M-P

Cramer's Mad Money - Obama's Revenge (3/5/09)

Cramer is like anyone who talks a lot (forecasts, asserts, etc.) - he will be right some of the time and wrong on others. The hit rate and materiality are important. My big issue w/ the administration is that they are trying to do too much at the same time ... health care, taxes, capital injections, etc. When the world is unpredictable and in a state of change, capital sits on the sidelines. In this environment, predictability is often more important that the perfect policy, which doesn't exist anyway. Today's problems were yesterday's solutions.

Nationalizing the U.S. Banking Sector: There's No Choice

The real issue here, as others have pointed out, is that we really don't want to feel the pain if market forces prevail. The banks made some highly risky decisions and are now paying the price. With reward comes risk - look at the bonuses the executives made from 2004-2007. Tens of millions for making risky, correlated bets on opaque debt instruments and "insurance" products.

Look at the GDP with and without Mortgage Equity Withdrawls from 2004-2007. If we didn't have MEW's, we were growing at 1%. We were living an inflated lie that was a concoction of low rates, negative savings, and materialism. There's only so much you can do about a bad hangover.

Unintended Consequences of Four Government Policies

Many of these consequences have been debated ad nauseum ... the salary cap piece is political symbolism - most have been grandfathered and the main part of total comp has not been salary ... the best and the brightest comment is amusing, if not inane. If the salaries over the last few years at GS, Countrywide, BAC, ML, etc., etc., are directly related to the "talent" that was/is there, please define talent for me - get real specific. A talent for malfeasance and literally mortgaging one's future on specious bets and vegas-style risks is not "talent" in my mind. The best and brightest and the comp correlation is weak at best - think politics, business, sports, etc. Also, the bottom line on the mark to market is the underlying asset - it was often too risky, too opaque, and too hard to value. The mark is part of the issue in illiquid, hard to value markets (mark to model markets), but the other issue is the asset itself. Risky decisions have consequences - in the mark case, it's more immediate - hopefully, the bank's, etc. decisions are within a portfolio of decisions that balance risk and prudence. The mark issue seems like a false dilemma.

Compensation Caps Will Drive Away Talent? To Where?

For those who think the "talent" will go elsewhere, please define talent for me - if "talent" can't perform, what is it ... good luck going to other parts of the world - managing the cross-region regs, the legal diffs, the work councils - they'll be back to the States. Easy to think there are no friction costs - that's a fallacy. Again, I'm all for paying for "Alpha" performance vis-a-vis the industry/market.

Thain's Undoing: Thinking He's Worth It

Bottom line, smarts are not enough. There are plenty of high IQ people who make dumb decisions (at some point). In actuality, the higher your IQ - in general - the more likely you are to having a hardening of the attitudes - there is a relatively strong correlation with one's IQ and their willingness to incorporate contradictory opionions. What is means to be "smart" is another question. It's one thing to spend your own money on whatever you want - I don't really care - but when you spend taxpayer or shareholder money on excess, it calls attention. What makes you great can also be your downfall - many executives have hubris, ego and confidence. Like most things, some is good, but more is not necessarily better. Dose-response issue.

Banking Is Tanking Worse Than Ever

There a some similiarities to the Great D, at least in the peak to trough. However, as others have pointed out, there are some significant differences as well. We have quite a few more stabilizers now than before. The banking issue is basic financial analysis - how will they re-create their revenue streams from their previous model - high leverage, risky bets, equity lines, derivatives, etc. The top lines will be challenged and they will need to cut more people. They need to get their cost structures in line with their revenue, which will be challenged for a while. The question for bank stocks - as for any stock - is where is the catalyst, competitive advantage, and cash flow? I just don't see it in the near to medium term.

John Thain Called Out by the President

Basically, Thain is emblematic of the rotten corpse. He at first asked for his $10m bonus - didn't see any issue with it - and then backed down given the public outcry. He then pays out bonuses early so he can get in under the BAC wire. I have no issue with paying for performance, but basically, ML, C, and others should, by all intents and purposes, be bankrupt. They gambled on some risky bets and lost. See long term capital management for another example. If you start perverting the risk-reward curve (more risk = potentially more return), then you might as well stop trying to predict, because the relationship breaks down.

Obama May Have No Choice but to Mimic Bush's Bank Bailouts

Hard to disagree w/ this anlysis on the face. Everyone seems to be making it up as they go along. The major problem is the lack of transparency so it's hard to know what's "worked" and what hasn't. It's like driving with your eyes closed - you'll never really know the best route - can't replicate it. The banks took undue risk, a lot of people made poor choices, and the taxpayers are picking up the pieces. There is no sidestepping the fact that risk works on both sides of the coin - more risk = higher upside, but also higher downside. It's the classic - private gains, public losses scenario, which is hard to swallow.

