Another Example Of De-leveraging

AIG this morning is selling off its prized business, their Asian life insurance unit for $20 billion.  This money supposedly will be used to pay off its government loans.  The buyers could bee HSBC, Prudential, or China Life Insurance Co.  This is beginning to be a pattern.  Citigroup had to sell off part of their brokerage business last week to Morgan Stanley.  This is what we’ve been talking about for weeks on here and on my radio show.  This type of action could continue to put pressure on stocks.  These struggling businesses only have a few options when they need capital.  They can issue bonds at 20% because of the risk to investors which the companies really can’t afford to do.  They can issue more stock and dilute the other stock holders.  Or, the pattern we’re seeing right now, which is selling off their best pieces of the business.  They are stripping down the companies and basically cannibalizing themselves.  It’s the equivalent if you were struggling with your income and you had debt obligations to meet.  What would you do?  It’s called de-leveraging.  You are shrinking your balance sheet.  You’d maybe sell that expensive house for cheaper than it’s really worth.  You’d pay off the debt so you don’t have the monthly expenditure.  Then, you’d have this skinny balance sheet but your net worth wouldn’t grow as fast because when housing prices recover, you don’t own a house to profit from.  Remember, the only reason companies lever up is because they either have to or they want to buy a fast growing asset with cheap money (low interest debt).  If you did sell off your house and pay off the house, you’d basically be starting over building wealth and trying to find alternative ways to build that wealth.  That’s what these companies are going through right now.  I think perhaps the thing we should focus on are the people buying these good assets are cheaper prices.  Now, you do have to be careful.  Remember, Bank of America bought Merrill Lynch.  At the time, it looked like they were getting a steal.  But, they are still having big problems.  But, the potential bidders of Prudential, HSBC, or China Life Insurance may need to be checked out.  Any time there’s a distressed seller, there’s a smart buyer taking advantage of them.


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