Wanna be sedated?…

September 24, 2008

Scary events like Lehman’s fall and AIG’s takeover are inspiring what you might call “Prozac disclosures,” intended to soothe anxious investors.

For example, on Friday Constellation Energy Partners (CEP) reported to investors that it had no bad news to report. In this press release, it said it had “no hedging or other contractual counterparty exposure” to Lehman or its affiliates. (However, it faces other challenges.)

Companies with some exposure to last week’s crop of failed companies are also doling out the Prozac. For instance, Cigna (CI) filed this 8K Friday, disclosing holdings of $10M in Lehman debt and $30M in AIG debt. It said it was “continuing to assess the recoverability of these investments.” But the company made sure to point out some things it doesn’t have, like outstanding derivative transactions with either Lehman or AIG, or common stock in Fannie and Freddie (though it does hold $13M in preferred stock of the two GSEs). And it noted that as of June 30 it had over $18B in total invested assets, the message being that any write-downs on the busted firms will be minor in the scheme of things. Cigna’s stock price bumped down only slightly after that filing, so its Prozac strategy seemed to be working.

Other companies were less successful in medicating the markets. Sovereign Bancorp (SOV) announced in a Friday 8-K that it had “taken a major step to reduce risk” by selling all of its CDOs. But this move, combined with a previous CDO hit, reduced the bank’s tangible capital by $390M. Coming on top of Sovereign’s earlier announcement that it held $623M in Fannie and Freddie preferred stock, some apparently found this ample cause for anxiety. Sovereign lost nearly a quarter of its value on the next trading day, and also suffered a bunch of downgrades.

Prozac disclosures are nice, but some firms may want to start handing investors the actual pills.

Image source: Daily Mail Online

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Note/plug: Just want to let folks know that, after a hiatus, I’m back to posting at Proxyland.

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