Merrill Lynch Datapoint of the Day

I'm somewhat ambivalent on BAC. I'm a long time customer and I now own their stock - individually and in funds. At this point, I think they are "too big to fail." The government (taxpayers) has back-stopped them and has an escalation of commitment in terms of sunk costs. I hope that BAC really focuses on integration - back and front office - and leveraging all the assets they have. I would prune back all the under-performing assets and really try to have the core engine running well. The Citi supermarket model is tough to manage. I'm not sure on Lewis. He will be in the spotlight for the next few months - at a min - so we'll see. I have a feeling that BAC will be doing some loan mods and forgiveness in the near future (cf. to Citi and the govt ownership and control), which will stir up a number of lawsuits. We'll see how BAC handles it.

The Danger in Financial Stocks in 2009

This is a good summary. It's hard to disagree with points made. Many of the banks will have challenges in maintaining their revenue streams - more charge offs on CC's, less mortgages/loans being done, and overall margin-rich fee revenue down - along with asset write-downs/offs. All of us have to question to ability of the banks to understand their own risk (e.g., level 2 and 3 assets). I'm not sure they do understand their book - their underwriting standards across assets are in question. Time will tell if the big banks can exploit the synergies with recent acquisitions. The next year is likely to be bumpy and who knows how the government intervention will turn out. Lots of uncertainty - more cash sitting on the sidelines.

Year-End Buyouts: Big Challenges for the Big Banks

It's interesting how Lewis has often blamed his failings on anything but himself and his actions, which I've written about in previous posts. I'd like to see a more "mature" management style and personal ownership. I'm still amazed at how many emails and letters I get from BAC that demonstrate how siloed their customer database is and how fractured their marketing efforts are. I'll be very interested to see if Lewis can exploit his assets and up-sell and cross-sell the BAC customer base, which has grown significantly. We all own BAC at this point and I would like to see them be successful, but I don't want to see the taxpayer throw good money after bad. The too big to fail model is a little scary and puts all of us at some risk.

Tough Times for Card Companies - Barron's

If I recollect from another SA piece, BAC and JPM had over 20% of their revenue come from the CC business, which is definitely material. The revenue streams of many of the banks is in jeopardy in the near to medium term. CC fees are almost pure margin and the charge-offs have been manageable ... I don't see job growth increasing at a fast rate even with a job works program, which will take some time to spool up. Also, the wage delta between the jobs lost and new jobs is likely to be significant - add-in the a higher savings rate and deleveraging and consumer spending should be down by $500B to $1T, if not more. All said, without strong jobs and wage growth, I see the CC issue only becoming worse and bank earnings under serious pressure.

Banking's Ins and Outs: $188 Billion from Bailout, $1.6 Billion to Execs

I believe in capitalism and the implied pay for performance contract, but I have trouble with the bank execs receiving this kind of $ when they are being subsidized by the taxpayer because they took undue risk. Why don't we look at a clawback provision whereby we take back $ that was ill-gotten via reckless leverage and risk. Unfortunately, the seeds of failure were planted a number of years ago and we are now cleaning up the mess. Why do we reward malfeasance? Why do we subsidize recklessness? Why do we pay for incompetence?

Bank of America: Optimism Is Unwarranted

I like this piece as I've been looking at BAC for months now ... the difference between this piece and others is that the author has some basis for his recommendation and opinion - and the basis can be verfied and is objective. Given the risk-adjusted value of their recent acquisitions, it appears that BAC paid too much for Countrywide and ML. The amount of Level 3 assets - mark to model assets - are troubling. When times are tough, most banks go down to their tangible book value. For BAC, that's around 10. However, given the Level 3 asset exposure, you could discount the book by 20 to 30%. They are probably a great buy - with a year or two time horizon - at 8 or so. In the long term, I think they will do well and go back to the 20's, 30's, and beyond. The up-sell and cross-sell potential is signficant - if they can figure how to have a single view of the customer, BAC will be dangerous. The biggest issues for them going forward - in the near term - are capping their exposures and learning to integrate and execute against the assets and entities they've acquired. I'd be watching customer retention, products per customer (wallet share), and exposures.

Ken Lewis on Bank Accounting: Sensible Talk from a Surprising Source

Per other comments that Lewis has made, he often seems to be blaming things external to his firm and himself for BAC's issues. I'm not sure I find this comforting (cf. the language of Buffett in his annual reports). Bottom line, the mark to market is an issue because he bought highly risky assets that the firm didn't understand, with high levels of correlated risk. The reserve piece is not so atypical for a firm that is significantly impacted by the business cycle. The issue is to assume we will have "fat tails" and a black swan will happen. All reserves should have a contingency for those improbable events. Also, statements at one point in time are meaningless - let's look at the behavior and trail of statements to understand the real theme and message. A more holistic perspective and evidentiary base is needed.