Wall Street Breakfast: Must-Know News

• TARP repayment restrictions. Bailed-out banks will have to do more than raise cash in order to pay back TARP funds; they will also have to pass a test to determine whether the repayment is in the nation's economic interest, said a senior government official. The three-part test will check to "make sure the system is stable," ensure that repayment doesn't create "incentives for more deleveraging which would deepen the recession," and ensure the system has enough capital to "provide credit to support the recovery." The comments come as Goldman Sachs (GS), JPMorgan Chase (JPM) and other relatively strong banks push to be allowed to repay bailout funds.
• So long IBM, hello Oracle. Oracle (ORCL) announced Monday morning it has agreed to buy Sun Microsystems (JAVA) for $7.4B, including $1.8B in debt assumption and $9.50 cash per share. "Oracle will be the only company that can engineer an integrated system - applications to disk - where all the pieces fit and work together so customers do not have to do it themselves," CEO Larry Ellison said in a press release this morning. ORCL -4.25% premarket. JAVA +27% to $8.50. (7:30 ET)
• Gov't may take bank equity stake. In a marked shift, the White House and Treasury have reportedly concluded they can prop up the banking system without asking Congress for more money and make TARP funds last longer than previously expected by converting government loans to the country's 19 biggest banks into common stock. However, officials have to weigh the advantage of avoiding a confrontation with Congress against the inevitable backlash from what critics will call back-door nationalization. The potential equity conversions would also increase taxpayer risk by exposing the government to the fluctuations of the common shares' prices.
• Glaxo reaches $3.6B Stiefel deal. The latest in a series of pharmaceutical industry deals, GlaxoSmithKline (GSK) has agreed to buy Stiefel Laboratories for up to $3.6B. Glaxo will pay $2.9B in cash and expects to assume $400M of net debt. Depending on future performance, Glaxo could make a further $300M cash payment. Stiefel makes remedies for skin ailments like acne and diaper rash, and the purchase fits squarely with CEO Andrew Witty's strategy to expand in consumer products and diversify away from pure pharmaceuticals.
• Obama to tackle credit card fees. Obama has high credit card fees and interest rates in his sights, and will soon focus "on a whole set of issues having to do with credit card abuses," said White House economic adviser Larry Summers. It's unclear whether or how Obama's efforts will differ from credit card legislation being pushed by Democratic lawmakers. Summers is scheduled to meet with the heads of some of the largest U.S. credit card issuers on Thursday.
• Pepsi's bottler buyout. PepsiCo (PEP) has offered around $6B in cash and stock to buy out other shareholders of Pepsi Bottling Group (PBG) and PepsiAmericas (PAS), its two biggest bottlers. The offers mark a 17% premium on each bottler's April 17 closing price. The move is meant to give PepsiCo full control of around 80% of its North American beverage market, an area where both volume and profitability have fallen. PepsiCo estimates the acquisitions will add at least $200M to annual pretax profit. Separately, the company announced better-than-expected Q1 earnings this morning (see details below).
• UBS sells unit at a loss. UBS (UBS) will sell Brazilian investment bank Banco Pactual back to one of its original owners at a 'small loss' in order to reduce risk and raise capital. Pactual will be sold for $2.5B, raising UBS' Tier 1 ratio by 0.6% for a Q1 ratio of roughly 10.6%. CEO Oswald Grubel has committed to shrinking UBS in order to bring the bank back to profitability, but a spokeswoman declined to comment on potential further disposals.
• AIG delays proxy filing, may reshuffle board. AIG (AIG) has delayed the filing of its annual proxy statement and will reschedule its annual meeting, possibly in order to expand and reshuffle its 11-member board. Since being bailed out in September, AIG's board has remained largely unchanged, though AIG previously announced three board members are expected not to stand for re-election. AIG's statement on the delay is vague, saying only "we are in ongoing discussions regarding several issues and as a result have not yet filed our proxy statement." Separately, AIG revealed in an 8-K filing this morning that the Treasury will provide it with another $29.84B for five years, in exchange for a swap of its preferred shares to a different class of preferred shares. Their agreement restricts AIG's ability to repurchase shares and requires it to maintain certain corporate policies. AIG -9.3% premarket to $1.47 (7:30 ET).
• GM draws closer to Ch. 11. Still trying to stay afloat, General Motors (GM) CEO Fritz Henderson conceded bankruptcy remains a 'probable' outcome for the automaker. Negotiations with bondholders and its union have been slow to produce results. Asset sales are not going particularly well either: the company took its AC Delco off the market after failing to get enough cash for the parts business, and may sell its Opel stake for zero gain. GM says it needs another $4.6B in government loans in Q2 to stay afloat, money the Treasury has not yet approved.
• Upset on the Fortune 500 list. Exxon Mobil (XOM) bumped Wal-Mart (WMT) from the top spot on the 2009 Fortune 500 list of largest publicly traded companies. Exxon managed to rake in revenue of $442.9B in 2008 despite the year-end fall in energy prices and posted $45.2B of profit. Wal-Mart's revenue rose 7% to $405.6B. Chevron (CVX), ConocoPhillips (COP) and General Electric (GE) placed third, fourth and fifth, respectively. Overall, Fortune 500 earnings fell 85% last year, the biggest drop since the list began 55 years ago. (Check out the Fortune 500 list)
• Bye bye, bank. Friday saw the 24th bank failure this year as regulators closed Missouri's American Sterling Bank. Metcalf Bank will assume the failed bank's $171.9M in deposits and buy roughly $173.6M of its $181M in assets. American Sterling's failure will cost the FDIC around $42M.

