Wall Street Breakfast: Must-Know News

• Couldn't even wait until Friday: In the biggest bank collapse of 2009, regulators seized Florida thrift BankUnited yesterday afternoon, a failure which could cost the FDIC $4.9B. For the current crisis, only IndyMac's failure ($11B) has been bigger. The bust brings into focus recent rumblings that extending government stress test results to smaller banks could result in another $24B or even $100-200B in losses. (table: banks gone bust)
• Geithner pledges to shave deficit. Treasury chief Geithner said Thursday he's committed to trimming the bulging budget deficit and maintaining the U.S.'s pristine AAA sovereign rating: "It's very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term." Treasurys and stocks came under heavy selling yesterday, which influential bond trader Bill Gross said was due to concerns over America's AAA rating, after S&P downgraded the U.K.'s outlook to Negative.
• So long fat profits. Taxpayers could be left to absorb a $10B loss on stock warrants being sold back to banks who are repaying their TARP loans. So far, 17 financial institutions have repaid TARP funds, but only one - Old National Bancorp (ONB) - has come to terms with the Treasury. ONB gave the Treasury $1.2M for warrants that may have been worth $5.81M. If other banks can finagle similar terms, they could walk away with 80% of the profits taxpayers were hoping for.
• Next sucker? AIG (AIG) Chairman and CEO Edward Liddy says he'll step down as soon as a replacement is found, noting the company has reached an 'inflection point' and needs a CEO who's ready to commit long term. Sources say a search could take 3-6 months, which seems optimistic considering the job description includes coming out of a comfortable retirement to put up with congressional buffoonery on an almost weekly basis for a $1 pre-tax salary. AIG also said it will split the two jobs, and proposed a 20:1 reverse stock split, which would bring shares back on to the radar screens of institutional investors. AIG -1.7% premarket to $1.77.
• Card companies brace for big losses. Analysts say companies that pitch credit cards to riskier customers and those that issue cards for retailers will be hardest hit by new legislation being signed into law today. Major players include Bank of America (BAC), Citigroup (C), Capital One (COF), HSBC (HBC), GE (GE), and Target (TGT). Some analysts estimate the new laws - which restrict fees, limit rate increases, and require more transparency - will lop $10B in revenue off the industry's top line.
• GM, union strike deal. UAW reached a tentative deal with GM (GM) and the Treasury to modify its labor agreement, including enabling GM to contribute shares instead of cash to a new, union-managed healthcare plan. On Tuesday, GM said it didn't envision reaching a deal with the UAW before May 26, when an offer to bondholders to exchange $27B in debt for a 10% stake expires. The deal, which must still be ratified by workers, will not necessarily allow GM to avoid bankruptcy. A story in the WaPo says the Obama administration is steering GM to file for bankruptcy protection as early as the end of next week, but Reuters sources say otherwise.
• Citi looks to slice IT costs. Citigroup (C) is ramping up efforts to slash IT costs, and sources say it believes it can save more than $1B 2009 through a massive systems integration.
• Opel draws another vulture. A Chinese automaker expressed interest in GM's (GM) Opel and Vauxhall operations in Europe, bringing potential bidders to four: unnamed Chinese firm, Fiat, Magna International (MGA) and RHJ International, a buyout firm with automotive assets.
• Leading indicators show signs of growth. The Conference Board's Leading Indicators rose 1% in April, in-line with consensus. It was the first increase in seven months, and indicates the recession will be less intense - at least in the near-term - and give hope for growth in H2. "The question is how long before declines in activity give way to small increases. If the indicators continue on the current track, that point might be reached in the second half of the year," Conference Board's Ken Goldstein said. (Conference Board's release)
• Factory sector still struggling. The Philly Fed's Business Outlook Survey edged up to -22.6 in May from -24.4 in April. The increase was substantially less than consensus estimates of -15. Although clearly indicating continued overall decline, the reading was the highest since last September. New orders remained negative, but shipments and the future activity index improved notably. "The survey does suggest that the rebound from the post-Lehman shock is not yet morphing into a sustained recovery story," Ian Shepherdson of High Frequency Economics says. (Philly Fed's release)
• U.S. still bleeding jobs. Initial Jobless Claims fell 12,000 from last week to 631,000 - just worse than the consensus of 625K. Continuing claims rose by 75,000 to 6,662,000. The report failed to satisfy bulls or bears, offering neither proof that job losses have topped, nor clarity that they're headed higher.

