From the Bess Levin hot tips hotline(tm): Goldman to conduct secondary offering to fund their bonus-preserving liberation from the chains of government equity ownership. (Good for you Goldman!)
Smart stuff if true, really. True, salary caps look like they might be defanged, but who can argue that Goldman would not run rings around any institution still burdened by the need to submit to the enlightened mercies of government decree?
Archive for February 2009
Reuters is reporting that that whole preferred shares idea with respect to bank bailouts might not really be so preferred. We’ve argued for some time now that if the government really wanted to influence policy and have some control over the day-to-day operations of the targets of its largess, it should do so like everyone else, with common stock. Someone obviously thinks this plain.
We aren’t sure that we buy those early and oft repeated arguments for preferred stock, that using that particular vehicle would get the taxpayers funds back quicker and with more certainty. To us the selection of preferred stock looked like a weak emulation of Warren Buffett’s investment in Goldman Sachs, and a not-so-subtle message to the banks that the government would still be as “hands-off” as a non-voting shareholder during a proxy fight.
Perhaps now the gloves are coming off?
U.S. officials are examining ways to convert government stakes in banks into ordinary shares as banks accumulate losses, the Financial Times said, citing people close to the discussions.
Policymakers are considering an idea that the government change its existing holdings in the banks, which have taken the form of preferred shares — non-voting stock that carries a fixed dividend — into convertible preferred shares that could be converted into common stock, the paper said.
Under this proposal, the shares would automatically convert into common equity if there was a decline in the bank’s health, as measured by its tangible equity ratio, for example, the paper reported.
The government may also make future capital injections in the form of such convertible preferred shares, the paper said.
It bears mentioning that this passage sounds a bit ominous: “Policymakers are considering an idea that the government change its existing holdings in the banks.”
One wonders if this will be with or without the consent of the banks in question.
U.S. explores converting stakes in banks: reports [Reuters]
We don’t know what line Vegas had on Linda Thomsen keeping her job, but even before the SEC was Marked-to-Markopolos this week, it was a pretty good bet that the Head of Ennuiforcement, 6 years shy of her 20, was unlikely to be collecting a government pension of any note. The Post confirms it with an unconfirmed rumor that there is a lot of light and noise emanating from the Mary Schapiro set to this general end.
Newly installed SEC boss Mary Schapiro is quietly searching to replace Linda Thomsen, the agency’s embattled enforcement chief, with a prosecutor’s Street cred, according to people familiar with the situation.
Sources said Schapiro is scoping out the ranks of professionals in various offices of the US attorney, who litigate cases on behalf of the US government under the direction of the attorney general.
Well, it certainly wasn’t quiet, but that’s no surprise. The surprise would be if the SEC hadn’t leaked it themselves to try to take a little bit of the Class O star level heat coursing out of the beltway off of themselves. Unfortunately, at this point there isn’t an SPF number obviously high enough to keep even the Alaska office agents from getting a nice, deep Mozilo.
We’re also not so sure that the “ranks of professionals in various offices of the US attorney” is the best place to look. Sarasota might give white collar prosecution a better name at this point.
Looking ahead, what’s the Vegas line on Schapiro? Selected, as she was, before it was obvious to the entire planet how useless the SEC is, how likely are the attributes that commended her to the position to seem useful now? What say you, Dealbreaker?
SEC’s Blind Spot [The New York Post]
The adorable woodland creature Dick Bové would likely to kindly shut up about “failure,” cause that’s never gonna happen. Bank of Amerillwide is a buy, for a variety of reasons, among them being the fact that Ken Lewis is “the best operating manager of any bank in the United States.”
Bank of America (BAC): Fighting for Credibility
• Bank of America’s stock is now selling at 0.28x expected 2009 revenues; 6.9x expected 2009 earnings; 0.19x stated book value; 0.50x tangible book value. Its market capitalization is 3.4% of its total deposits and 1.7% of its assets.
• These numbers are clear, investors believe that this bank is about to fail and be nationalized by the United States government. If they believed that it would continue as an operating entity it is unlikely that the bank would be selling at such a low value.
• One reason for this conviction, on the part of investors, is Bank of America’s acquisition of Merrill Lynch. It is felt that either the company did not do the appropriate due diligence before making this acquisition, or that the company lacked the ability to understand how bad Merrill’s problems were. In either case a lose/lose situation.
• Management is now fighting back. In an article in today’s Wall Street Journal it is reported that the United States coerced Bank of America into buying Merrill against management’s will. This article could only have come from an interview with Bank of America’s management. The point to investors is “we knew what was going on but we had no choice.”
• This, to some extent, alleviates the questions concerning management’s competence. It does not take away the belief on the part of investors that the company’s woes are so significant that it will fail.
