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Fantastic, must read OpEd in the NYT today by Jake DeSantis, the soon-to-be-former head of equity trading at AIG.

DeSantis argues that anyone not involved in the CDS side of FP was entitled to their contractual bonus, and that penalizing those people with nothing to do with bringing down AIG is counter-productive. He makes a very persuasive argument:

“I started at this company in 1998 as an equity trader, became the head of equity and commodity trading and, a couple of years before A.I.G.’s meltdown last September, was named the head of business development for commodities. Over this period the equity and commodity units were consistently profitable — in most years generating net profits of well over $100 million. Most recently, during the dismantling of A.I.G.-F.P., I was an integral player in the pending sale of its well-regarded commodity index business to UBS. As you know, business unit sales like this are crucial to A.I.G.’s effort to repay the American taxpayer.

The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity — directly as well as indirectly with the rest of the taxpayers.”

The bonuses are a flea on an elephant’s arse, a few million dollars out of trillions, and the tail was wagging the dog. On the radio yesterday, I tried to make the point (over a very insistent interviewer) that we are in danger of missing the bigger crisis.

Unfortunately, this is an easily understood concept, where as how we got here is not.

Go read the full DeSantis piece . . .

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Sources::
Dear A.I.G., I Quit!
Jake DeSantis
NYT, March 24, 2009

http://www.nytimes.com/2009/03/25/opinion/25desantis.html

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RTTNews

http://www.rttnews.com/Content/AVDownload.ashx?ID=28423&url=Audio2/2009/March/24/INTV-RITHOLTZ-AIG-03.24.09-lbr.mp3

The MBA said the average 30 yr mortgage rate fell another 26 bps to 4.63%, the lowest in at least 20 years as the Fed’s purchases of MBS is working in impacting this metric. However, the response remains predominantly in the huge increase in refi’s with barely a ripple in purchases. Refi’s for the past week rose 41.5% and are 400% off the lows of mid Nov right before the Fed announced their purchase plan. Purchases though while rising 4.2% for the week, are just back to where they were in mid Nov, thus there has been ZERO net impact on the buying of homes as the Fed spends billions.

Price has been the main driver of activity as evidenced by the level of foreclosures and not the cost of money. While refi’s are very helpful, the Fed embarked on this path to spur demand for buying homes. ABC confidence fell 2 pts but the State of Economy component rose to a 3 mo high. Personal Finances fell to a 1 1/2 mo low. German IFO was in line with estimates. Durable Goods and New Home Sales are out today.

UK failed Gilt auction

Out a little while ago, the UK government failed to get enough bids for its 40 year Gilt auction. This comes even with the UK government in the market weekly to buy Gilts to influence longer term interest rates lower. The UK 10 yr yield is now at a 3 week high and demonstrates the huge risk that the UK and now the Fed is taking on in buying bonds to manipulate the level of interest rates.

Durable Goods
Feb new orders for Durable Goods surprised to the upside, rising 3.4% headline and 3.9% ex transports and comes after a big revision downward to Jan which fell 7.3% headline and 5.9% ex transports. Non Defense Capital Goods ex Aircraft rose 6.6% after falling sharply in the prior two months. Helping orders were gains in computers/electronics, electrical equipment, machinery and fabricated metals. Shipments however, which gets directly plugged into GDP, fell .5% so the key is turning the Feb orders into future shipments instead of seeing them get canceled. The inventory to shipments ratio did tick a touch lower to 1.88 from 1.89 in Jan which was the highest since 1992.

Part I

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Part II

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Sources:
Part I: Geithner’s Plan “Extremely Dangerous,” Economist Galbraith
Henry Blodget
Mar 23, 2009 11:08am EDT
Tech Ticker March 23, 2009

http://finance.yahoo.com/tech-ticker/article/yftt_216311/Part-I-Geithner’s-Plan-%22Extremely-Dangerous%22-Economist-Galbraith-Says

“Happy Talk” Won’t Solve Crisis, Galbraith Says: Much More Govt. Action Needed
Aaron Task
Tech Ticker, Mar 23, 2009 01:04pm EDT

http://finance.yahoo.com/tech-ticker/article/216690/%22Happy-Talk%22-Won’t-Solve-Crisis-Galbraith-Says-Much-More-Govt.-Action-Needed;_ylt=AtCWuOtcOPiFarNfSB_.sHpk7ot4?

Things are tough all over:

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via NYT

Top Hedge Fund Managers Do Well in a Down Year
LOUISE STORY
NYT, March 24, 2009

http://www.nytimes.com/2009/03/25/business/25hedge.html

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From Alpha Magazine via the NYT, comes the latest list of earners, in order of 2008 take home pay.

