Sunday Musings: Using The Numbers To Suit Your Needs

You may recall my book review last June with the title “Why Business People Speak Like Idiots.”

I am reminded of the stupid statements being pushed on to the public almost daily. One in particular that caught my eye a couple of days ago was a blurb by the WSJ MarketBeat called “AIG Slumps…If One Believes in Numbers.” Let’s listen in:

Beware of companies that find new ways to value assets while they’re sinking.

Where have we heard this story before? A company loses a bundle of money due to depressed values for its assets, and it says those valuations don’t really count.

That’s what has happened to American International Group Inc. today in its conference call, and not for nothing, but instead of bouncing in the aftermath of the company’s chat with analysts, the stock is tailing off, lately hitting its worst level of the day, down 8%.

The company lost $7.8 billion in the quarter. During the conference call, Steven Bensinger, vice chairman at the company, noted that the $19.3 billion unrealized loss estimate in one of its pools of collateralized debt obligations doesn’t jibe with their analysis, which should suggest a loss of $1.2 billion to $2.4 billion.

Naturally, the estimate to be ignored is the one based on accounting principles, as the company says that “during the first quarter of 2008 AIG developed a new methodology to estimate more precisely its potential realized losses from this portfolio.” Naturally, this new methodology “lowers” the “potential realized losses.”

They also ignore a third-party estimate of $9 billion to $11 billion in losses in this particular portfolio, saying “but because of the disruption in the marketplace we continue to believe that a market-based analysis is not the best methodology to use as a predictor of AIG’s potential realized losses.” Floyd Norris of the New York Times says the company is in denial, at a time when most institutions (even Citigroup) have tried to move past alchemy-based valuation techniques.

For financial institutions, it seems lower housing valuations (as determined by a market) are enough to alter lines of credit, raise certain interest rates or change insurance and loan terms. But market-based analyses of their own portfolios? Obviously hogwash.

Some analysts recently suggested that the improvement in certain credit markets in the second quarter would offset some of the first-quarter losses, and AIG mentioned this in the conference call, saying the commercial mortgage-backed securities market has improved, but that the residential mortgage and subprime securities have not. Still,
the firm says the ABX Index (which some believe does have problems) “is not very well correlated to our books,” and therefore should also be ignored.

Another odd wrinkle, and maybe this is just a confidence ploy, is this: the company has decided to raise its dividend. The insurance giant is going to raise $12.5 billion in capital, some of which will then be used…to pay current shareholders more money. They’re borrowing from Peter to pay Peter, really. Mike Shedlock of Sitka Capital wrote recently of companies borrowing money to pay dividends. “It does not make economic sense to borrow money at 8% to pay a dividend of 5%,” he writes, surmising that perhaps there would be an adverse reaction if dividends were cut.

AIG apparently feels this way, but it isn’t working so far. Bank of America analysts wrote in research today that “over time, we believe the company will have to dial down its leverage and risk profile, which is likely to put pressure on operating earnings.”

[Emphasis added]

I have to admit, reading this left me pretty much speechless. I can’t remember ever having heard this much denial, numbers manipulation and BS by one company since maybe the Enron days.

This type of garbage is being unleashed on the public almost daily, maybe not to that extreme; however, if you invest in individual stocks (I don’t) and follow their news releases, make sure you understand what is really being said.

If I were a stockholder in AIG, I would definitely review my reasons for having invested in this company in the first place.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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