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European Bank Chiefs See Potential for Pickup
The head of the European Central Bank and some other central bankers said Monday the world's economy is still slowing, but suggested a turning point could be near as massive fiscal stimulus packages, low interest rates and cheaper energy prices bolster prospects for growth.
"We're approaching a moment where we might have a pickup," said European Central Bank president Jean-Claude Trichet, in his most optimistic assessment to date of tentative signs of stabilization in some markets. He cited a modest rebound in corporate bond markets as one positive sign. Mr. Trichet spoke to reporters on behalf of participants in a meeting of central bankers from the world's leading economies at the Bank for International Settlements in Basel, Switzerland
Mr. Trichet also suggested investors, who last week drove major U.S. stock indexes to 12-year lows, are underestimating the significance of government efforts. Policy makers worldwide have made "a very, very strong commitment ... not to let any systemic institution go under," Mr. Trichet said. This "may not be fully priced in by the market."
Economic policy makers from around the world are jockeying for position ahead of a gathering of finance ministers and central bankers from the Group of 20 nations -- the major industrialized and emerging market economies -- this weekend in preparation for a summit of the G-20 heads of state on April 2. The U.S. is pressing for more aggressive government spending to lift the global economy; others seek to use the meetings to restructure global financial regulation.
People's Bank of China Vice Governor Yi Gang said Monday the fiscal stimulus measures announced by China so far are appropriate and already seem to be working. "At this point, I think the current package of the fiscal stimulus is sound and it seems already effective," Mr. Yi told reporters in Switzerland. "So at this point, I think the current stimulus package is fine."
A bit of positive news underscored central bankers' optimism Monday. Interest rates on euro zone household and corporate loans fell markedly in January, ECB figures showed. Rates on business loans for up to a year fell to 4.73% from 5.38%, while the average interest rate on a popular mortgage type slipped to 4.39% from 5.09%. The ECB has cut its key rate to 1.5% from 4.25% in July. Policy makers will welcome further evidence their cuts are feeding through to the real economy.
Central banks worldwide, including the U.S. Federal Reserve, have taken rates closer to zero and launched a bevy of lending programs aimed at goosing growth. The Bank of England last week lowered its policy rate to 0.5% and launched a £75 billion program to unclog credit markets by buying assets directly.
But markets remain tense. A key barometer of financial-sector health -- the London interbank offered rate -- rose for the 10th consecutive day Monday. The three-month dollar Libor, a benchmark for the rates at which banks lend to one another, has fallen markedly since it peaked at 4.8187% on October, as central bank and government programs propped up confidence. But amid ongoing money-market tension, the rate rose to 1.3125% Monday from Friday's 1.2925%.
After the BIS meetings, Polish central bank governor Slawomir Skrzypek also said Monday he does not see "a risk for recession in Poland" and stressed the country's banking system remains "sound." Fears of a full-blown crisis in eastern Europe have battered the currencies of countries across the region and worried analysts who contend western European banks could face whopping losses on investments in the east.
http://online.wsj.com/article/SB123662299160574161.html
Some Myths About Banks
By Ken Lewis - Bank of America CEO
The story of our economic crisis mirrors every great market bubble in history. Clearly, banks were key participants, but they were not alone. Mortgage lenders, borrowers, regulators, policy makers, appraisers, rating agencies, investors and investment bankers all played a role in pushing economic excesses forward. The institutions that gave in completely to the frenzy are no longer with us. Those that balanced the need to compete with the need to lend prudently survive today and are helping to stabilize the system.
Amid the turmoil, it has become clear that banks need to make changes in the way they run their business, from risk management to expense control to compensation practices. Most banks are making these changes in a good-faith effort to adjust to new economic realities.
And what role should government play in this? Speculation is rife about whether banks need more capital assistance from the government or whether they need to be nationalized. Unfortunately, our current debate has been riddled with misinformation that will not help us understand our current reality, or help us decide on a sensible path forward.
I would like to provide some clarity on a few key claims that have been repeated so often they are now taken to be fact. They are not.
- The banks aren't lending. This claim is simply not true. Yes, banks have tightened lending standards after a period in which standards were too lax. But, according to Federal Reserve data, bank credit has actually increased over the course of this recession, and business lending is trending up modestly so far in 2009. Also, mortgage finance volume is booming as a result of low interest rates. What's gone from the system is the easy credit that got us into this mess, as unregulated nonbank lenders have disappeared, and the market for many asset-backed securities has all but dried up. Most banks are making as many loans as we responsibly can, given the recessionary environment.
- The banks are insolvent. In the past 18 months, we've seen fewer than 50 bank failures. That compares to about 2,000 failures or closings of commercial banks or savings institutions between 1986 and 1991. There may be more to come, but the vast majority of banks will weather this economic storm.
- The Troubled Asset Relief Program (TARP) hasn't worked. Not true. Last October, when the TARP was enacted, systemic risk threatened our entire financial system and economy. The point of the program was to stabilize surviving banks, prevent a total meltdown, and enable banks to lend more. The TARP and other government programs have worked, and banks are making more loans as a result.
- Taxpayers have given the banks billions and won't get their money back. TARP funds are not charity. Banks that received TARP funds will make about $13 billion in dividend payments to the U.S. Treasury this year. TARP funds are loans yielding anywhere from 5% to 8% interest. This is a win-win: Banks are getting the capital they need, and taxpayers are getting a strong return on their investment.
- The banks that caused this mess must be held accountable. In fact, while all banks participated in the bubble economy to some degree, the companies that did the most to cause this mess are gone. The managers and shareholders of those institutions have been held accountable by the toughest, most unforgiving master of all: the free market.
- The only way to fix the banks is to nationalize them. This is a misguided premise. The announcement of nationalization would undermine confidence in the financial system and send shudders through the investment community. Politicizing lending decisions and the credit allocation process would be destructive for the economy. Nationalization also would give the false impression that all banks are insolvent. We agree with Federal Reserve Chairman Ben Bernanke's statement that nationalization of banks is not necessary to stabilize the banking system.
