IANR

Live Discussion: Treasury's Bank Recovery Plan

The new investing would likely be at a much higher rate (cents on the dollar) than a private investment firm could begin to buy in the marketplace. But by participating with the US Gvt one is entering into a program whereby the Gvt underwrites 95% of the downside risk. Not saying this makes it a good deal, but I do think it's why this program will attract private funds.
Best solution? Buy NOW and take 100% risk AND participate with the Gvt in a few weeks time!


On Mar 24 02:07 PM Dave Friedman wrote:

> One thing I do not understand is this: what incentive does a private
> investment have to co-invest with the government?
> Why wouldn't a private investment fund assume that it will be the
> target of future populist outrage, and become a target for clawback
> legislation down the line?
> Absent any guarantee on the part of the government that private funds
> with which it co-invests will not be subject to confiscatory legislation
> in the future, I don't see why a fund would choose to participate
> in this.

Yesterday's Rally Is No Silver Bullet

Here's the issue as far as I can see.

There's around a Trillion dollars of badly impaired assets on bank's books and there is only a small market for these assets at say 30 cents on the dollar. Whereas worst case, hold to maturity math, says they should be worth around 80-85 Cents.
However general accounting rules push for such assets to be "market to market" soon i.e. 30 Cents.
Meantime the Treasury has given many banks Billions of dollars of TARP funding to rebuild their capital bases. But these same banks are NOT expanding new lending perhaps because their capital bases will soon be eroded by "market to market" of the problem assets.
In rides the Treasury with the new idea of combining with private funds and buying up these assets and thereby driving the prices higher. (By the way the tax payer takes 95% of this new risk for 5-10% profit potential UGLY).
But the questions are now:
1) At what price will these new funds bid for the problem assets currently valued at say 30 cents. It's got to be a lot higher so will it be 50 or 60 or 70 cents? Who knows????
2) At what rate would these banks decided to sell these assets, which they feel confident they could hold to maturity and make back 80-85 cents? They presently are not selling at 30 cents, but would have to "realize" losses thru their current P&L account at likely less than 80 cents. 60 or 70 ?
3) What's the maximum price the new, semi private, funds are prepared to buy these problem assets? The private interests would want to lowest possible rate to maximise profit potential, while the Gvt would want a much higher price.

Overall IF the new funds buy the whole trillion dollars of assets I will be extremely surprised. What I expect could be the real outcome will be that the presence of real buyers, with trillion dollar deep pockets, will begin to energize the real market place which will push prices higher and higher towards a "real" mathematical valuation. IF this happens, with only a few hundreds of billions of dollars spent, the whole program will be considered a great success at "minimal" risk to the tax payer. Plus the banks "mark to market" problem will mostly go away. These banks will then have more than adequate capital funds to go out and make the new loans the Treasury and the Fed really want to happen thereby "freeing up" the stalled credit markets for borrowers.

The ultimate shell game and it might work!

The Murky Lewis-and-Thain Story

Thain's job was primarily to sell ML to BoA for the best price possible. Namely $29.00 per share. He achieved this, though she eems not to have apprised neither his BoD, nor shareholders of the near hiccup due to large ML write-downs.
Lewis' job was to acquire ML for an attractive price. Since the larger than expected ML losses caused a near rethink why did not Lewis reduce the price BoA would finally pay for ML? i.e. well below the $29.00 price? Such a last minute renegotiation of price would seem to have been logical and acceptable to both sides (what was ML's alternative??). It would also have meant that BoA would have needed slightly less funds from the Treasury surely? The only losers would have been ML shareholders, but it was their company which was bleeding money....

Here Comes a Consumer Killer

On the other hand the credit card companies are experiencing increasing rates of default (and thereby increasing their provisions each Quarter) in the current economic environment. So what should a prudent company do to stem such writedowns and losses? Are you suggesting that reduced lines of cedit and higher rates of interest are NOT the tools they should use?
The writer may be able to pay off his CC debt easily (which begs the question as to why he was running it anyway) for others the higher interest rates is a an incentive to begin to pay off such debt quicker than B4. It's NOT the job of CC companies to help the economy recover by increasing lending and increasing their losses. They are responsible to shareholders and BoDs to manage their business prudently.
Better money management by consumers will eventually improve our economy while we undergo a period of deleveraging until the economy can safely grow again.

