The Worst Is Over Day I

Guest commentary
by David S. Products

OK, here is what we're trying to do. As you no doubt have been proclaiming on your pixels, “the worst is past, the bottom is here, all is well, go ahead and start spending again.” You may be wondering why we are doing this ruse? Well, the deal is that all the banks are pretty much insolvent so we need to recap all of them.

Especially in the UK where, and I know this is hard to believe, the lie factor is much higher.

So now we’ve had a rip in the stock market that means that we can:

1. Find fools to invest in wiped out banks (see: National City (NCC) and Corsair Capital (and, to be clear, it is pure coincidence that Corsair is a spin-off from JPM (JPM)—what are you, a conspiracy freak or something?)) and
2. These uber-fools (because they are by definition “greater”) will believe in a valuation big enough to be more than zero.

Oh, and in reading about National City over the weekend, a timeline of the crisis showed “Ten ways National City could have avoided trouble.” Nine of the 10 were a variation on not making so many loans to people who couldn’t afford them, but Number 5 was:

Not buy back stock in early 2007
National City bought back more than $3 billion worth of its own stock in early 2007, when the price was at its highest in years and near its highest level ever (it hit an all-time high of $39.44 in October 2004).

The buyback came in two waves—with the second approved by the board of directors in April 2007, just as the bank was gearing up to disclose that its first-quarter financial results weren't all that good.

A week after the second buyback was announced, the bank said first-quarter profits plunged by nearly one-third because of the slumping home loan sector. At the same time, the bank quadrupled its reserves for loan losses, believing that more tough times were ahead...Companies buy back stock to show that management feels good about the future and, sometimes, to increase earnings per share or spend unused cash.

They did what? As you know crime never pays and I’m sure those responsible for that will be brought to full and fair justice. It’ll be a big trial, I’m sure. I can safely assume they are working on arrest warrants as we speak.

Noted with interest: Lehman (LEH) spent over $750 million on share repurchases in its most recent quarter, while growing assets by another $90 billion and pushing leverage well over 40 times. It was, of course, able to refinance those repurchases by finding fools to kick in $4 billion (please note the date on this Bloomberg article).

Comments

[High-tech investor]

Your National City comments are insightful as you provide solid analytical observations to back them.
Your Lehman comments are not : what you call fools are people who oversubscribed by almost 4x to the $4B capital infusion. Of all the financial companeis which raised capital in 2008 to strenghten their balance sheets, Lehman had the least shareholder dilution. Doesn't that tell you something ?