Comments on Timothy Travis' articles RSS Syndication from SeekingAlpha.com http://seekingalpha.com/author/timothy-travis/articles http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-285012 285012 Fri, 17 Oct 2008 22:29:06 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-251443 251443 Thu, 11 Sep 2008 09:38:32 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-249580 249580 Tue, 09 Sep 2008 13:58:29 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-247511 247511 Sun, 07 Sep 2008 12:28:04 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-242073 242073 Sat, 30 Aug 2008 04:56:04 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-241924 241924 Fri, 29 Aug 2008 16:34:20 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-241893 241893 Fri, 29 Aug 2008 16:00:22 -0400
Go to their August 10Q, go to page 101, see the table "contractual obligations". There are $1 trillion in total. Over $700 billion on one line, their insurance and investment contracts. Check the times and you will see those stretch out over 30 years into the future at the average run rate.

When credit gets worse, interest rate spreads rise, and this creates mark-to-market losses in current value accounting. But as every bond investor knows, rates moving higher reduces the actual value of the position only up to the duration point in the future. At the duration point, it has no impact. And beyond it, the sign of the impact reverses.

Well, liabilities also change in present value when interest rates change. Significantly higher rates will dramatically lower the present value of a liability stream that is $700 billion in size and spread over 30 years into the future.

Can AIG "mark" its liabilities to reflect the fact that a much smaller investment in bonds at today's huge spreads, will fully cover those future obligations, than it would take to meet them a year ago?

One entry and one side of the sheet accounting is occurring.

It is only justified if the *entire* increase in spreads since last summer shows up as higher loan losses, dollar for dollar. They won't. Instead, higher spreads will cover the higher loss rates and then make up much of the losses so far, as well.

I leave aside how ridiculous it is to worry about the liquidity of a company with $700 billion in float for 30 years, and $100 billion a year in operating cash flow.

The present value of AIGs bondholdings has indeed fallen, because you can go buy bonds or preferreds paying 8% to 10% right now, not the 6% of last year.

But being a huge bond-owner with cheaply borrowed money (much of it essentially free, if the underwriting is done remotely correctly) is a much better business to be in when bonds yield 8-10%, than when they yield 6%, let alone the 4% of a few years ago.]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-241398 241398 Fri, 29 Aug 2008 05:42:21 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240599 240599 Thu, 28 Aug 2008 00:55:37 -0400
1. Our financial system is quaking from the huge deleveraging happening because of the huge amounts of derivative securities tied to the mortgages/real estate industries as they themselves unwind. As this unfolds, all those gamblers who are on the hook will be penalized severely, and might disappear, because of the power of leverage, which cuts both ways with a 10x or 20x effect.

2. AIG does not simply hold long CDOs or CDS. They were 'insurers' and sold short CDS ie were the insuring party on a lot of credit default swaps tied to mortgages/real estate. So, their potential losses from this are unlimited and leveraged.

3. So, as hedge funds or whoever got their CDS, CDO insured by AIG gains on a leveraged basis due to house prices declining, AIG, MBIA etc will bear the losses on the other side of that zero-sum game. A 10% decline in house prices could potentially reflect itself in a 100% decline in shareholder equity amounts on which AIG, MBIA etc insured those 'credit derivatives' (CDO, CDS, ABS, CLO...)

4. Therefore, potentially these stocks have negative or zero future shareholder equity. If so, how can anyone place a multiple on the fair book value on an expected basis. Remember, trailing book value will look huge and you must not value these financials now on trailing P/B basis, but only on an expected P/B basis.]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240531 240531 Wed, 27 Aug 2008 20:58:03 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240496 240496 Wed, 27 Aug 2008 19:45:03 -0400
AIG sounded a lot like ABK when they started talking about why they increased the stress case losses on the insured CDO portfolio from a range of 1.2 -2.4 billion to a range of 5 - 8.5 billion. Apparently they didn't understand the structural considerations created by downgrades of the collateral. They do now.

