• Contra Geithner
    Posted by on January 23rd, 2009 at 12:38 pm

    Joe Weisenthal makes the case against Geithner:

    We know that not everyone would’ve made the same decision here. We’ve worked with people in our professional life, who everytime they encountered something legally or ethically murky opted to make the conservative choice that wasn’t immediately beneficial to them. They do exist, believe it or not. We suspect a guy like Warren Buffett would’ve asked for a professional opinion on the tax issue, were he in that same position.
    Again, it’s not that Geithner is so bad, it’s just that his mindset is apparently similar to the people who got us here. Substitute “Moody’s” for “TurboTax” and it should be be obvious.
    It’s moot at this point. The speed of the banking crisis means the full Senate will sign off on today’s finance committee vote. But we will soon have a Treasury Secretary who was basically of the same mindset as everyone else, rather than a real clean break from the failed, convenient thinking of the past.

    Geithner said he simply made a mistake on his taxes and apologized. Well, the apology is good but it misses the point, the mistake is the issue. Calling it one doesn’t diminish the significance. The Secretary of the Treasury should know how to do his taxes without making obvious, boneheaded mistakes.
    Larry Ribstein has more.

  • New Stock Options for Google Employees
    Posted by on January 23rd, 2009 at 10:35 am

    A few years ago, I criticized a Wall Street Journal story that claimed corporate executives were profiting off 9/11 by granting themselves new options after the market dropped. I thought this was a completely made-up scandal. The article described perfectly legal activity in such a way as make it seem sinister (see here for my original post).
    The reason why I mention this is that Google has essentially done the same thing the WSJ was complaining about two-and-a-half years ago. Here’s the AP story in full:

    Google Inc. is allowing its employees to swap their stock options for new ones that will give them a better chance to profit from their holdings.
    The Mountain View-based company outlined the exchange program Thursday in its fourth-quarter earnings report. Google suffered its first-ever decline in quarterly profit because of charges taken to account for its deteriorating investments in Time Warner Inc.’s AOL and Clearwire Corp.
    Google will have to absorb another hit to earnings to pay for the new options being made available to its 20,222 employees. Management expects the accounting charge to be about $460 million, assuming the new exercise price for the options is around $300.
    Google shares ended Thursday at $306.50. The new options are expected to be priced on March 2. The exchange program is scheduled to start Jan. 29 and expire March 3.
    A 47 percent drop in Google’s stock price during the past year drove the decision to give employees a chance to turn in options that have been awarded during the past few years. As of Sept. 30, about 8 million of Google’s 14.3 million outstanding stock options had an exercise price of at least $400, leaving roughly 17,000 employees with options that are “under water” and can’t be cashed in now at a profit.
    Google reasons employees will have greater incentive to remain at the company and worker harder if they have stock options that are more likely to yield a windfall.
    The special treatment comes as Google is eliminating some employee perquisites and even laying off a smattering of workers to shore up its profits during the recession.

    For the record, I don’t think there’s anything wrong in what Google is doing. But I’m curious if we’ll hear the same screams of protest that we got in the summer of 2006.
    To use the problematic logic from the WSJ’s original article, Google executives are “profiting off” the global economic turmoil. Worse, they’re giving themselves raises while they’re laying their own people off.
    Where’s the media outrage?

  • Aflac’s Press Release
    Posted by on January 23rd, 2009 at 10:12 am

    I’m glad to see AFLAC (AFL) making a public statement:

    “I think it’s also appropriate to comment on the status of the perpetual debentures, or so-called “hybrid securities” we own. Based on preliminary year-end numbers, our holdings of hybrid securities at fair value were $8.1 billion, or approximately 11.8% of our consolidated investment portfolio of $68.6 billion. We purchased the hybrid securities from 1993 to 2005. For GAAP accounting purposes, the perpetual debentures are held in the available-for-sale category. As such, they are marked to market and reflected on the balance sheet at fair value. By contrast, these perpetual debentures are carried at amortized cost for statutory accounting purposes. That means that the changes in the fair value of these hybrid securities are not included in, and therefore do not impact, the risk-based capital ratio.
    “As we discussed in our third quarter earnings announcement and conference call, the Securities and Exchange Commission (SEC) issued a letter on October 14, 2008, to the Financial Accounting Standards Board (FASB) on the topic of hybrid securities. The SEC’s letter noted that due to the debt characteristics of hybrid securities, a debt impairment model could be used for filings subsequent to October 14, 2008, until the FASB further addresses whether a debt or equity impairment approach is most appropriate. Aflac’s debt impairment approach is primarily based on an assessment of whether it is highly probable we will receive timely payment of interest and principal, whereas our equity impairment approach is based on the aging and degree of unrealized losses. With no pronouncement forthcoming from the FASB, we continued to apply our debt impairment model to the perpetual debenture investments as of December 31, 2008. Pending new guidance from the FASB, we will continue to use the debt impairment approach. In addition, for statutory accounting purposes, we will continue to evaluate our perpetual debenture holdings using the debt impairment approach, and we do not anticipate that approach changing.”

  • Worst Hoax Ever
    Posted by on January 22nd, 2009 at 4:08 pm

    Dude, if you’re going to be a jerk, at least get a copy-editor.

  • Strong Earnings from Baxter
    Posted by on January 22nd, 2009 at 2:19 pm

    Baxter International (BAX), one of the new stocks on my Buy List, posted decent earnings for the fourth quarter. Earnings-per-share came in at 91 cents, two cents ahead of the Street’s estimate. The company sees 2009 EPS ranging from $3.70 to $3.78. That could be on the low side.