Unlike the weasels who ran Merrill, Morgan, Bear & Lehman into the ground, then grabbed the cash and ran, these boys actually made their money the old fashioned way: They earned it, via outperformance.

Read ‘em & weep:

Rank: 1
James Simons
Renaissance Technologies
Est. 2008 earnings: $2.5 billion
Est. 2007 earnings: $2.8 billion

Rank: 2
John Paulson
Paulson & Company
Est. 2008 earnings: $2 billion
Est. 2007 earnings: $3.7 billion

Rank: 3
John D. Arnold
Centaurus Energy
Est. 2008 earnings: $1.5 billion
Est. 2007 earnings: $480 million

Rank: 4
George Soros
Soros Fund Management
Est. 2008 earnings: $1.1 billion
Est. 2007 earnings: $2.9 billion

Rank: 5
Ray Dalio
Bridgewater Associates
Est. 2008 earnings: $780 million
Est. 2007 earnings: $400 million

Rank: 6
Bruce Kovner
Caxton Associates
Est. 2008 earnings: $640 million
Est. 2007 earnings: $100 million

Rank: 7
David Shaw
D.E. Shaw & Company
Est. 2008 earnings: $275 million
Est. 2007 earnings: $210 million

Rank: 8
Stanley Druckenmiller
Duquesne Capital Management
Est. 2008 earnings: $260 million
Est. 2007 earnings: Not available

Rank: 9 (tie)
David Harding, left
Winton Capital Management
Est. 2008 earnings: $250 million
Est. 2007 earnings: $225 million

Rank: 9 (tie)
John Taylor Jr., right
FX Concepts
Est. 2008 earnings: $250 million
Est. 2007 earnings: Not available

Rank: 9 (tie)
Alan Howard, not pictured
Brevan Howard Asset Management
Est. 2008 earnings: $250 million
Est. 2007 earnings: $245 million

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Sources:
Group Brother, Can You Spare a Billion? The Top 25 Moneymakers
Stephen Taub
Alpha, March 25, 2009

http://www.iimagazine.com/Alpha/Articles/2165684/TODAY/Brother,_Can_You_Spare_a_Billion?.html

Things are tough all over

http://www.ritholtz.com/blog/2009/03/big-hedge-fund-money/

See also:
Top Hedge Fund Managers Do Well in a Down Year
LOUISE STORY
NYT, March 24, 2009

http://www.nytimes.com/2009/03/25/business/25hedge.html

Hedge-Fund Pay May Fall 25% in 2009 as Fees Evaporate
Katherine Burton
Bloomberg, March 25, 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aJEKqMJXSP.E&

I am off to Tunku Varadarajan’s MBA class with John Carney of Silicon Alley Insider to discuss blogging and the media.

The class is “The Media and the Business World” — it is an MBA elective course.

See you there!

In researching and think about AIG, I have been writing about them as if it were two separate companies: A well regulated Insurer, and a rogue derivatives products firm (FP).

The working assumption has been that the regulated insurer was run fairly conservatively, and the structured financial product side run like a giant hedge fund. The 32% net profit retention on the FP side is actually better than what most hedge funds see.

This dichotomy is mostly true, but with now has an interesting twist to it. In congressional testimony today, Ben Bernanke implied that had the Fed allowed AIG too fall, he detailed what might have happened had AIG been allowed to fail:

The Federal Reserve and the Treasury agreed that AIG’s failure under the conditions then prevailing would have posed unacceptable risks for the global financial system and for our economy. Some of AIG’s insurance subsidiaries, which are among the largest in the United States and the world, would have likely been put into rehabilitation by their regulators, leaving policyholders facing considerable uncertainty about the status of their claims. State and local government entities that had lent more than $10 billion to AIG would have suffered losses. Workers whose 401(k) plans had purchased $40 billion of insurance from AIG against the risk that their stable value funds would decline in value would have seen that insurance disappear. In addition, AIG’s insurance subsidiaries had substantial derivatives exposures to AIG-FP that could have weakened them in the event of the parent company’s failure.

If we are to take Bernanke at face value, he is saying that AIGFP had buried their own firm with junk paper. BB does not define what “substantial derivative exposure” meant — but given the $2.7 trillion dollars in derivatives exposure that FP had, even a tiny percentage might amount to an enormous sum.

That the collapse of AIG Financial Products would have damaged the other Insurance half of the firm is a frightening development.

