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HomeUncle Sam Economy: Not Exactly a Level Playing Field
Posted by Larry Doyle on June 9th, 2009 8:08 AM |
As we navigate the landscape of the Uncle Sam Economy, we will soon realize that the “playing field” is anything but level. What does this mean? How can we most appropriately manage? Will there be opportunities? Let’s break out our compass and project what is on the horizon.
As Bloomberg reports, U.S. Said to Plan Approval for 10 Banks to Repay TARP:
The Treasury is preparing to announce today it will let 10 banks buy back government shares, people familiar with the matter said, signaling confidence some of the largest U.S. lenders won’t again need a taxpayer rescue.
JPMorgan Chase & Co. is among those cleared to repay Troubled Asset Relief Program funds, a person said on condition of anonymity. Goldman Sachs Group Inc., American Express Co. and State Street Corp. are also among those that have sold shares and debt unguaranteed by the government, demonstrating they can raise funds without federal aid.
Allow me to provide further color:
1. Why are these institutions keen to repay TARP funds, which are widely held to be a cheap source of funding?
As none other than Pimco’s Bill Gross said of Uncle Sam, “don’t turn your back on him.” I would agree. Uncle Sam is not a good business partner. His agenda runs much farther afield than the bottom line focus of these institutions.
Make no mistake, the greatest motivation for these institutions to repay TARP funds is to be freed from the shackles of compensation controls. The major assets of financial institutions ride down the escalator and go out the door every evening. Operating under compensation caps is a surefire way for an institution to achieve “extreme mediocrity” over the long haul. Why?
The strongest employees will gravitate toward more attractive and financially rewarding opportunities.
2. From an investment perspective, how should we think of TARP recipients versus prospective non-TARP recipients?
In my opinion, the non-TARP institutions will be viewed much more as “growth” opportunities. Why? They will be able to more aggressively allocate capital and take risk unencumbered by Uncle Sam and his minions.
The TARP recipients may very well gravitate more toward a utility-type of business in which they provide basic services while simultaneously fulfilling elements of Uncle Sam’s social agenda.
Geithner, Bernanke, Obama and team will discount this reality but I believe it is a strong likelihood within the financial industry, much as it will be within the automotive industry.
3. From a borrower’s perspective, how should we think of TARP recipients versus non-TARP recipients?
Perhaps initially there will not be much disparity in the relative pricing of different products, but I do believe the disparity will grow over time. All we need to do is review the undercutting of prices within the insurance industry by AIG to see the potential for the same within the financial industry. As borrowers, we will likely have more opportunities to comparison shop going forward. It is not inconceivable that certain non-TARP institutions decide to exit select businesses as pricing becomes non-economical.
4. The greatest question remains, will any of these institutions, both TARP and non-TARP alike, ever be allowed to fail?
The fear of failure at one point was the greatest motivator for innovation and real long term success. Having violated this moral hazard by unprecedented margins, the cost to capitalism will only be known far down the road.
As such, the need to prudently and proactively navigate the economic landscape will remain of paramount importance. The need for Sense on Cents will grow ever stronger.
That’s a good thing!!
LD
Heavy Losses Raining on Insurance, Roll Out The TARP
Posted by Larry Doyle on May 15th, 2009 8:29 AM |
The fact that a handful of insurance companies are eligible to receive government funding via the TARP is a much bigger event than the benign media reports would indicate. In my opinion, the news reported by Bloomberg, Prudential Said To Be Among Insurers Cleared For TARP, is a clear sign of a much larger storm on the horizon. Why? Let’s get after it.
Not every insurance company has the same business profile. Some are more aggressive in underwriting. Some are more aggressive in their investment portfolio. Some are more aggressive in their product offerings. That said, they’re all members of the same family and if one has the flu, you can rest assured many others are also sick.
On March 12th, in Is My Insurance Insured?, I wrote:
While the government has already taken an 80% stake in AIG, how do the state insurance commissioners deal with entities like Hartford, Met Life, and others with outsized risks and resulting declining capital cushions? Let’s go visit Uncle Sam!! That’s right, if you thought “bailout nation” was already swamped by banks, automotive companies, and Freddie/Fannie, the fun continues: The Next Big Bailout Decision: Insurers.
Fast forward to May 15th and here we are.
