Archive for the ‘Financial Collapse’ Category

Moral Hazard

Tuesday, September 22nd, 2009

Back during the crisis last year, when Rick Santelli – the floor trader in Chicago – first proposed the idea of a second tea party (did you forget that Howard Kurtz?), his helper jumped in saying “Moral Hazard! “.

Video

I don’t think most of the people watching, including the reporters who cover Wall Street got the significance of that shout out – because it is a term of art in the Insurance business, not on Wall Street.

A fundamental principle of underwriting insurance is making sure that you don’t create a “moral hazard” – a reason for the owner or beneficiary of the policy to behave recklessly because they know they have insurance.   In the extreme, they may deliberately cause a loss to enrich themselves. 

For instance, if you sold a disability policy that paid 125% of the normal salary, people would be motivated to injure themselves on purpose.   If you could take out a life insurance policy on another person with which you have no economic connection, you could be motivated to cause the death of that person.

AIG started writing policies (Credit Default Swaps – CDSs) that protected people from the possibility that Freddie Mac and Fannie Mae’s mortgage backed securities (CDOs) would lose value.  Folks started buying the CDSs like crazy because they believed AIG was way underpricing the risk they were taking, and AIG was feeding a moral hazard.   They were incentivizing the entities buying the securities to CAUSE the failure of Freddie Mac and Fannie Mae.   The bulk of the federal bailout funds went right through AIG to pay off the people who benefited from the moral hazard of encouraging the reckless mortgage lending practices.

Bankruptcy Watch: Triple Crown Media

Monday, September 14th, 2009

http://www.forbes.com/feeds/afx/2009/09/14/afx6882390.html

Not much here – just one more newspaper owner filing chapter 11.  Their biggest newspaper is in Albany, NY

Bankruptcy Watch – Freedom Communications

Monday, August 31st, 2009

http://online.wsj.com/article/SB125166593642570507.html

The operator of the Orange County (California) Register is preparing to join the string of major newspapers who have filed for bankruptcy.  When all the newspapers are dead, where will Matt Drudge get his news?

Not to worry, the Obama administration is starting to put together a task force to study how to “fix” the newspaper business.   Maybe they’ll create a government run news service to keep us informed on what we need to know.

Bankruptcy Watch – Reader’s Digest

Monday, August 17th, 2009

Per Bloomberg

The publisher of Reader’s Digest plans to go through an orderly bankruptcy proceding to get out from under $1.6 billion in debt.    It’s hard to see how Reader’s Digest has much of a future as a paper magazine.   For much of its history, Reader’s Digest did not accept advertisements and was funded entirely by the subscription fees and consumer point of purchase sales.

The bankruptcy should not affect publication of the magazine, at least for now – and doesn’t involve the company’s non-U.S. subsidiaries

Bankruptcy Watch – American Axle

Wednesday, August 5th, 2009

Story here

As was speculated a few weeks ago, American Axle is close to falling into the bankruptcy Abyss, unless someone rushes in with a basket full of money.  I guess when people buy Toyotas using the Cash for Clunkers money, that doesn’t sell an American Axle.

3/4ths of American Axle’s business is with GM  (the bad GM or the good GM?)

Timmy throws a tantrum

Tuesday, August 4th, 2009

CBS Report

Several reports yesterday that Timmy Geithner is headed for a rubber room. He doesn’t understand why the people charged with enforcing securities law and financial regulation can’t just make up the law as they go along the way he does.

I met Mary Shapiro while working at NASDAQ. I don’t think you’ll find a more level-headed honest competent person who understands the Securities business. Many of the things Geithner has already done would land a lesser man in jail for market manipulation and insider trading – not to mention being a tax cheat. He’s getting on very thin ice.

The world is finally waking up to the Goldman Sachs connections to the events of the past year (and the past century) and Mr Geithner is making himself the point man for the coming showdown.

Bankruptcy Watch – Cooper-Standard

Monday, August 3rd, 2009

Forbes Story

Cooper-Standard is another automotive parts supplier declaring Chapter 11 today.   From the Forbes story, it sounds like Ford is their main customer – they hope to dump about $600 million in debt by going though the bankruptcy.

Delphi Bankruptcy update

Wednesday, July 29th, 2009

The Delphi judge is working hard to get the GM parts maker out of bankruptcy by using a process similar to GM and Chrysler.

First, Delphi is terminating its pension plan and dumping it into the Federally run Pension Guaranty Corporation.   That means lower pension payment for existing retirees and possibly some government funding in the future.

The other big item is the judge told the Michigan Workers Compensation fund to go pound sand.  The fund is owed $120 million for past claims and a $24 million annual premium payment.    The State of Michigan is broke.  Most likely way to deal with this is to raise insurance premiums on all other Michigan employers, which means even more businesses will flee Michigan.

About 1000 fired employees with get 75% of their severance.

Not to worry – everything is under control.

Bankruptcy Watch – Stant

Tuesday, July 28th, 2009

http://www.bloomberg.com/apps/news?pid=20601103&sid=aoEbT.uKdxvM

Stant makes fuel systems for GM and Chrsyler, and their bankrupties have forced this 111 year old company into bankruptcy.   They were surely one of those  creditors that Tim Geithner pushed out of the way to give GM to the UAW. 

It’s hard to make cars without a gas tank and fuel pump and radiators.   I guess that 30 something year old “kid” that made these decisions about how to “fix” the car business didn’t know that.

So one more company Tim Geither will have to “save” to keep GM in business.  It won’t be the last.

Geithner’s new helper

Thursday, July 23rd, 2009

Six months after President Obama was sworn in, Tim Geithner is finally getting around to officially appointing his helpers (subject to Senate approval).  

The Wall Street Journal reported today that Jeffrey Goldstein will be nominated to be undersecretary for domestic (as opposed to international) finance.

So who is Mr. Goldstein and what does it say about future policy?   He currently works for a private equity firm, but before that, he worked at the World Bank as CFO.

The World Bank isn’t a “bank” at all. It makes “loans” to third world countries that it knows have no chance of ever paying the money back, kind of like a global Freddie Mac and Fannie Mae.

Some of its current areas of interest are: Gender Equality, ending Poverty in Africa, Ending Poverty in South Area, Global Climate Change. They work on the conflicts mostly by flying around the world holding conferences, forming study groups and passing resolutions.

Where does the World Bank get the funding to carrying on this critically important projects? Well, one source is the U.S. Agency for International Development, which is part of Hillary Clinton’s US State Department. The World Bank and the International Monetary Fund are sister organizations created as a result of the Bretton Woods conference in 1944 to deal with global finance and reconstruction of post-war Europe as World War Two was winding down.

Sounds like he’ll fit right in.