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Government is moving up the capital ladder, ahead of trust preferred hodlers.
Pressure mounts on BofA and Citi
By Krishna Guha in Washington and Francesco Guerrera in New York
Published: May 6 2009 00:16 | Last updated: May 6 2009 14:55
US regulators are moving to impose tough conditions on banks that want to repay federal bail-out funds, requiring them to prove that they can issue debt without government insurance.
This new requirement, which was confirmed by a senior US official, could deter some banks from trying to repay funds early. Banks have issued more than $300bn of debt insured by the Federal Deposit Insurance Corporation. Earlier, a second senior US official told the Financial Times that banks wishing to repay government funds may also be required to demonstrate that they can raise equity capital from private investors.
The new debt-raising condition will be part of a framework for repayment that could be published as early as Wednesday before the release of bank stress test results on Thursday. The disclosure came as reports from the US suggested that regulators may require Bank of America to raise as much as $34bn in additional capital. The Financial Times reported on Wednesday that BofA –which already received some $45bn from the US government – was considering the sale of part of its stake in China Construction Bank, which would raise about $8bn.
It also emerged that Citigroup will have to raise less than $10bn in fresh equity – and possibly as little as $6bn – after the stress tests. US regulators were believed to have told Citi, which has already been bailed out three times by the government, it might have to raise up to $10bn to bolster its balance sheet.
People close to the situation said the authorities had taken into account the fact that Citi had agreed to two disposals that would raise up to $9bn in common equity, thus reducing its need for extra capital.
Citi, which declined to comment, is likely to raise any extra capital by converting trust preferred shares held by non-government investors into common stock. The stress tests will effectively divide banks into four groups: those (if any) that need to raise additional capital to guard against the risk of a deeper-than-expected recession, those that need more equity but not more capital, those that have enough capital and those that have surplus capital even in the stress test scenario.
Most of the 19 banks will fall into the middle two categories. Those banks told to increase their equity following the stress tests are expected to outline plans to do so on Thursday. Options include raising more equity, converting existing prefered shares – including government prefered stock – and selling businesses. Bankers said regulators appeared to have placed little weight on the strength of the industry’s profits in their first quarter when deciding future capital requirements.
Several banks had lobbied the Treasury and the Fed to use their first-quarter results as a guide to their future profitability but the authorities are believed to have concluded that those earnings were unsustainable because of unusually favourable market conditions. Officials have budgeted for $25bn in repayments of funds originally allocated under the Troubled asset relief programme (Tarp) over the next year, but the second official said “it could be significantly more than that”.
The disclosures came after Ben Bernanke, the chairman of the Federal Reserve, said demand in the US economy “may be stabilising” with consumer spending up and signs of a bottoming in the housing market, though he said the evidence of overall stabilisation was still “tentative”.
Goldman Sachs and JPMorgan Chase - two banks that are likely to pass the stress tests without requiring additional capital - have already raised non FDIC-guaranteed debt. Their executives have argued they are ready to repay Tarp as soon as the regulators give them the go-ahead. Morgan Stanley has said it wants to repay Tarp but it has yet to issue non-government backed debt. The bank declined to comment on Tuesday but people familiar with the situation said its executives believed Morgan Stanley could raise non-government debt and did not see the new condition as an hurdle to Tarp repayment.
Yet another example of the Law of Unintended Consequences, the result of having an amateur calling the shots who has little to no understanding of the potential implications of his actions.
or the Law of Intended Consequences. If no private money will play, then only the govt and govt controlled entities (i.e. TARP recipients) can or will fill the void and become the defacto Bank of the US.
But perhaps I am indulging too heavily in conspiracy conjectures.
Unafraid In Greenwich Connecticut
Clifford S. Asness
Managing and Founding Principal
AQR Capital Management, LLC
The President has just harshly castigated hedge fund managers for being unwilling to take his administration’s bid for their Chrysler bonds. He called them “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”
The responses of hedge fund managers have been, appropriately, outrage, but generally have been anonymous for fear of going on the record against a powerful President (an exception, though still in the form of a “group letter”, was the superb note from “The Committee of Chrysler Non-TARP Lenders” some of the points of which I echo here, and a relatively few firms, like Oppenheimer, that have publicly defended themselves). Furthermore, one by one the managers and banks are said to be caving to the President’s wishes out of justifiable fear.