Getting our facts straight as we debate the important issues will help us rebuild a healthy financial services sector that can better support economic growth. I have two thoughts to help us get started.
First, our industry must continue to work in partnership with the government to solve our toughest problems. Congress and the administration have already taken several very positive steps. The Fed is providing sufficient liquidity and has helped lower mortgage rates. The $787 billion stimulus package will help boost economic activity. The Term Asset-Backed Securities Loan Facility (TALF) will help liquefy the credit markets. And the administration's housing and foreclosure relief plan will be very helpful to both homeowners and banks as we work to stabilize housing markets across the country.
Second, one of our greatest challenges is balancing the need to extend credit with the need of households to pay down excessive debt. In an economy that became too dependent on debt-driven consumption to create growth, the prospect of household deleveraging is sobering. The answer, in my view, is to let competitive forces lead us back to responsible lending practices, not the type of indiscriminate lending that has created so many problems.
Mr. Lewis is chairman, chief executive officer and president of Bank of America.
http://online.wsj.com/article/SB123655575807665985.html?mod=googlenews_wsj
Medchal,
Call buyers are not willing to bet that the price will exceed $5.10 through the middle of July.
You mean that IDIX is at the bottom now but you don't know wether it will pass the $5.10 mark at the middle of July. Am I right?
IDIX seems to be another GTCB to me... They soon run out of cash and then crash like GTCB!
Any comments!
TIA
Does anyone in here know what's with MNTA? The pps keeps falling like a rock!
Thanks!
WID
Where has anyone been?
Ken Lewis Interview on Financial Times
For the month of January, BOA makes $40 bil. mortgage loans.
BoA received an initial $25bn from the Treasury in September. It requested a further $20bn at the end of December as the scale of Merrill’s losses eclipsed BofA’s initial forecasts.
“In hindsight, it was a tactical mistake because it put us in the same category as Citigroup,” said Mr Lewis. “We could still have had 8 per cent tier 1 capital after a $15bn loss but we wanted a cushion.”
The full interview is at:
http://www.ft.com/cms/s/0/50000286-074f-11de-9294-000077b07658.html
BAC will return some TARP money back to the government soon... Then, BAC will shine again!
Stay tuned!
WID
What's wrong with IDIX and MNTA? They are close to 52 week lows!
Please advise!
Will Citi Common Stock Soar Tomorrow? (C)
http://www.businessinsider.com/will-citi-common-stock-soar-tomorrow-2009-3
Have a great Monday trading!
WID
Detailed Risk Analysis for BAC
http://documents.scribd.com/docs/1kenvbg1vhmc08md23nn.pdf
If you need to get a copy of the report, give me your email address so I can email it to you... I don't know how to post the pdf in here.
Thanks!
WID
Credit Markets Recover, but Proceed With Caution
February 27, 2009, 5:32 pm
Credit Markets Recover, but Proceed With Caution
Posted by Heidi N. Moore
Companies have been issuing bonds in record amounts for two months in a row, indicating that the corporate credit markets are working again. But, in many cases, the reason is that companies are approaching them like a war zone: gingerly and methodically, leaving little room for failure.
Naturally, companies with the highest investment-grade credit ratings have benefited most, raising $549 billion from the sale of bonds this year, more than double the year-earlier volume of $245 billion.
January and February were the most active months for investment-grade corporate bond issuance among American companies since 1995, according to Dealogic data. (Dealogic excludes bond sales from the financial sector, which issues debt every day and tends to skew issuance numbers.) In February, companies raised $141 billion by selling investment-grade bonds; in January, it was a 14-year high of $161 billion. The most recent months to even approach such volume were April and May 2008, when investors bought $101 billion and $122 billion of investment-grade bonds, respectively.
Bonds aren’t only getting strong demand, but strong performance, too. The $16 billion of bonds Roche Holdings sold last week to finance its hostile offer for Genentech has since increased $515 million in value, according to Bloomberg data.
Of course, there still is distress in the bond markets. A record number of ratings downgrades affected nearly $900 billion of U.S. corporate bonds in 2008, Fitch Ratings data show, or 24% of the entire market in U.S. bonds.
As a result, the most successful bond sellers have approached the debt markets gingerly. Pfizer secured a $22.5 billion bridge loan from several investment banks for its acquisition of Wyeth, then quickly went on the road to market bonds that would refinance the loans before the credit markets closed. While Roche launched a one-week offensive directly to potential bond investors in order to avoid having to borrow money from already-squeezed banks.
Still, Dow Chemical has said it can’t complete its $15.3 billion acquisition of Rohm & Haas until it can finds enough financing to replace a $13 billion bridge loan it had arranged and so far that hasn’t happened, though it is in talks with its lenders.
And a good example of companies’ caution is Agrium, a fertilizer company that launched a $3.6 billion hostile bid this week for rival CF Holdings. Agrium is funding the cash-and-stock bid with a combination of $1.4 billion in bridge loans from the Royal Bank of Canada and the Bank of Nova Scotia and term loans. Usually, bridge loans are eventually refinanced through bond sales.
Agrium’s bid required that CF disrupt its own $2 billion hostile bid for another rival, Terra Industries. Agrium’s hostile bid might have been stronger if it had been launched 12 days earlier, in time to try and oust CF’s board. But Agrium, which had been quietly planning an offer for CF for months, delayed until its financing was fully in hand, according to investors briefed on Agrium’s plans. Agrium executives told investors this week that the company wanted to do such a big deal the right way–and that included planning the financing well before announcing the deal.
Such advance planning is welcome to skittish bond investors. But one has to wonder why more companies were as cautious when they were piling on debt during the credit boom.
IRA's Letter Grade Rating System for all US Banks
Some clearification for the grading of A+, A, B, C, D, and F for the stress tests on US banks.
A+ -- Overall Bank Stress less than 1995 1.0 index baseline. Banks with this grade tend to exhibit stong metrics across the board.
A -- Stress slightly less than the industry average. Bank business practices are much more varied than people realize. Institutions in this category exhibit business model choices that allow them to operate with improved cushion against current systemic threats.
B -- Stress slightly above the industry average. These banks begin to show sensitivity to systemic stresses but still have a business model that offers a some degree of flexibility to resist crisis forces.
