The Great Deleveraging

[HenryTo]

Similar views from Peter Bernstein regarding our longer-term credit/economic outlook in this weekend's commentary:

http://www.investorsinsight.com/otb_va_print.aspx?EditionID=670

[rffrydr]

More RE-leveraging.
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Today is the Tomorrow you worried about Yesterday!

[Rubedo]

http://www.beearly.com/pdfFiles/SprottJune2008.pdf

The list is growing shorter. But there were at least some smart investors who noted the
downward trend and successfully negotiated for downside protection. We know of at least
two cases (though there are doubtless others); namely, Merrill Lynch’s $12.8 billion
investment from Temasek (the Singapore sovereign wealth fund) and Washington Mutual’s
$7 billion raise from TPG (a private equity firm). Quite unbeknownst to the general public at
the time, downside protection was built into these equity raises to protect these investors.
They are called “look back” provisions or “full ratchet” compensation. We believe it is more
accurate to call them “death spiral” securities. They work as follows. The investors in the
equity raise would have their investment “protected” by a provision which states that should
the bank afterwards raise money at a lower price than what they paid, these investors would
be compensated retroactively by having their initial investment priced at this lower price,
thereby being issued new shares for free. It doesn’t take a mathematician to see how these
provisions can result in massive dilution should the bank subsequently raise even a paltry
amount of capital. A new offering will trigger a lower price because of the dilution it would
cause, which would trigger even more dilution because of the lower price, which would then
trigger an even lower price because of the even higher dilution, etc. This is why we call such
securities a death spiral. They hurt the price of any and all future equity offerings and open
the door for potentially limitless dilution of existing shareholders if and when the bank goes
to the markets for more capital at ever-lower prices.
However, unless the bank goes bankrupt, these investors can’t lose. And we already know
to what lengths the Fed will go to prevent a banking bankruptcy. It’s heads I win, tails I win.
They can even short the stock in the expectation that it will go down and still not lose. At the
next financing, which is sure to come, they will be made whole... even making money on the
short! It’s a perverse situation. Even if they don’t short (or aren’t allowed to short) they still
can’t lose. It’s like being given a free put option written by existing shareholders. They get
all the upside and existing shareholders (insult to injury) pay them on the downside! It’s the
worst way to raise equity. We wouldn’t even call it equity. It comes at a tremendous cost to
the already beaten up shareholders of these financial institutions. How did this happen?
Because these are “private” transactions, and thus no prospectus was required at the time of
the offering. The banks disclosed only what they wanted to disclose. It is only after the fact,
in the footnotes of subsequent 10-Q’s, that shareholders (if they dig deep enough) will
realize that they got nailed/ratcheted/screwed. How many other financings were done on
this basis? Only time will tell.
In the meantime, it is little wonder that banking indices are in freefall and the demand for
new bank equity is becoming increasingly muted. Investors are finally beginning to say: no
mas! When regulators have to get involved in order to push financings through (for instance,
Bradford and Bingley in the UK), it is a signal for ordinary investors to steer clear of the
financial sector. It’s a misallocation of capital… good money chasing bad… that can
ultimately only be resolved by a massive central bank bailout. You don’t want to be a
shareholder when this happens… and in the interim be subjected to an unacceptable lack of
transparency. Financial shares, if they weren’t already, are now toxic. They will become
only more so with each equity offering.

[HenryTo]

Report asserts that financial institutions - excluding investment banks - will need to raise another $30 billion or so going forward:
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Analysts: Banks might need extra $30B in capital
Tuesday July 1, 2:35 pm ET
Keefe, Bruyette & Woods estimates banks could be forced to raise $30 billion in coming years

NEW YORK (AP) -- A research report released Tuesday by Keefe, Bruyette & Woods Inc. says banks would need to raise as much as $30 billion in new capital to cover a further sharp downturn in credit performance.

Among the banks reviewed by KBW, 10 are large-capitalization banks that would account for $21 billion in capital necessary to cover potential losses. Of the 44 banks KBW believes will need to raise capital, five will need at least $1 billion in new capital, according to the firm.

Banks have been plagued by rising losses tied to a spike in defaults among many types of loans. Those losses have eaten into capital reserves, forcing banks to raise new cash and slash dividends to cover the losses and shore up their balance sheets.

KBW looked at a variety of loan types -- including home equity, commercial, residential mortgage, credit card, commercial real estate, construction and development and other consumer loans -- to determine potential losses for the next three years under a stress scenario.

KBW anticipates Bank of America Corp. would need to raise the most under its stress scenario -- $10 billion in fresh capital, KBW wrote in the note.

Shares of Bank of America fell 45 cents to $23.42 in afternoon trading.

Washington Mutual Inc., Wachovia Corp. and Wells Fargo & Co. may all need to raise between $2 billion and $2.5 billion in the coming years, while SunTrust Banks Inc. might need about $1.5 billion, KBW said in the note.