Earnings: Thursday After Close

• Aeropostale (ARO): Q1 EPS of $0.49 beats by $0.01. Revenue of $408M (+21.3%) vs. $405M. Issues upside EPS guidance for Q2 of $0.46-0.48. Same store sales for Q1 increased 11% vs. 10% a year ago. (PR)
• Alkermes (ALKS): FQ4 EPS of -$0.14 misses by $0.02. Revenue of $44M (-29.7%) vs. $45M. Issues downside guidance for FY '10, sees revenue $182-197M vs. $205.84M consensus. (PR)
• Aruba Networks (ARUN): FQ3 EPS of $0.01 beats by $0.02. Revenue of $46M (+7.5%) vs. $43M. (PR)
• Autodesk (ADSK): Q1 EPS of $0.18 beats by $0.10. Revenue of $426M (-28.9%) vs. $419M. (PR)
• Dress Barn (DBRN): FQ3 EPS of $0.39 beats by $0.08. Revenue of $376M (+6.6%) vs. $362M. Issues upside EPS guidance for FY '09 of $1.00-1.05 vs. $0.88 consensus. (PR)
• Excel Maritime Carriers (EXM): Q1 EPS of $2.42 beats by $1.73. Revenue of $222M (+218.2%) vs. $109M. (PR)
• Foot Locker (FL): Q1 EPS of $0.20 beats by $0.07. Revenue of $1.2B (-7.1%) in-line. (PR)
• Gap (GPS): Q1 EPS of $0.31 beats by $0.01. Revenue of $3.1B (-7.6%) in-line. (PR)
• LDK Solar (LDK): Q1 EPS of -$0.21 misses by $0.13. Revenue of $283M (-33.6%) vs. $240M. (PR)
• Pacific Sunwear of California (PSUN): Q1 EPS of -$0.13 beats by $0.16. Revenue of $223.5M (-16.3%) vs. $214.5M. (PR)
• Salesforce.com (CRM): Q1 EPS of $0.15 beats by $0.04. Revenue of $305M (+23.1%) in-line. (PR)
• Zumiez (ZUMZ): Q1 EPS of -$0.06 misses by $0.02. Revenue of $77M (-2.4%) vs. $76.5M. (PR)

Today's Markets

Asia was mostly lower following a difficult session in the U.S. Thursday, but Europe stocks have moved up from early lows. Futures are up.

• Asia: Nikkei -0.41% to 9,226. Hang Seng -0.8% to 17,063. Shanghai -0.5% to 2,598. BSE +1.1% to 13,887.
• Europe at midday: London +0.8%. Paris +1.1%. Frankfurt +1%.
• Futures at 7:00: Dow +0.7% to 8350. S&P +0.7% to 895. Nasdaq +0.8%. July crude +0.8% to $61.57. Gold +0.5% to $955.70. Treasurys flat. Euro +0.5% vs. dollar. Yen +0.3%. $Cdn +1%.

Friday's Economic Calendar

• Thur. 11:30 PM BoJ Rate Decision
  10:00 Mass Layoffs
  10:00 Regional and State Employment and Unemployment
  10:30 ERCI Leading Index
  10:30 FDIC meeting on assessment fees
  2:00 PM Bernanke speaks
• Notable earnings before Friday's open: BAIRY.PK, CPB, YGE
• Notable earnings after Friday's close: GA

Seeking Alpha editor Rachael Granby contributed to this post.

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Comments

[doubleguns:]

Geithner says we must trim the deficit. I hope he clued BO in on that.

On a good note. Everyone enjoy your memorial day weekend and spend some time with the family if you can. Remember our troops who are not able to do that this week end..... so that you can.

Pray for the troops.

May 22 07:49 AM

[dcb:]

TARP Warrant Sale Shows Banks May Reap ‘Ruthless Bargain’
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By Mark Pittman

May 22 (Bloomberg) -- Banks negotiating to reclaim stock warrants they granted in return for Troubled Asset Relief Program money may shortchange taxpayers by almost $10 billion if Treasury Secretary Timothy Geithner’s first sale sets the pace, data compiled by Bloomberg show.

