Category Archives: Meltdown
Huffington Post broke us this one, Thanks James, Adrinana! Huff!
Add someone in Hongkong who writes a default swap for them ( insurance, in case of default, maybe the local Nankiang units can diversify :) ) and you have another perfect crisis, for the Chinese to fund this time. And they’ve defaulted on quite a few contracts themselves! ( commodities, October 2009)
Citi taught us to use Off Balance sheet financing
Banks are moving loans off their balance sheets in order to dress up their accounts for worried regulators.Only this time it isnt Citigroup C or State Street SST thats involved, but Chinas big banks.In November Chinas banks packaged and then sold $18.6 billion in loans to Chinese trust companies, removing those loans from the banks balance sheets, Shanghai Benefit Investment Consulting has told the Wall Street Journal. Thats a huge 54% of all the new loans banks made in the month according to government figures. For the year the total of loans packaged and sold by banks comes to almost $90 billion.The repackaging and sales come as Beijings bank regulators have started to worry that the countrys banks dont have enough capital to back all the loans theyve made in 2009. So far in 2009 Chinas banks have made more than $1 trillion in new loans, according to government figures. Regulators have begun to press banks to raise more capital to buttress their balance sheets.By selling the loans to trust companies, banks take them off their balance sheets. That has the effect of reducing the amount of loans that the banks look like they have made. That in turn reduces the amount of capital it looks like they need to raise to support these loans via James Jubak: Chinas Banks Copy Citigroup in Hiding Bad Loans Off Their Balance Sheets.
Who brought the house down?
Hank Greenberg in an apparent bid to recover AIG’s golden goose from the two year hiatus in economic activity, remembering his last coherent version of 2007 here:
Greenberg blamed new standards for credit-default swaps — pushed by Goldman or Deutsche Bank AG, he said — and subprime, housing-backed derivatives sold and then shorted by Goldman as contributing to AIG’s collapse
This is excerpted from a short note on Bloomberg here
Also, in case you are wondering, no we do not plan this effort to grow into something as bg as the Business Week BX..pretty cool stuff, eh!
Blankfein not stepping in yet, means Greenberg has another couple of hits at it..and his best chance is if he gets a closed door session behind the curtains..write in
Meanwhile Blankfein got a vote down from the Financial Crisis Inquiry Commission
Lloyd Blankfein, the head of Goldman Sachs Group Inc., failed to own up to his firm’s role in selling mortgage securities that helped trigger the global credit crisis, said the chairman of the panel investigating the financial meltdown.
“Mr. Blankfein himself never admitted that there was any responsibility of Goldman Sachs to make sure the products themselves were good products,” Philip Angelides, chairman of the Financial Crisis Inquiry Commission, told reporters after a hearing in Washington today. “That’s very troublesome.”
Blankfein had just explained things too simply for those who expected a sobbing recalcitrant kneltdown humbug in every witness to the state, where they sat happily with the same Greenberg, prompting him to spend $44m on a weekend layover with his team among other things
Repayment week came a cropper as Citibank found a lukewarm market waiting for its sale to raise the $20 billion to repay. It seems Vikram Pandit’s team failed to do the required homework before declaring its ambitious calendar and lacked the skills to judge the market conditions right for its sale. All the meetings Vikram Pandit had been having with the Treasury came a cropper on a day that mysteriously coincided with Obama’s call to the bankers.
The market does nt ignore such folly. All insider trading and information based decisioning apart, the market first and foremost reads market information and that information now puts Citi and AIG in the same league. Both will now be assessed with a lack of direction and difficulty in reading its stakeholders because of a simple public fracas. I mince no words when I say that they could now be treated worse than an Accenture cuddling Tiger woods a week after the man destroyed his marriage.
