U.S. regulators are drawing up rules that would make it easier for private equity firms to acquire troubled banks, aiming to free up more funds to recapitalize lenders, the Financial Times reported, citing people close to the situation.
The plan, which has yet to be finalized, may require private equity companies to inject substantial capital into lenders and to agree not to sell them for at least two years, the newspaper reported.
Obama administration officials continue to stress concerns about ensuring sufficient capital in the financial system, even as several financial institutions have begun lining up to return funds borrowed under the governments $700 billion troubled asset relief program to cope with the financial crisis.
The paper cited analyst estimates that private equity firms could provide up to $50 billion to recapitalize banks.
The Federal Deposit Insurance Corporation, which is charged with taking over failed lenders, is leading the drafting of the new rules, the paper quoted people familiar with the situation as saying.
The FDIC board, which also includes representatives from other banking regulators, is expected to discuss the matter in the next few weeks, it said.
Buy-out funds wanting to buy a troubled bank would have to disclose performance measures and marketing materials to allay fears that they might use the banks to subsidize other companies in their portfolio, it added.
The Federal Reserve has limited private equity groups to bank stakes of less than 25 per cent, reflecting concerns over conflicts of interests, but the latest crisis has prompted regulators to take a softer stance, the paper said.
Sheila Bair, the chairman of the Federal Deposit Insurance Corporation, on Tuesday addressed Citigroup’s board in an effort to defuse tensions sparked by the regulator’s push to replace Vikram Pandit as chief executive.
People close to the situation said Ms Bair called for an end to squabbling between the two sides, reminding the bank that the FDIC is carrying out its normal regulatory duties. Ms Bair did not address Mr Pandit’s position, in spite of her widely reported desire to see him replaced by someone with greater commercial banking experience. Citi and the FDIC declined to comment.
People with knowledge of the meeting said Richard Parsons, Citi’s chairman, also struck a conciliatory tone. ( as reported in Finanncial Times, N Y Times et al)
By Goldilocks ;) I presume
The stock market has erased almost all its losses for the year, yields on long-term government debt have returned to something like normal, and commodity prices have been surging — all evidence that the worst of the economic crisis may have passed.
But the road to recovery is far from smooth, or even assured. As investors ponder their next moves in this unusually unpredictable cycle, they are confronted with a confounding array of potential risks.
via Recovery Scenarios: Will It Be Too Hot, Too Cold or Just Right? – Real Time Economics – WSJ.
Bank of America named four new directors on Friday as part of a shake-up designed to infuse the board with more financial services expertise.
The new directors are Susan Bies, a former member of the Federal Reserve’s board of governors; William Boardman, retired executive of Bank One and Visa International; D. Paul Jones, former chairman and chief executive of Compass Bancshares; and Donald Powell, former Federal Deposit Insurance Corporation chairman.
Temple Sloan, a long-time director, stepped down from the board last week, and Robert Tillman, former chief executive of Lowe’s, revealed his retirement on Thursday. Two more BofA directors are expected to announce their resignations as early as Monday. BofA would not disclose their identities. BofA’s 18-member board has come under pressure as details about the bank’s acquisition of Merrill Lynch, championed by chief executive Ken Lewis, have emerged.
New York’s attorney-general revealed that Mr Lewis tried to back out of the deal in December because of Merrill’s mounting losses. The deal closed only after federal regulators, led by former Treasury Secretary Hank Paulson, supposedly threatened to remove Mr Lewis and his board if BofA didn’t go ahead with the transaction.
Those disclosures helped undermine investor support for Mr Lewis, who was stripped of his chairman title at BofA’s annual meeting in April. The new board chair, Walter Massey – president emeritus of Morehouse College – began a search for new board members. BofA said on Thursday that Amy Brinkley, chief risk officer, would step down at the end of June to be replaced by Greg Curl, head of strategy and corporate development.
As chief risk officer, Ms Brinkley presided over growing losses at the bank’s credit card business and in BofA’s portfolio of collateralised debt obligations. Still, Mr Lewis’ decision to replace Ms Brinkley, a friend and stalwart supporter over several decades, came as a shock to people familiar with the pair. Ms Brinkley and her husband were among the few couples who would occasionally be invited to dinner at Mr Lewis’ home in Charlotte, North Carolina.
Mr Lewis, is scheduled to appear before the House committee on oversight and government reform on Thursday to discuss the events surrounding BofA’s acquisition of Merrill.
One part of Treasury Secretary Geithner’s plan to prop up the failing bank sector is a forward-looking “stress test” imposed on every bank with over $100 billion in assets. Those failing the test would have access to contingent capital that could, thought goes, keep them alive — or zombified, depending how you look at.
As was the general theme of Geithner’s announcement, no details of how such a test might work were disclosed. Here’s what the Treasury gave us:
A key component of the Capital Assistance Program is a forward looking comprehensive “stress test” that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.