C -- Stress levels moderately above industry average. In these banks, one or more key metric areas begin to show degradation(s) indicating a need for active attention by officers and directors.
D -- Stress indicators well above the industry average. These institutions tend to show significant degradation in one or more of the key areas of measurement. Concern has likely begun to garner the attention of parties outside the bank.
F -- Stress levels at the extreme range above industry average. At this degree of stress, one or more of the key elements of the business model has reached
IRA RELEASES Q4 BANK STRESS RATINGS FOR ALL US BANKS
BAC: With the second highest stress level in the top four after C, BAC is in the unenviable position of being number two on our list of banks likely to be resolved during 2009. While the lead unit has a Stress Index score of 1.4, the score for FIA Card Services (FKA MBIA) at 4.0 drags up the stress score for the aggregate BAC bank rollup. Only time will tell whether the accumulated financial and legal issues due to the Countrywide and Merrill transactions force BAC to go back to the government for more capital.
See link below:
http://www.institutionalriskanalytics.com/media/news_030109.pdf
Bank of America's Lewis on Merrill Acquisition and other issues.
The interview lasts for about 27 minutes... It is interesting to see how things turn out on Monday.
http://media2.bloomberg.com/cache/v9hcB9Fg9pxw.asf
Have a great weekend!
WID
Bank of America's Lewis on Merrill Acquisition - Link 2
Copy the full text and paste it into your IE... It will work that way if you can't click on the link.
http://media2.bloomberg.com/cache/v9hcB9Fg9pxw.asf
The interview lasts 27.16 minutes.
Way to go on Monday!
Bank of America's Lewis on Merrill Acquisition and More
Spend a little bit of your time on the weekend to listen to this interview... I think we can see the light at the end of the tunnel soon!
http://www.bloomberg.com/avp/avp.htm?N=adviser&T=Bank%20of%20America's%20Lewis%20on%20Merrill%20Acquisition&clipSRC=mms://media2.bloomberg.com/cache/v9hcB9Fg9pxw.asf
Listen to this one... Things are going well with BAC!
http://www.cnbc.com/id/15840232?video=1045920478&play=1
The Journal noted that some key details of the agreement remain unclear, including the price at which the government will convert the preferred shares to common stock. Reportedly, people briefed on the discussions told the Journal that Citigroup was asking regulators to convert at a price of as much as $5 a share -- twice the bank's closing stock price on Thursday.
Representatives from Citigroup could not be reached late Thursday for comment on the report.
Earlier this week, as reports of the possibility of the Treasury taking a bigger stake in the bank surfaced, Stuart Plesser, a financials analyst at Standard & Poor's Equity Research, told investors that converting the government's preferred equity stake into common stock "would help boost the company's low tangible equity ratio (currently 1.5%), which we believe is too low given Citi's asset base."
"Such a move would be more psychological than tangible, as no real capital would be added to Citi," he added. "But it might help ease investors' concerns over the banking space."
In recent months, investors have focused more on tangible common equity ratios to measure banks' financial strength.
This shows what common stock holders would theoretically get if an institution was shut down and its assets sold.
The ratio is more conservative that the Tier 1 capital ratio, which is used by regulators and banks. This ratio counts preferred securities as equity, as well as common shares.
In Citigroup's case, its tangible common equity ratio was 1.5% at the end of 2008, well below the 3% level that investors consider safe, the Journal said on Monday. The bank's Tier 1 capital ratio was 11.8%, well above what regulators consider well capitalized, the newspaper noted.
http://www.marketwatch.com/news/story/report-citigroup-government-reach-share/story.aspx?guid={ACD35E88-F28B-4BD3-B00B-A57422A26D60}&siteid=yhoof
Clip of Ken Lewis of BofA
Link: http://www.bloomberg.com/avp/avp.asxx?clip=mms://media2.bloomberg.com/cache/vW.x_9.WG8gM.asf&vCat=&RND=182524515&A=
Common Shares Conversion Premiums - Corrections
Still, bank stocks jumped in Thursday's action as other details of the CAP and stress test provided short-term relief for some investors.
If the stress test concludes that some banks need more capital, the Treasury will buy convertible preferred shares in the institutions. Banks that sold preferred securities to the government as part of last year's Troubled Asset Relief Program can redeem these for the new convertible preferred shares.
If needed, the new securities can be converted into common stock, boosting banks' tangible common equity, a measure of financial strength that's become more important to investors and regulators recently.
The securities have to be converted to common stock after seven years. That will dilute current common shareholders. However, the conversion will happen at a 10% discount to the average closing price for the banks' shares over the 20 trading days ended Feb. 9, 2009.
Shares of many banks facing the stress test have slumped in recent weeks, so these conversions will kick in at a premium to current prices for many institutions, analysts noted on Thursday.
http://www.marketwatch.com/news/story/story.aspx?guid=%7BA96848BC%2D31C9%2D455C%2D887F%2D016CA8DEAC51%7D&siteid=rss
The plan is already in place.. See message_id=35883152
Treasury Unveil Details of ‘Stress Tests’ and Preferred-Stock Convertibility
Convertible preferred stock will carry a 9% dividend and be convertible into common at 90% of the closing price of the common stock on 2/9/09. Preferred shares may be redeemed at par if both parties agree; otherwise they automatically convert after seven years.
http://online.wsj.com/article/SB123557705225772665.html
Feb. 26 (Bloomberg) -- Distressed assets offer the best investment opportunities this year as the global recession deepens, billionaire hedge-fund manager John Paulson said.
“The decline in the market has created a very good buying opportunity,” Paulson, 53, whose New York-based Paulson & Co. oversees about $30 billion, said in a speech at a hedge-fund seminar hosted by Societe Generale and Lyxor Asset Management in Tokyo today. “Distressed opportunity in the U.S. is shaping up to be the best opportunity in a lifetime.”
Paulson said he’s focused on assets such as mortgages and debt from bankrupt companies, while in the equities markets he cited the utilities, consumer staples and pharmaceutical industries. Financial stocks remain risky, Paulson said.