I worry about the rating agencies mandating a capital raise under adverse conditions, so I am keeping the AIG position small until I can get some clarity on the issue. ]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240469 240469 Wed, 27 Aug 2008 18:49:55 -0400
one troubling thing is that if you look at AIG's investment portfolio, it holds a fair amount of 2006 and some 2007 vintage CDOs. i think losses will be higher on this paper even if they hold to maturity. it also seems to me that the presence of this paper suggests that the right hand is not speaking with the left - if the CDS team saw such problems with 2006 and 2007 mortgages, why was this information not relayed to the investment portfolio team? Hank may have been smart enough to run this empire but it seems to me that the inconsistent holdings (don't write 2006 CDS but hold 2006 CDO's) combined with the substantial overexposure to the mortgage business (what percentage of AIG’s total capital based was exposed to the US mortgage market? Why was this allowed?) suggests that this thing is too unwieldy for one person to manage – similar situation over at Citigroup (which also holds a pile of high grade CDOs marked down to $0.60 which has yet to suffer 1 dollar of cash flow impairment).

One other thing – I think mark-to-market clearly has problems but this is rule. For that reason, it is not impossible that a further move downward in ABX causes further mark-to-market hits, leading to rating downgrade, additional collateral, and then further equity raise. Stock is so cheap it won’t matter if you hold the Company for several years but if you’re managing money for clients, it is much tougher as you could conceivably endure 20% hit for another follow-on offering!…my two cents
]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240319 240319 Wed, 27 Aug 2008 15:08:21 -0400 The only problem I have with this article is I wonder if there needs to be more analysis on what the actual CDOs have underlying them. The real problem with the CDOs is that they're collateralized not by straight mortgages or assets, but tranches and pools of asset backed securities in the first place. A CDO may be an overcollateralization of tranches of securities that are all about to get wiped out, because the securities that back the CDO are early in line for default. If you're collateralizing the CDO with tranches of junk, the overcollateralized super senior portion of the CDO get's wiped out too, because overcollateralization of zero is still zero, or close enough. It's the senior portions of the original AB security that will prove to be collateralized better, not the CDO and it's the double layerering of risk that is the biggest problem, IMO. Until you figure out piece by piece the loss severities on the securities underlying the CDO, it's really hard to know what's going on. That's very interesting a lot of it is vintage 2005. I have a feeling understanding AIG would take enormous amounts of time, which has been my biggest problem. Ultimately I think you're right, but it's a hard fish to fry.

I think the things I want to know regarding AIG are:
1) Is the guaranty business potentially walled off from the rest of the company if they were to just abandon it?
2) If they were to write off those securities to zero, what's their adjusted tangible book value?
3) Assuming 1, what's the value of the rest of the individual components of the company?
4) Not assuming 1, what's the rest of their exposure?

Personally, I think those questions are the root of figuring out the Margin of Safety. I'd say, assume the absolute worst and then get an idea of what's it's worth. Email me offline if you want to discuss more: gregharris_73 .. at .. yahoo dot com. I really don't have enough time to root through as much as I'd want to by myself, but I'm certainly willing to put in some work through it. ]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240320 240320 Wed, 27 Aug 2008 15:08:21 -0400 The only problem I have with this article is I wonder if there needs to be more analysis on what the actual CDOs have underlying them. The real problem with the CDOs is that they're collateralized not by straight mortgages or assets, but tranches and pools of asset backed securities in the first place. A CDO may be an overcollateralization of tranches of securities that are all about to get wiped out, because the securities that back the CDO are early in line for default. If you're collateralizing the CDO with tranches of junk, the overcollateralized super senior portion of the CDO get's wiped out too, because overcollateralization of zero is still zero, or close enough. It's the senior portions of the original AB security that will prove to be collateralized better, not the CDO and it's the double layerering of risk that is the biggest problem, IMO. Until you figure out piece by piece the loss severities on the securities underlying the CDO, it's really hard to know what's going on. That's very interesting a lot of it is vintage 2005. I have a feeling understanding AIG would take enormous amounts of time, which has been my biggest problem. Ultimately I think you're right, but it's a hard fish to fry.

