Recently, Tom Gallagher, an analyst from Credit Suisse lowered his earnings-per-share estimate and price target for American International Group (AIG), due to elevated losses from its derivatives business. According to Gallagher, "Virtually all the aforementioned indices have declined this quarter, with non-AAA (rated) being hit the hardest, declining between 3%-25%."

This news bodes poorly for AIG's 3rd quarter GAAP earnings in that they will likely have to take additional mark to market losses on both their investment portfolios, and CDS/mortgage insurance portfolios. Keep in mind though that AIG has tremendous underlying revenue and cash flow to help offset the write-downs but that is not the point of this article.

Often during a bear market quality companies can be bought for fractions of their intrinsic value, and one of the clearer examples of this in the current market panic is Legg Mason (LM). Legg Mason is a diversified asset manager with substantial assets under management in equities, bonds, money markets, and fund of funds. Contrary to public perception they are not overly reliant on any one fund or manager but instead they have a broad array of managers and asset classes to offer investors in their funds and separate accounts.

At the close of trading on July 28, 2008 LM had the following statistics:

After the stunning developments that occurred today I thought it would be a good idea to update my previous views on Fannie Mae (FNM) and Freddie Mac (FRE). I'm not going to get into any moral hazard discussions because A) I don't believe in judging others, and B) it is irrelevant to evaluating this investment. A few key points:

1) The businesses didn't change last week. The stock prices did which is irrelevant to the actual business fundamentals. These companies do have some embedded losses in their portfolios due to the housing slump, but I have no doubt that the actual losses will be substantially less than the mark to market losses that have already been taken by the respective companies. Horrendous and irresponsible journalism had far more to do with what we saw last week then the actual fundamentals of the business.

Over the last week, Freddie Mac (FRE) and Fannie Mae (FNM) have seen their share prices decimated. The primary concerns are higher funding costs and misinformation about the companies' business and balance sheets.

In listening to all of the rumors and discussions on television in regards to the GSEs' prospects, it is clear that most commentators and observers discussing these institutions have very little understanding of the actual businesses.