CreditSights sees the repayment of TARP funds as “a positive step for the banks allowed to exit the program as well as the U.S. taxpayer.”
“Still in our view, the repayment of TARP funds represents only an interim step in full normalization of operating conditions for banks. There are still several major financial institutions which will remain in the TARP program after this initial round of repayments and the FDIC’s TGLP program is still active for banks which cannot issue on a non-guaranteed basis. We note, as well, that there are ongoing reports that the Administration favors compensation limits across the financial services industry, as well as potential regulatory changes, both of which we feel could potentially have long-term implications for the financial industry depending on the ultimate outcome of these initiatives.”
“The Treasury also noted in its statement that banks which repay their TARP funds have the right to repurchase the warrants which Treasury holds at fair market value.“
We note that the price of the warrants has remained a sticking point with many banks, who feel that they are too costly.
CreditSights provides an analysis of the impact of the potential pricing and impact of repurchasing the warrants in U.S. Banks: Repaying TARP, Off to the Races Again?
Ed Harrison at Credit Writedowns, along with Boston University Professor Mark Williams argue that the repayments will make make banks weaker and could lead to more failures in the longer term.
Technorati Tags: (bac), (c), (JPM), (MS), (WFC), bank bailout, Bank-of-America, Citigroup, Goldman-Sachs, GS, JPMorgan-Chase-&-Co, morgan-stanley, TARP, Wells Fargo & Co.
Moody’s has weighed in on the results of the stress test for the 19 systemically important banks, which concluded that 10 of the 19 companies need to build larger capital buffers totaling $75 billion.
“The stress test results are generally in line with our Bank Financial Strength Ratings (BFSR) on these firms, our measure of a bank’s stand-alone financial strength (i.e., without government support). Also, given the clear government support that is being offered to these institutions in the event they cannot meet the required capital increases on their own, which is already factored into our ratings, we do not expect to make any changes to our ratings on deposits, senior debt, or senior subordinated debt of these firms in response to these results.”
All else being equal, upgrades could be contemplated in the medium term if the capital buffers being required become a permanent feature of these firms.
“In contrast, and perhaps more importantly, we continue to view the government support of the banks’ most junior creditors as uncertain, especially if government preferred shares were to be converted to common equity. We will review each firm’s capitalization plan and take rating actions on relevant securities if we perceive a risk of a distressed exchange.”
For details, see: U.S. Government Stress Test Results in Line with Moody’s Existing Bank Stand-Alone and Senior Bank Rating.
Technorati Tags: American Express, Bank of New York Mellon, Bank-of-America, BB&T-Corporation, Capital One Financial, Citigroup, Fifth-Third-Bancorp, GMAC, Goldman-Sachs, JPMorgan-Chase-&-Co, KeyCorp, MetLife, morgan-stanley, PNC Financial, Regions-Financial-Corporation, State-Street-Corporation, stress test, SunTrust-Banks, U.S. banks, U.S.-Bancorp, Wells Fargo
Fitch Ratings said it is likely to place “certain bank ratings on Ratings Watch Negative” following the Government’s stress tests.
Fitch said prospects for increased loan losses in the coming quarters are driving its current review of U.S. bank ratings, which it expects to complete in the coming week. “The review includes but is not limited to the 19 banks in the government stress test and will likely result in Fitch placing certain bank ratings on Rating Watch Negative. Fitch may take rating actions sooner on certain banks facing more near-term developments such as weaker results from the U.S. government’s stress tests or the issuance of new debt/hybrid securities to the capital markets.”
‘Fitch’s view on a bank’s need for incremental capital or a remix of its capital base to restore common equity as a more meaningful loss buffer protecting rated obligations will include an updated review of each firm’s relative exposure to deteriorating loan portfolios as well as the published results of the US government stress tests,’ said Jim Moss, Managing Director and co-head of Fitch’s U.S. Financial Institutions Group. ‘The specific steps that individual institutions are expected to take to enhance their capital positions will also be an important consideration.” Such measures may include asset sales/dispositions or further capital issuances.’
Fitch continues to frame its views on the U.S. banking industry in light of the impact of the weakened global marketplace on the ratings of the banks in its coverage universe.