While 17 financial institutions have repaid TARP funds, only one has come to terms with the U.S. on the value of the rights to buy stock that taxpayers received for the risk of recapitalizing the industry. That was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million for warrants that may have been worth $5.81 million, according to the data.

If Geithner makes the same deal for all companies in the rescue program, lenders may walk away with 80 percent of profits taxpayers might have claimed.

“For once we’d like to get a fair value when we come into contact with the banking system,” said Representative Brad Miller, a North Carolina Democrat and chairman of the Investigations and Oversight Subcommittee of House Science and Technology Committee. “We don’t want a ruthless bargain.”

Under the Old National warrants formula, Bank of America Corp. would save $2.03 billion, followed by Wells Fargo & Co. at $1.48 billion and JPMorgan Chase & Co. at $1.46 billion. Morgan Stanley’s benefit would be $983 million, Citigroup Inc.’s would come in at $965 million and Goldman Sachs Group Inc. would have $693 million, according to the data compiled by Bloomberg.

For the 20 largest TARP recipients, the total savings would be $9.985 billion, the data show.

‘Stronger Incentives’

Geithner wants to move swiftly to sell the TARP warrants, he said on May 20. Their worth depends on assumptions made about the chances the underlying stock will go higher than the rights. Depending on the input, different valuation models reach a range of conclusions.

Lenders shouldn’t be trusted to make suppositions that would be to the advantage of taxpayers, said Linus Wilson, an assistant professor of finance at the University of Louisiana at Lafayette.

“Bank managers have stronger incentives than Treasury personnel to get a better deal for their constituents,” said Wilson, who has written about appraising warrants.

Because Old National was the first to repay TARP money and buy its rights back, the May 11 transaction “sets the price point for the whole program,” said Simon Johnson, a fellow at the Peterson Institute for International Economics in Washington who testified on the securities before Miller’s subcommittee on May 19.

‘Doing Our Best’

“The point of the warrants is that taxpayers participate in the upside,” Johnson said in an interview. “It defeats the whole purpose if you’re going to sell them way below market price.”

Treasury Department spokesman Andrew Williams declined to comment on Old National.

“We’re doing our best to protect the taxpayers’ interest and make sure we get fair market value,” he said.

The department has a “robust process” evaluation process, using two modeling systems, consulting with an outside asset manager and collecting bids from market participants, Williams said.

The U.S. received rights to buy 1.4 billion common shares in exchange for $287 billion in TARP capital, according to data compiled by Bloomberg. A company that accepted aid had to grant warrants equal to 15 percent of the TARP investment at a strike price equal to the 20-day trailing average of the shares. A strike, or exercise, price is that at which an option can be exercised.

Option-Implied Volatility

Now that Goldman Sachs, JPMorgan and Morgan Stanley have applied to return the $45 billion they received, they may also reclaim their warrants.

Those are worth about $4 billion, data compiled by Bloomberg show. If the U.S. followed the Old National formula for the three New York-based banks, taxpayers would receive less than $1 billion.

JPMorgan spokesman Joseph Evangelisti declined to comment. Mark Lake, a spokesman for Morgan Stanley, said the bank “would support any program that is focused on benefiting the U.S. taxpayer.” Goldman Sachs spokesman Michael DuVally said company officials have “always said the taxpayers should benefit from the value associated with these warrants.”

In the case of Old National, each of the 813,000 warrants had a strike price of $18.45.

‘Good For Taxpayers’

On May 11, the day the U.S. announced the sale, the stock’s option-implied volatility, derived from market prices of stock options that are traded daily, was 61 percent, according to data compiled by Bloomberg. The risk-free rate of return, or the yield of government debt, was 3.47 percent that day.

Based on that volatility and that rate, the Black-Scholes options valuation tool appraised one Old National warrant at $7.18. The bank paid the U.S. $1.48 for each.

“We were able to reach a deal that was good for our shareholders and Treasury felt was good for taxpayers,” Old National Chief Executive Officer Bob Jones.

The bank, with more than $8 billion in loans and branches in Kentucky and Illinois, hired an appraiser to evaluate the warrants, Jones said. He said the government rejected his first offer of $600,000.

Old National closed down 12 cents at $12.27 yesterday in New York Stock Exchange composite trading.

