AIG and the Quants

Today, the NY Times has an excellent article that starts to shed some light on how AIG was brought down.  I’ll be honest, when I heard AIG was getting rescued by the US government, it wasn’t all that clear how things could have gone so wrong for them. AIG was everywhere and looked to be doing pretty boring stuff – insurance.  In India, AIG has an insurance partnership with the Tata Group – the largest private company in India and well regarded.

The article focuses on AIG Financal Products (AIGFP) based in London as the culprit for the turmoil of AIG. In the quarter that ended Sept. 30, 2007, A.I.G. recognized a $352 million unrealized loss on the credit default swap (CDS) portfolio. At the end of A.I.G’s most recent quarter, the London unit’s losses reached $25 billion.

AIGFP seemed to be doing deals with all types of financial products. One of the deals involved acquiring an equity state in Aspect Capital back in Jan 2006.  AIGFP took a 4.3%  stake and provided USD $75 million in capital to Aspect’s investment programs.

Who is Aspect Capital?  Here’s the blurb from their website:

Aspect Capital (“Aspect”) is a systematic investment manager. The company applies a quantitative and systematic approach to investment management with the aim of generating high-quality and diversifying alpha for its clients’ portfolios.

Aspect was started by Michael Adam, Martin Lueck, Eugene Lambert and Anthony Todd. All of them used to work at Man Investments (MI), which currently manages around USD 80 billion.  In fact, Adam is the “A” and Lueck is the “L” in AHL, the highly successful algorithmic fund at MI – Man AHL .

So why the investment from AIGFP, access to their trading models, access to their capacity, access to their clients?  My guess is AIGFP was making so much money, they were just looking to stash their cash flow into all types of deals.  I’m sure this deal worked out better then their investments in the CDS business.

Palin interview with Couric

Sarah Palin, Republican VP nominee, has been sheltered since her debut at the Republican National Convention but that all changed this week. Katie Couric of CBS News got first crack at Sarah and it was a disaster, even for hard core Republicans it must have been embarrassing.   Palin explaining her foreign policy by “proximity to Russia” is a joke.  Following the same logic, I live near a doctor which means I know a lot of stuff about curing people – wrong. 

Then towards the end of the interview her understanding of “who the good guys are and who the bad guys are” is something I would have said after 6 beers in college – trash talk.

Real Estate Update

Several of my friends were in town this week for a real estate conference and I got a chance to catch-up with them and get the real deal on the Indian real estate market. They said most of the conversations at the conference went like this:

Developer A – We are okay, we didn’t grow too fast but Developer B is screwed
Developer B – We are okay, we started early but Developer A is screwed

The build out for the retail segment is a complete disaster, malls are empty and the ones operating have occupancy rates from 25% to 80%. In many instances the malls cannot be reconfigured, case in point the Crossroads Mall in South Bombay was converted to an office building after an extended and expensive renovation.

Residential is set for a large fall since many of the new projects were bought by investors looking for a quick flip. With rates going up, people will end up bailing on these units and add to the overall supply.

This past week the equity markets were not kind to the Indian real estate sector including some of the companies I track. HDIL (down 87% from peak, click the above image for a chart), Orbit (-83%), Parsvnath (-84%) and Sobha (-82%) are all near their all-time lows, of course most have only recently listed on the exchanges. HDIL is the Bombay based property kingpins run by the Wadhwan family. This research report from ENAM covers HDIL, the report is good if you want a macro view on the Bombay real estate market.  ENAM had a price target of Rs. 712 when it published the report on Aug 18, 2008, on Sept 26, HDIL closed at Rs 190.35. I might be a bit jealous of HDIL as they have one of the largest collection of sweet rides in Bombay, most notably the Rolls Royce Drop Head Coupe.

Excellent reports on Indian politics

Kotak Securities which is known more for it’s corporate equity research has partnered with the newspaper Business Standard to produce a great two part PDF report on the overall political landscape of India.  It’s almost like a “Indian Political 101” reference document that highlights some of the key political movers and shakers within the Indian government.

Part 1 has people such as Vilasrao Deshmukh, Chief Minister of Maharashtra, and Murli Deora the Minister of Petroleum and Natural Gas. Cabals and Kings Part 1 (PDF, 680KB, 56 pages)

Part 2 covers people like Amar Singh, Mamata Banerjee (of Tata Nano/Singur fame) and has a primer on the Indian political framework. Cabals and Kings Part 2 (PDF, 636KB, 48 pages)

A Plea for Help…Nigerian 419 style

I died laughing when I got this email last night…(hat tip Abbi V.)

