LIBOR AND THE AEGON FLOATING RATE PREFERRED STOCK

Added 2/12/2010: An extensive discussion of AEGON HYBRIDS can be found at:

Aegon Hybrids: Gateway Post - Post Dated 12/6/09

 See also: Advantages and Disadvantages of Equity Preferred Floating Rate Securities

This is a link to the prospectus for AEB: www.sec.gov

This is a link to the Aegon web page that contains information about all Aegon preferred stocks:  Capital securities - AEGON Group

This is a link to a web site that has a lot of information for equity and trust preferred issues.QuantumOnline Credit Ratings - QuantumOnline.com

This is a link to my Gateway Post for floating rate securities: Floaters: Links in One Post

***********************END OF ADDITION: Original Post with Revision to Add Headers in Green:

Before turning to today's topic, I wanted to discuss my usual general political and economic observations.

For those who have read my commentary about the markets prior to commencing this blog, you already know that I have been talking about Financial Armageddon for months and the unfolding mortgage crisis for at least two years. Each day, I would comment on the financial news and provide links to support my thesis. There is no reason to continue hammering those points since we are now at the place where I predicted we would be and no purpose is served now by continuing to highlight what is now obvious. I was surprised by the rapidity of the decline that started with the seizure of Fannie and Freddie just a few weeks ago.

1. Federal Reserve Starts to Respond to Crisis: On the bright side, while slow to respond to the crisis initially or even to recognize its existence, the Federal Reserve is now taking all steps within its power to ameliorate and stabilize as much as possible now, unlike the Fed at the outset of the Great Depression that continued to restrict the money supply which fell by about 1/3rd between 1929 and 1932. The Fed had actually started to tighten money supply in 1928 by raising interest rates at a time when the economy was just exiting a recession and commodity prices were falling. It is also generally known that a slowdown had already started before the stock market crash in October 1929, and the Hoover administration took no proactive steps to cushion the economies downward spiral after the Crash, including most importantly shoring up the banks and the credit system. Fortunately, the Marsha Blackburn republicans are not in control of policy now.

2. Checking the Accuracy of Claims Made by Politicians: For those of us who do not blindly accept what politicians of either party say as true, or even partially true, it is important to use the fact checking services provided by the New York Times or the Washington Post, or the non-partisan organizations like FactCheck.org or Politifact.com. For political advertising by either party, I generally assume that the claims made by one candidate about the other are false or misleading until proven otherwise. During the campaign season before an election, particularly a Presidential one, I will keep the remote close by and will immediately change the channel when a political ad comes on from either side, firmly believing that at best the candidate is just trying to manipulate me with some sort of nonsense which would not stand the light of day. If all Americans would ignore these commercials, refuse to give the politicians any money to air them, and instead focus just on accurate factual content, then we would be off to at least a good start to reform the current political scene.

When watching a debate, I am generally familiar with the false or misleading statements that a candidate makes because they so often repeat versions during the debate of their stump speeches, often word for word, and those claims have already been vetted by the fact checkers. This was true of Sarah Palin during the Vice-Presidential debate.

3. True Believer vs. True Conservative Distinction: I know that there are people, tens of millions of people in this country, who have an unshakeable belief that the New York Times and the Washington Post are part of the media liberal elite, unable and unwilling to report the news in an unbiased way. I have even heard many of those people claim that these newspapers and other national media outlets will even try to hide the truth or just make up the facts in some kind of vast conspiracy to undermine the truth known by the zealots who call themselves and each other conservatives, but few of them are conservative in any traditional sense of the word. Conservative just sounds more soothing than a more appropriate label. Conservative ideology has been hijacked by those who are boisterous, ignorant, closed minded, lacking in curiosity about the world, intolerant, frequently biased, often practitioners of the vitriolic spiel, and rigidly ideological. Those people do not actually read these papers to form an opinion about their news coverage. Instead, there is a circular feedback loop where they congregate at the same web sites, like newsbusters.org, and exchange stories about each others claims about liberal news bias when the only bias detectable by an intelligent person is frequently their own claims about bias. Their general idea is to exclude any information that is not consistent with their previously formed ideological beliefs which requires them to ignore or to dismiss any information not disseminated in an accepted media outlet, which excludes virtually all news media with a few exceptions such as right wing blogs, Fox, Coulter, Malkin and Limbaugh. All information is screened through an ideological prism formed without much information and what little information used to form their rigid and unassailable opinions can often be proved to be inaccurate or incomplete. Part of the effort to exclude information and facts from consideration is done simply by placing a label on the source, like “liberal”, originating from any non-sanctioned outlet. The label, in and of itself, is to them a winning argument, the only thing needed to be said about it. It is impossible for me to label a position on the invasion of Iraq as being conservative or liberal, more like informed and uninformed.