Three Volatility Assumptions

Black-Scholes, a risk management device, was developed in 1973 by Fischer Black and Myron Scholes to estimate the fair market value of stock-option contracts. Williams, the Treasury spokesman, declined to say whether Black-Scholes is one of the two models the department employs.

At the University of Louisiana, Wilson used Black-Scholes and two other systems to evaluate Old National’s warrants, plugging in three volatility assumptions: 37.1 percent, 59.72 percent and 72.89 percent.

The lowest, calculated from the bank’s stock price movements over the past seven years, yielded the smallest warrant value, ranging from $2.50 to $6.72 per warrant. The highest, based on changes since Jan. 1, 2008, returned a range from $8.88 to $11.05. The middle estimate -- the options-implied volatility -- said a right to buy the stock was worth from $5.93 to $9.69.

Wilson said the government would serve taxpayers better by auctioning off the securities to investors. The law that established TARP allows for an auction.

‘Onerous Exit Fee’

Miller, the North Carolina congressman, said the Treasury should have insisted on terms for taxpayers similar to those Warren Buffett secured for Berkshire Hathaway Inc. shareholders when he invested $5 billion in Goldman Sachs in September.

Buffett received 43.5 million warrants valued by Black- Scholes at $3.6 billion, or $82.18 each, on the date of the transaction, data compiled by Bloomberg shows. Taxpayers injected twice as much into Goldman Sachs and got 12.2 million warrants worth $882 million, or $72.33 each.

The American Bankers Association said in an April 16 letter to Geithner that a company that wants to get out of TARP now faces an “onerous exit fee” because it has held the investment for so little time.

“There is no reason for Treasury to impose such a punitive obstacle to exiting,” said Diane Casey-Landry, the association’s chief operating officer in Washington.

‘Tough Penalty’

After Shore Bancshares Inc. returned $25 million in TARP money, plus $208,333 in interest, it offered to buy its 173,000 warrants, according to CEO Moorhead Vermilye. He declined to disclose the bid, which he said the U.S. rejected.

The Easton, Maryland-based bank’s warrants were valued yesterday at $12.33, or $2.1 million, according to data compiled by Bloomberg and modeled by Black-Scholes. Paying that to reclaim them would amount to an annual interest rate of more than 30 percent a year.

“It’s a tough penalty for the short time we had the money -- three months,” Vermilye said.

To contact the reporter on this story: Mark Pittman in New York at [e-mail].
Last Updated: May 22, 2009 00:09 EDT

May 22 08:23 AM

[AndrewBaker:]

So the tax-payer gets ripped off again if the banks gets their way in paying back TARP funds. Funny, I'm not surprised. The way the government, Fed and banks are coiling around each other, a three-ways is almost inevitable, and maybe planned from the outset.

Is this how the banks will cover the losses they've made; through tax dollars handed to them by the government?

The many people who have lost their homes or are likely to do so; have lost their jobs or likely to do so, have lost their savings and likely to do so when the correction comes, have lost their financial security in retirment or likely to do so, and those who will not now be able to retire as planned and will have to work on, will no doubt be very interested in knowing that the banks will not have lost much because it has been or is likely to be made up to them by tax-payers. And it is good to know that their jobs are safe as are those of their friends in government and state and federal run bodies: after all, we would not want to lose the services of our saviours in these institutions, would we ... ?

May 22 09:12 AM

[dave mckay:]

Big deal. 10 billion is really nothing in the grand scheme of things. I'm glad the govt. is theoretically losing this amount. After the mafia tactics the govt. used last fall, making an offer the banks couldn't refuse, it's nice to see some payback. I own preferred stock in Old National Bank. and I sleep like a baby collecting my big dividend.

May 22 09:25 AM

[axelrod608:]

Thank you Edward Liddy. You volunteered for a hopelessly difficult job that paid $1 a year, took the unwarranted insults of ignorant Congresscritters, and by my estimation have brought AIG through the worst of a difficult restructuring. You followed the instructions of the Fed and Treasury even though they were hopelessly flawed. You performed with professionalism and distinction.

This nation needs more men like you and a whole lot less Alans, Hanks, Bens and Timmys.

Thank you for your service sir. You are a gentleman and a patriot.