I think the things I want to know regarding AIG are:
1) Is the guaranty business potentially walled off from the rest of the company if they were to just abandon it?
2) If they were to write off those securities to zero, what's their adjusted tangible book value?
3) Assuming 1, what's the value of the rest of the individual components of the company?
4) Not assuming 1, what's the rest of their exposure?

Personally, I think those questions are the root of figuring out the Margin of Safety. I'd say, assume the absolute worst and then get an idea of what's it's worth. Email me offline if you want to discuss more: gregharris_73 .. at .. yahoo dot com. I really don't have enough time to root through as much as I'd want to by myself, but I'm certainly willing to put in some work through it. ]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240267 240267 Wed, 27 Aug 2008 14:12:30 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240201 240201 Wed, 27 Aug 2008 12:55:11 -0400
I would have touched on some of this but the article was long enough as is. The market cap is $55 Billion as it stands right now. Their stated book is $78 billion to which I would conservatively add back $15 billion to come to about $93 billion adjusted book value.

This provides me with a considerable margin of safety as is and AIG has consistently proven that they can return 11-15% on equity over long periods of time. I'd estimate that their normalized earnings are arond $12-$15 billion per year assuming no growth which is probably far too conservative given the companies track record of growing earnings. Put a 10 multiple on those earnings and you will probably be lot closer to a reasonable market cap then you are right now. The point is the margin of safety is so large that it would be a waste of time and effort to try and come up with a precise DCF analysis. I'd be lying if I said I could accurately forecast exactly how this business will look in 5 years and what the cumulative losses will be. I feel extremely certain however that by observing the information available and making reasonable forecasts given the current strains on the US housing market and projecting further declines, that AIG is at least 50% undervalued under the most dire circumstances. The losses already taken are vastly overstated any reasonable assumptions. The capricousness of the ratings agencies could force a capital raise which would hurt shareholders but would also provide another buying opportunity for dollar cost averaging at absurd prices.
]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240183 240183 Wed, 27 Aug 2008 12:34:39 -0400
Merrill's fire sale was from the 2007 vintage which is significantly worse then the 2005 vintage. Even with that being said I think that it was foolish for them to sell those securities at those prices in addition to financing them. I think that it was more of an institutional decision by John Thain to wash his hands of the securites, as opposed to an actual business decision in which they would try to maximize value for their shareholders.

Investment Banks use far more leverage then insurers and have very different capital requirements in relation to mark to market losses then insurers, so it is not really an apples to apples comparison. Just think about the fact that these are secured first lien mortages for the most part. The CES and HELOC exposure is more risky but they also have more protection built into the structures, but on the first lien exposure come up with a default rate and severity that can possibly justify those prices. It is nearly impossible to come up with justification for the current pricing.]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240142 240142 Wed, 27 Aug 2008 12:10:30 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240115 240115 Wed, 27 Aug 2008 11:53:33 -0400 http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240066 240066 Wed, 27 Aug 2008 11:11:08 -0400
The thing that's holding me back from buying more shares is uncertainty over how much capital the mentally impaired rating agencies will force them to raise based on these GAAP numbers market to an inefficient, illiquid and frightened market. They've already had to dilute the heck out of investors by raising $20 billion at a low stock price.]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-240026 240026 Wed, 27 Aug 2008 10:42:41 -0400 What is the 'correct' current value of AIg based on their expected normalized earnings, normalized adjusted book value and cash flow? Has anyone figured that out with a reasonable degree of accuracy? Can the author tell us anything about that other than he thinks AIG's stock is 'too cheap'? If not, what is that notion of 'too cheap' based upon? ]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-239990 239990 Wed, 27 Aug 2008 10:14:57 -0400
FASB mark-to-market accounting rules do their level best to give an accurate picture of a balance sheet at a point in time, namely today. However, the equity value of a company is a function of all of it's future cash flows, discounted to today's present value. The distinction between the two numbers can be, and usually is, large.