Fitch anticipates that economic weakness will persist to a significant enough degree to warrant assessing the banks’ profit and capital prospects in a scenario where loan losses increase from already elevated levels.
Fitch’s on-going analysis includes a prospective view on a broad range of financial factors, including the assessment of the effect of environmental issues such as government initiatives to provide support to the industry. In particular, Fitch is focused on evaluating the prospects for increased loan losses in the coming quarters. Fitch’s attention is directed towards banks’ common equity levels given the meaningful erosion in recent quarters and bleak prospects for internal capital generation in future quarters. Other factors being considered in the reviews are each company’s recent performance metrics as well as Fitch’s view of future earnings generation, governmental support, and available liquidity.
Fitch’s analysis will continue to pay special attention to the notching between holding company issuer default ratings (IDRs) and the ratings of hybrid capital instruments, particularly preferred stock (see Fitch Sees Elevated Risk of Bank Hybrid Capital Coupon Deferral in 2009. Fitch believes those companies that have greater exposure to deteriorating loan portfolios and have few alternatives to address a capital shortfall over the intermediate-term could choose to defer their hybrid capital instruments or convert it into common stock. The increased potential of that risk could ultimately result in Fitch widening existing notching between hybrid instruments and holding company IDRs beyond the standard levels, which has already occurred for specific obligations of Citigroup, Inc., (NYSE: C), Bank of America Corp., (NYSE: BAC) and State Street Corp., (NYSE: SSC).
Technorati Tags: Bank-of-America, Citigroup, State-Street, stress test, U.S. banks
CreditSights says today’s anticipated announcement by the Federal Accounting Standards Board of an easing in mark-to-market accounting rules should benefit US banks, especially large ones, but could also reduce the effectiveness of the PPIP toxic assets plan. The ruling allows banks to value securities using cash flow models rather than market prices when markets are not active
“The FASB rule should be a positive for banks, as it will allow them to employ expected cash flow models to value securities rather than recent prices. We sense this change will be most important for larger banks, such as Citigroup, BofA, Wells Fargo, Goldman Sachs, and Morgan Stanley that tend to have more material exposures to these difficult-to-value securities as a result of their investment banking activities.”
Still, CreditSights “would like to see better disclosure from banks if they use this new standard. We remain concerned that a good portion of the price declines in value for these securities is driven by fundamental deterioration in the expected cash flows as a result of higher credit losses.”
As well, we believe that this change has the potential to limit the effectiveness of the recently announced PPIP program, since it potentially widens the gap between banks’ pricing and the market price.
Ed Yardeni goes a step further saying that the ruling “might make the Treasury’s latest cockamamie toxic asset plan (PPIP) totally irrelevant.” CreditWritedowns provides further commentary here.
For CreditSights’ full analysis see FSB Folds on Fair Value.
Technorati Tags: (bac), (c), (MS), (WFC), Bank-of-America, Citigroup, fair value accounting, FASB, Goldman-Sachs, GS, mark-to-market, morgan-stanley, PPIP, toxic assets, U.S. banks, Wells Fargo
U.S. auto suppliers, some of which were facing imminent collapse according to Standard & Poor’s Credit Research, will get a significant reprieve from their cash flow troubles as a result of the Treasury’s plan to provide $5 billion in aid.
But the ratings agency writes in a new commentary that the reprieve will be short-lived and will not help the long-term ratings of most of the suppliers.
The crux of the plan is that auto suppliers could sell their receivables to the U.S. government, thus easing an immediate cash flow crunch. But it’s far from a panacea, as the suppliers are simply getting payment for the parts ordered by automakers earlier than the usually 60 days.
The financial vulnerability of the U.S. automotive sector is evident in our ratings: Nearly half of the original equipment suppliers that we rate have ratings of ‘B-’ or lower, and a third are in the ‘CCC’ category. These ratings imply significant default risk in the near term, and we believe smaller, unrated suppliers are generally in even worse financial condition.
For example, Delphi Corp. remains in limbo, unable to exit bankruptcy or secure an extension of its debtor-in-possession funding ahead of a June deadline.
