Corporate Bust Outs

by Larry Levin

For those of you that follow economic news closely, the corporations in the news today are no surprise. AIG is less than broke and begging for more money. GM's new share target is ZERO. Fannie Mae will have a negative net worth next quarter. And finally, Circuit City has filed for bankruptcy. Yep, these are Corporate Bust Outs for sure.

AIG's $85-billion bailout wasn't enough. The additional $37.8-billion handout on Oct. 8th wasn't enough. Then on Oct. 31, AIG was allowed to access another $20.9 billion through the Fed's commercial paper program. It still wasn't enough. Now AIG has the unadulterated gall to demand that its deal be restructured with less burdensome details on how it should repay these MASSIVE loans. Oh, and throw in an additional $40-billion says AIG.

The government's response was OK, yes sir! Step right up and get your taxpayer funded handouts. Red Hot handouts here - red hot! (Where am I, a ballpark?) How incompetent were the so-called experts at AIG? When will AIG's insatiable requests for money end? Nobody knows, nor do they seem to care. This is the essence of the proverbial saying; it's like throwing money down a rat hole.

So where is the money coming from? As if I had to ask; it's from the TARP bill. You may remember that it was to buy troubled assets (CDOs and such) from banks. To date, not a penny has been spent doing what your CONgressman said it would. Uncle Sugar Daddy has the Treasury Department stepping in with $40 billion from the TARP funds.

The new deal reduces the interest rate AIG will pay back to the new shareholders - taxpayers - and will extend the loan term to five years from two, reducing the need for AIG to sell off business lines and other assets at so-called fire-sale prices. So with the extra time, instead of selling off assets now, AIG will wait for better prices only to find that it should have sold off the assets today. Yeah, great deal for us. Oh - but it gets better.

The AP says - In addition, the new arrangement replaced the second $37.8 billion Fed loan to AIG with a $52.5 billion aid package. Under that part of the plan, the Fed will fund the purchase of both residential mortgage-backed securities from AIG's portfolio, and collateralized debt obligations, which are complex financial instruments that combine various slices of debt.

By removing these troubled assets from AIG's balance sheet, the bailout should take stress off the company, giving it more breathing room and helping to prevent future losses, Fed officials said. The Fed doesn't believe it will suffer losses because it is hopeful the market for such distressed investments will recover as the economy and financial markets eventually rebound.

So the Fed will not only give it $150-BILLION in loans, it is also taking onto its own books the worst garbage that AIG has on its balance sheet. Oh grand. If this nonsense continues the sovereign debt of the United States government will be in question. Get out your wallets!

This morning Fannie Mae announced another massive quarterly loss totaling $29 billion. Don't worry about ole' FNM folks, you are and will continue to bail her out. In case you forgot, in addition to owning the largest insurer in the world (AIG), you also own the largest mortgage companies in the USA, FNM and FRE.

The company blamed the majority of the loss ($21.4 billion) on the new tax accountants that are now compelled to - get this - TELL THE TRUTH. The accountants reversed a lot of the previous shell games that FNM used in order to LIE to Wall Street about its financial status, such as $21.4 billion in deferred tax assets. Since there will be no profits to put up against these so-called deferred tax assets, the heretofore equity in FNM is proven to be illusory. Moreover, the CEO of FNM knew this when he was on television explaining that the firm was solvent. Give me a break! There were also $9.2 billion credit-related expenses arising from the ongoing deterioration in mortgage credit conditions and declining home prices.

The company itself said today that it may fall to negative net worth by the end of next quarter, requiring MORE taxpayer funding. Get out your wallets!

GM is another bust out. Its business plan seems to be the same as the governments: promise more than you can deliver; make products that people don't like very much, and burn through cash like mad.

Apparently a Deutsche Bank analyst agrees. Rod Lache downgraded shares of General Motors Corp. to sell from hold, saying the automaker was on the path to bankruptcy before the end of the year unless the U.S. government agrees to a bailout. Even if GM succeeds in averting a bankruptcy, we believe that the company's future path is likely to be bankruptcy-like. In Mr. Lache's research note he essentially called the company's shares worthless with a price target of $0, reduced from $4.

A price target of $0 from an analyst? Wow, finally some truth from The Street.

Some time next week I'll bet we hear how GM is being nationalized in order to save X amounts of jobs. Translation: GM is being saved because it cannot afford the UAW's pension obligations so YOU will have to pay for their retirements. Get out your wallets!

Circuit City Stores Inc. filed for bankruptcy protection today. The firm said it is facing trouble on two fronts; consumers are not spending as much now, and vendors are afraid to sell to Circuit City because they fear the upcoming shopping season will be lame. As a result, vendors are fearful that money lent out today will not be paid back tomorrow.

Ironically, by filing for Chapter 11 bankruptcy protection today Circuit City can get enough relief from current debt holders to secure merchandise for Black Friday - the start of the Christmas shopping season.

If Chapter 11 doesn't work out, Circuit City can always tap Uncle Sugar Daddy's TARP money. Get out your wallets!



Previous Day's Trading Room Results:

Trade Date: 11/10/08

E-Mini S&P Trades*
(before fees and commissions):

1) OTF sell @ 10:30am at 935.50 = +1.75 (1 lot)

2) 80% sell @ 11:05am at 924.50 = -1.75 (1 lot)

3) OTF sell @ 12:35pm at 920.25 = -1.25 (1 lot)

4) Algorithm positions (37)...combined daily total...+14.25

ZB (30 Year Bond) Trades*
(before fees and commissions):


1) No trades today.



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