AIG Wants a Federal Bailout Like Freddie and Fannie
People who read our post on Saturday may not be surprised by the sirens going off today at
headquarters. The company is in the midst of serious talks to gain liquidity from its preferred lender, the Federal Reserve.
AIG is in even worse shape this morning, as the Lehman Brothers bankruptcy will put another dent in structured finance securities and credit default swaps that AIG had insured. UBS analysts believe AIG may incur more than $10 billion in super-senior CDS losses and $5 billion in realized investment portfolio losses in the third quarter.
The company may have no choice but to put its personal lines businesses, annuities business and aircraft-leasing business up for sale.
We continue to warn investors that the market environment is still dangerous for those hoping to buy stocks expecting there is a buyer/government rescue around the corner.
figured out that it needed to get a deal done, and AIG may need to do the same.
AIG has put itself in tough position to deal from. Analysts fear the company's failure can have large repercussions a la
, so some sort of coordinated effort will not be out of the question. It's just too dangerous for investors to take any gamble here that there will be anything left for them if a rescue deal happens.
American International Group is not a recommended dividend stock at this time, holding a Dividend.com rating of 2.4 out of 5 stars.
Can a Fed Rate Cut Stem Slides of Goldman Sachs and Morgan Stanley?
meeting is looming ever larger for the markets. Some market pundits are hoping interest rates will be cut by a half-point to stem the recent financial market turmoil, which has begun to accelerate.
The Fed has cut interest rates seven times in the past year, decreasing the fed funds rate from 5.25% to 2%. With each federal rate cut that doesn't effectively slow the financial markets' downward spiral, the fears of domestic deflation increase. In short, people could begin to put off buying today in anticipation of cheaper prices tomorrow. This trend has afflicted the Japanese real estate market for the last 16 years.
Many of the market "pros" have argued that this sort of deflationary trend could never happen in the U.S., because they feel the American consumer will always spend and thereby prop up the domestic economy. With credit markets tightening, however, Americans simply will not have the sort of buying power that they've enjoyed in the recent past.
Cutting rates tomorrow could put a floor under any rumor-driven run on
, which some say have more exposure to
American International Group
than previously thought. Investors need to tread carefully here, and not be afraid to shuffle the deck of stocks if need be. We have certainly not resisted reminding investors that complacency is a bad thing in this type of market.
Goldman Sachs is not a recommended dividend stock at this time, holding a Dividend.com rating of 3.3 out of 5 stars. Morgan Stanley is not a recommended dividend stock at this time, holding a Dividend.com rating of 3.4 out of 5 stars.
Should Bank of America Have Waited to Buy Merrill Lynch?
Bank of America
is becoming the biggest financial player in the U.S. today, after announcing it will acquire Merrill Lynch for $50 billion in stock. Specifically, BAC would exchange 0.8595 shares of its common stock for each Merrill Lynch common share.
In this deal, Bank of America would be adding more than 15,000 investment advisers and $2.5 trillion in client assets, making the company a true one-stop financial shop.
In the past, we've seen many acquisitions like this one not fare so well. One such example is the 1998 Citibank acquisition of Travelers. The synergies in that deal were supposed to be never-ending; however, Travelers was later spun off in 2002 due to its drag on Citi's stock price.
At the end of the day, it appears Merrill Lynch may not have had many options. There are reports floating around that Bank of America had approached Merrill Lynch about a deal last year, when Merrill shares were trading at $90 a share, but Merrill's board scoffed at such an idea. The "sell when you can, not when you have to" mantra couldn't have been applied better than this particular situation we are reading about this morning.
We have decided to remove the shares of BAC from our "Recommended" list, as the integration issues of the two companies are a big concern. BAC barely finished a deal for troubled home lender Countrywide, and we are not sure what sort of mess exists in the company's mortgage paper. We do understand the government is there to "help" this deal in whatever way possible, but investors need to step back here and let things sort out for a bit.
We put out a piece this weekend highlighting BAC as one of the potential winners of the financial crisis -- we had no idea they'd surprise us with another monster acquisition like this one. There will be some that question the premium BAC paid for MER, and why BAC didn't wait a bit longer to get the company cheaper. Both are valid questions at this point.
Bank of America is not recommended at this time, holding a Dividend.com Rating of 3.4 out of 5 stars.
Citigroup Is a 7% Dividend Trap
has held up a bit better than some of the other financials we have covered since we initiated coverage in early June. That said, we are not advocating an investment of the shares here at this present time.
Citigroup has had its fair share of turmoil the past few months, with big losses being recorded. The company disclosed this week that it has taken a $450 million pretax hit so far this quarter, due to its exposure to the troubled mortgage finance companies Fannie Mae and Freddie Mac.
The company has posted losses for the past three quarters due to its heavy investment in assets tied to mortgages and other souring debt.
We are still avoiding shares of the stock, as we have been since our early June coverage began. We'd like to see the company sustain at its current levels and begin to show investors it has its arms around a solid turnaround strategy. In the meantime, don't let the 7%+ dividend yield entice you.
Citigroup is not recommended at this time, holding a Dividend.com Rating of 2.8 out of 5 stars.
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At the time of publication, the author had no positions in stocks mentioned, although positions may change at any time.
Tom Reese and Paul Rubillo are senior editors of Dividend.com. Visit Dividend.com for more dividend stock ratings, picks, news, and analysis for long-term and income-seeking investors.