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Puts and Calls: The price of settling

Tom Karol Occasional Political Commentator
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Will AIG pay back its bailout? It depends on whom you listen to. During Wednesday’s hearing at the Congressional Oversight Panel for the Troubled Asset Relief Program, the government folks and AIG’s chief executive spent most of their time discussing why the AIG bailout was warranted and how things are getting better. They suggested that AIG may be able to pay off some debts, thanks to the sale of two foreign life insurance subsidiaries, by the end of the year. The managing director of insurance ratings at Standard & Poor’s suggested that the agency may lower the already-low rating of AIG if its operating performance does not improve. The managing director of property and casualty insurance research at Keefe, Bruyette & Woods noted that the company recently downgraded common shares of AIG to underperform and established a price target of $6 — despite yesterday’s closing market price of $34 for AIG. If that weren’t bad enough, 20 percent of Prudential UK shareholders announced that they plan to vote against the $35.5 billion takeover of AIG’s life insurance subsidiary.

No changes forthcoming on Fannie and Freddie: On Wednesday, Federal Housing Finance Agency acting director Edward DeMarco told the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises that the present state of conservatorship for Fannie Mae and Freddie Mac was not a long-term solution, but that he had no particular insight when that may change. “I can’t speak for the administration’s timeline of coming before Congress with a specific proposal,” he said, suggesting he is even left out of discussions with the administration. Despite the written statement of Rep. Paul Kanjorski, Pennsylvania Democrat, chairman of the subcommittee, that, “Today’s hearing is part of a deliberative process that will ultimately lead to a new housing finance system,” the sole witness was unable to offer information on changes, and Kanjorski suggested that Congress should await the final report from the Financial Crisis Inquiry Commission before tackling Freddie and Fannie, even though the GSEs were “not major contributors” to the crisis.

Flash crash prompts SEC rule for better information: Twenty days after the stock market drops of May 6, the Securities and Exchange Commission and other regulators are unable to say what happened. This is due in large part to the fact that the complexities and diversity of share trading resulting in the SEC and other market regulators being unable to track trade data across multiple markets, products and participants. On Wednesday, the SEC proposed a new rule that would require the self-regulatory organizations to establish a consolidated audit trail system that would enable regulators to track information related to trading orders received and executed across the securities markets. SEC Chairman Mary Schapiro said the change would “allow us to rapidly reconstruct trading activity and quickly analyze both suspicious trading behavior and unusual market events.”

Treasury makes more TARP profits: In some good news, the Treasury department announced Wednesday that it sold about 20 percent of its Citigroup common stock holdings and received gross proceeds of about $6.2 billion. Treasury received 7.7 billion shares of Citigroup common stock last summer as part of the exchange offers conducted by Citigroup to strengthen its capital base. Treasury exchanged the $25 billion in preferred stock it received under TARP for common shares at $3.25 per common share. Treasury sold the shares at $4.13 a share for a profit of 88 cents a share, or $1.32 billion. Treasury currently owns about 6.2 billion more shares of Citigroup common stock and plans to sell an additional 1.5 billion shares in the near future. Earlier reports that the Qatar Investment Authority has been interested in buying Citigroup stock from Treasury continue and have been neither confirmed nor denied by authorities.

Goldman going to the mattresses? CNBC.com reports that, contrary to market rumors, a settlement between Goldman Sachs and the SEC is not imminent. The agency accused Goldman in a suit filed April of selling a collateralized debt obligation without disclosing that hedge-fund firm Paulson & Co. helped pick some of the underlying mortgage securities and was betting on the financial instrument’s decline. Instead of settling, the Goldman may be preparing to file a detailed response to the fraud charges including a full-blown, point-by-point defense against the allegations. The unique nature of the suit, rumors of a $500 million to $1 billion settlement demands by the SEC, reputed requirements that Goldman be made an example of bad behavior, and the overall aggressive reputation of Goldman indicate that there may be some validity to the potential for Goldman to contest the matter, rather than roll over.Put