Wednesday, March 25, 2009

AIG - Ain't It Great?

Yesterday's New York Times printed an Op-Ed article by now former AIG executive Jake DeSantis titled Dear A.I.G., I Quit!

In summary, Mr. DeSantis is resigning from AIG, returning his $742,006.40 bonus after taxes and is outraged at the treatment that has befallen him. Defending his "legacy," he states:

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.

But, you see, there is a big difference between how the taxpayers have suffered and how Mr. DeSantis has suffered. Mr. DeSantis decided by his own accord to risk his own capital by investing it in AIG. The American taxpayers had their capital stolen from them without their consent. One is capitalism and the other is theft.

But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses.

Not true. The employees of the financial products unit shared the same employer as those individuals that lost hundreds of billions of dollars. If the company fails, everyone working there fails as well. I am sure there were many honest, hard working employees at Enron and Lehman but when those companies went bust everyone lost their jobs.

As most of us have done nothing wrong, guilt is not a motivation to surrender our earnings. We have worked 12 long months under these contracts and now deserve to be paid as promised.

This is exactly why you let failing institutions go bankrupt. When you bail them out, you have employees walking around acting like they deserve something. What exactly would Mr. DeSantis feel he "deserved" if AIG went bankrupt back in the fall? That answer would be decided in a bankruptcy court, where he would have had to stand in line with the company's debtors, customers and other stakeholders.

None of us should be cheated of our payments any more than a plumber should be cheated after he has fixed the pipes but a careless electrician causes a fire that burns down the house.

Compelling analogy. As a hypothetical, if the electrician and the plumber both worked for the same company, would you feel the same way? Not such a strong argument anymore, now is it?

Many of the employees have, in the past six months, turned down job offers from more stable employers, based on A.I.G.’s assurances that the contracts would be honored. They are now angry about having been misled by A.I.G.’s promises and are not inclined to return the money as a favor to you.

That sucks but that is life. Go talk to former Lehman employees or retired coal miners who had their pensions renegotiated by bankruptcy courts.

I think I will stop here as I will only start to get more nasty. Mr. DeSantis is surely mistaken if he thinks that anyone should feel sorry for him. The absolute last type of person I want to hear from is a whining banker.

Thursday, March 5, 2009

Beware of False Prophets

I would like to turn your attention to a truly great article by Michael Lewis titled Wall Street on the Tundra. It is a fascinating look at the peculiar country of Iceland and the recent collapse of its financial system from the perspective of an outsider. Here is the introduction:

Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness. What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power? In Reykjav√≠k, where men are men, and the women seem to have completely given up on them, the author follows the peculiarly Icelandic logic behind the meltdown.

I know almost nothing about Iceland but when I heard about the collapse my first thought was, "hey, I remember hearing a lot about investing in Icelandic bonds." I did a quick search through my emails and found articles from the email list that I subscribe to: Daily Wealth.

Daily Wealth is a free financial publication written by Dr. Steve Sjuggerud. From 2005 to 2007, Sjuggerud wrote many articles extolling the virtues of investing in Iceland and "safe" Icelandic government bonds in particular. Here is a small sampling of quotes from various issues...

When you add up the interest (4%) and the inflation payback (5%), these bonds [Icelandic Government Bonds\ will likely pay 9% total interest in 2006. Let me say that again… government-issued bonds from a AA-rated country are paying 9%.

It’s time to buy long-term inflation-indexed bonds in Iceland. You’ll get paid 9% in interest (4% interest, plus 5% inflation payback). But that 9% isn’t even what excites me…

What excites me is the capital gains potential, as long-term interest rates in Iceland return to earth from these record levels. As interest rates come down, the value of a bond goes up. The more long-term the bond, the higher the capital gain will be.
November 9, 2005

In fact, across my career I've been significantly responsible for about $100 million dollars in trading activity in this country [Iceland].

In all that time, I haven't had a problem. In short, I never worry about my money there. It's because I believe this country may be the safest country in the world in which to do business.

I think they’ve made a great move here… a high paying CD in the world’s safest country.
February 2, 2006

The downgrade sparked a sell-off in Icelandic assets. Iceland’s currency – the krona – fell 10% over the next two days. It was all a big surprise [Comment: This was your first hint that the "safest country in the world" might not be so safe].

Iceland still has the highest interest rates in the industrialized world. It has a top-notch credit rating [Comment: This is from the good old days when at least one person believed in the value of credit rating agencies.] and aggressive policymakers who aren’t afraid of cranking up interest rates. Interest rates in Iceland may even rise further from here, especially after Fitch’s warning and the krona’s fall last week.