Memo to Warren: AmEx Preferred at 15%, Warrants at $12

I believe I should expand on my comments and also ask the question:
What event would make the writer close out their short position in AXP? This considering that AXP will be profitable in 2008 and is expected to be profitable in 2009, even if delinquencies reach a high of near 9%... Bearing in mid the stock is down near 70% from its high. i.e. how much more play is there, realistically, on the downside? Needless to say the the short play has been terrifically profitable to-date. But can it continue far?

I don't mean to describe the AXP managers as in ANY way "faultless". They are "marketing" orientated and "do" that well and run a reasonable tight expense base (much more in line after their new 10% culling this Quarter). What they have NEVER been is good Liability managers and for decades they refused to accept that there was anything better than funding largely via the cheap and prior readilly available commercial paper(CP) market. Now that "mistake" has been realised () and they have become a BHC all of a sudden (should have heppend decaes ago), This gives them an immediate alternative to very expensive CP markets i.e. Fed windows.....
As a newly annointed BHC and recipient of $3.5B in TARP they are in what appears to be OK financial health (well compared with all those other financial service BHCs which have been making depressingly consistent Quarterly losses and writing down assets by the many 10s of billions). We will likely see some more domestic bank failures, closed by the FDIC and poor asserts removed. What better BHC to sweep in and takeover such failed BHC deposit base? And what better use of such money to fund still profitable AXP card receivable business with relatively inexpensive, stable funding. The Fed and the FDIC would surely be happy as it would remove AXP as a future heavy user of "window liquidity" and create a combined MUCH stronger business. Paradoxically by a poor (AXP) management decision, not to become a BHC much sooner (read decades ago) AXP might well "luck out" by sometime soon helping the Fed Gvt takeover such a BHC cheaply. Of course current shareholders probably don't think themselves lucky and one has to ask why management and directors only belatedly saw the light (BHC light). Hint get better stronger independent thinkers as directors. But that's an industry wide problem! It was also a reulatory failure in alllowing non bank companies to flourish, largely outside of Fed supervision for decades, yet morp into bank like lending.


A Liability based bank takeover would be long term good for AXP's business and surely erode much more downside risk to the AXP stock and raise investor and analysts confidence in the future prospects?

I wonder why, therefore, the writer and shorter of AXP stock continues to like take the shorting risk in AXP? They have done tremendously well thus far. When is time for a rethink?

I would also like to see a new generation of AXP management hired, from the outside, to counterbalance their existing marketing heavyweights at the Executive Management levels. Preferably person(s) with Liability management background and excellent dynamic risk management skills. This could place AXP back as a TOP financial services(BHC kind) leader for years to come. A much quicker potential fix, IMHO, than at many other financial services companies.

Disclosure : Long AXP

Memo to Warren: AmEx Preferred at 15%, Warrants at $12

Of course if meantime AXP buys a nice $20B domesic bank with a nice set of stable Liabilities...... One or two may naturally become available...

Why American Express Should Be Ignored

Ian's (not me) article is very short sighted and too simplistic IMHO. He ignores the fact that AXP is reserving 100% of ALL deliquencies each Quarter. He ignores the fact that AXP have a little over $4 Billion coming in over a 2 year period, from his favorite picks Visa and MasterCard. MORE than enough to top up those reserves and they also sold AEBL to Standard & Chartered 2nd Quarter 2008. Sure delinquencies are rising, but you have too look at how well reserved a company is and how well they can work through the current economic climate and how well positioned they will be for a better economy in 2009 and 2010. Then you have to consider how much the stock price has retreated from October 2007 and consider if this is an over reaction based upon the above. Seems UBS did this thinking and Ian did not....