million each
– The largest bonus was $6.4 million! (AIG lawyer offers to return this $6.4M bonus)
Doesn’t it seem like the rich are getting richer? Pressures approach Obama and Geitner in their attempts to stop the bonuses, which resulted in failure as the bonuses were distributed. Geitner’s failure to act to stop the bonuses have caused him many criticisms, overwhelming his achievements.
And how should we feel about Mr. Edward Liddy? The government-appointed chief of AIG last fall when the troubled insurance company was nationalized, defends the multimillion-dollar bonus payments which were issued to the same people who run the division that had brought down the whole company. But let’s consider this: this is a man who got out of his retirement and is getting paid only $1 a year to help out AIG. He makes it clear that he was not responsible for getting AIG into this mess as he was not with the firm when the contracts were first issued last year. He has also asked his employees with bonus payments over $100,000 to return at least half. And now the House is voting on a 90% tax on bonuses, which would apply to employees whose total annual pay exceeds $250,000 at firms which received more than $5 billion in government rescue funds. Fair enough?
Tags: 90% tax, AIG, aig bonuses, current news, edward liddy, federal reserve, largest insurance company, President Obama, Secretary of Treasurer, Timothy Geitner, treasury department, white house
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Monday, March 16th, 2009
AIG, once the nation’s largest insurer, have caused extreme outrages regarding bonus payouts to its executives. Have people already forgotten about the $173 billion bailout funds they received from the government just a couple months ago? Now, according to AIG’s legal contracts mandating that bonuses be paid, which are deals claimed to have been made before the bailout last year, AIG plans to pay its executives $165 million in bonuses as their retention pay. With taxpayers’ money! (We must not forget that us, taxpayers, own nearly 80% of AIG and without us, the contracts will essentially not be worth anything) As if the situation could not be any worse, this is just after AIG had reported that they had lost $61.7 billion for the fourth quarter of last year, the largest corporate loss in history.
President Obama and Secretary of Treasurer Timothy Geitner are aiming to propose any legal action possible to block the bonus payouts since it is rather hard to believe that these executives actually deserve bonuses after the giant had failed last year. However, they still do not have a list of the recipient of the bonuses. Also remember that most of these executives are the same ones that took part in selling risky financial contracts that had caused huge losses for AIG. To say that they deserve a reward after all that’s happened is certainly judged as outrageous by taxpayers, economists, Congress, etc.
Obama states, “This isn’t just a matter of dollars and cents. It’s about our fundamental values. All across the country, there are people who work hard and meet their responsibilities every day, without the benefit of government bailouts or multimillion-dollar bonuses. All they ask is that everyone, from Main Street to Wall Street to Washington, play by the same rules.”
Another reason why this issue has caused such commotion is something that many of us have neglected to realize. If the Obama administration proceeds with their legal actions and succeeds to prevent the executives from receiving the bonuses, it might inject an idea for future companies to use the same legal measures to break contracts that they themselves might find inconvenient. As Pearl Meyer states, they will be “raising a whole new question about the trust and commitment organizations have to their employees.”
Finally, on another note, Federal Reserve Chairman Ben Bernanke announced that the recession might end as early at this year’s end. He has also stated that government has no intention of nationalizing banks, which is a relief for the market, alleviating many of our investors’ worries.
Tags: AIG, bailout funds, bonuses, current news, Federal Reserve Chairman Ben Bernanke, largest insurance company, nationalizing banks, President Obama, recession, Secretary of Treasurer Timothy Geitner
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