This is a setback for the entire recovery mechanism and a symptom of the misreading that afflicts the Geithers, Benmoshes and the Pandits
Even a Hongkong market could raise over $50 billion but you came out with an offer no one wanted for Citi. Sounds like, Citi is no better than one of the 133 banks that have failed in the US this year. This cannot be compared to the Mortgage meltdown or made a part of it. It needs a new chapter by itself. We all suffer for such fools though the gimmer of hope is that now no one cares when an AIG or Citi breaks the buck and the markets go on with better picks. It’s a shop like any other..In fact in pstate Des Moines in Iowa, the schools and the lake planes are all fine. The Ski resorts are doing big business too. And Dubai is back. Azerbaijan has a sovereign wealth fund. What about the new oil and mineral deposits south of Brazil and in the dense African safari..
zyakaira notes: This crisis ain’t over yet by a mile, Going back on 66, Chicago may be next as California and Vegas have already given in..sad to see Hollywood , valley and more just sink without a trace
Reporting from Sacramento – Less than four months after California leaders stitched together a patchwork budget, a projected deficit of nearly $21 billion already looms over Sacramento, according to a report to be released today by the chief budget analyst.
The new figure — the nonpartisan analyst’s first projection for the coming budget — threatens to send Sacramento back into budgetary gridlock and force more across-the-board cuts in state programs.
The grim forecast, described by people who were briefed on the report by Legislative Analyst Mac Taylor, comes courtesy of California’s recession-wracked economy, unrealistic budgeting assumptions, spending cuts tied up in the courts and disappearing federal stimulus funds.
“Economic recovery will not take away the very severe budget problems for this year, next year and the year after,” said Steve Levy, director of the Center for Continuing Study of the California Economy.
In fact, after two years of precipitous revenue declines, the new report projects relatively stable tax collections for the state, said those who were briefed. But that won’t stop the deficit from climbing to nearly $21 billion.
Gov. Arnold Schwarzenegger, who will present his next proposed budget to Californians in January as he begins his last year in office, started sounding the alarm last week.
“I think that there will be across-the-board cuts again,” he said at a San Jose news conference.
The task in 2010 could be even harder than it was this year, when record deficits and cash shortfalls drove California to issue IOUs for only the second time since the Great Depression. Lawmakers have already cut billions from education, healthcare and social services while temporarily hiking income, sales and vehicle taxes.
“I can’t think of any good solutions,” said Assemblywoman Noreen Evans (D-Santa Rosa), who chairs the lower house budget committee.
The current budget year accounts for $6.3 billion of the deficit, the nonpartisan analyst projects. Prisons spending will outstrip what has been budgeted by more than $1 billion, and K-12 schools were underpaid by $1 billion under the complex formula that governs education funding, the report says.
Another $14.4 billion of the deficit is for the fiscal year that begins next summer, say those briefed on the report. The governor’s next budget will have to account for both years.
The New York Life Insurance Company, 9th till last year, jumped to No. 2 in market share behind Metlife with a near 6% market share in Life taking a leaf out of the book of the World’s best. AIG dropped just 4 places in the whole melee of the stimulus and this continuing depression. New York Life simply ‘educated’ prospects about how it was properly capitalised and fully ready in case of any further financial breakdown, bringing it a whole lot of new business ( see story: Slump spurs grab for Markets)
NY Life always had a vibrant sales force and with its diligent processes and adequate attention to current relationships, it has also managed to keep its existing customers happy, increased its share in market friendly Variable Life plans and kept its leadership in Whole Life plans for more than a decade. There is definitely one underlining factor that believers in the risk driven markets model do not realise. The underlying fact in winning is sanity in leadership and focus on the good pieces of business. It is not about Richard Branson and other half baked half thinking brazen tomfoolery like at BofA after the purchase of Merill ( there are some Indian examples that you can also read at http://zyaada.info Or http://india.advantages.us ) or the GOP reaction to Obama’s healthcare plans. ( And how is Obama’s plan going to make insurance cheaper? It does not seem to be the issue at all!!)
New York Life also lost $3.5 billion on its investment portfolio like the other big banks and AIG but Metlife having taken all of the business headed for AIG ended up with a sky rocketing 12% market share and NY Life managed to increase market share by a further 180 basis points. True, NY Life is but a can of soup for those hit by the recession opportunity..because there are other ways to beat the old leaders in the recession.
