Insurance giant American International Group posted a record $7.8 billion loss in the first quarter as it wrote down more than $15 billion in assets, much of them mortgage-related, and said it needed to raise more than $12 billion to shore up its capital. The Wall Street Journal on its page one says the news illustrates that “while the credit crunch may be easing on Wall Street, it appears to be tightening elsewhere”, and the Financial Times says AIG is in “crisis.”
More than $9 billion of AIG’s writedowns were for derivatives called credit-default swaps (CDS), which are insurance contracts that protect against non-payment of a security. Those have either declined in value or AIG has had to pay out bigtime to investors who bought insurance on mortgage bonds that are now not being paid.
The New York Times says the loss quadrupled analysts expectations and goes into the crucial CDS issue a bit more than the WSJ does, but it’s still not enough. Why crucial? It’s a $60 trillion market (give or take a few trillion) and nobody really knows what the repercussions will be as it unwinds, though Warren Buffett has famously called derivatives like them “financial weapons of mass destruction.” We’d like to see some more reporting on what AIG’s losses mean for the overall derivatives market.
“Their appetite for risk was excessive,” said Joyce Sharaf, an analyst at A.M. Best Co. in Oldwick, New Jersey. “They said, `We can take the risk, we have a strong balance sheet.’ Well, it blew a hole through their balance sheet.”
Elsewhere in credit-crisis land, Sovereign Bancorp, the second biggest savings and loan, said it would need to raise $2 billion in new capital.
And speaking of appetites for destruction, Citigroup now wants to unload $400 billion in assets, according to the FT. Good luck doing that in this market! The FT does well to note that wee problem, writing “The sale of the assets is likely to take years, and some of the non-core holdings may never be sold, according to people close to the situation.”
A strong NYT story on private equity
As if private-equity’s image could get much worse, the NYT on its page one reports that private-equity firms are forcing tenants out of rent-regulated apartments in New York in order to jack up rents. The Times reports that about 6 percent of the 1.2 million such apartments in the city have been bought by private equity in the past four years.
The report is damning. It notes that a city board says the vacancy rate for rent-controlled apartments is 5.6 percent but in some buildings owned by two private-equity firms, the rates are more than 30 percent.
The Times looks at a Vantage Properties securities filing that point-blank says its strategy is to have turnover rates five times the normal pace in order to convert them to market rents. It notes that the debt alone on one group of apartments it owns is twice the rental income. The private-equity firms are taking tenants to court at a pace far beyond what is normal. In one 2,100 unit complex, Vantage filed 1,000 housing-court cases against tenants.
Excellent reporting by the NYT here.
and on Sen. Shelby
The NYT takes a look on A1 at the influence and interests of Richard Shelby, senator from Alabama, who the paper says “has more say over the revamping of housing finance laws than almost anyone else in Congress.”
Shelby has a $5 million loan from Freddie Mac—a government-sponsored enterprise that his Senate Banking Committee regulates, and for which he has blocked legislation that would crack down on Freddie’s lending—on an apartment complex he owns and also owns a title-insurance company. Being Republican means he’s in the minority but in a Senate that’s Democratic by the slimmest of margins, the Times says he wields outsize influence and, surprisingly enough, tends to side with the mortgage industry.
There are lots of tenuous ties here to things that might not be on the up and up, but there’s no proof showing they’re not. But the essential point the Times is getting at but can’t outright say in the constraints of a conventional news story is—how can you regulate an industry in which you have a vested interest?
Quote of the day
In economic news, the Journal reports on its page two that its survey of economists found that most think inflation is rising because of real economic pressures, like soaring demand for commodities and products in China and India, and is not an investment bubble. But most say the Federal Reserve has the right ideas on fighting inflation. Quote of the Day here:
“Worry about inflation after we’re sure this isn’t a depression,” said David Wyss of Standard & Poor’s Corp.