May 22 09:26 AM

[onesiggy:]

Amazing, duped again. The whole thing sinks to high heaven. Our
bureaucrats never learn ...

May 22 09:28 AM

[axelrod608:]

I find it hard to believe that anyone took seriously the idea that the taxpayers could make any money on the bank welfare plan. From inception every facet of the plan was designed to benefit the financial corporations at taxpayer expense. Of course the government will allow them to buy back their warrants at a fraction of their market value. Duh.

C'mon, folks. We all know how to tell if people in the government are lying. Their lips move.

May 22 09:42 AM

[Joseph Sherman:]

Opel draws another vulture by a Chinese firm - a new face to "Made in China"

May 22 10:07 AM

[xmichaelx:]

So people were crying because the TARP $$ was "never going to be paid back," and now people are crying because it's being paid back too early and without sufficient interest??!

Does the whining never end?

May 22 01:11 PM

[notsosmart:]

today the credit card industry saw what can happen when greed runs out of control. this industry commited suicide just like wall st.it reminds me of cancer.cancer lives well off the host but the parasite takes more & more & kills the host.i have an amex card dated 1962.it was a fine business then & run in a reasonable manner. the crooks & scoundrels ran wild without oversight & a bought congress.this is the result & the capitalists who screwed the whole system keep hollering"socialism".of course the dumb-dumb americans fit right into this mess as they are more interested in the sport scores.maybe this memorial day,hopefully, a lot more folks will think of the mess that"mission accomplished",chaney & rumsfeld created that has killed over 4000 young americans & wounded thousands more.im an independent registered voter & not a socialist or any other "ist".this nation is in decline,sadly,& has lost its reputation.the talking heads on tv & radio all have an agenda.the congress is bought& is only interested in reelection.if the middle class benefits from some legislation its by accident.so happy holiday,citizens.

May 22 03:58 PM

[ecoco:]

Why all comments have negative vibe in them, and everyone is cynical of the present administration, they are not to blame of the present situation. Instead look at the bright side of earnings beating expectation and sign of growth.

People spending more than earning is to blame for losing their jobs and houses.
Credit Card abuse by consumers & Card issuers to blame for Credit Card failures.
Bank greed and fraud are to blame for Bank failures.
Manufacturing ignorance and complacency coupled with greedy unions to blame for car industry failure.

And after all this you expect the government to clean the mess of previous administration.

It is this negative sentiment that will prolong the agony of this recession. We had it so good in the past and we should pay the price. It is us to blame and us to put this economy back on its feet.

May 22 04:39 PM

[axelrod608:]

>> "People spending more than earning is to blame for losing their jobs and houses." >>

Sure, but they couldn't have done it without the government policy of easy cheap unlimited credit for all, even the uncreditworthy. You must be a young person with a limited understanding of history. When I bought my first house, if you didn't have 20% down, they didn't take the application.

As for your comment that it's not the fault of this administration, sure enough that';s true. But what';s also true is that both of the ruling parties and all their administrations is that there's no difference - BOTH have championed the stupid, shortsighted policies that have brought us to this sorry state of affairs.

Finally, if you really, honestly think that pouring a decade's worth of tax receipts down the drain in an attempt to "fix" this mess is a good policy, all I can ask is "Do you believe in magic ?" In all of history, it has never worked before.

A very wise man, Albert Einstein, once observed that the most powerful force on earth was the power of compound interest. The formal IOUSA policy is to go against this power by continually running the government as if this was not true. We have neverending deficits and an evergrowing national debt that we can NEVER hope to repay. NEVER.

And the power of compound interest is 100% working against us. The IOUSA is unsustainable. There are only two options - default on the national debt or devalue the currency enough to make the natuional debt serviceable..

We have two ruling parties that have ZERO control over spending and a policy of "cutting taxes". Both have conspired to bring us to unsustainability.

Next time you go to the voting booth, remember - IF you vote for a Republicrat, YOU are the problem.

May 22 09:28 PM

[eieinli:]

Ed Liddy's dollar a year pre-tax salary turned out to be $460,000 worth of perks! How many Americans earn that kind of money?
Add to this his holdings in GS and you know what's really happening...(between AIG & GS). It's this revelation that forced Liddy back to retirement!! ...some patriotic duty!!!!

May 22 10:50 PM