Earnings: Monday Before Open

• Bank of America (BAC): Q1 EPS of $0.44 beats by $0.40. Revenue of $36.0B (+111.7%) vs. $27.1B. (PR)
• Eaton (ETN): Q1 EPS of -$0.22 beats by $0.03. Revenue of $2.8B (-19.5%) vs. $3.1B. (PR)
• Eli Lilly (LLY): Q1 EPS of $1.20 beats by $0.21. Revenue of $5.05B (+5.0%) in-line. Shares +2.2% premarket (7:00 ET). (PR)
• Halliburton (HAL): Q1 EPS of $0.44 beats by $0.03. Revenue of $3.9B (-3.0%) vs. $4.0B. (PR)
• Hasbro (HAS): Q1 EPS of $0.14 in-line. Revenue of $621.3M (-11.8%) vs. $644.9M. (PR)
• PepsiCo (PEP): Q1 EPS of $0.71 beats by $0.04. Revenue of $8.3B (-0.8%) in-line. (PR)
• Weatherford International (WFT): Q1 EPS of $0.27 misses by $0.02. Revenue of $2.3B (+2.7%) in-line. (PR)

Today's Markets

Asia markets managed to eke out modest gains, but Europe has drifted lower and futures are under pressure.

• Asia: Nikkei +0.19% to 8,925. Hang Seng +0.96% to 15,751. Shanghai +2.14% to 2,557. BSE -0.4% to 10.980.
• Europe at midday: London -1.2%. Paris -1.9%. Frankfurt -2.5%.
• Futures at 7:00: Dow -1.1% to 7993. S&P -1.2% to 853.50. Nasdaq -1.6%. June crude -3.7% to $50.31. June gold +0.4% to $871.

Monday's Economic Calendar

• 8:30 Chicago Fed National Activity Index
  10:00 Leading Indicators
• Notable earnings before Monday's open: BAC, ETN, HAL, HAS, LLY, MMR, PEP, WFT
• Notable earnings after Monday's close: BRO, BSX, BXS, CNI, IBM, PKG, SYK, TXN, ZION

Seeking Alpha editor Eli Hoffmann contributed to this post.

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Comments

[dayter:]

And yet BAC is down 70 cents since the call. I think the market knows by now to expect beating of expectations from the banks.

Apr 20 08:22 AM

[lo574:]

*Dumb money* is what drove the banks higher since early March. What profit would any of the banks had w/o the TARP money? Zip, zilch, nada. Just reading the above articles should convince anyone to sell the banks or go with an inverse financial ETF.

Obama hunting to lower credit cards fees = hello, lower bank margins. Haven't you noticed they've been raising their fees lately?
TARP recipients will not be allowed to repay unless they pass a test that proves repayment will not encourage further leveraging = of course it will.
TARP funds may be converted to common shares = that's called nationalization folks

They're not going to be allowed to go back to their old leveraging ways; they're stuck. A rally today? Are you kidding me? LOL You're hilarious. Go ahead and buy some banks; smart money wants your cash.

