wcinvest

Citi Out of TARP? Hardly

The government should have relaxed the restrictions against Citi but told them that the government doesn't plan to sell ANY common shares below 5 dollars or before 2012/2013.

CEO Robert Kelly tells employees he's staying at Bank of New York Mellon (BK) and not taking the top job at BofA (BAC). From a memo reviewed by WSJ: "I wanted you to know - and to hear from me directly - that I'm not leaving BNY Mellon and I look forward to working with all of you to make this great company even stronger."

Kelly appears to have had zero loyalty to Bank of New York. By all accounts, he stayed since BofA didn't offer him enough money. Other accounts are he wanted to move the company's headquarters to NY.

I am sure the top execs of Bank of New York are overcompensated like nearly every other financial executive in the United States of America.

The government should phase in a mandatory but high pay caps of anyone working at an FDIC insured institution that can borrow from money from the Fed cheaply. Individual salaries shouldn't be micromanaged on a large scale but a top salary/incentives of $10 million(either via salary or options) before taxes throughout the *entire industry* would convince the next generation of fat cat bankers to go into something more productive like manufacturing, engineering or industrial research if they want to become ridiculously wealthy. And make it only 10 employees at each FDIC insured bank can make that 10 million a year salary and that would set incentives for companies not to become too large!

The goal should be to reduce salaries at the executive level in the financial sectors by 50-75%.

The government should pursue policies that shrink the entire financial sector and that includes hedge funds, trading and private equity. In the 50's and 60's many more of the best minds in the country went into fields that benefitted society but now greed has taken over. The United States doesn't benefit that much from financial innovation. We need the best innovative minds to go into different sectors of the economy. The government can stop this but reworking the incentive structure at the top.

BofA is a well run bank but going forward they don't need a CEO making megabucks. They made 3 major mistakes. 1) Not managing their credit card business well compared to most of their competitors. Banks will lose money in standard credit cards in a severe recession but BofA's losses were higher on a percentage basis then their competitors. 2) Poorly time acquisitions without raising tons of capital to make sure the market had confidence in your ability to swallow the acquisitions. 3) Trusting that the government wouldn't change the rules after the government encouraged them to buy Merrill Lynch.

All of this being said, BofA is an incredibly well positioned bank going forward. They did buy good assets from a long term perspective and they have a solid track record of integrating acquisitions but Lewis clearly made mistakes over the past 2 years.

BofA's Dismal Mortgage-Modification Rate

More unfair BAC bashing. BAC is showing it's competence by only offering loan modifications when it's prudent. If those consumers don't follow-up with the appropriate paperwork *and* proof of income, it is not BofA's fault. BofA sent *another* letter recently telling those customers what documentation was missing.

JPM's rate is under 1% so BofA should not be isolated for its refusal to alter loans at unfair rates. It's also not BofA's fault if consumers don't follow-up. If the largest conversion rate is 6.4%, it shows that there are major issues with the program that both banks and consumers don't like.

If BofA had lots of loan mods, many people would be unfairly bashing them for taking advantage of a very small government subsidy even though BofA and other banks would have preferred no government program at all! And the subsidy is designed to actually help the government by keeping property taxes up.

Banks shouldn't be forced to do a *single* loan modification. If consumers are truly in terrible shape and have lost their jobs and have no safety net, they can default. It sucks but their credit can be rebuilt after 7 years.

Lastly, speculators on home prices destroyed the economy more then financial executives -- who also deserve their fair share of blame.... The best way to end the speculation on home prices permanently is to make ALL home loans recourse loans like they do in Canada and require 20% down under most circumstances. And then actually have the banks follow-up and go after the defaulters. Once folks saw the consequences of overpaying for homes, they would be much more prudent.

Banks deserve their share of the blame for the recession but so don't consumers, real estate agents/brokers and the government. Frugal Consumers should not be bailing out consumers who weren't prudent, often lied and bought houses simply because they were going up.