Bloomberg News reports that Citigroup (NYSE: C) may be the Treasury’s choice to implement the $5 billion program, and will likely work with General Motors (NYSE: GM) and Chrysler LLC to determine how the funds are dispersed among auto suppliers.
Bottom line, according to S & P, is that the “continuation of low and volatile production by the automakers is a far more serious problem for suppliers because it could erode their liquidity even with their newfound ability to sell receivables.”
Technorati Tags: (c), (GM), auto suppliers, automakers, Chrysler, Citigroup, credit-crisis, Delphi Corp, General-Motors, Treasury plan
Meredith Whitney, the banking analyst whose claim to fame was foreseeing problems at Citigroup (NYSE: C), told an audience at a Wall Street Journal conference that the big-bank model may go the way of the buggy whip by the time the current crisis is over with.
At the WSJ’s Future of Finance Initiative, Whitney, of the firm bearing her name, said that big banks “will look very different two years from now.”
Whitney said key parts of the big banking model made them susceptible to the types of problems that caused the financial crisis. She added that five banks controlling two-thirds of mortgage origination and credit cards is fundamentally unbalanced.
Whitney outlined a “back-to-basics” approach of sound lending based on strong relationships between lenders and borrowers. She suggested “super-charging” regional banks with TARP money that big banks have pledged to pay back as soon as possible.
Technorati Tags: (c), bank crisis, big banks, Citigroup, Meredith Whitney, regional-banks, Whitney
There’s no doubt that Jon Stewart’s extended defenestration of Jim Cramer and CNBC has captured the national zeitgeist. When the topic takes up a good chunk of the likes of public radio’s Diane Rehm Show , you know the topic has transcended the financial news arena. On the show’s Friday News Roundup The Atlantic’s Andrew Sullivan likened the event to the storming of the Bastille, with Stewart championing the cause of the populace.
Whether it will have any real impact on Cramer’s “Mad Money” antics or the boosterism of CNBC is debatable, but it was certainly cathartic to witness them in the modern equivalent of the medieval stocks and pelted with virtual rotten fruit and vegetables.
Meanwhile, Cramer and CNBC are rapidly being usurped as whipping boys by AIG, the object of public tongue lashings from Ben Bernanke, Larry Summers and Barack Obama, in what seemed like a coordinated attack. Not that AIG doesn’t deserve whatever it gets, but it would be a shame if the focus on AIG drew attention away from the industry-wide issues that still have not been adequately addressed.
Posts on struggling financial institutions have been the most popular at Research Recap recently. The top post by a mile was our Research Roundup of the latest efforts to recapitalize Citigroup, while another Roundup, featuring HSBC was also well read.
Standard & Poor’s report on US regional banks feeling the pain featured prominently, and outside the financial sector the most popular posts were a Forrester Research report finding that booksellers offer the best online experience and S&P’s analysis of the recession’s impact on public power utilities and co-ops.
Research Recap Quote of the Week: What else, but….
I understand you want to make finance entertaining. But it’s not a fucking game. Jon Stewart to Jim Cramer on The Daily Show.
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Technorati Tags: (c), booksellers, Citigroup, CNBC, HSBC, Jim Cramer, Jon Stewart, online, regional-banks, utilities, Zeitgeist
It should come as no great surprise that the reaction to the much-anticipated “non-nationalization” of Citigroup (NYSE: C) announced today was underwhelming. The market has spoken, hitting Citi’s shares hard, and analyst comment collected at Alacra Street Pulse is overwhelmingly negative. A few sample comments:
“How much longer are we going to have to go through this? At this point, it’s just plain embarrassing. Can’t we just grab the place, chop it up, and sell off the pieces? What the market’s telling us this morning is that that outcome is inevitable, so we might as well get on with it.” - Henry Blodget at Clusterstock
“So for about 100% of the market value of Citi, plus insurance guarantees worth of as much as 500% of its value (~$275 billion), we got less than 1/10 of a company that in total was worth 1/5 of our investment.” - Barry Ritholtz at The Big Picture.