Bottom line: the krona is still a very attractive currency for our bank deposits.
February 28, 2006

If we’re right, we’ll make a fortune. If we’re wrong… We’ll still make a heck of a lot of money, safely.

If you’re looking for a safe place to put money outside the dollar that still has significant upside, this bond is it.

In the last month, Iceland’s currency has been beaten up. Danske Bank, a Scandinavian bank, warned of a financial crisis in the country. After investigating, I’m not worried. Iceland’s fundamentals are sound. [Comment: How many times have you heard that last phrase - the fundamentals are sound - in the last year?]

Once the currency settles down, I really do believe certain Icelandic bonds will be the best bond plays in the world for the next eight years.

If you’re looking for a safe place to put money outside the dollar that still has significant upside, this bond is it.
March 27, 2006

For example, I don’t know how many trips I’ve made to Iceland in the last few years checking things out. It’s at least a half dozen. And I’ve met with the local brokerage firms and feel extremely comfortable that our money is absolutely fine there [Comment: If you have not done so already, please read the Michael Lewis article. You will find this particular quote quite funny after having read that article].
October 25, 2006

Iceland has one of the highest credit ratings on the planet. It's one of the world's safest places to live and do business, according to many surveys. Transparency International just ranked Iceland the least corrupt country in the world, out of 163 countries.

You won't find a safe government bond anywhere in the world paying you interest anywhere close to this... [Comment: And you won't find it in Iceland either!]
March 14, 2007 can see why it's really easy to bet on Iceland's currency.
May 10, 2007

When it comes to investments, Iceland offers the highest interest rates of any developed country. Is Iceland a developed country? Absolutely – income per person is in the $45,000 range. Is it a safe place to put your money? As safe as anywhere on the planet... The government here has no net debt (it can pay off its debts with its income), and Iceland is traditionally ranked the world's safest, least corrupt country.

You can earn outrageous rates of interest, and you really have no default risk in my opinion.

Iceland is traditionally expensive. But I've been here a handful of times now, and it's as expensive as it's ever been. So the currency could (and probably should) weaken. [Comment: I thought part of the bet was that the currency was going to strengthen?]
June 6, 2007

This is what Iceland looks like now:

The Iceland articles in Daily Wealth ceased in 2008. In the last year and a half, Daily Wealth has not mentioned Iceland in a single issue. Did Dr. Sjuggerud sell his positions? Did he recommend to his paid subscribers in True Wealth to sell their positions? I cannot answer these questions. All I know is that Dr. Sjuggerud was gung-ho on Iceland and Icelandic bonds for several years and then uttered not one peep about either one in his Daily Wealth newsletter as these markets imploded. If you held Icelandic currency through the crisis, you were most likely completely wiped out. If you were lucky you may have gotten off with a huge loss due to the collapse of the currency.

Fast forward to a few weeks ago. Dr. Sjuggerud is still taking credit for his "safe" and "easy" investment with high yields. In an article titled The Best, Safe Investment of 2009 Pays 19% Interest:

Three months ago, I said you should "take advantage of this no-risk trade right now." I hope you took my advice then... because you'd be up about 10%, including your 4% quarterly dividend payment. If you didn't listen, you're in luck, because the opportunity is still huge...

Thanks for the advice Dr. Sjuggerud, but I think I have seen this all before.

If you want to read Daily Wealth and follow the advice of Dr. Sjuggerud, be my guest. He certainly has some valid investment advice and has not been wrong about everything. Just don't be surprised when one of his "safe" investment ideas collapses and you never hear him acknowledge it again. If he had one or two notes about Iceland over the years that would be one thing. In this case, however, he pumped the $&%^ out of Iceland for many years. Is it too much to ask for maybe one article about the total miss? I guess so. With that kind of intellectual honesty at play, you are better off avoiding such investment advice.

Beware of false prophets.

Quick TLT Update

This is my third post in regards to the treasury bond market and TLT, the 20+ year treasury bond ETF. For the prior posts, please see here and here.

My original post on January 11, 2009 called for a big drop in TLT. From January 11 to January 31, TLT dropped 7.97%. I changed positions and went long on January 31. Since then, TLT has risen from 103.75 to 104.96, a small gain of 1.17%. I would like to re-iterate my long position for the near term future. We will see what happens.

Click on the chart below for a larger view.