In the 15 years since starting its first funds, Paulson & Co.’s one down year was 1998. All his funds were profitable in 2008, with the flagship fund returning about 38 percent, compared with a loss of 19 percent for hedge funds worldwide on average. The 2008 returns came after his funds made more than $3 billion for the firm in 2007 by anticipating the collapse of the U.S. housing market and subprime mortgages.
Investors are chasing distressed assets after more than $1.1 trillion in losses at financial firms globally and frozen credit markets helped drag the U.S., Europe and Japan into their first simultaneous recessions since World War II.
Deep Recession
“In 2009, we expect this recession is going to be deeper and longer than consensus estimates,” Paulson said. “We don’t think we’re through the banking crisis yet. We think that in many cases, losses the banks will experience will exceed their common equities.”
Hedge funds are private, largely unregulated pools of capital whose managers can buy or sell any assets, bet on falling as well as rising asset prices, and participate substantially in profits from money invested. Managers typically charge fees equal to 2 percent of client assets and 20 percent of investment profits.
“We’re bearish on the economy, but very bullish on opportunities in front of us,” Paulson said.
To contact the reporters on this story: Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net
Geithner: Nationalization Is “The Wrong Strategy”
Treasury Secretary Timothy Geithner, in an interview with PBS’s Jim Lehrer to air Wednesday evening, offered the Obama administration’s strongest declaration yet knocking down talk of nationalizing banks. “I think that’s the wrong strategy for the country and I don’t think it’s the necessary strategy,” he said. Mr. Geithner also defined capital injections that would follow the stress tests as “insurance from the government” designed to improve the likelihood of banks attracting private capital.
Following are excerpts from his interview, based on a transcript released by The NewsHour With Jim Lehrer:
Bloomberg News - Ken sounds very confident about the "stress test".
Feb. 26 (Bloomberg) -- Bank of America Corp.’s purchases of Merrill Lynch & Co. and Countrywide Financial Corp. are paying off as other parts of the bank struggle, Chief Executive Officer Kenneth Lewis said.
Lewis, speaking yesterday in a Bloomberg Television interview from his Charlotte, North Carolina, headquarters, said Merrill will be “a thing of beauty” over the long term. Merrill, the New York-based securities firm, lost almost $35 billion over the past two years, including $15.8 billion in the fourth quarter.
“The two stars, the ones that are doing the best are Merrill Lynch and Countrywide,” Lewis said. “This powerful corporate bank, coming together with our investment bank -- and then Merrill Lynch on top of it -- everything we thought is playing out.”
The 61-year-old banker’s views on the acquisitions counter criticism from bank analysts such as Stuart Plesser of Standard & Poor’s Corp., who contend that the bank overpaid when it agreed in July to buy Countrywide and in September to acquire Merrill. Bank of America’s $4 billion profit last year contrasts with Citigroup Inc. and other major financial institutions that posted multibillion dollar losses, Lewis said.
“We’ve had one loss in one quarter in 17 years,” Lewis said. “We should not be painted with that same brush and for some reason, we have and it’s been really unfortunate.”
Revenue Expectations
Lewis said Bank of America expects revenue to top $100 billion this year, with Merrill and Countrywide poised to become key profit contributors. Merrill had annual operating profit of $3.7 billion to $7.8 billion between 2001 and 2006, while Countrywide had profit of $3.6 billion to $4.3 billion between 2003 and 2006 as the housing market soared. Bank of America is cutting more than $7 billion in annual expenses from the mergers, further boosting profit, Lewis said.
“I don’t think Countrywide will ever return to those kinds of profits,” said Plesser, an equity analyst at Standard & Poor’s who has a “hold” rating on the bank. “There was a lot of securitization going on and both Countrywide and Merrill were leveraging up.”
Five months after he agreed to buy Merrill and cap a four- decade career at the nation’s largest bank, Lewis is under pressure from investors and Congress to bolster his share price and increase lending. Lewis, the CEO since 2001, said in internal memos and a letter to clients in recent days that Bank of America, the recipient of $45 billion in government aid, doesn’t need further help.
“I almost fell off my chair” after hearing Lewis’s comments, Michael Holland, who oversees $4 billion as chairman and founder of Holland & Co. in New York, told Bloomberg TV. Holland doesn’t hold Bank of America shares.
Everything ‘Playing Out’
Bank of America gained 9.1 percent to $5.16 in New York Stock Exchange composite trading yesterday. The shares have declined 63 percent this year.
Industry statistics show the company is gaining market share against Wall Street rivals, Lewis said.
“Countrywide is ripping right now because we’ve got a refinance boom going on,” said Anton Schutz, president of Mendon Capital Advisors Corp., a Rochester, New York investment firm that owns Bank of America shares. “And for Merrill there’s a pretty good fixed-income market right now.”
The U.S. government’s plan to use “stress tests” to review balance sheets of the 19 biggest banks won’t pose a problem, Lewis said. It is “a stress test on top of a stress test,” he said in the interview.
Reducing Assets
The bank expects to boost its ratio of tangible common equity to assets to 3 percent by the end of 2009 by reducing assets or selling some business units that don’t fit its strategy, Lewis said. The ratio was 2.68 percent at the end of last year.
“We may over time sell more of CCB, but the point with China Construction Bank is that it is a strategic partner and we always want to have a relatively substantial stake,” Lewis said.
The bank lost $1.79 billion in the fourth quarter, excluding the Merrill losses. The bank cut its quarterly dividend to 1 cent from 32 cents on Jan. 16 to preserve capital. Its stock traded at $33.74 before the Merrill deal was announced on Sept. 15.
Two former Bank of America CEOs praised Lewis’s decision to buy Countrywide last year and said the government forced the bank to purchase Merrill. Countrywide positions the bank “to take advantage of one of the few bright spots in the entire industry right now: the surging market for mortgage financing,” Hugh McColl Jr. and Thomas Storrs said yesterday in the Charlotte Observer.
