Friday, January 16, 2009
bad banks: citi broken into pieces, BoA fed $20bn to digest toxic merrill
“It looks like a kitchen-sink quarter,” said Peter Sorrentino, who helps manage $16 billion at Huntington Asset Advisors Inc. in Cincinnati, including Citigroup shares. “Sweep it all in there and get this behind us.”
that would be the fourth consecutive "kitchen sink" quarter, if i'm counting properly. as the wits at ft alphaville quipped on analyzing her majesty's treasury's nascent plan for bad bank restructuring: so where's the good bank? even more so than the aggregate of british banking, it will be hard even for citi's good bank to survive the losses on assets now in the pipeline.
which is why the incoming administration is said to also be considering a good bank/bad bank restructuring of the entire american banking system. per bloomberg:
“They need to do something dramatic,” said Harvard University Professor Kenneth Rogoff, a former chief economist at the International Monetary Fund, and member of the Group of Thirty counselors on financial matters, a panel that includes Treasury Secretary-designate Timothy Geithner and Lawrence Summers, incoming director of the National Economic Council.
Federal Reserve officials are focusing on the option of setting up a so-called bad bank that would acquire hundreds of billions of dollars of troubled securities now held by lenders. That may allow banks to reduce write-offs, free up capital and begin to increase lending. Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, estimates that financial institutions need as much as $1.2 trillion in new aid.
Switzerland in October relied on the mechanism to aid UBS AG. ... It isn’t clear how stockholders or bond owners would be treated in a bad-bank scenario. In the case of UBS in Switzerland, there was no direct impact on either. ...
A more radical alternative would be the nationalization of some banks. Sweden used that option during a crisis in the 1990s. It took over two of the most troubled banks, Nordbanken AB, now part of Nordea AB, and Gota Bank, which later became a unit of Nordbanken. In addition, the government created a bad bank that bought troubled assets at a discount, while leaving financial institutions to manage their more-liquid holdings.
[FDIC head Shiela] Bair indicated government takeovers aren’t being actively considered. “I’d be very surprised if that happened,” she told reporters in New York.
nationalization has the advantage, however, of definitively ending the fear of the banks. backing or removing assets to leave the banks private is only good if you know what the extent of the problems are and where the bodies are buried. this is precisely the problem at the moment -- if anyone knew what the extent of the damage was, the crisis would already be over. what's more, it is insanely expensive for the government in comparison to a nationalization, which would likely be characterized (as sweden's was) by forced debt-to-equity conversions which recapitalized the banks in preference to government capital injections.
meanwhile, as testament to the potential insanity of the expense, another $20bn was sunk down the hole to bank of america, and titanic asset guarantees made besides.
In the Bank of America deal, the government will protect a $118 billion pool of assets that a U.S. official said includes residential and commercial real-estate holdings and credit- default swaps. The official spoke to reporters on a conference call on condition of anonymity.
The $20 billion purchase of preferred shares, which carry an 8 percent dividend, will be made later today. The funds come from the first half of the Treasury's Troubled Asset Relief Program. The U.S. Senate voted yesterday to allow the release of the next $350 billion of the program.
it seems than ken lewis couldn't see back in september what everyone else suspected -- that merrill was in need of being flushed. and that on top of actually paying money for countrywide! to be fair, BoA is rumored to have wanted to back out of the acquisition of merrill only to have a gun pointed at its head by hank paulson.
Bank of America officials then told regulators last month that the Merrill deal might be abandoned because of worse-than- expected results, Lewis said. The government insisted the transaction proceed because its collapse would create new turmoil in the financial system, he said.
i suppose this kind of supersized bailout is the quid pro quo of that transaction. but ken lewis' instinct to close deals has nevertheless been an utter disaster for the bank.
“This thing is unraveling so fast Lewis may know his job is lost,” said Paul Miller, an analyst at Friedman Billings Ramsey Group Inc. in Arlington, Virginia, who has an “underperform” rating on Bank of America. The management team has “lost credibility,” he said before results were announced.