• From my perspective these fears simply make no sense whatsoever. In the fourth quarter, Bank of America’s deposits rose by almost a net $9 billion. Its loan loss provision was $8.5 billion but 27% of this was a reserve build and the whole amount was a non-cash charge. It took close to $8 billion in losses related to securities. The portion that was non cash in nature may have been as high as 75%.
• The point is that this bank is cash flow positive. It is not in danger of failure. Plus, the United States is now committed to keep it in business.
Which you already knew, but it’s nice to see him go the extra mile to put it in print. Also, the Bank of Amerwillwide board is apparently up to get down with $2/share (kidding?) and the acquisition of a third asbestos company (suggest one today). Per the Journal:
Last week, Mr. Lewis went before his directors in Charlotte for “the longest board meeting in anyone’s memory,” he told employees in a memo. “The board unanimously endorsed our business model, strategic direction and the team. The burden of execution and accountability, as always, rests squarely on our shoulders to vindicate their confidence in us.”
Serious, WTF Was The Deal With Stan O’Neal’s Office? You Can Tell Me, I Ain’t Gonna Rat You Out
By Bess Levin
I know the whole John Thain (MER)- Ken Lewis (BAC) rumble in the Bronx seems realer than a $35,000 commode but you know full well it’s not official until Geoffrey Raymond chimes in. Blissfully, that time has come. Above, “The Enumerated Thain.” As in the past, the artist, in his infinite wisdom, would like Dealbreaker readers to offer their two cents, for annotation on the canvas. Whatever you’d like to say to Mr. Thain, say here. Raymond is also currently accepting bids for the piece, though you’ll have some stiff competition from Ken Lewis, who’s said to be an interested buyer.
From the front lines:
BofA ETS Principal Desk was let go. The desk that actually made money (as opposed to who they purchased). Ask Henry Mulholland at ML to explain this logic.
Madoff Hits Where It Hurts Most: Swiss Bankers (Bloomberg)
“The waitlist at Geneva’s Michelin two-star restaurant Domaine de Chateauvieux evaporated after Bernard Madoff’s Dec. 11 arrest, along with about 10 billion Swiss francs ($8.5 billion) the city’s banks and funds had invested with him.
Bankers canceled six-month-old reservations for holiday parties of a dozen or more, said restaurant manager Esteban Valle. Sales of 5,900-franc aluminum-titanium Zai Spada skis have slumped, and a decline in landings by private jetliners at Geneva International Airport accelerated last month.”
Nothing For Something (Reuters)
The US Government got hosed from an investment perspective on AIG and Citi, but both were necessary. Without intervention on behalf of the two banks liquidity would have completely evaporated such that there wouldn’t be a need for a stimulus plan at all: there’s some things you just can’t crawl back from. But, there’s always going to be a downside, and there’s always going to be people who bitch, moan and yawl about the downside (mostly because their intelligence is such that that’s where their capacity ends.)
“The Congressional Oversight Panel report said the Treasury overpaid financial institutions by about $78 billion in its capital injections last year through the Troubled Asset Relief Program.
It paid $254 billion in 2008 in return for stocks and warrants worth $176 billion under the Troubled Asset Relief Program.
[...]
The report showed that the Treasury got the worst deal on second-round investments in American International Group for $40 billion and Citigroup for $20 billion under special aid programs tailored for the two institutions.
For each $100 spent on these two companies. the Treasury received securities worth $41, the report concluded.”
Deutsche Bank Sees Cap As Recruiting Plus (FT)
There’s going to be a keep your head down mentality in the American banking culture for the next 2/3 years which the Deutsche are seeing as a plus:
“If you are only going to be able to pay a $500,000 bonus, I think talent will be happy to work for us. At the end of the day, this is a people business, about who has the best talent,” Ackermann said.
$$$ The comp crackdown and shareholder rights [The Deal]
$$$ Fail of the Week: Grassley/Levin Hedge Fund Regulation Act [1-2]
$$$ Look out Marketwatch says equities are the new bird flu. [NG]
Since the end of the day quickly approaches, we happily present to you some dense academic work that points out a few new nuances on something you probably already intuitively knew about securitization. Alea picks up on an interesting paper that will take you there:
…as a result, statistical default model fitted in a low securitization period breaks down in the high securitization period in a systematic manner: it underpredicts defaults for borrowers for whom soft information is more valuable (i.e., borrowers with low documentation, low FICO scores and high loan-to-value ratios). We rationalize these findings in a theoretical model that highlights a reduction in lenders’ incentives to collect soft information as securitization becomes common, resulting in worse loans being issued to borrowers with similar hard information characteristics
The Failure of Models that Predict Failure: Distance, Incentives and Defaults [Alea]
The thing about this production of “Theater of the Absurd” is that the first act never seems to end.
A Senate committee put off its vote on Representative Hilda Solis’s nomination as labor secretary, one day after her husband paid to settle tax liens.
Welcome to the big leagues, gang!
Solis Nomination Vote Delayed After Tax Issue Arises [Bloomberg]
