Tuesday, January 6, 2009

Sold BDNPRC/ WP stories on AIG Financial Products Unit

I returned to HG HQ and saw that one of the REIT cumulative preferred stocks was rallying, BDNPRC was up about 15% to a 14.75 bid. This position was sold. I am looking to re-deploy the proceeds to a more senior security. I look at the cumulative preferred stocks as trades and I simply intend to make a profit on them as a group.  With BDNPRC, I will paid one quarterly dividend.  I mention that I had three REIT cumulative preferred stocks in the high at risk category and I would change that to say four:  GRTPRF, GRTPRG, BEEPRA and CBLPRC. I view all of the other REIT preferred stocks that I own to be at a minimum moderate risk.  I had lumped GRT preferred issues into one security but I own two.  It would be considered as one when judging the risk. Since Strategic Hotels has eliminated a common share dividend, at least for now, it is by far the most at risk of the high at risk category as to potential deferral of a dividend payment?  Why? 

A guy from Morgan Stanley was hired near the end to clean up the mess at the Financial Products unit. He was quoted in the Post article as saying that the ridiculously compensated employees at this unit were "very, very, smart" and had just made a miscalculation that sank the company. Just a wee small one or so he says.   They had just assumed that AIG would always have a AAA credit rating and never planned or took into account a downgrade in the debt. Really, was that the problem or just one of many problems, failing to consider a whole range of possibilities about the securities they were insuring?  And did their activities contribute to the downgrade in the debt rating that then caused their plans to go awry?  The head of the unit, a Mr. Cassano, was quoted telling analysts that it would be hard for him "even see a scenario within any kind of realm of reason  that would see us losing $1 in any of those transactions"  

Well, okay, maybe the taxpayers should ask for the 150 billion back right now and see how good that prediction proves to be. Apparently, it was a product offered by the Financial Products unit that brought Hank Greenberg down and I did not remember that correctly. 

If there are any lessons, the ultimate decision on risk has to be made by someone who is neither arrogant nor a quaint, but has proven to have good judgment. Arrogance would lead to an assumption that all events impacting the outcome of the transaction had in fact  been modeled, with at a minimum some restraint in taking on business based on assumptions of Black Swan events.  To say that there was no scenario in the models that took into account a debt downgrade is not consistent with being "very, very smart". The cumulative nature of the transactions themselves, their complexity, the number of parties involved and the types of transactions, even the total amount of dollars involved, something like 500 billion, had systemic risk written all over it.  

The transactions themselves could cause a risk to the credit rating of AIG which would then cause the spiraling out of control. 

  I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional political commentator.   I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine.  Any discussion made by me of particular securities  is not a recommendation to buy or to sell.  Trade at your own risk.  Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons.  The sale may before or after the post.  Before buying or selling any stock, even one recommended by a trusted financial advisor,  please research it and make up your own mind which is what I always try to do.  Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news.  In this post, and all others by me, I am merely describing my reasons for purchasing  or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale.  The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile.  Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   All content in these posts is provided for informational and entertainment purposes only, and it is a form of entertainment for me. 

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