One of these popular ways this time has been to give jobs to out of work investment bankers from Goldman Sachs, Lehman and others at Deutsche Bank and some boutiques, that were not owned by these ex bankers. However, Deutsche Bank has already been caught in trying to beat the losers of the recession, continually facing funds shortages in the market and hungry for Capital after market adjustments caught up with its losses.
Yet it is relatively easier, and thus there is an opportunity during a bad recession to catch up with the falling Joneses and come up ahead in the race. It visibly happens in retail in the Coke vs Pepsi and the P&G vs others wars (Unilever in Asia and Europe) or in GM vs Ford, but is equally vehement in markets in banking and insurance. Competition is the life blood of the economy and without such acts it is very difficult to beat any recession.
On a relatively obscure note, that is also why banks running away from Asia are unlikely to survive in the coming decade, as the growth and the money here ensure that the growth is sustainable, and Life and P&C entrants in this market would also do well to learn more regulatory control from the economies in Asia that remained capitalized and capable despite investments sinking..but then that is another article altogether.
Citigroup plans to sell 20 businesses in consumer finance area, many of them located in Europe, its CEO Vikram Pandit said in an interview with Singapore’s Business Times.
He said the move was due to the shift in the consumer finance market where “there is less funding availability and they are probably less robust as businesses.” Pandit also said that the group’s capital position following the completion of the exchange of preferred shares for common equity in July, reflected an “incredible financial strength.” “On the completion of our exchange offer, we had 12.7 percent tier 1 capital and more than 9 percent tier 1 common capital,” Pandit said during his recent trip to Singapore.
The New York-based bank has said in July investors have agreed to swap $32.8 billion of preferred securities for common stock, and the US government, which will officially take a 34 percent equity at the bank and become its largest shareholder, will swap $25 billion. The US third-largest lender conducted the offers after heavy credit losses and writedowns prompted a series of bailouts, including a $45 billion injection of taxpayer funds from the Troubled Asset Relief Program.
Citigroup reported a quarterly profit of $4.28 billion, compared to a year-earlier loss of $2.5 billion. However the second quarter was boosted by $6.7 billion gain from the sale of its Smith Barney brokerage. Without that one-off gain the lender would have reported a $3.7 billion loss.
Citigroup has been garnering investor interest amid optimism on Wall Street that the worst is over for the beleaguered banking company.
Citi shares have been pounded in the past two years, falling to around $3 from $55 because of heavy losses and a huge increase in its shares outstanding as a result of a $58 billion preferred-stock exchange offer designed to shore up the company's equity capital base.
Citi stock is down 50% this year alone, while J.P. Morgan Chase shares have risen 20%, to a recent $38, and Goldman Sachs has surged 90%, to a recent $162.
The Worst Is Past
The bullish case for Citi is that it has put concerns to rest about its viability and capital adequacy.
And, based on tangible book value, a conservative measure of shareholder equity, its stock looks inexpensive. (Book value is the value at which assets are carried on a company's balance sheet — or the value of a company if it sold off all its tangible holdings.)
Citi has been trading at about 70% of its book value of $4.30 a share, pending completion of the preferred exchange offer that probably will boost its share count to 23 billion from the current 5.5 billion.
In contrast, J.P. Morgan and Goldman fetch about 1.6 times tangible book; Wells Fargo commands twice its book value.
“Citi is the one stone that investors haven't turned over,” says John McDonald, a banking analyst at Sanford Bernstein who carries a price target of $4 on Citi shares.
Note:This is post the $3 b sign up with JPM/GS and the share was down 16% in trade. Last week, before the $3b signup, it cost $2.5 million to save (blah blah..insure..blah blah) $10b of its outstanding debt. This is where Wall Street and London made all the money from 2001 till early last year..
Advisers to large bondholders of CIT Group Inc (CIT.N: Quote, Profile, Research) are pushing to allow the company to restructure its debt with a prepackaged bankruptcy option if later debt exchanges fail to attract enough creditors, a source close to the negotiations said on Thursday.