I view myself as a true Conservative and I have nothing in common with many millions today who call themselves conservative. I believe that each citizen has an obligation to discover the truth. The Founding Fathers protected the press in the First Amendment to further that truth seeking obligation of citizens. Once the news stories are read, no matter the source, then a person can sift through them, separate the wheat from the chafe, fact from opinion, using all of the tools now available to a free person in a free society including the vast array of sources available over the internet, and then use their life experiences, knowledge and intelligence to make sense of it all. When you hear Republicans since Spiro Agnew repeatedly rail against the liberal and elite media, their ultimate goal for using these labels of “elite” or “liberal” is to convince people not even to access information to determine the truth for themselves and instead accept whatever version that they happen to be advocating at the moment without any effort to verify it. Their approach is at its heart and core anti-Conservative and anti-democratic in its purpose and intent and instead designed and intended to achieve a political goal, maintaining power by whatever means necessary.

4. Gerrymanding to Insure Re-Election of Incumbents and to Increase Polarization in American Politics by Eliminating the Influence of Moderates and Independent Voters: The 7th Congressional District in Tennessee where I reside, as with all districts in Tennessee, was gerrymandered by the Democrats and the Republicans in the State Legislature in 2002 to insure that all incumbents would be safe. This kind of effort has been made in most other states. Besides being anti-democratic in it effect and purpose, in that it only gives members of one tribe influence over the election, gerrymandering with this objective contributes to the increasing polarization of American politics where moderates and independents have no say in most congressional races. The end result is that I ended up with Marsha Blackburn as my representative. Before the last gerrymandering, Brentwood, a bastion of die hard Republicans, was part of Bart Gordon’s (D) district and consequently he was invariably involved in a squeaker. One race that I remember was against Steve Gill in 1994 and was decided by a handful of votes. Brentwood was taken out of Gordon’s congressional district so his district became safe for the Democrats. The new 7th Congressional District was tailored for, how shall I say, a “conservative” Republican. It starts up in Clarksville, near the military base at Fort Campbell, moves through farm land bypassing Nashville, a city dominated by Democrats, to the West, and then picks up the City of Brentwood, south of Nashville, then proceeds down Franklin Road to pick up a few Republican precincts in Franklin, then makes a curly snake through some more farmland, avoiding as many Democrats as possible, to pick up some sparsely farm counties along the border of Alabama and Mississippi, and then after traveling a couple of hundred miles or so from Brentwood- the objective is finally reached- to pick up one town for Marsha, another city called Germantown, just outside of Memphis, a richer and more Republican version of Brentwood. It is my understanding from reading the local newspaper that both political parties participated in this thoroughly anti-democratic process.

I viewed Marsha Blackburn a few months ago being interviewed by someone on MSNBC and I thought that she had been treated unfairly by a reporter who was wearing bias on his sleeve that day. Marsha, an unthinking supporter of the war, who has had no second thoughts about this trillion dollar decision notwithstanding all of the information that has come out since the invasion, kept being asked by the interviewer, David Shuster, the name of the last soldier killed in her district and she did not know. I doubt that she could name one. He kept harassing her about that point ad nauseam. Marsha was there to talk about a MoveOn.org ad in the New York Times about General Petraus that many people found offensive including me (that kind of ad does not advance intelligent dialogue about the Iraq War and only provides an opportunity to create a diversion for those who no longer want anyone to focus on their role in ensnaring the nation in it) While I agreed with her view of the ad, I was struck again by her view of the world which is typical of many people who call themselves conservatives now. She clearly viewed herself, and her extremist ideology, to be in some kind of an ideological war with the New York Times, and her side was winning that war she claimed as judged by a decline in the Times circulation and profits, viewed objectively as part of the secular decline in the newspaper industry experienced by all newspapers. Since I read the Times everyday, I have not detected anything other than good in-depth journalism about national and world events, most but not all of the time, and certainly no indication on the Times part of participating in some kind of ideological struggle with Marsha and those of her political faith.

