Strange Bedfellows

September 17, 2008

The fall-out of the investment banking industry is creating some interesting partners to say the least. Merrill Lynch has been purchased by The Bank of America (one could call this a "shotgun marriage") and Lehman Bros has filed Chapter 11 bankruptcy, both of which are normal courses of action in financial turmoil.

However, as Don Roose (USC) reported today the US government was forced (forced ??) to take a 79.9% ownership interest in the largest insurance company in the world, infusing 85 billion dollars into AIG. AIG has some solid assets this will help them sell, and it helps stabilize the world economies. BUT the US government as a result now owns a majority interest in the largest insurance company in the world and 52% of all US housing mortgages after taking over Fannie Mae and Freddie Mac. The Fed is also pumping huge amounts of money into the financial sytem. So much for a free economy with no strings of tie to the federal government. To quote a friend; when you keep partnering strength with weakness you ultimately get weaker.

Don Roose of USC continues to be concerned about the huge Dow/AIG Index fund. How much of a huge postion has been liquidated is unknown. Open interest in corn was down 12,218 contracts yesterday indicating long liquidation, soybeans were down 843 contracts indicating long liquidation, cattle open interest went down 1,759 contracts and hogs went down 6,004 contracts --- all in one day. In corn, soybeans, cattle and hogs it created an almost "limit down" day.

The concern is that AIG may have large postions yet to liquidate in the futures market. It does not make sense that the US government now owning 79.9% of AIG, would want to be long futures positions. Remember the recent CFTC investigation into commodity futures buying? As I said earlier, this needs to be a time of real caution for those managing risk.