How the Treasury — who didn’t see this massacre coming in the first place — expects to accurately predict what sort of massacre lies ahead is beyond me. I assume they’ll come up with some fancy-pants formula to model a “worst case” scenario, and then extrapolate whether a bank currently has enough capital to survive. Again, no one really knows. These assets are impossible to value, so it’s impossible to determine exactly how much capital a bank really needs.
But I’ll still try
At any rate, I threw together a stress test of my own, however imperfect. I used just one statistic: the tangible common equity ratio. Why? Of all of the capital adequacy measures, I feel it’s not only the most accurate, but the most meaningful to average Joe common shareholders.
My test was pretty simple:
I looked at banks’ tangible common equity (TCE) ratio at the end of 2008 and compared it to the end of 2007. This gives a rough estimate of how common capital position changed over the past year.
I then took the percentage change and applied it to today’s TCE ratio, in effect giving it a forward-looking “stress test”.
Why do I feel these assumptions are useful? Two reasons: (1) While far from perfect, it gives us an indication of asset quality, and (2) most credible estimates predict we’re only a fraction of the way through total credit writedowns. Therefore, whatever carnage was inflicted in the past year could easily repeat itself — perhaps on a larger scale — in the next.
Now, I admit: This analysis is crude, rudimentary, and deserving of hole-poking. It’s intentionally simple because, more often than not, complexity leads analysis astray. I’m not claiming it to be perfect, because, well, it isn’t. There are a zillion variables it ignores. On a broad basis, however, I think it provides a practical look of where big banks are heading.
Without further ado, let’s take a look:
Bank 2007 TCE 2008 TCE Forward-looking TCE
JPMorgan Chase (NYSE: JPM) 4.05% 3.31% 2.70%
Citigroup (NYSE: C) 2.27% 1.19% 0.63%
Bank of America (NYSE: BAC) 2.99% 1.97% 1.30%
Wells Fargo (NYSE: WFC) 2.94% 2.25% 1.73%
US Bancorp (NYSE: USB) 3.94% 2.62% 1.74%
Goldman Sachs (NYSE: GS) 2009 7.55%*
Morgan Stanley (NYSE: MS) 2009 7.52%*
Source: Capital IQ, a division of Standard & Poor’s, and author’s calculations. Bank of America’s calculation doesn’t include Merrill Lynch — combined company data unavailable. *Raised TCE ratios in 2008.
A few thoughts
Scary numbers, Fools. According to RBC Capital Markets, TCE above 6% has been a historical norm.
Once you get into the 1%’s — where some banks are today — common shareholders are holding on for dear life. Below 1%, and it’s likely gameover.
Therefore, Citigroup, almost any way you spin it, is headed for zombie land. Bank of America (even without calculating the effects of Merrill Lynch) isn’t far behind. Of the major commercial banks, JPMorgan appears to be best of breed, but hardly qualifies as “safe”. Investment banks Goldman Sachs and Morgan Stanley actually strengthened their TCE ratios in 2008, as they were able to shed assets and de-lever much faster than others. How long that can continue is anyone’s guess. I wouldn’t bet on it.
What’s the takeaway here? My belief is that most investors should avoid all bank stocks like the plague, at least until details of the pending “aggregator bank” Secretary Geithner’s working on become clear. There may indeed be some incredible bargains in bank stocks today, but with this much uncertainty you won’t know what’s cheap until after the fact. There’s plenty of opportunity today. Just don’t waste your time digging for it in bank stock
UBS Financial Services has added more than 400 brokers to its 8,000-strong network in the past few months, insiders say.
The moves have enraged rivals, who claim the Swiss group’s big pay offers have triggered a costly price war for brokers when most banks, including UBS, are struggling to cope with losses.
Merrill Lynch is believed to have lost more than 100 brokers to the group.
UBS denies it pays over the odds for brokers. “We have no interest in running a business that can only hire talent by being the high bid,” wrote Marten Hoekstra, US head of wealth management, in an internal memo.
Documents seen by the FT show that UBS offered brokers at a rival firm compensation of about 260 per cent of the previous year’s profits to switch over.
People close to UBS confirmed the offers were made late last year but said the packages were in the range of 200-220 per cent.
The earlier stories on Deutsche and Lehman can be reached by going to the home page of the blog as they imediately precede the UBS story
Contrarian Indicator: CEOs?
March 18, 2008
In the current recessionary environment, if a CEO comes out to say that all is well, is that an indicator to short the stock?
On the 31st of January, after a worse than expected quarterly loss, MBIA CEO Gary Dunton came out to say that “We believe that these steps, along with reduced capital requirements resulting from slower business growth, will result in our capital position surpassing rating agency Triple-A requirements … and will allow us to continue serving the needs of our clients and investors”
February 28th, John Stomber, CEO of Carlyle Capital, reported that during the fourth quarter the company’s portfolio stabilized and generated returns consistent with our near term targets, continuing to run the business to preserve the value of our shareholders’ equity and to position the Company to meet our long run objectives of earning an attractive risk adjusted return and paying a consistent dividend in the future.
On March 12th Bear Stearn’s CEO Alan Schwartz came out to say that Bear Stearns would have a profitable 1st Quarter and that the company had a $17 billion cushion against losses.