Other then it's charge card operations -- which are in the process of being cleaned up -- BofA is a very well run bank from an operational perspective. They got out of subprime early and had the financial strength to absorb Countrywide and Merrill Lynch while still earning a profit in 2008 and 2009 in all likelihood... Where BofA deserves blame is overpaying for some of its acquisitions including Merrill Lynch and not doing large enough capital raises before buying companies that were over leveraged. And for having the stupidity of actually trusting the government given that they don't have the political connections of a Goldman Sachs or JPM!

Why Bank of America Paid Back the Money

Of all the banks, BAC is clearly the one bank that got screwed by the government. The government did help all of the banks with some of their actions but they really did unfairly hurt a few banks.

After being encouraged by the government to buy Merrill or Lehman, shortly thereafter the government tells BofA that they need to raise more capital.

The stress tests treated the earnings power of BofA like Citigroup.

They also forced BofA to pay roughly 450 million to get out of a deal that was never signed or fully agreed to. This is extortion!

I question whether BankofAmerica should have completely paid back TARP. Would they have been better off long term if they reached some sort of agreement with the government in which they paid back $25 billion but only raised 5 billion in equity.

It really comes down to the financial benefits of not having the government restrictions and stigma of owing the government money versus dilution at fairly low stock prices.

It made sense for JPM to payback tarp since they didn't have to dilute their stock at a low price.

But BAC should have not wanted to sell additional shares unless the share price was above at least $25 or the economy was expected to get much worse in 2010.

Bernanke Needs to Go

The government has propped up the mortgage market for a long time and they were playing games with how they were handling the GSE's. They were treating them as government entities while trying to pretend that the government wouldn't back their bonds.

And the government has done lots of actions to actually hurt some of the commercial banks. Most of the really bad banks when it came to subprime etc. failed or were taken over by stronger players when they were about to fail. Changing the capital requirements in the middle of a recession despite the fact that a supposed zombie bank like Bank of America will end up having squeaked out a profit in 2008 and 2009. Instead of demanding that they raise capital when their stock prices where high, the government handed them billions and that was a mixed blessing for the banks to say the least since the terms of the loans for all practical purposes were changed.... It was actually a bad deal for most of them. Most major commercial banks would have survived if the government and regulators just did their job at enforcing capital requirements. Yes, there would have been dilution for stockholders but less then what has happened to a few banks.

I don't completely agree with the policies but low interest rates are response to any recession in the US nowadays. In 2001 the banks weren't in trouble but interest rates were still lowered quite a bit so the economy would pick back up after the dotcom bust.

And don't kid yourself... the government is most concerned about saving its tax revenue base and that is the main reason for low interest rates. If the rates were 2% right now, sure home prices would be moderately lower as well. Low home prices = low property taxes. S&P at 500 = even lower tax revenue. So, tax revenue would also been much lower and can the US afford that? The government has gotten *very fat* and used to high tax revenues. I wouldn't have minded the entire system being reset but the banks at their worst financial position were not in nearly bad shape as government entitlement programs and pension obligations! Without MBS being bought buy Bernanke, the banks would have been hurt but those affects may have been offset by an even larger spread on mortgages.

I don't agree with the bailouts of AIG, GM, Chrysler and the GSE's but Bernanke and Paulson/Geithner were correct in deciding to take decisive action to make sure there wasn't a run on the banks. JMP, Wells Fargo, BofA, Citigroup all failing would have led to everyone taking their money out of their banks. Nationalize Citigroup and literally everyone puts their cash in the Citigroup. I don't agree with some of their decisive actions but overall they did a reasonable job responding to the crisis. The government deserves tons of blame for doing little to prevent a major crisis in the first place.

Why Bank of America Paid Back the Money

If practical, I wish BAC had not paid back TARP and simply stated that they will pay back TARP over time through earnings and possible future capital raises..if and only if the stock price more closely reflects its long term value. The compensation restrictions are a poor excuse for paying back TARP. I would have been more pleased with simply paying back 50% of TARP since that would have lowered media scrutiny and not led to much dilution.

