Category Archives: O’nomics

China’s banks are over-leveraged | A new ‘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.

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Bank results week: Wells Fargo profits from the weak

Wells Fargo used 2009 as a good time to review its national footprint and with Wachovia in its belt used the time to grow its retail presence and cement a leadership position that now threatens BofA directly

Also a couple of tricks of the trade, kept it more profitable than most in its competitor set, using the now derogatoy ‘Proprietary Trading’ desks to hedge with mortgage securities

MARKETWATCH.COM

In investor-speak, that means Wells Fargo, which has 6,600 branches in 39 states, purchased investments that pay off when short-term rates fall–which is exactly the action central bankers have taken to keep credit flowing during the financial crisis.

Wells Fargo reported a profit of $2.82 billion or 8 cents a share for the 4th Quarter up 92 cents a share from the year ago results. The bank reported revenues of $88.7 billion for 2009, producing $12.7 billion in income and the 4th quarter results were well ahead of expectations

MORTGAGE WARS: Wells Fargo vs Bank of America

In the fourth quarter, Wells Fargo originated $94 billion in mortgages while Bank of America originated $84 billion, up sharply from the volume of mortgages they made in the fourth quarter of 2008 at the depths of the financial crisis. According to trade publication National Mortgage News, the two banks accounted for 40% of new mortgages in the third quarter of 2008, the latest period for which information is available. They have similarly dominant positions in the servicing of mortgages.

After this, the war is now heavily tilted in favour of the west coast headquartered Wells Fargo, with Citi struggling to keep up with both. Wells Fargo was never under the pay czar’s administration and despite a 47 cent loss from a $25 b repayment in the fourth quarter, did not tailspin like the other two

Bank Reforms: A second Edition

Paul Volcker has new risk limits

After the treasury induced reforms that were more a laundry list of all measures, with existing internal controls at banks pushed into the open, in the next round against criminal misuse of the monetary and fiscal basis, Obama leaned towards Paul Volcker to introduce risk based limits for the Treasuries at commercial and investment banks. Goldman Sachs has already brought leverage down to 4.42 times net worth during the upheavl of 2009.

In an interview with ABC on Wednesday Mr Obama characterised the move by saying that the administration was about to get into a “big fight with the banks.”

“We’ve got a financial regulatory system that is completely inadequate to control the excessive risks and irresponsible behaviour of financial players all around the world,” he said.

“People are angry and they’re frustrated. From their perspective, the only thing that happens is that we bail out the banks… We’re about to get in a big fight with the banks.”

An administration official on Wednesday said the plan – in discussion for the last couple of months – was born out of a need to “cut down on excessive risk taking”.

The announcement is likely to stop short of the return to a forced separation between riskier investment banking and the utility functions of retail and commercial banking that was enshrined in the Glass-Steagall Act.

Goldman Sachs – which runs a large proprietary trading business and which reported stronger than expected fourth-quarter profits on Thursday – will be watching the details closely, but the measures are more likely to threaten institutions whose operations are large and span commercial and retail operations as well as trading for their own benefit.

MARKETWATCH.COM: Breathing Fire

“While the financial system is far stronger today than it was a year one year ago, it is still operating under the exact same rules that led to its near collapse,” said President Barack Obama at the White House.

“My resolve to reform the system is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see record profits at some of the very firms claiming that they cannot lend more to small business, cannot keep credit card rates low, and cannot refund taxpayers for the bailout. It is exactly this kind of irresponsibility that makes clear reform is necessary,” Obama added.

The proposal aims to deter commercial banks from becoming so large that they put the broader economy at risk and distort normal competitive forces

Metlife could get American unit of AIG

Andrew Sorkin at NYtimes’ Dealbook just updated below

Update | 1:12 p.m. MetLife has emerged as the lead bidder for the American International Group’s Alico life insurance unit, people briefed on the matter told DealBook, as A.I.G. seeks to sell off the unit to help repay its $182 billion in government aid. The February offer was a good 25% lower at $11 billion

[picapp align=”left” wrap=”true” link=”term=aig+building&iid=4269881″ src=”8/4/c/3/PicImg_AIG_gives_company_2d16.JPG?adImageId=9298971&imageId=4269881″ width=”234″ height=”156″ /]Under the terms being discussed, MetLife would pay about $14 billion to $15 billion for the A.I.G. business, these people said. A.I.G. has said that in a disposition of Alico, about $9 billion of the proceeds would go toward repaying the government’s lifeline.