Washington Mutual already raised $7 billion earlier this year through an investment from a group led by private equity firm TPG.

Shares of Washington Mutual rose 17 cents, or 3.5 percent, to $5.10.

SunTrust said late in June it does not foresee having to cut its dividend or issue new shares of common stock to raise capital.

Shares of SunTrust fell 91 cents, or 2.5 percent, to $35.31.

KBW said 33 banks have already raised $63 billion in capital to shore up their balance sheets amid deterioration in the credit markets, but some of those banks might still have to raise additional cash, such as Washington Mutual. Of the banks that have already raised capital, 10 large-cap banks have accounted for $59 billion of the money raised, with Citigroup Inc. having raised the most at $21 billion.

Bank of America and SunTrust did not immediately return calls seeking comment.

Wachovia, Washington Mutual and Wells Fargo declined to comment.

Wachovia shares fell 8 cents to $15.45. Wells Fargo shares declined 6 cents to $23.69.

[HenryTo]

Bankstocks.com discusses the new proposed rules as applicable to investing in bank holding companies. Look for much more private equity investments in the financial institutions after the smoke has cleared:

http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=5179&ArticleTypeID=2

[HenryTo]

Revising this will be conducive to more capital raisings among banks in the US financial system. I am looking for another $50 to $75 billion or so over the next couple of months:

http://www.bloomberg.com/apps/news?pid=20601087&sid=abFvKFObrfpA&refer=home

[HenryTo]

Fortis cuts its $2 billion dividend and vows to raise around US$12 billion. Stock is down about 11%. Make no mistake: The Euro Zone's yield curve is already inverted and the ECB has absolutely no room to hike rates, unless it wants to see its financial system in tatters:

http://www.bloomberg.com/apps/news?pid=20601087&sid=axIjx5DyBDvw&refer=home

[Suomodo]

Well, fundamentials of no value short to mid term (3-6months), as no one knows to estimate the earnings, nor the inflation ( i.e. the bonds yield, implicitely the PER)... i.e. the price of P is difficult to get..

However I think FED will hold the rate pretty close to where they are now until the housing markets starts expanding... 0,25-0,5 hike to give an impression they figh the inflation is possible, but another 0,5 cut should the market tumble also ... If they start a hiking campaign they can kill the stock market... in election year very unprobable

http://seekingalpha.com/article/81810-u-s-stock-market-muddling-through-the-fundamentals?source=side_bar_editors_picks

[Suomodo]

[rffrydr]

...Perhaps. But while the ecomonic credit issues are being written off the will be written up. Probably net's out at lower end of middle. BCA now at pre-financial mania levels, discount a little recession and we can get get back to "value."
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

John Paulson - founder of Paulson & Co, the most successful hedge fund last year - says write-downs to eventually reach $1.3 trillion.

http://www.bloomberg.com/apps/news?pid=20601087&sid=a_dAvx5tof.o&refer=home

[HenryTo]

Fed now pressuring the regional and small banks to raise capital and to cut dividends:
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Regulators Seen Fueling A Rash of Banks' Dividend Cuts

Jun 13, 2008 18:15:38 (ET)

NEW YORK (Dow Jones)--In a move that could alienate investors and push down banks' stock prices, federal regulators are pressuring regional and small banks with sagging balance sheets to cut dividends and raise capital.

A spokesman for the Federal Reserve System confirmed that banking regulators have issued enforcement actions prohibiting some banks from issuing dividends.

On June 3, the Fed released a copy of a notice it issued to Millennium Bankshares Corp. (MBVA) in Reston, Va. in which it told the bank that it shall "not declare or pay any dividends without the prior written approval of the Reserve Bank."

A spokesperson for Millennium didn't immediately return requests for comment.

Likewise on May 6, the Fed released documents it issued to Integrity Bancshares Inc. (ITCY) in Alpharetta, Ga. in which it had similar comments. The order to Integrity also asked the bank to submit a capital plan "to fulfill...the bank's future capital requirements." A spokesperson for Integrity didn't immediately return requests for comment.

The Fed made public on May 1 an order to First Bank of Snook in Snook, Texas, and on April 29 yet another order to WSB Financial Group Inc. (WSFG) in Bremerton, Wash. also prohibiting both banks from declaring or paying any dividends without prior written approval from the Reserve bank.

A spokesperson for First Bank of Snook said the bank's policy is not to comment. A spokesperson for WSB Financial Group said the bank doesn't currently have any comment, "but as time progresses we probably will."

The increased scrutiny of dividends by regulators doesn't come as a total surprise. In a speech in mid-March on the financial markets, Treasury Secretary Henry Paulson said, "We are encouraging financial institutions to continue to strengthen balance sheets by raising capital and revisiting dividend policies."

Balancing the responsibility to serve shareholders with the need to mollify worried regulators has left many capital-strapped banks in a bind. While regulators may be justified in asking cash-poor banks to conserve capital by reducing the dividends they pay to shareholders, the moves can alienate dividend-focused investors and send share prices plunging. Bank shares are a popular choice among dividend-minded investors, since many banks have decades-old track records of raising dividends annually, even during short periods where performance temporarily sagged.

