Opening Bell: Et tu, A.I.G.?

Plus, NYT strong work on NYT housing and a powerful senator; Toyota's skids; the container shortage. etc.

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.

New jobless claims dipped last week more than expected, but were still relatively high. Retail sales were better than expected in part because of the timing of Easter, but were still anemic. The WSJ says a Morgan Stanley sales-prediction index is at a seventeen-year low.

Boxed in

A shortage of shipping containers is threatening to put a damper on U.S. exports, the WSJ says in an interesting report. A farm-lobby executive says his industry could have exported as much as 30 percent more so far this year if there had been adequate shipping containers.

Exporters’ frustration is building even as U.S. agricultural exports have jumped 20% by weight in the six months ended Feb. 29, compared with the same period last year, according to the Department of Agriculture. Shipments of lentils and peas are being delayed by months. Cargo-ship operators are raising prices. Many cold-storage facilities are packed to near capacity with pork and other meat products waiting to be loaded into containers—rectangular boxes that are generally 20-feet or 40-feet long.

Seems like the rest of the world could use some of that food right about now.

Bad bet

The WSJ on A1 looks at the bizarre world of commercial real estate, where just because you lose your lenders and investors a couple hundred million bucks here and there, doesn’t mean you can’t do it all again. The paper profiles a New York developer who’s about to be wiped out of his billion-dollar-plus casino and condo development in Las Vegas. It’ll be the second time in the last two decades one of his major projects has gone belly up, not to mention a couple of other properties he’s owned that he’s lost or had to put into bankruptcy.

Forget about all that—would you lend a billion dollars for this?

For the retail space, they ordered up a pair of 28-foot industrial robots programmed to box, to dance to “Disco Inferno,” and to play 12-foot Fender Stratocaster guitars. On the roof above the casino and stores, they planned a five-acre “beach” with sand, cabanas and a pool with artificial tides.

Toyota skids

Seemingly unflappable Toyota’s profits dropped 28 percent last quarter in what its president called a “severe business environment.” It predicted its annual profit would drop this year for the first time since 1999 because of the U.S. downturn.

The WSJ on B1 leads with “an ill-timed bet on the U.S. truck and SUV market” causing the decline, though it also says a weak dollar and higher prices for materials hurt, too. The FT:

Toyota’s gloomy guidance bodes ill for the global car industry’s prospects this year as the Japanese company produces more compacts and other fuel efficient cars—such as the Prius petrol-electric hybrid—than competitors such as General Motors. It makes relatively few of the larger vehicles consumers are shunning as petrol prices spike. Toyota outsold GM in the first quarter of this year and is expected to overtake it soon as the top-selling carmaker.

The NYT inside its business section says the American market’s woes will push the company faster into newer markets like China. Bloomberg says an S&P report predicts car sales this year will be the lowest since 1995. General Motors offered to give a parts supplier $200 million to help it settle a strike that’s been going on for ten weeks.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.