Merrill Deal
Lewis said the bank was “strongly advised, with an emphasis on strongly,” not to walk away from the Merrill deal. He said the government told Bank of America, “‘We will work with you. We know this is a Merrill issue.’ I was told, ‘We view you as a strong company that has done the right thing in a difficult situation,’ and that, ‘the money will be there for you.’”
Lewis said he looks forward to talks with New York Attorney General Andrew Cuomo, who is investigating Merrill’s $3.6 billion bonus payments to employees in December, just before the merger was completed. “When we get the facts out and we show what we’ve done and how we did it, we’ll be fine,” Lewis said.
To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net
Bank Nationalization Isn't the Answer
Trust me. I've done this before.
By WILLIAM M. ISAAC
People who should know better have been speculating publicly that the government might need to nationalize our largest banks. This irresponsible chatter is causing tremendous turmoil in financial markets. The Obama administration needs to make clear immediately that nationalization -- government seizing control of ownership and operations of a company -- is not a viable option.[/b/
Unlike the talking heads, I have actually nationalized a large bank. When I headed the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, the FDIC recapitalized and took control of Continental Illinois Bank, which was then the country's seventh largest bank.
The FDIC purchased Continental's problem loans at a big discount and hired the bank to manage and collect the loans under an incentive arrangement. We received 80% ownership of the company, which increased to 100% based on the losses suffered by the FDIC on the bad loans.
We replaced Continental's senior management and most of its board of directors. We required the bank to submit a business plan to shrink to half its size within three years. All major decisions required FDIC approval, including the hiring, firing and compensation of senior management, and the undertaking of new business endeavors.
The takeover occurred in 1984, the FDIC completed the sale of its ownership stake seven years later, and Continental was purchased by Bank of America in 1994. The old shareholders ultimately received nothing, all creditors and preferred shareholders came out whole, and the FDIC suffered what we considered a reasonable loss: $1.6 billion.
So, you might wonder, what's so bad about nationalization? It appears to have worked well at Continental.
Let's begin with the fact that today our 10 largest banking companies hold some two-thirds of the nation's banking assets, and some are enormously complex. Continental had less than 2% of the nation's banking assets, and by today's standards it was a plain-vanilla bank. This is important for three reasons.
First, any bank we nationalize will be forced, both by the regulators and the marketplace, to shrink dramatically. We are in the middle of a serious economic downturn where deflation is a realistic concern. Do we really think that dismantling our largest banks would be helpful? I don't.
What's more, we won't be able to stop at nationalizing one or two banks. If we start down that path, the short sellers and other speculators that the Securities and Exchange Commission still refuses to re-regulate will target for destruction one after another of our largest banks.
Second, for nationalization to work there needs to be a reasonable exit strategy. In the case of Continental, we had scores of options for returning the bank to private hands, including a public offering or a sale to any number of domestic and foreign banks and investor groups.
Today, who has the wherewithal, legal authority, and desire to purchase our largest banks? No one comes to mind, particularly if we rule out foreign groups, which I suspect would not pass muster due to national security concerns about ceding that much power over our economy to foreign powers.
Third, who will run these companies when we dismiss the existing senior managers and board members? We had significant difficulties attracting quality people to Continental even without today's limits on compensation.
So-called experts frequently cite the success of the Swedish experience with bank nationalization in the last decade. Nothing could be less relevant. Sweden's population, economy and banking system are roughly the size of Ohio's. Sweden's largest bank is roughly 10% the size of each of our three largest banking companies. Moreover, Sweden nationalized only Gota Bank -- and that was after it had already collapsed.
The Obama administration should declare that nationalization of any major bank is off the table; that the government stands behind our entire banking system; and that our banks will continue to receive a nonvoting form of equity capital, such as convertible preferred stock, from the government to the extent needed. Yesterday's joint announcement to this effect by the Federal Reserve, FDIC, the Comptroller of the Currency, and the Treasury is a critical step toward healing our banking system and economy. Well done.
Mr. Isaac, chairman of the FDIC from 1981-1985, is chairman of the Washington financial services consulting firm The Secura Group, an LECG company.
Bank Nationalization Isn't the Answer
Trust me. I've done this before.
By WILLIAM M. ISAAC
People who should know better have been speculating publicly that the government might need to nationalize our largest banks. This irresponsible chatter is causing tremendous turmoil in financial markets. The Obama administration needs to make clear immediately that nationalization -- government seizing control of ownership and operations of a company -- is not a viable option.
Unlike the talking heads, I have actually nationalized a large bank. When I headed the Federal Deposit Insurance Corporation (FDIC) during the banking crisis of the 1980s, the FDIC recapitalized and took control of Continental Illinois Bank, which was then the country's seventh largest bank.
The FDIC purchased Continental's problem loans at a big discount and hired the bank to manage and collect the loans under an incentive arrangement. We received 80% ownership of the company, which increased to 100% based on the losses suffered by the FDIC on the bad loans.
We replaced Continental's senior management and most of its board of directors. We required the bank to submit a business plan to shrink to half its size within three years. All major decisions required FDIC approval, including the hiring, firing and compensation of senior management, and the undertaking of new business endeavors.
The takeover occurred in 1984, the FDIC completed the sale of its ownership stake seven years later, and Continental was purchased by Bank of America in 1994. The old shareholders ultimately received nothing, all creditors and preferred shareholders came out whole, and the FDIC suffered what we considered a reasonable loss: $1.6 billion.
So, you might wonder, what's so bad about nationalization? It appears to have worked well at Continental.
Let's begin with the fact that today our 10 largest banking companies hold some two-thirds of the nation's banking assets, and some are enormously complex. Continental had less than 2% of the nation's banking assets, and by today's standards it was a plain-vanilla bank. This is important for three reasons.
First, any bank we nationalize will be forced, both by the regulators and the marketplace, to shrink dramatically. We are in the middle of a serious economic downturn where deflation is a realistic concern. Do we really think that dismantling our largest banks would be helpful? I don't.
What's more, we won't be able to stop at nationalizing one or two banks. If we start down that path, the short sellers and other speculators that the Securities and Exchange Commission still refuses to re-regulate will target for destruction one after another of our largest banks.