The prepackaged option would explicitly open the door for CIT to file for bankruptcy if not enough bondholders tender their notes, said the source, who declined to be named as discussions were private.
The lender to 1 million small and middle-size companies clinched $3 billion in emergency financing from large bondholders this week to restructure its debt and avoid bankruptcy, after the collapse of rescue talks with the U.S. government.
CIT said estimated funding needs for the year ending June 30, 2010, include $7 billion of unsecured debt. The firm has about $40 billion of long-term debt, according to independent research firm CreditSights.
In a first step, CIT is offering 82.5 cents on the dollar for $1 billion floating-rate senior notes due Aug. 17, but the company said it could be forced to file for bankruptcy.
July 16: Default Swaps, Shares
Credit-default swaps on CIT jumped as much as 17 percentage points to 51 percent upfront before falling back to 47 percent upfront at 8:16 a.m., said broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $4.7 million and $500,000 a year to protect $10 million of CIT debt for five years.
The lender gained 1.9 percent to $1.64 yesterday before trading was halted by the New York Stock Exchange. When trading resumed today, the stock plunged as much as 99 percent, and was down $1.27, or 78 percent, to 37 cents as of 10:34 a.m.
The stock, which fell 64 percent this year, sold for more than $60 in February 2007. Common shareholders typically get little or nothing in a bankruptcy unless creditors are paid first. CIT employed about 4,800 people at the end of March.
“Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies,” the Treasury said in a statement yesterday.
Treasury Secretary Timothy Geithner declined to comment directly on CIT today, saying only that his team has “been working very closely with the FDIC and the Fed and monitoring” the situation.
When May 2009 began, the stress test results more or less indicted Bank of America asking it to raise $34 billion in fresh equity to cover its gap. This came on the heels of its questionable act ( Kenneth Lewis is still responding to the resulting enquiries) in first accepting and then trying to finagle out of the Merrill Lynch takeover using the MAC clause. But all that is past as BofA successfully raised the required capital and closed the second quarter with exceptional trading profits of $6.7 billion and a top line of $33.9 billion showing its old magic and leaving the markets with a lot of positive expectations. The market reaction has not been that positive in terms of actual stock performance as people wait for the next few steps to show and prove that this is indeed the best investment american investor should make.
Wells Fargo had a far worse business performance but they were only $17 b short in the stress test, as BofA was one of the biggest mortgage and trading players, not good old WFC. Probably that image gap is the first thing BofA must prioritize for 2010. Where it was the strongest retail brand in the US after its 2001 takeover of Fidelity in the east, today it looks like it may be playing second fiddle to others. Not only because it had to cough up more capital, but also because it is one of the very few who sold their crown jewels outright in China and other Emerging Markets and whose global presence is now severely in question.
While the US Economy suffered a 6.1% deceleration in Q1 of 2009 and passed a shaky $3.9 trillion Budget for 2009 after much soul searching, Non Performing assets continued to grow at the bank rising to $31 billion at June 2009. The bank is currently on its way to sell Columbia Asset Management for an expected $2 b in pre tax gains and will likely report $12-13 b in pre tax profits in each of the remaining two quarters thus maintaining profitability after paying preferred dividends to the Government and even paying off some of the $45 b it had to borrow from the government. It is also selling the Asian real estate investing business of erstwhile Merrill Lynch. (Merrill’s Asian Business Drawing Strong Interest)
Will BofA therefore be able to act as the Market Leader American Investors expect it to be from here? There is no other way. However, it cannot sell all the banking businesses it acquired albeit in the last 5 years like MBNA (2000-1) and hope to do so. The Merrill Lynch units in Asia and at home in North America also have to turn in a good performance as the investment banking business becomes the most profitable at current valuations. It’s higher fees on retail accounts by itself will not be able to absorb rising credit losses as retail customers implode on current accounts ( overdrafts) , cards and mortgages.