I run an approximately twenty billion dollar money management firm that offers hedge funds as well as public mutual funds and unhedged traditional investments. My company is not involved in the Chrysler situation, but I am still aghast at the President's comments (of course these are my own views not those of my company). Furthermore, for some reason I was not born with the common sense to keep it to myself, though my title should more accurately be called "Not Afraid Enough" as I am indeed fearful writing this... It’s really a bad idea to speak out. Angering the President is a mistake and, my views will annoy half my clients. I hope my clients will understand that I’m entitled to my voice and to speak it loudly, just as they are in this great country. I hope they will also like that I do not think I have the right to intentionally “sacrifice” their money without their permission.
Here's a shock. When hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back. However, they know, or should know, they take the risk of not being paid back. But if such a bad event happens it usually does not result in a complete loss. A firm in bankruptcy still has assets. It’s not always a pretty process. Bankruptcy court is about figuring out how to most fairly divvy up the remaining assets based on who is owed what and whose contracts come first. The process already has built-in partial protections for employees and pensions, and can set lenders' contracts aside in order to help the company survive, all of which are the rules of the game lenders know before they lend. But, without this recovery process nobody would lend to risky borrowers. Essentially, lenders accept less than shareholders (means bonds return less than stocks) in good times only because they get more than shareholders in bad times.
The above is how it works in America, or how it’s supposed to work. The President and his team sought to avoid having Chrysler go through this process, proposing their own plan for re-organizing the company and partially paying off Chrysler’s creditors. Some bond holders thought this plan unfair. Specifically, they thought it unfairly favored the United Auto Workers, and unfairly paid bondholders less than they would get in bankruptcy court. So, they said no to the plan and decided, as is their right, to take their chances in the bankruptcy process. But, as his quotes above show, the President thought they were being unpatriotic or worse.
Let’s be clear, it is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money, and many are spectacularly so, but if they give away their clients’ money to share in the “sacrifice”, they are stealing. Clients of hedge funds include, among others, pension funds of all kinds of workers, unionized and not. The managers have a fiduciary obligation to look after their clients’ money as best they can, not to support the President, nor to oppose him, nor otherwise advance their personal political views. That’s how the system works. If you hired an investment professional and he could preserve more of your money in a financial disaster, but instead he decided to spend it on the UAW so you could “share in the sacrifice”, you would not be happy.
Let’s quickly review a few side issues.
The President's attempted diktat takes money from bondholders and gives it to a labor union that delivers money and votes for him. Why is he not calling on his party to "sacrifice" some campaign contributions, and votes, for the greater good? Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power.
Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won't work because of this irresponsible hectoring.
Last but not least, the President screaming that the hedge funds are looking for an unjustified taxpayer-funded bailout is the big lie writ large. Find me a hedge fund that has been bailed out. Find me a hedge fund, even a failed one, that has asked for one. In fact, it was only because hedge funds have not taken government funds that they could stand up to this bullying. The TARP recipients had no choice but to go along. The hedge funds were singled out only because they are unpopular, not because they behaved any differently from any other ethical manager of other people's money. The President’s comments here are backwards and libelous. Yet, somehow I don’t think the hedge funds will be following ACORN’s lead and trucking in a bunch of paid professional protestors soon. Hedge funds really need a community organizer.
This is America. We have a free enterprise system that has worked spectacularly for us for two hundred plus years. When it fails it fixes itself. Most importantly, it is not an owned lackey of the oval office to be scolded for disobedience by the President.
I am ready for my “personalized” tax rate now.
http://www.businessinsider.com/henry-blodget-this-hedge-fund-managers-not-afraid-of-big-bad-obama-2009-5
Perhaps a synthetic coverd call, long the debt short the common calls.
GM exhanged trded debt is getting hammered.