Why do the state insurance commissioners have to go to Washington? What about the reserves at the state level? Well, are you sitting down? Those reserves nationwide total only $8 billion.
Can insurers write enough premiums quickly enough to generate sufficient capital to address the losses? That is the $64 billion question. Actually, it will likely be much larger than that. Why?
As consumers are strapped for liquidity and getting credit lines squeezed – if not totally cut by their banks – they will look to tap the cash value of their insurance at an ever greater rate. If consumers were to triple the rate at which they have tapped these lines, the insurance industry would experience a capital drain of approximately $500 billion. Insurance companies will be forced to raise capital via debt or equity offerings, asset sales, or drawdowns of cash and liquidity reserves. The industry has approximately $450-$500 billion in cash and liquidity reserves. “Houston, we’ve got a problem.”
Haven’t insurance companies benefitted from the relaxation of the mark-to-market? No, they do not utilize that form of accounting. Insurance companies typically carry assets at cost or model valuations. If and when the assets suffer a prescribed level of defaults, the losses must then be recognized via a write down in the asset’s value. As losses via defaults and foreclosures across their assets continue to increase, well, that’s why we just saw these insurers “roll out the TARP.”
Can’t the insurance companies sell their assets to stem the losses? Not easily. Why? Insurance companies have traditionally reached for yield (higher rates of return) by purchasing higher risk assets or writing higher risk insurance. In doing so, the industry has sacrificed the liquidity associated with lower risk assets/products. What are these assets and where do the problems lie?
1. Annuities: this product was aggressively underwritten by insurance companies after the meltdown of the NASDAQ in 2001-2002. A principal protection component was particularly attractive to many investors. That component provided investors downside protection but is now a large source of pain for the industry. In short, investors won, insurance companies lost as the market plummeted.
2. Commercial Real Estate: aside from the banks, insurance companies are the largest underwriters and holders of CRE. Insurance companies not only originated billions in CRE but they were typically the biggest buyers of the subordinate classes of CMBS (commercial mortgage backed securities) deals underwritten by Wall Street banks.
3. Defaults: with default rates on loans (mortgages, corporate, commercial real estate) expected to at least double, likely triple, and in the most credit sensitive sectors potentially quintuple, these losses will quickly burn through established reserves.
As Bloomberg reports:
“If you had some of these companies, the bigger ones like Hartford, go into a spiral, that would just cause another round of panic,” said Robert Haines, a New York-based analyst at CreditSights Inc. “I don’t like the idea of the government getting involved with these companies. You’re making to an extent a deal with the devil, but your options are really limited at this point.”
The problems within the insurance industry are not contained to the firms (Hartford Financial, Prudential, Principal, Allstate, Ameriprise, and Lincoln) that received approval for TARP funds. These institutions are eligible for government funds via TARP because they have bank subsidiaries or have purchased a bank or S&L. What about the insurance companies not in that position? Stay tuned.
Sense on Cents will be monitoring this situation very closely.
LD
For a compilation of posts by Sense on Cents on this topic:
January 12th: Got Insurance? 529 Plans? Financial Aid? Read On…
-an interview with Sean D’Arcy, a longstanding professional within the insurance industry and financial planning space. Sean laid out all the problems.
March 12th: Is My Insurance Insured?
-a review of the fact that policyholders have credit exposure to their insurance carriers.
March 30th: What Is Lincoln Thinkin’?
-a review of Lincoln Financial’s purchase of a small savings and loan in Indiana in order to gain access to government funding.
April 6th: Insurance Companies’ Ignorance Is Definitely Not Bliss!!
-a survey of insurance brokers in which the brokers maintain the insurance companies did not appreciate and understand the degrees of risk embedded in insurance products sold.
April 7th: Uncle Sam To Throw Lifeline To Life Insurers
-a post pointing toward the move made yesterday.
Dianne Feinstein Exposes Herself Under the TARP
Posted by Larry Doyle on April 28th, 2009 3:30 PM |
Senators Dianne Feinstein (D-CA) and Olympia Snowe (R-ME) proposed legislation earlier this year to create transparency in the distribution and use of TARP funds. From Feinstein’s own website:
Senators Feinstein and Snowe are the authors of bipartisan legislation, called the Troubled Asset Relief Program Transparency Reporting Act, which would promote transparency and establish strict accountability standards for firms receiving TARP funds. The bill was originally introduced during the 110th Congress on November 20, 2008, and was reintroduced with a new bill title for the 111th Congress on January 6, 2009.