Apr 20 09:00 AM

[stockartist:]

From preferred to common stock should set off an alarm with tax payers, let congress know this is not what was agreed on. Looks like the banks are in worst shape than we thought: I think the stress test is a delay tactic. Citizens of the US are getting the raw end of this deal. Banks will be off the hook for paying dividends to the tax payers and will be left with worthless common stock. Given the interest rate backdrop, rates are set to rise later on in the year when the Fed loses control of the Treasuries and the banks with have to pay higher interest rates to borrow and charge more to consumers. Later this year, look forward to a financial perfect storm.

Apr 20 09:15 AM

[SW Richmond:]

"they will also have to pass a test to determine whether the repayment is in the nation's economic interest"

Da, comrade. There are no markets, there are only interventions.


"The comments come as Goldman Sachs (GS), JPMorgan Chase (JPM) and other relatively strong banks push to be allowed to repay bailout funds."

This is such a confusing situation. GS, JPM et al are anything but "strong", and I think it's a stretch to even classify them as "relatively strong". IMO they are more like "nearly dead" from the movie "Princess Bride". The best visual I can offer is when Billy Crystal had to use a bellows to pump air into the lungs of the "nearly dead" Cary Elwes so that he could speak.

Perhaps the "relatively strong" banks would like to also swap back all the Treasuries they have exchanged for their nearly dead MBS at the TALF / TSLF? If we're gonna press the reset button and let these banks start paying an average of $600,000.00 salaries / bonuses, lets reset all the way, shall we?

Apr 20 09:16 AM

[t-bird:]

One earlier poster wrote:

You don't quite get it do you? The banks are fabricating their numbers! The abandonment of mark-to-market allows these guys to use any of five different ways to value assets. Basically they start at the bottom line and work their way backwards. You'd have to be a fool to believe anything they say.

Wonder what the numbers would reveal if all the toxic debt and CDO's were allowed to be factored in? Treat financials as a short term trade only!!! Take your profits and hit the exits!

Apr 20 09:16 AM

[mac123449:]

The Turner Radio Network has obtained "stress test" results for the top 19 Banks in the USA.

The stress tests were conducted to determine how well, if at all, the top 19 banks in the USA could withstand further or future economic hardship.

When the tests were completed, regulators within the Treasury and inside the Federal Reserve began bickering with each other as to whether or not the test results should be made public. That bickering continues to this very day as evidenced by this "main stream media" report.

The Turner Radio Network has obtained the stress test results. They are very bad. The most salient points from the stress tests appear below.

1) Of the top nineteen (19) banks in the nation, sixteen (16) are already technically insolvent.

2) Of the 16 banks that are already technically insolvent, not even one can withstand any disruption of cash flow at all or any further deterioration in non-paying loans.

3) If any two of the 16 insolvent banks go under, they will totally wipe out all remaining FDIC insurance funding.

4) Of the top 19 banks in the nation, the top five (5) largest banks are under capitalized so dangerously, there is serious doubt about their ability to continue as ongoing businesses.

5) Five large U.S. banks have credit exposure related to their derivatives trading that exceeds their capital, with four in particular - JPMorgan Chase, Goldman Sachs, HSBC Bank America and Citibank - taking especially large risks.

6) Bank of America`s total credit exposure to derivatives was 179 percent of its risk-based capital; Citibank`s was 278 percent; JPMorgan Chase`s, 382 percent; and HSBC America`s, 550 percent. It gets even worse: Goldman Sachs began reporting as a commercial bank, revealing an alarming total credit exposure of 1,056 percent, or more than ten times its capital!

7) Not only are there serious questions about whether or not JPMorgan Chase, Goldman Sachs,Citibank, Wells Fargo, Sun Trust Bank, HSBC Bank USA, can continue in business, more than 1,800 regional and smaller institutions are at risk of failure despite government bailouts!

The debt crisis is much greater than the government has reported. The FDIC`s "Problem List" of troubled banks includes 252 institutions with assets of $159 billion. 1,816 banks and thrifts are at risk of failure, with total assets of $4.67 trillion, compared to 1,568 institutions, with $2.32 trillion in total assets in prior quarter.

Put bluntly, the entire US Banking System is in complete and total collapse.

