Wednesday, May 16, 2012

AIG blindly betting on subprime a second time and hoping for a better outcome

Bloomberg reports that AIG is betting on subprime securities again.

This is amazing.  You would expect that after needing to be bailed out by the government, AIG would have learned not to gamble on opaque, toxic securities.

As regular readers know, buying subprime securities is gambling because buying these opaque securities is the equivalent of buying the contents of a brown paper bag sight unseen.  These securities do not provide enough disclosure so that a buyer can value them and actually know what they own.

American International Group Inc. (AIG), the insurer that needed a $182.3 billion bailout from the U.S. government in 2008 after failed mortgage investments, is betting this time it’s different. 
Chief Executive Officer Robert Benmosche has increased non- government-guaranteed residential and commercial-mortgage backed securities holdings by $11.1 billion since 2010 to $28.4 billion at the end of March, according to regulatory filings.... 
AIG, which is also bolstering its unit that insures home loans with low down payments, is wagering that a more than 35 percent plunge in property values, cheaper prices for the securities and fewer competitors justify returning to investments that four years ago required the government to step in when it was unable to meet margin calls to banks. 
None of these arguments tells you anything about the value of the actual securities that they purchased.
“This is massively illiquid, under-loved asset risk that’s actually really attractive,” Josh Stirling, an analyst with Sanford C. Bernstein & Co. said. “The one thing this doesn’t do for AIG is help simplify the story.”...
There is a reason only hedge funds want this asset.
Benmosche is targeting debt that may yield in excess of 10 percent as the Fed pledges to hold interest rates near zero through the end of 2014 to bolster the economy and help lower the 8.1 percent jobless rate....
How many investors are there who lost a bundle chasing yield and buying these securities based on yield heading into the financial crisis?
Pressure to generate profit from bonds held to back claims has increased as the company’s property-casualty insurer Chartis posted underwriting losses in 2010, 2011 and for the first quarter of this year, meaning the business spent more on claims and expenses than it earned in premiums....
This explains managements' willingness to gamble.

One of the unintended side effects of the Fed's zero interest rate policies is that it makes it difficult for insurance companies to generate profits from their bond portfolios.
With some bonds trading for as little as 30 cents on the dollar, senior securities tied to subprime home loans with expected lives of more than seven years will yield about 8 percent after accounting for projected losses, according to JPMorgan Chase & Co. (JPM) data. 
AIG’s investing “obviously doesn’t make any sense if the world relapses and there’s a massive recession and unemployment goes to 30 percent,” said Sanford C. Bernstein’s Stirling....
AIG's investing doesn't make any sense from a public relations perspective.
AIG has also added to its business that guarantees home loans against default. Its United Guaranty Corp. unit said last week it hired Donna DeMaio, the former head of MetLife Inc. (MET)’s bank, to be chief operating officer. 
United Guaranty has become the second-largest U.S. private mortgage insurer, according to industry newsletter Inside Mortgage Finance with a 23.7 percent market share in the first three months of 2012. That’s up from 14.6 percent a year earlier. Radian Group Inc. (RDN) is the largest. 
The unit is “putting very good business on the books as we grow,” Benmosche said on a May 4 conference call with analysts. 
While AIG is having to move out of traditional investment- grade bonds for yield, they’re not taking so much risk they’ll “blow themselves up again,” said Rob Haines, an analyst at debt research firm CreditSights Inc. in New York. “If they get a bloody nose again, the company will be punished very severely in terms of their stock price and their credit spreads, and I think they’re very cognizant of that.”

No comments: