C.M.O. 6.01.2009
Credit Market Overview
June 1, 2009
Three themes emerged last week in the most recent chapter of the book that at some point in the future might be titled “How Not to Bank” and they are, in their own dystopian sort of way, signs that the Gordon Geckos of the world; tasered during the down draft last year, are beginning to regain their motor skills.
The three things of which I speak are the banks attempt to game the Legacy Loan Program portion of the Public Private Investment Program, classify billions of dollars in future projected revenues as certain enough to help fill the capital requirements set by the Stress Tests and the raising of the salary slice of the total compensation pie for employees.
PPIP was designed to get some of the toxic assets off the books of the most beleaguered institutions but from the start there were questions as to the programs efficacy as the transaction price was seen as likely to benefit either the buyer or the seller but not create that warm fuzzy feeling when both sides think they’ve won.
The banks it seems figured out that if they could buy the assets from themselves with the public’s money it would give them the greatest chance of a big upside; so much in fact that they would be willing to take some pretty hefty losses on the sale of those assets. Because, after all, if they needed more money to meet their “Tangible Common Equity” requirements they could get some of that from the Government a.k.a. the taxpayer anyway. BAC, C and WFC are seen as the biggest sellers of assets once PPIP got under way.
Proving once again that there are two sides to every story Daniel Alpert, MD at Westwood Capital LLC thought “sensible restrictions should be placed on banks, especially those that have received government capital, from investing their own balance sheets in a back door effort to reacquire what could be their own assets with an enormous amount of federally guaranteed leverage.”
Tanya Wheeless, CEO of the Arizona Bankers Association was of a slightly different view saying that “bankers see it as a win-win”. It is undeterminable whether the win-win of which Ms. Wheeless speaks of is the banks winning when they got rescued and then winning again when they can buy they own assets back on the cheap or the win-win that occurs when the rules state: heads I win, tails you lose.
BAC and WFC were also lobbying the FDIC to allow financial performance in 2009 and 2010 to count towards the capital they were told they needed as a result of the stress tests recently conducted. Since raising capital in this environment is still pretty treacherous counting future earnings power seemed like a pretty easy way to get over the hump of meeting the capital requirements by the June 8th deadline. The banks initially wanted to use 20% of those revenues but the FDIC knocked that back to 5% given the recession and continuing loan loss reserve increases.
Making its way into all three areas where a second look is not necessarily a pretty sight, BAC was also included in the list of banks expected raise base salaries to compensate for limits on annual bonuses that have become de rigueur since the government threw the TARP over them.
BAC was not alone on this list however as C, MS, JPM and GS were also looking at ways to attract talent but still minimize the public’s ire.
James F. Reda of the eponymously named Associates thinks “this could give an advantage to the company paying the higher salary, and that creates a market.” ( I guess that’s why he has his own firm.) He also thought that “eventually GS and JPM will need to adopt the same changes to compensation.”
BAC’s stock has been languishing as of late stuck in 11 land but the CDS continues to slide lower closing Friday at a mere 150bps. Well off the 400bp mark seen in late March and much closer to the 110bp level seen in January of this year. The same can be said for WFC albeit at different levels. GS and JPM continue to pull away from the peloton with lower CDS levels begetting higher stock prices and vice versa.
Enjoy the week.
Jim Delaney