Second, for nationalization to work there needs to be a reasonable exit strategy. In the case of Continental, we had scores of options for returning the bank to private hands, including a public offering or a sale to any number of domestic and foreign banks and investor groups.
Today, who has the wherewithal, legal authority, and desire to purchase our largest banks? No one comes to mind, particularly if we rule out foreign groups, which I suspect would not pass muster due to national security concerns about ceding that much power over our economy to foreign powers.
Third, who will run these companies when we dismiss the existing senior managers and board members? We had significant difficulties attracting quality people to Continental even without today's limits on compensation.
So-called experts frequently cite the success of the Swedish experience with bank nationalization in the last decade. Nothing could be less relevant. Sweden's population, economy and banking system are roughly the size of Ohio's. Sweden's largest bank is roughly 10% the size of each of our three largest banking companies. Moreover, Sweden nationalized only Gota Bank -- and that was after it had already collapsed.
The Obama administration should declare that nationalization of any major bank is off the table; that the government stands behind our entire banking system; and that our banks will continue to receive a nonvoting form of equity capital, such as convertible preferred stock, from the government to the extent needed. Yesterday's joint announcement to this effect by the Federal Reserve, FDIC, the Comptroller of the Currency, and the Treasury is a critical step toward healing our banking system and economy. Well done.
Mr. Isaac, chairman of the FDIC from 1981-1985, is chairman of the Washington financial services consulting firm The Secura Group, an LECG company.
Moores2009:
I bought last Friday and will hold onto it for the next couple years and you will call me genius!
Hopefully I can use these shares to fun my kids college!
Have a great day!
WID
Capital Assistance Program to Start Wednesday
The following is a joint statement by the Treasury, FDIC, OCC, OTS and the Federal Reserve:
“A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.
“We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment. Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital. Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital.
“Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.”
Questions about Citi Group "C"..
For those who long in C will be happy that uncle sam is now on board with you so I think that your investment is safe there.
Do you think the government will make some mandate to protect its investment in Citi group such as temporary ban short banking and financial stock... etc.???
Please put some thought into this..
Thanks!
WID
BOA is safe, City is saved, short is fried!
Some light at the end of the tunnel soon!
This is the good and safe way to help the banking industries. Read the article below:
WASHINGTON, Feb 22 (Reuters) - The U.S. Treasury on Sunday declined comment on reports that Citgroup (C.N) was in talks that could result in the government taking a 40 percent stake in the company, but the department said it was open to converting preferred shares into common equity to strengthen banks.
Treasury spokesman Isaac Baker said that under Treasury Secretary Timothy Geithner's bank stabilization plan, institutions can apply to convert preferred shares into convertible preferred shares and later into common equity as needed to strengthen their capital structure.
"We are open to considering a request to do so if the institution and its regulator believe it would promote the long term stability of that institution, and if we believe it's in the best interest of long term stability of our economy and financial system," he said in a statement.
Baker added that the Treasury has "made clear that we will do what is necessary to strengthen and stabilize the financial system so that it can provide the credit necessary to support economic recovery.
Under the Geithner plan, this includes making sure that there is capital where it is needed, and that public support can be replaced with private capital as soon as that becomes possible, he added.
Earlier, a source familiar with the situation told Reuters that talks were ongoing between Citigroup and regulators that could increase the U.S. government's stake in the once mighty banking giant.
The Wall Street Journal said this could result in a 40 percent common equity stake held by the government, but Citigroup officials were hoping for a stake of around 25 percent. (Click [ID:nHKG310337] for more details)
The lender is discussing with U.S. officials a scenario under which a substantial portion of the $45 billion in preferred shares already held by the U.S. government, amounting to a 7.8 percent stake in Citigroup, would convert into common stock, the Journal reported.
The plan would not cost further taxpayer money, but other Citi shareholders would see their stakes diluted and the government would have much larger influence over Citi.
The discussions reflect growing concerns that Citi and other big U.S. banks could be swamped by losses amid the housing crisis and swooning economy, the Journal said. (Reporting by David Lawder; Editing by Kim Coghill)
http://www.reuters.com/article/marketsNews/idINN2330108720090223?rpc=44
Bank of America Corp. said Sunday that it isn't discussing a larger ownership stake for the government. "There are no talks right now over common stock conversion issue," said Bank of America spokesman Robert Stickler. "We see no reason to do that. We believe the goal of public policy should be to attract private capital into the bank, not to discourage it."
Some of the authors of some article obviously a tool of the short hedge funds. They possibly try to make their articles more negative even though this news is very positive for Citigroup shareolders?
They conveniently left out the fact that the government's choice to become a common shareholder, the odds of "wiping out" common shareholders is less likely since they are now in the same boat as the common shareholders.
There is a HUGE difference between the government taking ownership of preferred shares versus common shares!!!
Some of the authors of some articles obviously a tool of the short hedge funds. They possibly try to make their articles more negative even though this news is very positive for Citigroup shareolders?
They conveniently left out the fact that the government's choice to become a common shareholder, the odds of "wiping out" common shareholders is less likely since they are now in the same boat as the common shareholders.
There is a HUGE difference between the government taking ownership of preferred shares versus common shares!!!
BAC continues to stay strong! See article below:
BAC hit its annual lows below $3 on Friday as talks about nationalizing Bank of America and Citigroup (C) became stronger. Recently this has become a tradition for BAC specifically. Every time the stock slides downwards, nationalization talks gain momentum. On Friday BAC, hit its annual low for a combination of reasons and not as an indication that nationalization is inevitable.
Friday morning, Bank of America chairman Ken Lewis was served with a subpoena by New York Attorney General Andrew Cuomo over the Merrill Lynch bonus affair. On this news the stock prices sharply slid downwards. However, this news stands no ground. Lewis received a subpoena, he has not testified yet! Just because the man is served with a subpoena does not mean he did something wrong. Perhaps when he testifies he will have an opportunity to set it clear for the last time that he was not involved with the Merrill pay out. Merrill Lynch was an independent company at that time was led by John Thain. If anyone should be held responsible, it is completely Thain’s responsibility because he allowed it, paid it, and received it! Lewis has consistently stood up against high executive pays and set a $500,000 cap on Bank of America’s executive salaries. Additionally, Lewis and his direct reports did not receive a bonus for 2008. Why would Lewis allow Thain’s team to be paid out and not his own, especially when he will be the one paying for it? Talk can be cheap, but his disapproval of Thain’s decisions were proved when Thain was forced to leave Bank of America under pressure.