Running Bank of America as CEO should actually not be that difficult. It should not take a genius considering Bank of America should be done acquiring companies for a while.

But, lowering the government and media scrutiny from the TARP payments will certainly have some benefits but I'm not convinced they outweigh the dilution in the long term. Bank of America needs to protect their brand as much as possible since they don't want to lose business to JP Morgan Chase, Morgan Stanley and Goldman Sachs.

Bank of America: Is This Health or Financial Botox?

Unless I am mistaken, in the 3rd quarter Bank of America(BAC) would have made a profit or a much smaller loss if they didn't have to write-up their debt. The fact that BAC debt instruments that they could technically buy back went up in value hurt their income statement but it was a very positive sign that the market is finally recognizing that Bank of America will be one of the winners of the financial crisis and their debt is started to be rated more appropriately. Bank of America will end up with a profit for both 2008 and 2009. If they can make a proft -- albeit small -- in this severe recession, it stands to reason the profits will be very substantial moving forward.

You are right that the second quarter was only so profitable based upon the asset sales but Bank of America did that in order to raise capital for the stress tests and not to mislead investors with a profit for the quarter. They still have other items on its balance sheet that it could sell at a nice profit. Additional shares of CCB, Blackrock etc.

BAC will probably suffer a moderate paper loss in the next quarter due to paying back TARP or a small gain but after that the profits should increase moderately if the economy just stays at its current level. But, those profis would be of higher quality since they won't come from asset sales. If the economy get better as expected, then Bank of America will be one of the biggest beneficiaries.

Loans are down right now primarily since demand from high quality sources is down.

How Banks Actually Make More from Bad Credit

Credit cards are *unsecured* loans so banks would be absolutely nuts to lower the interest rate down to 6% for too many customers in the hope many more people wouldn't default. The 29.9% rate simply reflects the risks in this environment of unsecured lending. With high unemployment, banks are forced to charge higher interest rates unless they want to lose they want to suffer massive losses.

I do think the government's protections for consumers around credit cards are somewhat reasonable, however.

A very well run corporation borrows at 6% and obviously interest rates will be going higher..

The 29.9% interest rate for unsecured charge card debt is there to make up for all of the people that default on their charge card debt. Charge cards will not be profitable for many banks in 2009/2010.

Charge cards balances should only be carried in a small set of circumstances such as:

1) You don't have food, shelter or health care for your family....Notice discretionary items like vacations, nice clothes, cosmetic surgery or electronic gizmos are not included.
2) You are starting/growing a business and you are confident that your business will make it but need additional funds... they aren't available else where such as SBA so you decide to put bills on the credit card. This is a huge gamble but for some people it has funded their small businesses when no other sources of credit where available.

Fair Value of Bank of America: A Flaw in Paulson's Calculation?

The stress tests have clearly been proven wrong and overly pessimistic in their loan loss assumptions for a given rate of unemployment. Ken Lewis and BAC were 100% correct for strongly disputing the loan loss assumptions of the stress tests in the case of BAC. While the unemployment figure of the stress tests were reasonable and if anything low possibly so the American public wouldn't be scared, the other numbers were a very conservative somewhat doomsday farce that have proven to be wrong. Roubini has been proven wrong. He stated that many of the big banks would be out of business just about now from staggering loan losses. All except for Citigroup will be profitable for the year.

The high unemployment rate has been reached and BAC is STILL going to be profitable for 2009 after being profitable for 2008. And ALL analysts covering BAC expect it to do at least OK in 2010.

BAC should stick its middle finger up to the government and state that they will not pay back TARP by raising common or even preferred equity! Instead, simply pay it back from earnings in 2010 and 2011... By the second half of 2010, Bank regulators will come to their senses and realizes that BAC can pay back a substantial portion since they are overcapitalized and the stress tests were really for a truly nightmare scenario which obviously hasn't happened now that the country is out of the recession.

