Believe those who are seeking the truth. Doubt those who find it. Andre Gide


Wednesday, January 26, 2011

Binky Chadha: Non-investors are overweight stocks

With the Dow closing near 12,000 today, I thought I'd peruse the CNBC (First in Business Worldwide) webpage to see what analysts were talking about. I'm not sure why I do this...I am almost always left scratching my head afteward. A deficiency on my part, no doubt. Maybe some of you out there can lend me a hand.

Take this, for example. Here is a CNBC segment entitled "Pick a Pro's Brain," a short interview with Deutsche Bank's Binky Chadha labeled "Investors Are 'Very Underweight' Stocks." The entire interview sounds like gibberish to me. The man is speaking in a language that I trouble understanding.

What does it mean, in particular, for investors to be underweight stocks?

I think we can all agree that the outstanding stock of equity shares is owned...by someone, at least. It is therefore impossible for the population as a whole to be under or overweight in stocks. It is only possible for different groups holding different positions to be considered  under or overweight.

Now take the set of potential owners. It appears that this set can be divided into two subsets: investors and non-investors. I'm am not entirely sure what governs this division.

In any case, the claim is that investors are underweight stocks. Fine. But simple arithmetic then implies that non-investors must be overweight stocks.

So I am wondering: Is this, in fact, what Binky is saying? And if it is indeed what he is saying, then why is knowing this interesting, and how is knowing this important?

Wednesday, January 19, 2011

Holier than thou

Took a bit of a break from blogging lately. (I do have a day job, after all.) Unfortunately, I peeked into the blogosphere. Couldn't help it. Big mistake!

Exhausted by economic analysis, Paul Krugman has decided to stump from another pulpit these days. See here: A Tale of Two Moralities (via interfluidity).

Ah, the moral high ground...how intoxicating!  The conscience of a liberal...I am reminded of Gordon Liddy's gem:
A liberal is someone who feels a great debt to his fellow man, a debt which he proposes to pay off with your money.
According to Krugman, there is a "great divide" in America today. What defines this boundary?
One side of American politics considers the modern welfare state — a private-enterprise economy, but one in which society’s winners are taxed to pay for a social safety net — morally superior to the capitalism red in tooth and claw we had before the New Deal. It’s only right, this side believes, for the affluent to help the less fortunate.
The other side believes that people have a right to keep what they earn, and that taxing them to support others, no matter how needy, amounts to theft. That’s what lies behind the modern right’s fondness for violent rhetoric: many activists on the right really do see taxes and regulation as tyrannical impositions on their liberty.
There’s no middle ground between these views.  
Is this really an accurate characterization? To me, the divide seems to be defined more over the issue of who (or what body of institutions) should be trusted with the job of redistributing wealth. On the left, we have those who believe that a central authority is best suited for this job. On the right, we have those who believe that local governments, or private philanthropic institutions, are better suited for this job.

I do not believe that those with a libertarian streak (like myself) appreciate being demonized for, say, opposing a tax hike by the central government. I might oppose such a tax and at the same time favor a tax hike at the state or local level (if I thought the funds are to be put to good use). I might be against a tax hike altogether, and be in favor of redistributing existing government expenditures away from the military and to the disadvantaged. Or, I might just want to keep more of my money so that I have greater control over how to disburse it among competing charities. The "liberal" attempt to construe any of these positions as "immoral" along some dimension is, well, simply shameful, I think.

Friday, January 14, 2011

AIG Repays the Fed

New York Fed Ends AIG Assistance with Full Repayment
For release at 12:25 p.m. EST on January 14, 2011

NEW YORK – The Federal Reserve Bank of New York (“New York Fed”) today announced the termination of its assistance to American International Group, Inc. (“AIG”) and the full repayment of its loans to AIG as a result of the closing of the recapitalization that was announced on September 30, 2010. As of today, AIG will no longer have any outstanding obligations to the New York Fed.

Today’s closing represents a substantial step toward achieving the Federal Reserve’s dual goals of stabilizing AIG and ensuring its repayment of government assistance. It reflects the significant progress AIG has made in reducing the scope, risk and complexity of its operations and stabilizing its operating results. The accelerated repayment of the New York Fed frees up collateral that will enable the company to access private debt markets, an essential step toward facilitating the U.S. Department of the Treasury’s future sale of the common stock it owns.

"This concludes an important effort by the Federal Reserve to stabilize the financial system in order to protect the U.S. economy" said William C. Dudley, President of the New York Fed.

With today’s closing of the recapitalization, the New York Fed’s revolving credit facility has been fully repaid, including interest and fees, and its commitment to lend any further funds has been terminated ahead of the credit facility’s scheduled expiration in September 2013.

In addition, the New York Fed has been paid in full for its preferred interests in the AIA and ALICO special purpose vehicles. A portion of those interests has been redeemed with proceeds from AIG’s sale of ALICO to MetLife, Inc. The remaining interests have been purchased by AIG through a draw on the Treasury Department’s Series F preferred stock commitment and transferred to the Treasury Department.

The closing of AIG’s recapitalization also marks the termination of the AIG Credit Facility Trust, which was established to hold an approximately 79 percent controlling equity interest in AIG for the sole benefit of the U.S. Treasury, the general fund of the U.S. government. The Trust’s equity interest in AIG is being exchanged for common stock of AIG and transferred to the Treasury.

“We are grateful to Jill M. Considine, Chester B. Feldberg, Peter A. Langerman, and Douglas L. Foshee for their invaluable contributions and commitment to the execution of their responsibilities as Trustees,” Mr. Dudley added.

About the Federal Reserve’s actions related to AIG

In September 2008, the Board of Governors of the Federal Reserve System authorized the New York Fed to provide AIG with an emergency loan of up to $85 billion to prevent its disorderly collapse, which could have had catastrophic consequences to the U.S. economy during the most damaging financial crisis in 70 years. The assistance provided by the Federal Reserve was restructured over time, and was supplemented in November 2008 and April 2009 by additional financial assistance from the Treasury Department under the Troubled Asset Relief Program.

As part of the November 2008 restructuring of the government’s assistance to AIG, two special purpose vehicles, Maiden Lane II LLC and Maiden Lane III LLC, were created with loans from the New York Fed to purchase various mortgage-related securities in order to address AIG’s capital and liquidity strains. The loans extended by the New York Fed to the Maiden Lane II and III facilities remain outstanding and are being repaid from the assets in those facilities. The fair values of the portfolios well exceed the balances of those loans.