We would avoid the shares as it is unclear whether this is the last round of capital restructuring, which means that existing equity may be further diluted in the future. - Richard Ramsden at Goldman Sachs
Meanwhile, Egan-Jones, the credit research firm, said in a note to investors that it believed Bank of America (NYSE: BAC) was “next in line” for a government infusion of equity, according to DealBook.
According to Egan-Jones’s calculations, Bank of America will need $100 billion in equity within the next 100 days. That is in addition to the $45 billion in cash and $120 billion financial backstops that the government already committed to shore up Bank of America’s capital base.
Technorati Tags: (bac), (c), bank bailout, Bank-of-America, Citigroup, U.S. banks
Bank nationalization is undoubtedly the hot topic these days and has gone from non-starter to front runner in the space of a couple of weeks. The debate now is not so much whether, but when and how, some of the largest US banks will find themselves under effective government control, even if the “N word” is not used. Citigroup (NYSE: C) is currently the top candidate, as as our sister site StreetPulse documents.
The stimulus plan announcement has stimulated interest in infrastructure, though in our top post of the week, Fitch Ratings cautions that the recession could hamper infrastructure projects around the world.
There’s much debate over whether and to what extent the US recession will follow the same path as the prolonged slump in Japan in the 1990s. Koyo Ozeki, the head of PIMCO’s Japanese credit team is in the more pessimistic camp, predicting a second wave of asset deflation, in our number two post.
George Freidman’s new book The Next 100 Years, has now been in the top three for three straight weeks. Freidman predicts that the US will not be usurped by China or any other country as the leader global power in the coming century. He also sees Japan, Turkey, Poland and Mexico as rising powers, each for different geopolitical and demographic reasons.
Moody’s triaging of Aaa sovereign debt was also popular as was its new Government Liability Map.
Research Recap Audio-Visual Aid of the Week (H/T Felix Salmon):
Technorati Tags: (c), banks, Citigroup, credit-crisis, infrstructure, nationalization, recession
After the euphoria of President Barack Obama’s historic inauguration it has not taken long for lofty ideals to fall to earth with a thud. First came Treasury Secretary nominee Timothy Geithner’s the-dog-ate-my-homework-level excuse for dodging his taxes. Hardly the promised higher standard of accountability. Then comes President’s Obama’s undoubtedly necessary economic stimulus plan, loaded up with a disappointingly generous portion of pork, as pointed out by The Washington Post, among others:
Helping hire, equip and pay police, a $4 billion item under the bill, might be a good idea, but writing checks to individual households for the same amount would do more to stimulate the economy. Ditto for $16 billion in Pell Grants for college students, $2.1 billion for Head Start and $50 million for the National Endowment for the Arts. All of those ideas may have merit, but why do they belong in an emergency measure aimed to kick-start the economy?
The argument about whether the stimulus plan is too big or too small become almost moot when such extraneous measures are included.
Still, even this cannot take away from the majesty of an Inauguration more than two centuries in the making.
The year has gotten off to a bleak financial start with bearish posts on Research Recap drawing the most attention.
Top of the heap so far are Fitch Ratings‘ list of the top risks to credit quality for 2009, Oxford Analytica’s warning that the US is unprepared to cope with double-digit unemployment, and Standard & Poor’s update on the steady flow of corporate debt defaults so far this year. Today, S&P reports a further 4 defaults in the last week, bring the year’s total to date to 12. Of the four most recent defaults, two are media and entertainment companies, Nevada-based gaming company Black Gaming LLC and television broadcaster Young Broadcasting Inc. (NASDAQ:YBTVA). The remaining two are consumer products companies, tomato producer and marketer EuroFresh Inc. and mattress manufacturer Simmons Co.
Also very popular was our Research Roundup on the demise of the financial supermarket, Citigroup: Bowing to the Inevitable,
Research Recap Quote of the Week:
We remain a young nation, but in the words of Scripture, the time has come to set aside childish things. - President Barack Obama, (HT St Paul 1 Corinthians XIII)
Technorati Tags: (c), banking, Barack Obama, Citibank, Citigroup, consumer-products, corporate-default, credit-risk, economy, Geithner, stimulus, unemployment, Zeitgeist