From the government, BAC got zero credit for their earnings power and their ability to quickly reduce costs after acquisitions.

There is a very good reason for sound regulation and limits to leverage but on the other hand, I don't think a single bank should trust the government or even the Fed as that entity becomes politicized.

Google Wows, But Bing's Cashback Is Even Better

I have mostly used Google and occasionally Yahoo over the last 8+ years for searching but now I'm using Bing since overall I think Bing is now the best big search engine. I find the accuracy of bing's search results nearly as good as google and many times actually much better. With its pop up previews, Bing certainly has a much better display/navigation of the results.

This single feature allows me to operate so much faster now that I've adopted taking advantage of it. I can literally often research subject 5x faster with Bing then Google since I can put my mouse pointer on the right side of the search results and have a preview with a great deal of information appear. This feature is a boon to users since you can quickly glance at which websites to go to. Often times, I am searching for hard to find information and the first results in Google, Yahoo, Bing etc. are not the most relevant but Bing allows me to browse through many different web pages in a matter of seconds without leaving their main search page. Sooner or later, Google will have to add this feature but until they do, I will use Bing search as my primary search engine.

Both the Bing and Google search engines are better then Yahoo's current search engine which still has my favorite portal for non search content. Yahoo will benefit when the Bing search engine replaces their own engine.

Sometimes it makes sense to avoid all of the major search engines and just check out wikipedia.

I use many different sources when searching for the best deal but I don't use Google's product search engine for that since it just doesn't offer any value to me at all. I'd much rather have the cashback then let Google have it. If you just want an overview of pricing, for most items I would advice checking out pricegrabber first and foremost. And then Craigslist for your area if you are in a major city, Ebay and Amazon(new and used items).

To really research the best deals, checkout sites like Slickdeals.net, fatwallet etc. Fatwallet offers cashback from many different stores but Bing offers much more cashback in percentage terms so its a nobrainer to use Bing cashback when it's available.

Even if you don't like the Bing search engine for general web searches, Bing's cashback is tremendous for any bargain hunter and well worth signing up for. I have already saved over $300 using Bing cash back and the $300 savings is over truly great prices elsewhere and not inflated list prices.

BofA (BAC) CEO candidate Brian Moynihan plans to tell Congress tomorrow that the Merrill Lynch purchase "turned out to be a good deal" for everyone involved: shareholders, customers and the government.

The deal was good for customers, the government and Merill shareholders! Notice he didn't say BAC shareholders... Actually, it was also a good deal for taxpayers since it prevented another Lehman and in the long run taxpayers should benefit from this deal. BAC is already prepared to write a check to pay back at least half of TARP.

There is merit to those advocating that *everything* should be allowed to blow-up last year since that would have been a cleaning of the system that is long overdue. Government has gotten way too big with unions having too much power and policians/lobbyist stealing left and right. CEOs and execs in most cases are ridiculously overpaid and the huge deficit spending in the private and public sectors has made this possible... If all of this financial engineering completely blew-up the system, shareholders would wake-up and not let executives take advantage of them so easily. The media is greatly to blame for excess pay since by paying so much attention to these CEOs, it over-hypes their contributions. 95% of CEOs are not worthy of their pay.

In my estimation, the government screwed BAC more then they helped them and other financial institutions out by the Fed buying a bunch of agency debt etc.. BAC was penalized for not being politically connected like Goldman Sach. The Merrill deal was bad for BAC short and intermediate term shareholders since in all likelihood without this deal, BAC would not have had to raise money on such unfavorable terms.

BAC management had an obligation to intermediate term shareholders and they made a risky move when the upside isn't that great thanks to the dilution this past year. Yes, the deal in all likelihood will work out fairly well in the end but BAC would have been better off with more savvy management that didn't trust the government so much and only bought out Merrill if the price was 50-80% lower and after a capital raise.