To quote Ken Lewis at a recent Town Hall meeting in LA where he was addressing the Countrywide/Mortgage issues – “The bad news is that consumer confidence is at its lowest point since 1992. It’s easy to see why. Here in Los Angeles, distressed home sales are up from 3 percent of total sales in spring of 2007 to 30 percent in spring of 2008; 3.7 percent of all homes are in foreclosure; and across California, home sales prices are off almost 30 percent. And that is not to mention $4 gasoline and record food and commodity prices that are pinching household budgets.” In mortgages, the market will return to more traditional products also, along with Home buyer education and renegotiation of defaulting loans and that is no small exercise, but financial innovation has to continue as well. At this stage, while BofA consolidates it has to invest in more of market development efforts thru its extensive network and refocus on producing returns from the world’s nook and corners like in China and Brazil where there is more and more business as BRIc countries maintain their growth. BofA has to find robust business models and risk management while increasing its presence in Europe, LatAm and the developing world without decimating itself in the crisis and imploding on itself. Direct Banking models, Prudent Credit Card lending and tapping unbanked populations in responsible lending and banking programs are but obvious choices which cannot be swept aside for feigned problems in their operating structures. Business is successful in China, there are successful Credit Card companies and you are Bank of America, not an also ran. You owe it your investor and your customer.
Bank of America is among the world’s leading wealth management companies and is a global leader in corporate and investment banking and trading across a broad range of asset classes serving corporations, governments, institutions and individuals around the world and serves clients in more than 150 countries
zyakaira notes: Citi reported $4.3 billion, BofA $3.2 billion on $33 billion, $JPM $2.7 billion on $27.7 billion, with TARP repayments costing $0.10 to the EPS and $GS reported $1.8 billion (WAMU and MER seem to have paid off!)
Citi and BofA woula have made losses without the one time stake sales while JP Morgan has absorbed the bullets and GS never got shod in the shooting gallery for all practical purposes.
Unfortunately, $DB and the European banks are still sinking! Citi beat the analysts to hell! One more shot for the next quarters acquisition boom. If you note, all profit is from underwriting and fees while morts and Fixed Income has stopped bleeding at these 4 and hopefully $WFC
NOW LET’s GET TO REPAIRING THE ROAD AND THE POWER PROBLEMS, as Mamaa would say..
But behind the figures was a sober reality: Those happy results were driven by billions of dollars in one-time gains — in the case of Bank of America, by a profit from the sale of a stake in a big Chinese bank and, in the case of Citigroup, by a bonanza from a new joint venture for its Smith Barney division.
Without those one-offs, the banks, despite two taxpayer-financed bailout dollars apiece, would have lost billions.
Like Goldman Sachs and JPMorgan Chase, which stunned Wall Street earlier this week with robust earnings reports, Bank of America and Citigroup got big increases from their trading operations.
But the pain being felt by hard-pressed American consumers hurt these giants even more. Both banks set aside billions of dollars to cover looming losses on consumer loans and warned that, given the tough economy, the road ahead could be rocky.
Still, the results exceeded analysts’ expectations. Bank of America announced earnings of 33 cents a share, and Citigroup reported earnings of 49 cents a share. The results at Citigroup far outstripped the loss of 18 cents a share that analysts had predicted.
But both banks — the last of the big lenders that have yet to pay back their emergency bailout money from the federal government — sold significant assets during the quarter, cushioning their bottom lines. Bank of America’s results were enhanced by the $5.3 billion pretax gain from the sale of shares in the China Construction Bank. Citigroup formed a joint venture with Morgan Stanley for Smith Barney, resulting in an $11.1 billion pretax gain.
While the results provided another sign that American banking industry is stabilizing somewhat faster than many had expected, they nonetheless underscored how the sagging consumer economy is hurting banks big and small. For the moment, trading and other traditional Wall Street businesses, such as securities underwriting, are generating profit at many big institutions.
At Bank of America, a record trading profit of $6.7 billion and a pickup in investment banking fees lifted net revenue to $33.1 billion, up from $20.7 billion a year ago.