Saturday, November 1, 2008

Does Anybody Understand Balance Sheets?


On October 6, German insurer Allianz invested $2.5 billion in U.S. insurer Hartford Group. Sounded reasonable. Hartford shares had declined from a high of $103/share to around $30, operations were sound but the balance sheet needed some shoring up. This week, after Hartford reported the September quarter, huge losses and the fact that the assets underlying its annuity book were unraveling, the stock closed at $10.

On October 27, Mitsubishi Financial announced plans to raise $10.5 billion in fresh capital, 11 days after itself investing $9 billion in Morgan Stanley. The shares got clocked.

One conclusion might be that it is impossible to know that the financials are out of the woods if they themselves are still underestimating the depth of the write downs. We can keep guessing though.

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