What’s Up With Washington Mutual and AIG?

Forget Lehman, the biggest debates on the Street involve the continuing fate of other financials, but particularly today Washington Mutualand AIG.

Washington Mutual. Down 38 percent this week, but this one is not hard to figure out. On Monday before the open, the company announced they were ousting their CEO and entering into a Memorandum of Understanding (MOU) with their regulator, the Office of Thrift Supervision (OTS). There are few details here, but it's obvious their regulator is requiring them to report to them about risk management and compliance issues.

In this hyper-charged environment, the shorts are using this as an excuse to continuing shorting: the implication is that OTS has placed them on some kind of probation, and there is SOMETHING that is worrying them, most likely the loan portfolio. The stock has been under pressure since the announcement.

AIG. Down 17 percent this week to a 13-year low. This is much more complicated.

Issues that come up include:

1) concern that another capital raise might be necessary. They already raised $20 b in May--another capital raise is certainly a possibility, particularly if there are notable losses this quarter. Of course, it would be dilutive and would not be met warmly by investors;

2) concern about possible ratings downgrades. Moody's on August 7th, a day after AIG earnings came out, bluntly warned AIG that their affirmation of their debt ratings was based on an understanding that AIG "will actively address potential liquidity and capital needs at various operating units...failure to address these concerns in the near term could lead to rating downgrades..." Morgan Stanley also raised this issue in an investor note;

3) the extent of ownership of Fannie and Freddiepreferred shares.

At any rate, we will not have to wait long for more news. A strategic review announcement is expected by September 25.


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