Wednesday, March 25, 2009

U.K Bond Failure/Tepid Bids for U.S. 5 Year/AIG Employee Complains about Breach of Faith/

The market started to slide in the afternoon from decent gains in the morning after it was reported that investors were less than enthusiastic about bidding in the government's  five year treasury auction.  The failure of a U.K. bond auction  and the statement by a San Francisco Fed President, Janice Yellen that she was more concerned about disinflation or even deflation than inflation did not help matters. Yahoo! Finance  
A U.K. government debt issue failed to secure enough bids for the offering on Wednesday. International Herald Tribune
The market overcame these problems to finish the day with a flourish in the closing minutes.

I was curious what would happen when the government needs to finance a trillion and a few hundred billion dollar deficit and investor's start to balk about even submitting a bid.   The U.S. auction did not fail but the bidding was apparently tepid according to press reports.   The five year note has a current yield at around 1.8%.  Needless to say, I did not submit a bid in that auction or a non-competitive tender.   I am on strike as a buyer of treasury paper, though  as a result of inactivity I have allowed some 3 month T Bills to rollover having selected the maximum amount of rollovers for them when they were originally purchased last year in my Treasury Direct account after redeeming most of them until recently.   I do own TBT and PST as hedges for my corporate bond portfolio.

There were some wire services reports that Moody's had downgraded the preferred issues of Wells Fargo and Bank of America well into junk.  This had an immediate negative impact on the Trust Preferred issues that I own, JWF, KTV and MJH, even though the downgrade to junk status was for the equity preferred issues.  Wells did receive a downgrade on its junior subordinated debt from A1 to A3 and its preferred stock was reduced to B2 from A2.  The problem is in communication to your average investor.  The Trust Preferred issues that I own are junior subordinated debentures and "preferred" in that context has a different meaning than preferred used in the wire reports. - 

I am sensitive about what to do with MJH and JWF due to the huge percentage gains on those recently acquired positions, although I did engage in a risk reduction move with JWF.  I am under water with KTV but still willing to add maybe 50 shares to the 100 already owned.   One position that I do own, which is my only equity preferred in a U.S. bank, is a floater BACPRE, which consists of 50 shares.   I would consider bringing that up to 100 but I am trying to cut down my exposure to BAC, owning still 5 short term bonds after selling 5 near par, 50 shares of both MJH and BACPRE, and common stock.  The ING and Aegon preferred issues that I own are classified by me as equity preferred. 

Jake DeSantis, one of AIG's employees in its Financial Products unit resigned, and his resignation letter is published in the NYT.   The employee claimed in his letter that Liddy never talked about renegotiating the bonuses for employees in this unit until shortly before his congressional testimony.  Prior to that time, Liddy had assured them their contracts would be honored by AIG ( I would suspect than many of them would have left if the subject (renegotiation) had been broached).  DeSantis worked for a $1 annual salary and the bonus which came to 742 thousand after tax.  He further claims that neither he nor "most" employees in the Financial Products unit now working had any involvement in the credit default swaps that brought the company down.  He does not disagree with the assessment that they are overpaid and claims to have spent 10, 12 and 14 hours for the benefit of those who let him down.  I thought that I would give his side in my post.   I do think that some in the press probably have suggested that this entire unit was engaged in structuring credit default swaps which would not be correct.  This gentleman was head of "business development" in the commodities unit and claims to have been an integral part in the pending sale of this unit to UBS (sounds like his job is about over anyway and will he get a new one at UBS?).   

No one should compel in my view a renegotiation of a private contract between consenting adults using threats and intimidation, or  condone the heavy hand of the government interfering with the performance of a private contract, particularly when the work under the contract has already largely been performed by the employees which makes interference in it even more egregious.   If the government wanted to renegotiate these retention bonus contracts, then that needed to be done by Bush and Paulson when the government first became involved in AIG last September relating to work/profits to be performed in the future rather than for work already completed.  This is not to say that I approve of the AIG contracts because I view them as horrendous.  I do, however, strongly believe in the sanctity of contracts, my word is my bond, and government avoiding impairing lawful ones.   I  have been very critical for months of the London unit of AIG's Financial Products division that generated the credit default swaps and their compensation that allowed for millions to be paid to them even though their work failed in a truly horrific manner.  

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