If this is true, and this leak gains traction expect the media blitz to discredit it to be swift, ie they wall have cramer and the rest of the gang at CNBS and bloomberg radio talking green shoots everywhere and that this is total BS, at which point you know it's the truth...

Apr 20 09:28 AM

[AndrewBaker:]

Why only now does it appear that people are realising that we have been lied to consistently since the start of the year over the strength of the banks. This latest rally based much on banks telling us how much money they are making, when they are not, will result in a serious across the board market fall. And who will own up to any conspiracy? No-one of course: they will just conspire more to deliver yet more bullsh*t, and probably make out that investors who lose money by selling now they know the truth are pessimists trying to undo the great work they are doing saving us.

Apr 20 09:45 AM

[lo574:]

Mac, Minyanville already verified the Turner Radio Network blog was false. Check your sources b4 you post buddy. A blog is a blog. Not the WSJ

Apr 20 09:51 AM

[BeachRider:]

Oracle is buying Sun...
This is an amazing turn of events. It is a substantial change in the orientation of Oracle. They need to show the market that they know how to plan for such a change. That is why ORCL is down 5% right now.
I am surprised, so is Microsoft's CEO. This is an amazing turn of events.
Onward and upward!

Apr 20 10:06 AM

[C.Wayne Borum:]

herbert hoover nailed it! It is an issue that is clear to those with any understanding of the power of the pen wielded by the banking industry in these "hide behind the debt to asset transfer" era of banking exposure. This has been going on for at least ten years and as sad as it is to give credit to the crisis upon us, it has served to expose these fraudulent accounting methods used by some of our largest banks. The house of cards will continue to fall when the credit card interest rates are brought to light. A loan shark would think he had died and went to heaven it he could charge these rates and have legal protection at the same time. Profit is one thing, Greed is another.

Apr 20 10:08 AM

[notsosmart:]

lies, lies,by all.when are the sheeples going to wake up to the fact that the fleezing never stops.you cant believe anybody about anything & sadly this is now a worldwide situation.the fools & their teabags are a blessing for the media.the 24/7 need to to fill has become a joke.the only priority that counts is ratings for the talking heads,reelection for the pols,& more & more money for the ceo's & other wall st scoundrels.its all become a sad joke.

Apr 20 11:04 AM

[eieinli:]

Nobody really wants any bank to fail, except those led by greedy, uncaring b@st@rds. Where's the transparency that Herr Obama promised us? Disclose the truth, the real results of the stress test!

WAKE UP AMERICA! You're being lied to constantly!

Apr 20 11:12 AM

[bbowen7:]

WSJ reports that lending by the largest TARP recipients is down 23%. There's been lots of fuss about mortgages and a boom in refinances, but little discussion about loaning to small businesses which remains a big problem.

Apr 20 11:41 AM

[Allan Frain:]

"Bailed-out banks will have to do more than raise cash in order to pay back TARP funds; they will also have to pass a test to determine whether the repayment is in the nation's economic interest, said a senior government official."

Too bad TARP did not have to pass a test to determine if it was in the nation's economic interest.

Apr 20 11:59 AM

[Rob Viglione:]

Where in the Constitution does it state that bank decisions must be "in the nation's economic interests?" Or maybe repayment terms were included in initial loan agreements?

Apr 20 12:19 PM

[Linda Jones:]

The banks are already in a world of hurt. Add to that the coming commercial real estate losses, proprietary trading losses from being short during the rally, and continued home prices falling and they are in a world of hurt with no way out. It's a downward spiral that's in motion and unstoppable. I'm short the financials as of April 20, 2009.
Linda Jones
TheInvestmentSpa.blogs...

Apr 20 01:07 PM

[lo574:]

Hello.....MC V are not credit card companies. Any tightening Obama can effect will in no way affect them. They process the credit transaction; nothing more. The BANKS are the ones that issue the credit cards and tack on the huge interest rates and fee. The banks will be the ones to suffer. They way that MC V will suffer is from the consumer who's out of a job and can't get credit.

Apr 20 04:13 PM

[a. palmer jr.:]

So much for the rally.

Apr 20 05:54 PM

[Joseph Sherman:]

GM may sell its Opel stake for zero gain - the champions are looking for opportunities in this market.

Apr 20 10:30 PM