Moynihan should not be hired unless he admits his major mistakes and offers to get no additional pay/options etc for taking over the CEO job. The Wells Fargo, JP Morgan Chase, BAC CEO positions should not be a ridiculously compensated position since 3/4 of their business should be fairly stable and easy to manage from a CEO perspective....assuming proper regulations are in place.

Sound Lending Practices in One Simple Sentence

I would advise different solutions so that the country still has enough lending to have a reasonable economy. Nevertheless, lending standards do need to get tougher as a part of official government policy and not simply from weeding out the bad actors from them failing/being bought out by stronger financial institutions.

Some things that should get done.
1) At least 10% down before *anyone* can buy a house. Have most homes require at least 20% down. 10% down should be reserved for folks in special circumstances such as the military.
2) Mandate that banks and states to only offer recourse home loans. Canada is doing much better in part since they have recourse loans. Yes, if someone turns in their keys, the banks should be able to go after their future wages for the next 10 years or so and all of their current assets(jewelry, stocks, bonds, clothing) beyond 25k. They should even be allowed to go after parts of their 401k accounts if that account has more then let's say 500k in it. This is needed to fight speculation and have folks realize that society is not going to pay for their gamble that home prices will constantly increase more then inflation. The banks were not the biggest winners from the housing boom, it really was the speculators that got out in time and sold their homes to the next round of speculators. Laws must be put in place to discourage speculating on homes.
3) Real Estate agents/mortgage brokers/consumers/bank... who lie in the process of someone buying a home should go to jail and lose their licenses to operate in the industry.
4) Interest only/no documentation home loans should be outlawed. All arm loans should require at least 25% down
5) Downpayments on second homes should be at a minimum 25%. A third home should require 30% down. A fourth home should require 35% down. I know of several speculators that on 125k salaries levered up and bought 6 or 7 homes. Some of them got out in time; others didn't. But government policy should make sure that useless speculation like this is minimized since it's not in the national interest to have booms and busts in the housing sector.
6) Banks should be allowed to be involved with trading but the capital requirements for that side of the business should be fairly draconian and those employees should be subject to clawbacks.
7) The government is doing a fairly well balanced approach to cleaning up credit cards and checking accounts... Credit cards are a necessary evil since many businesses have started off from this sort of unsecured lending. Yes, many other have failed as well.


The solution to this problem is fairly simple and doesn't have to be draconian.


The US could learn a lot from Canada and other countries that didn't suffer major problems.

The poster who pointed out that some sort of independent agency should determine if the US is in equilibrium or not... I didn't know *when* it would blow up but it was obvious to me that the housing market and dotcom markets would blow up.

One thing the US government could do is implement a "trading tax" to end a good deal of speculation in the markets. The markets should be about efficiently allocating capital and not a bunch of short term bets. This would have the added benefit of actually making it easier to spot fraud. If not many people are left doing short term trades then it is even easier to identify insider trading and market manipulation.

What About Citigroup and BofA's Billions in Deferred Tax Assets?

BAC will end up having turned a profit in 2009 , 2008, 2007, 2006, 2005,2004, 2003 etc. If they can make modest profits in a fairly severe recession on an annual basis while only having realized less then half of the eventual cost saves from the Merrill and Countrywide acquisitions, they will certainly use their tax credits by 2028! Realistically, the tax credits will be used up before Obama's first term ends.

This past quarter BAC only suffered a modest loss instead of a modest profit because their debt was marked up -- which is obviously a good thing overall -- and they paid an extortion payment of 400+ million to the government to get out of a contract that they never signed and in my estimation clearly didn't benefit from. If the government was concerned with BAC's solvency or earnings power going forward, they should never have played matchmaker and ok'd the Merrill deal. BAC's earnings in Q1 this year were overstated due to an accounting quirk but they were understated in Q3 by a similar amount.

Maybe BAC hesitated on agreeing to the assets to be covered under that tentative wrap agreement since they realized the government and especially Congress was screwing them and scapegoating a company that didn't have much at all to do with the subprime residential mortgage crisis besides trying to clean part of it up by buying Countrywide..