Even more fascinating is this “lesson learned”

To conclude, I would note that AIG offers two clear lessons for the upcoming discussion in the Congress and elsewhere on regulatory reform. First, AIG highlights the urgent need for new resolution procedures for systemically important nonbank financial firms. If a federal agency had had such tools on September 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors and counterparties as appropriate. That outcome would have been far preferable to the situation we find ourselves in now.

In other words, we should have nationalized them from the beginning . . .

Hat Tip: Bob Lenzner of Forbes was the first to spot the issue of AIG’s insurance half having AIG FP derivative exposure.

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Source:
Chairman Ben S. Bernanke on American International Group
Before the Committee on Financial Services, U.S. House of Representatives, Washington, D.C.
March 24, 2009

http://www.federalreserve.gov/newsevents/testimony/bernanke20090324a.htm

Steve Randy Waldman writes the blog interfluidity. His take is usually away from the mainstream, and always interesting.

His most recent discussion on Bank Nationalization is quite interesting

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I often wish I were Mark Thoma. If I were Mark Thoma, I could be smart and paying attention without being bitter.

So I am not wedded to a particular plan, I think they all have good and bad points, and that (with the proper tweaks) each could work. Sure, some seem better than others, but none — to me — is so off the mark that I am filled with despair because we are following a particular course of action.

Unfortunately, I have a darker temperament, a spirit less generous and optimistic than Mark’s. I am filled with despair, not because what we are doing cannot “work”, but because it is too unjust. This is not my country.

The news of today is the Geithner plan. I think this plan might work very well in terms of repairing bank balance sheets.

Of course the whole notion of repairing bank balance sheet is a lie and misdirection. The balance sheets we should want to see repaired are household balance sheets. Banks have failed us profoundly. We want them reorganized, not repaired. A world in which the banks are all fixed but households are still broken is worse than what we have right now. Too-big-to-fail banks restored to health are too-big-to-fail banks restored to power. The idea that fixing legacy banks is prerequisite to fixing the broad economy is a lie perpetrated by legacy bankers.

I think that critics of the Geithner plan are missing some of its tactical brilliance. My guess is that behind the scenes, Geithner has arranged a kind of J.P. Morgan moment. You know the story. During the Panic of 1907, J.P. Morgan locked a bunch of bankers in a room and insisted they lend to stave a panic. We’ve already seen one twisted parody of this event, when Henry Paulson locked a bunch of bankers in a room and insisted they borrow money from the Treasury. This second one is more clever. I don’t think the scandal of the Geithner plan is going to turn out to be the subsidy to well-connected investors embedded in the non-recourse loan put option. On the contrary, I think that Treasury has already lined up participants for the “Legacy Loans Public-Private Investment Fund” and persuaded them to offer prices so high that despite the put, investors will expect to take a major loss. My little conspiracy theory is that the Blackrocks and PIMCOs of the world, the asset managers who do well by “shaking hands with the government“, will agree to take a hit on relatively small investments in order first to help make banks smell solvent, and then to compel and provide “good optics” for a maximal transfer from government to key financial institutions.

Read the rest of this entry »

Two heavy hitters have departed Merrill Lynch (or, as it is now called, Bank of America ): David Rosenberg, the chief North American economist for Merrill, and Richard Bernstein, their chief investment strategist.

Rosie is returning home to Canada where he is joining Gluskin Sheff & Associates in Toronto; Bernstein is starting his own money management company.

Here is the official announcement (via Bloomberg) from the President of BAC:

David has made the decision to leave the firm after nine years as an economist due to family issues of a personal nature. He has relocated to his hometown of Toronto, Canada and intends to return to the financial services industry with a buy-side firm in Toronto. Rich, after more than 20 years as a sell-side strategist, has made the decision to pursue new challenges, including potential opportunities on the buy-side, teaching and perhaps authoring another book.

It is of course, standard corporate speak.

Bank of America has had huge problems absorbing Merrill — the culture is very different, the businesses don’t mesh well.

I suspect both analysts have been chafing under the new regime; Rosenberg’s star has clearly risen over the past 2 years, and its easy to see him being taken for granted by BofA.

Bernstein (also a star) very publicly trashed the banks yesterday, and while you can do that when you work for Merrill, I would imagine its frowned upon when the name over the door is Bank of America. “Exploring opportunities” is corporate speak for shown the door  (I am curious if can confirm if RB was pushed).

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Source:
Bernstein, Rosenberg Plan to Leave Bank of America
Bob Ivry and David Mildenberg
Bloomberg, March 242009

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a_ujysijdX.E

News Hour – Paul Krugman & Donald Marron discuss Geithner’s plan,

Part I

Part II

via Firedoglake