Sep. 15th, 2009

peterbirks: (Default)
One thing about this economic crisis is that a few shining lights appear who are, as it were "the men of the moment". Bob Benmosche is one such. Recently installed at AIG, he's aged the guys at the Fed and his own board by at least 10 years by saying what he thinks and talking sense.

Talking sense, as you probably know, rarely has anything to do with "saying the right thing", which is why the politicians and the grey suits at AIG are so frightened. But Benmosche's advantage is that AIG has got through Sullivan, Willumstad, and Liddy in less than two years. That doesn't really give them the option of getting rid of Benmosche, and I suspect that he knows it.

Meanwhile, his staff already love him.

Indeed, Benmosche was way ahead on my nomination list for Time's "Man of the Year". That was until Jed Rakoff made a ruling yesterday that, as far as I am concerned, qualifies him for the Supreme Court.

First, a bit of background. It's a habit of companies and regulators, in the UK and the US, to come to "settlements" before things come to trial and all of the dirty linen is washed in public. The company pays tens of millions of dollars, without admitting or denying guilt, and then issues a press release stating that it had paid the fine solely "to avoid a protracted and expensive court case that would have been in no-one's interest", by which they mean, "a protracted and expensive court case that would most definitely not have been in our interest".

Meanwhile the incompetents at the regulator (be it the SEC in the US or the FSA in the UK) get to tick a box marked "case closed successfully and cheaply".

Now, generally, I'm all in favour of anything that cuts the income of lawyers, but this was beginning to get stupid. And finally a US judge has said so. Jed Rakoff, a US District Court judge who deals with a number of business cases, has rejected an agreement between Bank of America and the SEC on the grounds that the settlement was "a contrivance designed to provide the SEC with the facade of enforcement and the management of BoA with a quick resolution of an embarrassing enquiry, all at the expense of the sole alleged victims, the shareholders".

The case itself related to BofA allegedly misleading shareholders about bonuses to be paid to Merrill Lynch executives after BofA bought Merrill Lynch this time last year. But the important point is that in the US, where at least some judges understand business and don't look down their noses at it because it is "trade", these cozy sweep-it-under-the-carpet deals are at last being stopped.

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Another interesting thing has happened this week in the markets. Last October Allianz put $2.5bn into Hartford Financial Services. This was a three-tranche investment, with $1.75bn being subordinated bonds, a further $750m being convertible bonds at $31 a share, and a "kicker" of $1.75bn in warrants at $25.32 a share. At the time Hartford was priced at about $24.

Things got worse for Hartford, and Allianz ended up having to write off $465m of this investment in Q4 2008 and another $200m or so in Q1 2009. Hartford's share price sunk to less than $3.50 at one point. Not looking good, you might think.

Anyhoo, this week Hartford's share price exceeded $25.32. Yes, Allianz's warrants were in the money. Had there been call options on those warrants, you would have been able to pick up the option for next-to-nothing in March this year.

The upshot of this? That Allianz and companies like them which played it cannily at the back-end of last year (step forward Warren Buffett) will be getting huge boosts to their balance sheet by the end of 2009. Allianz, for example, should be getting back all that $665m or so that it had to write off.

Part of this illustrates the weakness of IFRS mark-to-market accounting rules, although the old accounting rules were weak in the other direction. But the interesting point is that companies such as Allianz will be reporting monster bottom lines next April and will also be sitting on more excess capital than you could shake a stick at. Hell, even Aviva said that its capital position was now "robust". A far cry from earlier in the year when the world and his wife was predicting a wave of cash calls.

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