By March 12th, Carlyle Capital is bankrupt. March 17th, Bear Stearns has been sold to JPMorgan for $240 million. MBIA while still grasping to its AAA foresees further write downs and withdraws from Fitch ratings.
Carlyle Capital Corporation
Such a situation not only brings up a whole lot of questions surrounding the legality of issuing such statements but the very credibility of company guidance. Is this fraud? Or for conspiracy theorists, is the misinformation deliberate, to allow insiders to get out of positions beforehand?
Either way, in current conditions, it might just be a good idea to start shorting a stock whenever a CEO comes out with “good news”.
1 Comment | Stock Market Contemplations | Tagged: Bear Stearns, Carlyle Capital, Contrarian Indicator, Ethics, MBIA | Permalink
Posted by jqwerty
the author is a bachelors student in Canada, haing been part of an equity research team in alt energy and blogs regularly at financialmusings.wordpress.com
The government launched its second attempt to stimulate the economy into growing faster. Simultaneously, the Reserve Bank has lowered two key rates to help get more credit flowing through the economy. The repo and the reserve repo rate under the liquidity adjustment facility (LAF) has been cut by 1 per cent while the cash reserve ratio (CRR) has been reduced by 0.5 per cent. The reverse repo rate is now 4 per cent, the repo rate at 5.5 per cent and the CRR at 5 per cent. The CRR cut will effectively make about Rs 20,000 crore available banks. It remains to be seen how much of this the banks will actually use for fresh credit.
Other major steps announced this evening are:
* FII investment limit in rupee denominated corporate bonds increased from $6 bn to $15 bn.
* The ‘all-in-cost’ ceilings on external commercial borrowings (ECBs) removed
* Development of integrated townships would be permitted as an eligible end-use of the ECB
* NBFCs dealing exclusively with infrastructure financing permitted to access ECB from multilateral or bilateral financial institutions
* A Special Purpose Vehicle will be designated shortly to provide liquidity support against investment grade paper to Non Banking Finance Companies (NBFCs) fulfilling certain conditions. The scale of liquidity potentially available through this window is Rs.25,000 crores, although details are yet to be announced.
* An arrangement will be worked out with leading Public Sector Banks to provide a line of credit to NBFCs specifically for financing commercial vehicles.
* Credit targets of Public Sector Banks are being revised upward to reflect the needs of the economy in the present difficult situation. Government will closely monitor, on a fortnightly basis, the provision of sectoral credit by public sector banks.
States will be allowed to raise in the current financial year additional market borrowings of 0.5% of their Gross State Domestic Product (GSDP) for capital expenditures. This would amount to about Rs 30,000 crore.
* India Infrastructure Finance Company (IIFCL), which has already been authorized to raise Rs.10,000 cr. through tax free bonds by 31st March ’09 for refinancing bank lending of longer maturity to eligible infrastructure bid based PPP projects, will be accessing the market next week for raising the first tranche of the amount. This will enable the funding of mainly highways and port projects on hand of about Rs.25,000 crore. To fund additional projects of about Rs.75,000 crore at competitive rates over the next 18 months, IIFCL is being enabled to access in tranches an additional Rs.30,000 crores by way of tax free bonds once funds raised in the current year are effectively utilised.
Apart from these, there are also measures to help exporters and some duty changes.
India’s central bank took emergency measures at the weekend to avert a growing liquidity crunch affecting the country’s estimated $43.7bn of outstanding trade finance.
Blocked trade credit is threatening to bring productive sectors of the economy to a standstill, particularly small and medium-sized businesses that are unable to fall back on large balance sheets.
Citi has singled out India’s $43.7bn (€34.7bn, £30bn) of trade credit as a particular “problem area”. The Reserve Bank of India is also increasingly concerned about the country’s outstanding short-term corporate sector foreign debt of $82bn.
The RBI on Saturday night more than doubled the funds it makes available for banks to refinance export credit at favourable interest rates to Rs220bn ($4.5bn, €3.8bn, £3bn).
It also extended the export credit repayment window for exporters to nine months from six months.
“There are indications that the global slowdown is deepening with a larger than originally expected impact on the domestic economy,” the RBI said.
The move came as the Asian Development Bank on Sunday appealed to Asian banks to unfreeze credit to customers, saying financial institutions had overreacted to the effects of the global financial crisis in the region
After pumping in around Rs 2.80 lakh crore liquidity into the banking system, the Reserve Bank on Saturday announced a slew of measures to give a boost to the real estate sector, in addition to taking steps to arrest decline in forex reserves.
In order to ensure more liquidity for the real estate sector, RBI allowed the registered housing finance companies to raise short-term funds from overseas markets.
"It has been decided to allow, as a temporary measure, housing finance companies registered with the National Housing Bank to raise short-term foreign currency borrowing under the approval route", a release by RBI said.
The decision will also help the country shore up its declining forex reserves, which according to the latest data, has slipped to about USD 250 billion from a high of $ 314 billion in April-May.