    JP Morgan analyst Michael Weinstein wrote in a research note. “To put this in perspective, at the start of 2008, management provided initial guidance of $3.10 to 3.18 a share, yet ended up delivering $3.38.”

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  • AFLAC’s Hybrids
    Posted by on January 22nd, 2009 at 11:44 am

    The problems in the British banking sector have spread back across the Atlantic to strike our very own AFLAC (AFL). The stock is getting crushed today on concerns about its losses in UK bank investments. Like a lot of insurance companies, AFLAC invests in perpetual debenture investments or “hybrid securities,” and an analyst is worried about the losses they’ve taken in banks like Royal Bank of Scotland, HBOS or Barclays.
    Morgan Stanley said, ”If even a small portion of these losses are realized, the hit to Aflac’s capital ratios could be substantial, and their overall capital adequacy could be significantly less than most investors believe.”
    Barron’s notes:

    According to Morgan, Aflac has nearly $8 billion exposure to hybrid securities, with as much as 80% of this exposure to European financial services companies, including Royal Bank of Scotland (RBS) and Barclays (BCS), both of whose solvency has become a subject of open conjecture amid talk that the British Treasury might nationalize some of its financial institutions.
    Some of the hybrid securities products have declined as much as 30% in just the past week, so that many have traded at less than 50 cents on the dollar. It’s these losses, that, if realized, would hurt Aflac’s capital adequacy.

    The stock opened down 11% but it’s slid all morning. At one point, AFL was down 39% for the day. In the most recent 10-Q, AFLAC discussed some of the accounting issues involved in their hybrids:

    Securities and Exchange Commission Guidance: On October 14, 2008, the Securities and Exchange Commission (SEC) issued a letter to the FASB addressing recent questions raised by various interested parties regarding declines in the fair value of perpetual preferred securities, or so-called “hybrid securities,” which have both debt and equity characteristics and the assessment of those declines under existing accounting guidelines for other-than-temporary impairments. In its letter, the SEC recognized that hybrid securities are often structured in equity form but generally possess significant debt-like characteristics. The SEC also recognized that existing accounting guidance does not specifically address the impact, if any, of the debt-like characteristics of these hybrid securities on the assessment of other-than-temporary impairments.
    After consultation with and concurrence of the FASB staff, the SEC concluded that it will not object to the use of an other-than-temporary impairment model that considers the debt-like characteristics of hybrid securities (including the anticipated recovery period), provided there has been no evidence of a deterioration in credit of the issuer (for example, a decline in the cash flows from holding the investment or a downgrade of the rating of the security below investment grade), in filings after the date of its letter until the matter can be addressed further by the FASB.
    As more fully discussed in Note 3 of the Notes to the Consolidated Financial Statements, in light of the recent unprecedented volatility in the debt and equity markets, we have concluded that all of our investments in perpetual debentures, or hybrid securities, should be classified as available-for-sale securities. We have also concluded that our perpetual debentures should be evaluated for other-than-temporary impairments using an equity security impairment model as opposed to our previous policy of using a debt security impairment model until further guidance is provided by the SEC and the FASB. We recognized realized investment losses of $294 million ($191 million after tax) in the third quarter of 2008 as a result of applying our equity impairment model to this class of securities. The impact of classifying all of our perpetual debentures as available for sale and assessing them for other-than-temporary impairments under our equity impairment model was determined to be immaterial to our results of operations and financial position for any previously reported period.

    AFLAC has said that it’s “comfortable” with its capital position. Earnings are due on Monday, February 4.

  • Political Interference in Bank Bailout Decisions
    Posted by on January 22nd, 2009 at 11:10 am

    I’m shocked! Absolutely shocked something like this could happen:

    Troubled OneUnited Bank in Boston didn’t look much like a candidate for aid from the Treasury Department’s bank bailout fund last fall.
    The Treasury had said it would give money only to healthy banks, to jump-start lending. But OneUnited had seen most of its capital evaporate. Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives’ use.
    Nonetheless, in December OneUnited got a $12 million injection from the Treasury’s Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.
    Mr. Frank, by his own account, wrote into the TARP bill a provision specifically aimed at helping this particular home-state bank. And later, he acknowledges, he spoke to regulators urging that OneUnited be considered for a cash injection.

    The WSJ has a nice graphic showing the distribution of TARP funds.

  • Parsons Named Chairman of Citigroup
    Posted by on January 21st, 2009 at 5:51 pm

    Remember George W. Bush? Me neither, but once he said that “Wall Street got drunk.”
    Few folks got more boozed than the kids down at Citigroup (C). The good news is that Dick Parsons has been named as their new chairman.
    The irony, of course, is that Parsons is a vinter. No seriously. Naturally, here’s the family crest.

  • The House of Commons Is a Tough Crowd
    Posted by on January 21st, 2009 at 5:23 pm


    (Via: Paul K)

  • This Day in Gold History
    Posted by on January 21st, 2009 at 5:20 pm

    From This Day in Market History:

    On January 21, 1974, gold hit a record $161.31 and silver hit a record $3.97 an ounce in London. It was still illegal for Americans to own the metal, until it was legalized on the last day of 1974.
    On Monday, January 21, 1980, gold hit $850 an ounce, a level it would not exceed for the next 28 years. Gold was over $800 for only one day back then, and it was over $700 for only three or four days. This daily spike to $850 was gold’s one-day bull market peak, a typical “spike” peak.