“American taxpayers put hundreds of billions of dollars on the line to rescue financial institutions, but we still don’t know how this money is being spent,” said Senator Feinstein. “This lack of transparency is simply unacceptable. Taxpayers deserve better, and the time has come to restore confidence in this unprecedented effort. Clear restrictions must be imposed on firms receiving assistance. These include tougher reporting requirements, lobbying prohibitions, and a ban on lavish and unnecessary expenditures.” (more…)
“White House Ties to Wall Street Doom Bank Rescue”
Posted by Larry Doyle on April 17th, 2009 6:37 AM |
None other than Nobel Prize winner Joseph Stiglitz of Columbia University provided a direct shot across Washington’s and Wall Street’s bow today. As I read Bloomberg’s Stiglitz Says White House Ties to Wall Street Doom Bank Rescue, the little voice in my head kept repeating, ” he’s right” or “I agree.” I am reluctant to copy and paste entire articles, but this one is so important that I feel compelled and will add commentary or links as warranted.
The Obama administration’s plan to fix the U.S. banking system is destined to fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.
Seems as if Stiglitz would agree with How Wall Street Bought Washington.
“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.
The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.” (more…)
Good News and Bad News: The Plot Thickens
Posted by Larry Doyle on April 13th, 2009 6:39 PM |
It seems as if Wall Street banks are releasing “surprisingly positive” earnings in stealth fashion these days. Goldman Sachs was expected to release 1st quarter 2009 earnings tomorrow. Well, Goldman just released that they “blew the doors off” the building in a very explosive and positive fashion. Bloomberg reports Goldman Sachs to Sell $5 Billion in Stock, Repay TARP:
The New York-based bank earned $1.81 billion, or $3.39 a share, in the first quarter as a surge in trading revenue outweighed asset writedowns. The results beat the $1.64 a share estimate of 16 analysts surveyed by Bloomberg.
The earnings were driven by a sizable increase in trading activity which reads as a major gain in market share. With Bear, Lehman, and Merrill all gone and Citi and BofA in the hospital, the crowd at Goldman is sowing while the sun shines. What does that mean? For those who want or need to “play,” Goldman is now one of the few shops truly open for biz. The price to “get in the game” just went up and Goldman’s franchise is clearly benefiting:
Goldman Sachs benefited as the gap between what banks pay to buy fixed-income securities and the price at which they sell, the so-called bid-ask spread, almost doubled to 19 basis points in six months, according to data compiled by Bloomberg.
Over and above the earnings, Goldman has sent a clear signal to Uncle Sam requesting him to leave the Goldman “casino.” With Goldman’s earnings power clearly defined, the firm has announced its intention to raise more equity capital and pay back the TARP money it received last Fall. It will make that equity raise after the release of the Bank Stress Tests at the end of the month. Uncle Sam’s intentions to oversee compensation, business practices, and the like is the antithesis of how Goldman operates. While the actual cost of the government TARP money is cheap, the unknown costs are enormous. Goldman has no interest in maintaining those risks. (more…)
No TARP For You!!
Posted by Larry Doyle on April 13th, 2009 1:49 PM |
No TARP for you!
Who can ever forget the Seinfeld episode featuring the Soup Nazi? Well, in that same vein, the insurance company Genworth Financial was just summarily thrown out of the Treasury “line” to receive TARP funds. The WSJ reports, Genworth Financial Shares Slump on TARP Ineligibility:
Shares of Genworth Financial Inc. fell as much as 31% Monday as investors responded to the insurer’s late-Thursday announcement that it is ineligible to participate in the Treasury’s Capital Purchase Plan because it missed a deadline that Treasury won’t extend.
The mere fact that Genworth, Hartford Financial, Protective Life, or any other insurer are requesting government funds is another version of the “putting perfume on a pig” play we saw with the FASB relaxation of the mark-to-market. Why is that?
The TARP (Troubled Asset Recovery Program) was designed by Congress for banks needing increased capital. If investment banks can become bank holding companies, why not insurance companies as well? Perhaps, the next thing you know, we’ll have plumbers designating themselves as banks. How about construction companies? Maybe a bakery or two? Anybody for a newly defined U.S. Financial Blogging Bank? Where do I sign? We could all use some “soup.” (more…)
Tea Is Served
Posted by Larry Doyle on April 4th, 2009 4:45 PM |
I strongly believe Congress and the Obama administration know that the American public has no appetite for further government bailouts. This public demeanor presents a challenge for a government that has gotten used to writing big checks for Wall Street, the Stimulus, and automotive companies.