"They're caught in a difficult bind between fiduciary duties to shareholders...and the regulators' demands for sufficient capital," said Chip MacDonald, a partner at law firm Jones Day who focuses on capital markets and financial institutions.

Regional bank stocks were broadly lower Friday as a number of analysts suggested that dividend cuts and capital raises are likely for several of the banks. Lehman Brothers Holdings Inc. (LEH) suggested Wachovia Corp. (WB) could soon cut its dividend for the second time this year. Wachovia shares fell sharply on the report. Multiple analyst reports suggested Fifth Third Bancorp (FITB) may be the next regional bank to both cut its dividend and raise new capital, and the reports sent Fifth Third's shares plunging 14% in heavy trading as dividend-focused investors scurried to sell. A spokeswoman for Fifth Third said the bank wouldn't comment on either the outlook for its dividend, or on analyst reports.

On Thursday, Cleveland-based KeyCorp (KEY) said it would raise at least $1.5 billion in new capital and also halve its dividend after a federal appeals court invalidated a complex "leveraged lease" tax strategy, costing the firm a one-time charge of $1.1 billion to $1.2 billion. The decision also marked the end of KeyCorp's impressive 43-year run of raising its dividend annually.

Many retired bank employees rely on stock positions in their former employers for income in retirement, meaning dividend cuts can hurt a bank's alumni, said Scott Colyer, chief executive of Fixed Income Securities. Banks' "legacy retirees count on the dividend quite a bit," he added.

Fifth Third isn't alone in facing scrutiny over the future of its dividend.

Bank of America Corp.'s (BAC) CEO Ken Lewis acknowledged the possibility this week that his firm could wind up cutting its dividend - and end its 30-year run of raising its dividend.

While Lewis emphasized that such a scenario is far from certain, the mere mention of the possibility sent the firm's shares sliding.

"It seems that the market has corrected in anticipation of a cut, even though the CEO has come out and said they don't have to do it," said Scott Schluederberg, a dividend-focused portfolio manager at Hardesty Capital Management, which holds Bank of America shares.

As many large and regional banks have seen their credit costs rise from a spike in delinquencies and defaults among borrowers, many investors say it hardly makes sense for banks to pay out cash to shareholders even as they wade into the credit markets in search of costly capital.

Said Colyer: "There's a school of thought out there that says, 'If you need to raise capital, why are you paying a dividend'?"

[rffrydr]

http://images.thestreet.com/tsc/common/images/storyimages/042908_simon04.gif
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Relative value?

http://images.thestreet.com/tsc/common/images/storyimages/060308_hy.gif

http://images.thestreet.com/tsc/common/images/storyimages/060208_simon02.gif
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Lehman comes back to the markets for more funds - this time by selling common stock via a secondary offering and directly diluting existing common stock shareholders:

http://www.bloomberg.com/apps/news?pid=20601087&sid=az8vN2FQAngI&refer=home

[HenryTo]

Look for more capital raising efforts over the next few months:
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Banks capital raising efforts likely to continue
Friday May 23, 12:17 pm ET
Citi Analyst: Banks likely will need to continue raising capital, cutting dividends

NEW YORK (AP) -- At least five national and regional banks will likely need to raise capital in the coming months, a Citi Investment Research analyst wrote in a report Thursday night analyzing capital and dividend risk.

Citi analyst Keith Horowitz said Bank of America Corp., Comerica Inc., Fifth Third Bancorp, Regions Financial Corp. and SunTrust Banks Inc. are the most likely to need to raise new capital amid the continued deterioration in the lending markets.

Horowitz based his assessment of the need to raise new capital or cut dividends to retain capital by looking at a bank's current capital levels; its earnings power relative to its dividend payout; losses on its balance sheet; and its ability to tap other sources of capital.

Among the banks with the least risk of reducing dividends or raising capital through a new stock issuance are Marshall & Ilsley Corp., New York Community Bancorp Inc., PNC Financial Services Group Inc., JPMorgan Chase & Co. and M&T Bank Corp.

Banks have been forced in recent months to raise capital and cut dividends because of continued rising defaults among loans, especially residential mortgages. The capital raises have been necessary and are likely to continue to be necessary as banks are forced to set aside more cash to cover losses on troubled loans.

"We are still early in the credit cycle with the potential for more negative surprises ahead," Horowitz wrote in the note.

Shares of banks fell Friday morning as broader markets posted steep declines.

Shares of Bank of America, based in Charlotte, N.C., fell 63 cents to $34.10, while shares of SunTrust, Atlanta, declined 69 cents to $54.16. Buffalo, N.Y.-based M&T Bank saw its shares decline $1.68 to $88.21 as JPMorgan, New York, shares gave up 49 cents to $42.56.