Research Zeitgeist: Automakers and Banks on the Ropes
Maybe the big three US automakers should order a few copies of Oxford Analytica’s report arguing that the automotive business model needs a radical rethink. OxAn’s thesis, which was bolstered by another dismal quarter at General Motors (NYSE: GM), generated the most interest at Research Recap this week. Further misery was heaped on GM by Standard & Poor’s, which downgraded the automaker to BB- from BB. You know you’re in trouble when a rating agency uses the word “dangerously” in assessing your outlook:
The negative outlook reflects our expectation that current liquidity levels could be almost halved by cash losses in 2008 and 2009, sinking to dangerously low levels if management’s cash-saving actions or capital-raising activities fall well short of plan.
And piling on the pain, S&P also cut its rating on GM’s 49%-owned GMAC. GM/GMAC face the triple whammy of weak domestic new car sales, plummeting prices of gas-guzzling vehicles coming off leases and a challenging credit market.
Ford Motor Company (NYSE: F) and its credit unit received similar treatment from S&P.
Merrill Lynch (NYSE: MER) CEO John Thain’s latest round of stable-cleansing was another hot topic this week, led by CreditSights’ analysis that the Merrill’s moves make it a more attractive takeover target for the likes of Goldman Sachs, (NYSE: GS) HSBC (NYSE: HSBC), Bank of America (NYSE: BOA), and JPMorgan Chase (NYSE: JPM).
The question remaining is whether and when other banks will need to remark their shaky structured finance holdings to the levels implied by Merrill’s write downs. For better or worse, Merrill’s move to extricate itself from XL Capital puts a marker (20 cents on the dollar) for unraveling the monoline bond insurance tangle.
Deustche Bank (NYSE: DB) chief Joseph Ackerman also was a man in the news. Deutsche’s latest writedown of $3.6 billion was substantial but less than half the amount that JPMorgan calculated would be needed to reflect the valuations implied by Merrill’s actions. As a result of the writedown S&P cut its rating on the bank and gave it a negative outook:
The downgrade reflects that we no longer consider Deutsche Bank’s performance to be materially stronger than that of the leading peers in the currently difficult environment.
Meanwhile, writing in the Financial Times, Ackermann was editorializing on how banks can win back confidence by adopting the International Institute of Finance’s proposed new code of conduct for banks. This led to some ribbing from FT Alphaville, but Ackermann also drew a flattering profile in the New York Times. As for the IIF’s laundry list of recommendations, it is filled with many sensible-sounding “shoulds” but appears to be lacking in teeth.
European banks are by no means out of the woods. In another top post this week, S&P said it expects more downgrades in the European banking sector into 2009.
It was indeed a good week for OxAn, whose report on efforts to tweak the new Basel II capital requirements for banks was also well read. OxAn’s view: failure to grasp the significance of the risks to the banking system could lead to national authorities taking more stringent unilateral action.
Research Recap Quote of the Week
…managing complex financial institutions requires raising the bar on risk management, underwriting and disclosure if companies are to prosper in the very competitive global marketplace. - Josef Ackermann, CEO, Deutsche Bank
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