SUBJECT: REQUEST FOR URGENT BUSINESS RELATIONSHIP

DEAR AMERICAN:

I NEED TO ASK YOU TO SUPPORT AN URGENT SECRET BUSINESS RELATIONSHIP WITH A TRANSFER OF FUNDS OF GREAT MAGNITUDE.

I AM MINISTRY OF THE TREASURY OF THE REPUBLIC OF AMERICA. MY COUNTRY HAS HAD CRISIS THAT HAS CAUSED THE NEED FOR LARGE TRANSFER OF FUNDS OF 700 BILLION DOLLARS US. IF YOU WOULD ASSIST ME IN THIS TRANSFER, IT WOULD BE MOST PROFITABLE TO YOU.

I AM WORKING WITH MR. PHIL GRAMM, LOBBYIST FOR UBS, WHO WILL BE MY REPLACEMENT AS MINISTRY OF THE TREASURY IN JANUARY. AS A SENATOR, YOU MAY KNOW HIM AS THE LEADER OF THE AMERICAN BANKING DEREGULATION MOVEMENT IN THE 1990S. THIS TRANSACTIN IS 100% SAFE.

THIS IS A MATTER OF GREAT URGENCY. WE NEED A BLANK CHECK. WE NEED THE FUNDS AS QUICKLY AS POSSIBLE. WE CANNOT DIRECTLY TRANSFER THESE FUNDS IN THE NAMES OF OUR CLOSE FRIENDS BECAUSE WE ARE CONSTANTLY UNDER SURVEILLANCE. MY FAMILY LAWYER ADVISED ME THAT I SHOULD LOOK FOR A RELIABLE AND TRUSTWORTHY PERSON WHO WILL ACT AS A NEXT OF KIN SO THE FUNDS CAN BE TRANSFERRED.

PLEASE REPLY WITH ALL OF YOUR BANK ACCOUNT, IRA AND COLLEGE FUND ACCOUNT NUMBERS AND THOSE OF YOUR CHILDREN AND GRANDCHILDREN TO WALLSTREETBAILOUT@TREASURY.GOV SO THAT WE MAY TRANSFER YOUR COMMISSION FOR THIS TRANSACTION. AFTER I RECEIVE THAT INFORMATION, I WILL RESPOND WITH DETAILED INFORMATION ABOUT SAFEGUARDS THAT WILL BE USED TO PROTECT THE FUNDS.

YOURS FAITHFULLY MINISTER OF TREASURY PAULSON

Fool Me Once…

Shame on you
Fool me twice
Shame on me.

Ben and Henry (Benry???) as I blog are pleading their case to the Senate Banking Committee. It’s almost like a repeat of the justification for the Iraq War – If we don’t do something about weapons of mass destruction (WMD) the US is toast.  This time the WMD’s are derivatives as Warren Buffet so accurately predicted back in 2003.  

This is a complete sham, they should be focusing on the homeowner – cut them a check and hope they don’t default.  Instead, their theory is to help the banks and people holding these toxic instruments and make them whole and in turn that will trickle down to the homeowners.  Awesome theory, I believe the theory about the Iraq war was that it would pay for itself once we start pumping the oil…we all know how that is going. Iraq is costing taxpayers close to USD 10-12 billion a month with no end in sight.  They want USD 700 billion for this bailout, I’m sure that figure will easily exceed USD 2 Trillion if they get this passed in Congress.

I’m not sure what will be more valuable – Monopoly money or the US dollar?

Government Bailout Plan

Lordy, the Treasury Secretary has spoken and in a nutshell “you the taxpayers are going to bailout the big boys.” Henry Paulson said the alternative was a complete collapse of the financial system, when phrased like that his plan doesn’t seem to bad. And, with that the markets have raced up 4%. Of course the taxpayer is already suffering from “massive mortgage syndrome” so I’m not sure where we are supposed to pony up the extra dough for this.

…provides broad federal authority to clean up releases or threatened releases of hazardous substances that may endanger public health…

The above was the mandate of the government sponsored Superfund back in the 1980’s to protect people, families, communities and others from heavily contaminated toxic waste sites that have been abandoned.  Yup…that sounds like what is happening right now.