The second reason why BAC hit its annual low was because the entire market was down. BAC may be increasingly volatile, but it moves with the market and Wall Street ended another depressing week on Friday, leaving major indexes down more than 6 percent. Stocks tumbled as investors worried about the term of the recession and showed mixed confidence in Obama’s new stimulus.
Moreover, Bank of America received a series of negative publicity on Friday, beginning with the subpoena order, which caused stock prices to drop in an already falling market. Then assumptions of nationalization surfaced and led to further drops in stock prices hitting its annual lows below $3. However, it's important to notice the bounce back in this volatile stock as it still managed to close at $3.79 with only 3.56% negative change even after surviving all the negative publicity.
The rule of thumb is buy low and sell high. Eventually stocks will rise after hitting rock bottom. However, investor confidence right now depends on whether Bank of America will be nationalized.
Here are all the reasons why Bank of America will NOT be nationalized.
First, and the most important reason, is that Bank of America is still profitable, has strong capital, is solvent, and is actively lending. Mid-quarter, it's hard to specify numbers, but there have been indications that business has improved over the fourth quarter after absorbing Merrill’s loss. There seems to be no reason why a company that is profitable and has strong capital and liquidity levels would be considered for nationalization. “Speculation about nationalization is based on a lack of understanding of our bank's financial position as well as a lack of appreciation for the adverse ramifications for our customers and the economy,” said Lewis.
Next, Lewis has confidently announced that he does not need any more government assistance. Once again he proved this by action, when Bank of America made its first TARP payment of $402 million to the government earlier this week.
Additionally, federal support for Bank of America has been indicated. Bank of America was a team player when it purchased Merrill Lynch after having second thoughts. Bank of America was rushed into the deal by the government when it was suggested that Merrill would pose a systematic risk on the economy if Bank of America did not go through with the deal. The Feds also indicated that they would back up the deal and provide protection against losses in troubled assets. A deal that caused Bank of America to see its worst days was rushed into for the good of not posing further risks on the economy and backed by the federal government. It is unlikely that the federal government will let Mr. Lewis fail.
Finally late Friday, White House indicated that they are not trying to take over the banks. When asked about nationalization, press secretary Robert Gibbs said, "This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government."
Disclosure: Long BAC. Although I work for BAC I do not get compensated for this. All opinions are personal and I write because I have invested in BAC and I tirelessly research the company
Increasingly Exasperated
Inside Citigroup, bank executives are growing increasingly exasperated with what they view as the Obama administration's failure to state even more explicitly that nationalization isn't imminent and that "stress tests" announced as part of the latest financial-rescue package aren't a guise for government takeovers that likely would make their common shares worthless. The tests, expected to begin next week, will be required for any bank with more than $100 billion in deposits. Government takeovers likely would make common shares of those banks worthless.
"They've got to make a statement against nationalization," said one person familiar with Citigroup's thinking. The Obama administration's rhetoric so far amounts to "destructive ambiguity," this person said.
In a statement Friday afternoon, Citigroup said its capital base remains "very strong." "We continue to focus and make progress on reducing the assets on our balance sheet, reducing expenses and streamlining our business for future profitable growth," the New York company added.
Kenneth Lewis, the chairman and chief executive of Bank of America, insisted in a memo to employees that there is no need to nationalize the bank. "We see no reason why a company that is profitable with strong levels of capital and liquidity and that continues to lend actively should be considered for nationalization," Mr. Lewis said. "Speculation about nationalization is based on a lack of understanding of our bank's financial position as well as a lack of appreciation for the adverse ramifications for our customers and the economy."
No More Help
Mr. Lewis added that Bank of America "does not need any further assistance today" and likely "will not need any further assistance in the future. I believe our company has more than enough capital, liquidity and earnings power to make it through this downturn on our own from here on out."
In recent days, Bank of America executives have been prodding administration officials to do something to bolster flagging confidence in U.S. financial institutions. "I think the banks have strenuously told the administration they are letting events get beyond them and they need to come out and make a definitive statement," said a person close to the bank.
The White House's comments appeared to mollify Bank of America. "I would say it's a very significant statement and an important clarification about the administration's policy direction," spokesman James Mahoney said.
One huge challenge for the Obama administration is that its assurances are colliding with rising unemployment, costly home foreclosures, tight credit markets and the steep drop in consumer spending. The U.S. banking industry is expected to record a quarterly loss in the fourth quarter for the first time since 1990.
The financial conditions of many banks are continuing to weaken, especially at those with large portfolios of credit-card loans and commercial real-estate loans that are being hit increasingly hard by the recession.
Even private-equity investors, well-known for scooping up assets that are considered to be undervalued, are wary about pouring money into the sector due to ongoing uncertainty about the government's role in financial institutions. "There has to be some level of stability and confidence in what the playing field is going to look like in order to make a reasonable investment decision," says John Stein, president of FSI Group Inc., which invests in small financial-services companies.
Treasury Secretary Timothy Geithner recently announced plans to pump more capital into banks and try to jumpstart credit markets, but government officials haven't quelled fears about the state of the banking sector. Analysts expect that roughly 1,000 banks might fail over the next three to five years.
As a practical matter, Citigroup's vast international scope would further complicate any U.S. government nationalization scheme. In Mexico, for example, where Citigroup controls the nation's No. 2 bank by assets, a law restricts outside governments from owning more than 10% of a domestic bank.
The Obama administration hopes to jump-start this crucial machinery by effectively subsidizing the profits of big private investment firms in the bond markets. The Treasury Department and the Federal Reserve plan to spend as much as $1 trillion to provide low-cost loans and guarantees to hedge funds and private equity firms that buy securities backed by consumer and business loans.
The Fed is expected to start the first phase of the program, which will provide $200 billion in loans to investors, in early March.