A deal for Alico is still two to three weeks away, these people said, cautioning that negotiations are ongoing and may still fall apart. MetLife and A.I.G. held talks about a potential sale of the unit before, only to fall apart over price.

via Dealbook | NY Times

Alico services 19 million customers in 54 countries with a government interest of $9 billion , while the IPO candidate AIA based in Asia is the other new Life insurance entity with a $16 billion Govt interest i.e. a $20b equity capital base. Reuters story here

The Alico and AIA book together make up the $600b in investment assets with AIG and a $14 billion price tag should turn in a neat book profit and cash for returning the govt liabilities of $180 billion. The AIA IPO will be a further $8 billion and has waited for Benmoshe and/or Greenberg to complete the Alico deal.

P.S. We are not mentioning the ink on N Y Times to Alico that still links to an Alco inc. in Agribusinesses, but really the way people disrespect paper and newspaper, it’s funny, rofl..

Also, in the mean time, Bernanke has stepped in to try and clear his name:

Bernanke, Hoping to Quiet Critics, Seeks Review of Fed’s A.I.G. Bailout By THE ASSOCIATED PRESS

[picapp align=”right” wrap=”true” link=”term=AIG&iid=6809696″ src=”0/f/f/7/Neil_Barofsky_testifies_ccc9.JPG?adImageId=9298931&imageId=6809696″ width=”234″ height=”156″ /]The $182 billion rescue has sparked public outrage and demands in Congress for more information about the lifelines, beginning in 2008, provided to the company.

What’s the deal with Cadbury?

It get’s wierd(er). I am flummoxed. Let me bite into a little late night chocolate. Searing hot.

One would have thought, esp the fat cat bankers and the Bens, that Cadbury’s needed a richer valuation. As the story unfolds however, there seems to be more than what meets the eye.[picapp align=”right” wrap=”false” link=”term=FUDGE&iid=5140001″ src=”d/4/9/6/closeup_of_a_3b19.jpg?adImageId=9179782&imageId=5140001″ width=”120″ height=”120″ /]

Nestle backing Kraft did not bring extra cash from Kraft and with Buffet watching, nothing more is likely to happen. However the counter offer for 790p or $12.80 as mentioned by Hershey’s today shows a rather bankrupt chocolate bank. I thought only one would be Charlie’s Willy Wonka. All the players are strapped for Cash, the market is growing, the health foods market is not hurting the Chocolate segment, i don’t see where it needs Willie wonka to save Charlie Cadbury.

But Cadbury is obviously out-of-pocket and cannot fund itself through a Management buy out, neither are the numbers interesting enough for PE. It seems like PE funds are passing on this one maybe because they do not read their stuff here. More chocolate dinners for them please. Transformers? Anyone? with a nice movie to curl up with , of course..[picapp align=”left” wrap=”true” link=”term=Chocolate+production&iid=5255854″ src=”3/c/f/1/Close_up_of_6a46.jpg?adImageId=9179945&imageId=5255854″ width=”120″ height=”120″ /]

I think the like of Bronson Point are obviously busy with bigger prey, but there are others who can help Philip Cadbury out of this predicament and continue growing the market. They were a very happy lot after announcing results in the local India office, esp as India and China continue to recruit in MNCs so we can be happy when things don’t move and we can get on with selling. I’m still waiting for the next offer myself.. I need that job for growing India’s brilliant consumer economy.[picapp align=”center” wrap=”true” link=”term=Cadbury%27s&iid=7312398″ src=”3/f/0/6/Cricket_Field_at_0be5.jpg?adImageId=9179974&imageId=7312398″ width=”120″ height=”116″ /]

But, as of now, Ben applied first and Warren Buffet does like fudge. coming back to PE front, no, emerging market desks here are unlikely to be interested because there is so much in infrastructure and IT, so much in existing brands that need to grow 2-3X from a large established base at ITC, Unilever and P&G apart from Pepsi and Coke. And Britannia, Fonterra, Kraft itself with the unhurt Nestle and the OTC pharma specials from the big 4.

And the issue was..cash. Of course, they might even need more cash to counter the Diamond Foods campaign in the Superbowl, and Irene wouldn’t overspend. Hershey’s is too small to play with Cadbury, but it shows how much Kraft is under-spending when cottage industry players like Hershey’s that have a niche like Swiss Cheese, no go on this deal.