Notwithstanding Robert Merton's argument suggesting that capital market stock prices accurately reflect all the information available about the value of a stock today, I concur with the author of this Seeking Alpha article, in suggesting that Wall Street today is paying too much attention to today's mark-to-market book equity, along with the risk of 1 to 2 year sustained EPS losses, rather than focusing on longer run cash flow generation from AIG.

Of course it's a matter of opinion, I just happen to think that Hank Greenberg, Warren Buffet and Robert Willumstad might well agree.

Disclosure -- As of Friday, August 25th, I'm long AIG too. I'm trying to make up for buying AIG Jan 60 '08 Calls at $10 in September '07!

Timing is everything, and differing views is what makes a market. I've placed my bet, and I like to think of it as an investment, though I'll be the first to admit that it certainly does have a speculative component.]]> http://seekingalpha.com/article/92887-aig-and-the-lunacy-of-gaap-reporting?source=feed#comment-239857 239857 Wed, 27 Aug 2008 07:47:17 -0400 ]]> http://seekingalpha.com/article/87655-legg-mason-quintessential-bear-market-value-play?source=feed#comment-228402 228402 Tue, 12 Aug 2008 02:22:43 -0400 http://seekingalpha.com/article/87655-legg-mason-quintessential-bear-market-value-play?source=feed#comment-224197 224197 Wed, 06 Aug 2008 13:11:50 -0400 http://seekingalpha.com/article/87655-legg-mason-quintessential-bear-market-value-play?source=feed#comment-218638 218638 Wed, 30 Jul 2008 14:49:47 -0400 http://seekingalpha.com/article/87655-legg-mason-quintessential-bear-market-value-play?source=feed#comment-218227 218227 Wed, 30 Jul 2008 09:22:39 -0400 ]]> http://seekingalpha.com/article/87655-legg-mason-quintessential-bear-market-value-play?source=feed#comment-218053 218053 Wed, 30 Jul 2008 05:05:43 -0400 http://seekingalpha.com/article/87655-legg-mason-quintessential-bear-market-value-play?source=feed#comment-218037 218037 Wed, 30 Jul 2008 03:56:22 -0400 They will not go completely out of business anytime soon, granted. But profits will not rise to their prior levels anytime soon. chances are, they never will again. buyers beware ]]> http://seekingalpha.com/article/87655-legg-mason-quintessential-bear-market-value-play?source=feed#comment-217855 217855 Tue, 29 Jul 2008 20:12:03 -0400
You can't excuse Bill Miller's performance by saying he's a value manager. According to Morningstar, he is in the 100th percentile of Large-Cap Blend (his real category - is AMZN a value pick?) funds over the last 5 years (with 1st percentile being the best). That means he is actually The Worst of his peers. This is a guy with a huge reputation, lots of access to companies, and a very high expense ratio for a large-cap U.S. fund with high assets (of course this is part of why he is underperforming, but the high expense ratio is supposed to be justified by outperformance), yet if you name ANY large-cap fund manager, he is beating Bill Miller (and charging you less in yearly expenses). When someone picks as many losers as Bill Miller has and rides them down as far as he has, smart investors stay away. The only thing keeping LM alive is people's misplaced hope in managerial ability.

Ok, so we've disposed of Bill. Name one of these other LM funds that I should take a look at. Money-market funds that are only staying at $1.00 because LM is supporting them with massive capital infusions out of rapacious expenses on their other funds (How long can they keep that up for? Why wouldn't I just buy a MM fund from Vanguard or Fidelity?) Bond funds that aren't even on the deep sonar of investors who prefer PIMCO, Harbor, Vanguard, Fidelity, T. Rowe Price, etc.? Come on. They'll limp along with the customers that don't read their annual reports, but the smart money will be gravitating to the better-run investment companies. This company's decline is yet another incident that demonstrates the validity of John Bogle's arguments about mutual funds. ]]>