I know that many people in the 7th Congressional District in Tennessee would not be caught dead reading the Washington Post or the NYT. I read them every day along with the Wall Street Journal and many other daily and weekly publications because I want and even need to stay inform with the best information available to me. So, for anyone not willing to read the excellent fact checking services available online for free from the Times and the Post, which service will run simultaneously with the debate tomorrow night, I have suggested Factcheck.org and Politifact.com, unless you want to swallow the claims by a politician hook, line and sinker and it is unfortunate that so many will.

I am not focusing now on purchasing common stocks in my portfolio. My approach now is take only baby steps. I will not acquire more than 50 shares of any security in the current environment with an order. I have cash but will deploy it cautiously. I am looking now only for opportunities to deploy my cash into bonds or bond like investments. Yesterday, I discuss a floating rate preferred security issued by Met Life. Today, I will focus on another floating rate security issued by Aegon (common stock symbol AEG).

5. Aegon Floating Rate Equity Preferred (AEB): The symbol of the floating rate preferred stock issue is AEB. It is an issue of Aegon, a Netherlands based life insurance company that owns Transamerica in the United States. The European market is in turmoil, for the same reasons as the United States financial markets, and there appears to be a lack of coordination among the European countries, as each now goes it own way, trying to shore up its own financial institutions rather than developing a comprehensive plan. Aegon is also impacted by the fear sweeping over all financial stocks. So, there is a great deal of risk to buy anything in markets spiraling downward, I am also reminded of the famous saying by the founder of the Rothschild dynasty, Meyer Rothschild (1744-1812): “Buy when there is blood flowing in the streets!” Easier said then done and it is certainly flowing now.

The dividend on the Aegon floating rate preferred stock is paid quarterly and floats at the greater of 4% or .875% over three month LIBOR. The LIBOR rate is explained in my prior post and it has been rising as banks no longer trust each other’s balance sheets. The following discussion assumes familiarity with terms discussed in yesterday’s blog. 

It has no maturity but it is cumulative unlike the Met Life floater discussed yesterday. If an interest is deferred due to a solvency event, it has to be paid after the solvency events ends. If the solvency event leads to bankruptcy, then the owner of a preferred stock will stand near the bottom of a long line, just ahead of the common stockholders. Aegon has the option to satisfy the payment of interest under certain circumstances by the issuance of common stock. Before investing in these types of securities, I become familiar with the prospectus and the financials of the company. My main goal, unlike someone investing in a common stock, is not to predict earnings growth or any other metric commonly used in stock investing but simply to determine as best as I can the likelihood the company will be able to pay interest on its bond obligations. Fitch has an A+ rating on the preference shares of Aegon as of today.

The current price of the Aegon floater as of 10 a.m. today is $7 per share and it has a $25 par value. At the guarantee of 4%, the effective yield based on a total cost of $7 would be 14.2%, calculated by dividing the annual interest of $1 per share by the cost. By way of example only, if the applicable floating rate becomes applicable by LIBOR rising to 5%, then the coupon becomes 5% + .875% or 5.875%. I am performing all of the steps in the calculation for those who are not used to doing it. At that coupon, the interest payments on 1 share would be $1.4687 (.05875% coupon times $25 par value=$1.4875). If your total cost was $7 for 1 share, you effective annualize yield would be 20.98%. As with the MetLife floater, the interest could go way above that last figure if the 3 month LIBOR rate shot up to say 8% by way of example only. Then, the effective yield at a $7 cost would jump to 31.25% annually.

The same downside risks discussed yesterday in connection with the Met Life floating rate preferred stock apply to the Aegon floater, other than the discussion about its non-cumulative feature.

In full disclosure, I own shares of AEB and will continue to buy additional shares at or below the current price, or even slightly above. This is not a recommendation to buy or to sell. Trade at your own risk, and perform research about this security by reading the prospectus at sec.gov and further studying the financial health of Aegon (symbol AEG at yahoo finance) before making any investment. Consult with your financial advisor prior to making any purchase. In this blog, I am merely describing my reasons for purchasing this security and the potential pitfalls that I identified prior to purchase. This security may not be suitable for others based on their unique financial position and risk profile. This caveat and warning will apply to all securities discussed in all prior and upcoming blogs.