Note from broker today:
Dear Customer,
On May 1, 2009, the FTC began enforcement of the Fair and Accurate Credit Transactions Act of 2003 (FACTA). This FTC regulation applies to any financial institution, including XXX, that maintain customer accounts for which there is a foreseeable risk of identity theft. In response to this regulation, XXX has developed and implemented a written Identity Theft Prevention Program which is designed to identify, detect, and prevent identity theft. As a result of these new procedures, you may be asked additional authentication questions when contacting XXX in order to verify your identity. We appreciate your understanding and cooperation with these additional safeguards.
Please contact XXX Customer Service if you have any questions regarding FACTA.
Sincerely,
XXX Customer Service
The government used to control about 30 % of the economy. Now that they have moved to control over 50% via ownership of banks, autos, etc. goernment influence is becoming dominant.
The End of America's Financial Independence?
http://www.investorsinsight.com/blogs/forecasts_trends/archive/2009/04/28/the-end-of-america-s-financial-independence.aspx
Administration is calling the shots at GM and has a bulls-eye on the Bondholders:
http://finance.yahoo.com/news/AP-Interview-GM-CEO-says-apf-15122204.html?.v=3
Wells Fargo , BAC and C will be asked to raise money:
http://finance.yahoo.com/news/Wells-Fargo-asked-to-raise-apf-15119637.html?.v=6
SWEEET
Agree on C preferreds. Look at what the Gov did to holders of GM and Chrysler debt / preferreds.
Joe,
Very impressive performance. Those returns are very noteworthy. I have been able to get close to your average but
used a lot nore leverage via derivatives.
Dave
Joe,
Did you use margin to get those returns?
Dave S
I often sell a lot of these before x-Div, as they ramp up into the X-date.
Took a gamble and picke up some CNBpB in here.
Joe,
Congrats on the GMAC holding.
The govt is demonizing bondholders, even though the gov forced bondholders into that position, since many/most are pension and investment funds that have a fiduciary resp. to their stakeholders.
Just like demonizing the AIG bonuses of several hunderd million while passing around over $100 billion to financial institutions via AIG CDS settlement.
Dave
Joe,
That's part of the reason I sold the debt. I am afraid this could be a long drawn out battle in BK, of bondholders vs. UAW/Govt. In the meantime, your monye is in limbo.
Dave
Sold my position in RGM this morning. Probably left a lot on the table, but a sure 40% profit was too juicy to pass up for me.
RGM doing quite well in here.
I believe that the X-div date is 4/28.
RE: RGM
The big question is how much of a haircut does the FED GOV try to force down bondholders throat. Hard to value securities when Uncle Sam is in the picture with a big hammer.
Joe,
I purchased a small quantity of RGM, betting that I might get a dividend before any CH 11 filing.
Dave
You don't think that covering has been heavy over the last week?
Joe,
How did you pick the GMS security versus the other senior Gm debt?
Dave S
Joe,
I think that the secured bondholders will get significant portions of the proceeds and senior unsecured not too much. The govt is working to stick it to bondholders. Not a great place to me IMO.
Joe,
Thanks a lot for the response. I picked up some this past week
at 8.70. I was getting a little uncertain if it still paied the dividend.
Thanks again.
Dave
Joe,
Do you know if FSE pays dividends or just accrues interest in
the price?
Dave S
Yes, I discovered the missed debt payments and decided the risk was too high. Thanks for the reply.
What's your take on AHR-C?
Dave
When is the FASB vote on mark to market?
Me too. they showed up this Am.
thanks
Joe,
Very nicely done.
Dave
Has anyone received dividends for GMXRP? I have not seen any yet.
Joe,
You might want to see how cheaply you can acquire the debt if the likely Ch 11 filing occurs.
Dave
Lots of sells and no buys. Hard to find any significant value right here.
Congrats. I couldn't stand the pressure and sold earlier this week.
Joe,
I sold my position in AFC today. Had a nice profit and I have noticed preferreds are dropping after dividend lately, even after the reduction in price.
Also parted with CFC-A and CNB-B today.
Dave S
Sold my positions in FBF-M and ABN-G to take profits and dividends.