What is the federal government to do for municipalities, insurance companies, commercial real estate companies, or others who may go bankrupt?
Secretary Geithner has laid the groundwork for government takeover of institutions deemed to present systemic risk. How that power is effected or implemented will be very interesting. (more…)
When Big Ben Speaks….
Posted by Larry Doyle on January 14th, 2009 9:40 PM |
Against the backdrop of the frozen tundra, numerous members of the storied Pittsburgh Steelers franchise have reached
Chairman of Federal Reserve, Ben Bernanke
legendary status. Included in this family are such greats as Jack Lambert, Mean Joe Greene, Terry Bradshaw, Rocky Bleier, Franco Harris, John Stallworth, Lynn Swann, Chuck Noll, and the longtime owner Art Rooney. For lovers of the NFL, these men are true giants. The current Steelers franchise is led by budding legend and All-Pro quarterback Ben Roethlisberger. When “Big Ben” leads, Pittsburgh follows. You can discuss this “Big Ben” tonight and every Wednesday night at 9PM on “No Topic Taboo . . . Everything Else with Jay.”
With all due respect to Mr. Roethlisberger, though, there are two other “Big Bens” that crossed paths just yesterday and hold much greater sway and impact in world affairs. I speak of Ben Bernanke and the famous London clock tower.
While the NFL is a great diversion, we ultimately return to the real world and need to deal with the realities it presents. Fed chairman, “Big Ben” Bernanke, presented chilling testimony yesterday in the shadows of the famous clock tower at the London School of Economics.
Understand that every message delivered by a Fed chairman is very carefully scripted. In years past, the Fed was much less transparent than it is today. That said, the Fed chairman speaks carefully so as not to unsettle markets but also to provide an outline as to future policy. In so doing, the general public is often hard pressed to decipher what he is saying and what it means. The general media typically does not capture the nuances and subtleties offered by the Fed. To that end, our work here at No Quarter looks to fill that void.
Repaying TARP Funds: Playing Ball With Uncle Sam
Posted by Larry Doyle on April 20th, 2009 10:27 AM |
Last evening on NQR’s Sense on Cents with LD (note: you can listen to audio recording of the show from the BlogTalkRadio player in the right sidebar), I proposed that the Obama administration would not release individual results of the Bank Stress Tests. I further added that I thought the administration may encourage stronger banking institutions to channel funds to weaker institutions. In so doing, these stronger banks – such as JP Morgan and Goldman Sachs – may actually take equity stakes in the weaker banks. Will JP Morgan and Goldman bear the entire risk of those equity stakes? Doubtful. Uncle Sam will likely negotiate terms along the lines of other bank bailouts in which a strong bank provides capital but the government bears the brunt of the losses.
As I write this, Bloomberg reports Bank of America is speculated to need another $10-20 billion in equity capital. BofA’s earnings were reported this morning at .44 earnings per share versus an expectation of approximately .03 earnings per share. Analysts are panning the earnings due to the propsects for ongoing increases in credit losses within BofA’s loan portfolio. BofA’s stock is down approximately 8% in early trading.
If BofA does need another $10-$20 billion in equity capital, where might it come from? In my opinion, in a non-public transferral of capital, those funds may come from JP Morgan and/or Goldman Sachs, and would actually be recycled TARP funds. Effectively, JPM and GS will merely be a conduit for increased government funds injected into BofA and Citigroup, as well. Remember JPM has $25 billion in TARP funds, Goldman has $10 billion. If BofA took $15 billion of these funds then Citi could receive $20 billion. What would JPM and GS receive in return? I would think these negotiations would be private and not released, although given that the capital provided is public money all information should be released. (more…)
Tags: Bank of America's earnings, Bank Stress Tests, FDIC-backed debt, Goldman Sachs repaying TARP, JP Morgan repaying TARP, Larry Summers comments on repaying TARP, TARP fund repayment
Posted in Bank Stress Test, Banking Institutions, TALF, TARP, Wall Street | 2 Comments »