But analysts question whether this approach will be enough to unlock the credit that the economy needs to pull out of a deepening recession. Some worry it may benefit only select investors at taxpayer expense.
The program also does not try to change securitization practices that, many investors say, spread risks throughout the world and destroyed financial institutions. Policy makers acknowledge that for now, fixing credit ratings, reducing conflicts of interest and improving disclosure can wait.
Under the program, the Fed will lend to investors who acquire new securities backed by auto loans, credit card balances, student loans and small-business loans at rates ranging from roughly 1.5 percent to 3 percent.
Depending on the type of security they are borrowing against, investors will be able to borrow 84 percent to 95 percent of the face value of the bonds. Investors would not be liable for any losses beyond the 5 percent to 16 percent equity that they retain in the investment.
In the initial phase, the Treasury will provide $20 billion and the Fed will provide $180 billion. Treasury Secretary Timothy F. Geithner said last week that the Treasury could increase its commitment to $100 billion to allow the Fed to lend up to $1 trillion.
Investors and economists said that the effort could help restore some lending, but added that it might not be big enough to fully replace all or most of what has been lost, especially if the nation’s biggest banks are not restored to health.
“The gap to be made up is huge,” said Hyun Song Shin, an economist at Princeton who has written extensively about the shadow banking system. “Ideally, you would like the commercial banking sector to step up and take charge of the train but they are in no position to do that because they are undercapitalized.”
The market for new securities backed by mortgages and other types of loans has collapsed. Last year, investors bought $313.9 billion of these securities, down from $1.6 trillion in 2007 and $2.1 trillion in 2006, according to Dealogic.
Last month, banks issued just $1.6 billion worth of such deals.
Banks and finance companies are holding more loans on their books, but their ability to do so has been eroding as losses rise on their existing assets. Since October, banks’ holdings of loans and leases have shrunk by 2 percent, to $7.1 trillion.
In the mortgage market, banks own just one-third of all loans, down from half as recently as 1990.
Investors and bankers say the Treasury program, called the Term Asset-Backed Securities Loan Facility, or TALF, could help unclog vital channels of capital, but they add that it is hard to know how big an impact it will have.
For one thing, the Fed will make loans against only triple-A rated securities, not lower-rated bonds, which are first to suffer losses when borrowers default on loans. That will not help banks sell junior bonds, which many investors have shunned because of fears that losses would rise as the economy worsened, said Thomas H. Atteberry, a partner at First Pacific Advisors, an investment firm based in Los Angeles.
“It’s probably a step forward but it may only be a baby step forward,” said Mr. Atteberry, who does not plan to use the TALF.
Jerry Marlatt, a partner at the law firm of Clifford Chance who specializes in securitization, said that lenders using the TALF would be willing to retain more of the risk associated with loans on their own books to get deals done. That should help ensure that lenders make better-quality loans in the future, because they will be liable for most of the losses.
Simon Johnson, an economics professor at the Massachusetts Institute of Technology and a former chief economist at the International Monetary Fund, said many people might take a dim view of the TALF program because it provided government subsidies to investors like hedge funds. Investors who borrow from the Fed could enjoy annual returns of 20 percent or more.
“The TALF,” he said, “raises a lot of questions.”
What Is a Stress Test?
At its simplest, a stress test is a way of revaluing a portfolio using a different set of assumptions. The results of a stress test show the sensitivity of the portfolio to a particular shock. Stress tests can be useful because for most asset markets,the history of returns does not provide sufficient information about the behavior of markets under extreme events. Stress tests complement traditional models with estimates of how the value of a portfolio changes in response to exceptional but plausible changes in the underlying risk factors.
You can read the article at:
http://www.imf.org/external/pubs/ft/stfs/stfs.pdf
Timeline of the Financial Crisis
Events of 2007
August, 2007: Liquidity crisis emerges[3][41][42]
September, 2007: Northern Rock seeks and receives a liquidity support facility from the Bank of England[43]
October, 2007: Record high US stock market October 9, 2007 Dow Jones Industrial Average (DJIA) 14,164[44]
Events of 2008
January, 2008: Stock Market Volatility
February, 2008: Nationalisation of Northern Rock[45]
March, 2008: Collapse of Bear Stearns
March, 2008: Federal takeover of Fannie Mae and Freddie Mac
September, 2008: Global Financial Crisis
September, 2008: Bankruptcy of Lehman Brothers
September, 2008: partial nationalization of Fortis holding
October, 2008: Large losses in financial markets world wide throughout September and October
October, 2008: Passage of EESA of 2008
October, 2008: Iceland's major banks nationalized
November, 2008: China creates a stimulus plan
November, 2008: Dow Jones Industrial Average (DJIA) touches recent low point of 7,507 points[citation needed]
December, 2008: The Australian Government injects 'economic stimulus package' to avoid the country going into recession, December, 2008
December, 2008: Madoff Ponzi scheme scandal erupts
Events of 2009
January 2009: U.S. President Barack Obama proposes federal spending bill approaching $1 trillion in value in an attempt to remedy financial crisis [46]
January 2009: Lawmakers propose massive bailout of failing U.S. banks [47]
January 2009: the U.S. House of Representatives passes the aforementioned spending bill.
January 2009: Government of Iceland collapses. [48]
February 2009: Canada's Parliament passes an early budget with a $40 billion stimulus package.
February 2009: JPMorgan Chase and Citigroup formally announce a temporary moratorium on residential foreclosures. The moratoriums will remain in effect until March 6 for JPMorgan and March 12 for Citigroup.[49]
February, 2009: U.S. President Barack Obama signs the $787 billion American Recovery and Reinvestment Act of 2009 into law. [50]
February 2009: The Australian Government seeks to enact another "economic stimulus package".
February, 2009: 2009 Eastern European financial crisis arises.
February 2009: The Bank of Antigua is taken over by the Eastern Caribbean Central Bank after Sir Allen Stanford is accused by US financial authorities of involvement in an $8bn (£5.6bn) investment fraud. Peru, Venezuela, and Ecuador, had earlier suspended operations at banks owned by the group. [51]
What's next????