C.M.O. 1.22.2010
Credit Market Overview
January 22, 2010
Oscar Wilde’s quote that, “Life imitates art far more than art imitates life”, was proven to be true once again yesterday as the GOP victory in Massachusetts was countered by the administration with a promise to re-enact, in spirit at least, the Glass-Steagall act separating consumer and commercial banking from investment banking and trading. The hope being that substituting one economically unsound populist measure for another would staunch the tide of support currently ebbing away from the party that thought it was good political business to attempt to pass legislation whether the constituents wanted it or not.
Where is the art that is being imitated, you might ask? My answer would be the Ally Bank commercials where even the young children can see the duplicity in the situation. It should not go without note that Ally Bank itself is being a bit cheeky as prior to the debacle it was called GMAC Bank. No further explanation needed, I hope.
One of the biggest calamities of the implosion of leverage that occurred after July of 2007 was the collapse of American International Group (AIG), which was actually triggered by the removal of Maurice “Hank” Greenberg by a then politically rapacious Elliot Spitzer. This left the insurance juggernaut without its micro-managing chairman and, well, the rest is unfortunately not history but the present.
Some small rays of hope have been seen emanating from the AIG situation lately as there have been reports of negotiations between Hank and his Uncle Sam regarding some sort of reconciliation and there was also the news Wednesday that MetLife Inc. (MET) is purchasing the American Life Insurance Co. from AIG and that AIG is planning an IPO of American International Assurance Ltd. Combined, these moves could result in as much as $45BN in receipts to the Treasury a.k.a. the U.S. Taxpayer according to the WSJ.
One of the reasons for the $14BN outlay by MET was “stability in the stock and bond markets, which has given the likes of MetLife the confidence to make such a large purchase” the article stated. Hopefully those within the “Loop” won’t pull too many more stunts like yesterday and the “stability” that encouraged MET will continue.
In reality it is not certain what will actually come to pass regarding the President’s announcement yesterday, given that many of the other initiatives proposed during the emotionally fired period following July ’07 have been molded into more sensible legislation (If that is not an oxymoron, what is?) or left to die on the vine.
What would be a disservice to the American public is a continuation of populist policy invectives that prevent the natural market forces from cleaning up the mess the politicians themselves were all too involved in creating.
MET’s CDS spent the last three quarters of 2009 receding from their March highs and the stock followed its empirically predictable path higher during the same period. The stock leveled off and became range bound during 3Q09 as the health care debated raged but seemed to be heading back to its highs in December of last year and January of this one. Every thing took a hit yesterday and MET was no exception but it does not appear any serious damage was done to the move, yet.
AIG’s CDS closed last night at 536bps which is very close to the lowest levels it has seen in quite a while. The stock is currently positively correlated to the CDS and has also been dropping fairly steadily. Interestingly, the stock did not take a major hit yesterday. The question that needs to be asked with regard to AIG’s CDS is that with Uncle Sam as an 80+% owner of the company and CDS spreads on U.S.’s debt trading at 42bps, isn’t there an arbitrage opportunity there?
It should also be noted that 42bps on U.S. sovereign obligations is a level that has not been seen since June of last year and obviously reflects the market’s aversion to America’s current borrowing binge. Maybe Paul Volker’s third act could be to fix the government’s fiscal policies after breaking up the banks.
In closing it would appear that the most recent flare up of the public’s ire towards Wall St. was fueled by Lloyd Blankfein’s remark in the FT some weeks back when he described Goldman Sachs as “doing God’s work”. It seems, however, that the head of the firm’s operation in Germany, Alexander Dibelius, might have a better handle on the true ethos of the finance industry as his response to a similar question was that banks “do not have an obligation to promote the public good”. After reading that, the only question you have to ask yourself is whether Alex was channeling Adam Smith or Gordon Gecko?
Enjoy the weekend.
Jim Delaney