Simply put they should not be put in the same group as Citigroup. Citigroup had problems when the economy was sound while BAC clearly didn't. If BAC wasn't unfairly forced to raise capital via the stress tests, folks would realize that Lewis made two acquisitions that would have very significantly on an EPS basis boosted profits going forwarded. Instead, the improved EPS will be more modest because of substantial dilution and increased regulation...a good portion of which is actually fair.

BAC's biggest mistake was trusting government officials and regulators. Why won't regulators acknowledge that BAC was actually right when they said they would be do *much better* then the government projected even under the more severe stress scenario. Acknowledge your mistake by letting them pay back at least half of TARP. While the recession has technically ended... they unemployment rate pretty much reached the severe stress scenario but BAC is still on track for a profit in 2009.

Roubini was wrong. He stated the big banks -- plural -- would implode by now. They haven't. He has been proven wrong so far and not just because the banks raised capital after the stress tests.

The government's stupid stress tests didn't acknowledge that BAC is a money making machine capable of burning through a good deal of bad loans.

Yes, The TARP Is Leaking

BAC has been pretty much unfairly portrayed by the media and many of the bloggers. While it wasn't a good deal for long term shareholders, BAC stabilized Countrywide and Merill. And instead of being given credit for helping clean up the crisis, they have been bashed by too many in the media and government. BAC exited the subprime housing market in 2001 so they weren't that responsible for a good part of the crisis. Countrywide was obviously responsible but BAC has helped clean up that mess.

Many months ago, I stated that the government will end up making money on most of the tarp investments in the large banks and even investment banks.

The real cash drains in which the government and taxpayers will lose billions are Fanny Mae, Freddie Mac and AIG. And the auto companies. The taxpayers and bondholders got bent over by the auto company unions. AIG should never have been saved. 80% of the attention focused on BAC should be on these other entities!

I can see why the Bush/Obama administrations saved the Fanny and Freddie because of the "implicit guarantee" of their debt but bondholders in these institutions should have shared some of the pain since an "implicit guarantee" isn't a full guarantee.

The government should allow BAC to at least pay back half of the tarp money with no strings attached since BAC management by Ken Lewis so far has proven to be correct and the government stress tests and Roubini has proven to be wrong. Unemployment has reached the dire stress test scenario of around 10% but BAC is still expected to make a profit in 2009. And this is after the government extorted $400+ million to get out of a tentative agreement that was never signed. Given the government's -- the US Congress -- behavior toward BAC, I don't blame BAC management for realizing that they shouldn't sign the Merrill guarantee since the government can't be trusted.

BofA Testing the Legal Limits

The US government is completely out of control if it considers an annual fee an interest charge. As long as consumers have advance warning, the banks should be able to chrarge annual fees. Annual fees are a charge with lots of transparency. If customers don't feel that their card gives them enough value for the annual fee, they can close out the account. I have done so myself in the past and it is only a 5 minute phone call.

Bank of America is in a test phase of adding annual fees to a very small portion of their accounts. I don't blame BAC for raising annual fees on customers but if they do it too much and in an unjustiable fashion, they will lose customers. Credit card debt is unsecured debt and not many companies stay in a line of business to lose money.

The truth of the matter is someone needs to pay for the people who end up defaulting on their credit cards. If the government makes the rules too onerous, BofA, Capital One, American Express, Discover, Chase etc. will dramatically and understandably cut back on charge card credit. If the government then forces them to offer low interest rate cards to bad credit risks, then some of these companies will just exit the market if they can't sell off their credit card operations.

If BAC's annual fees are too outlandish for the services/awards rendered, their customers can go to a different competition. Yes, the banks did some bad things but the primary culprits of future taxpayer losses are 1) AIG 2) Fanny Mae 3) Freddie Mac 4) GM. The government should keep this in mind when they write legislation.

High fees such as $99 make sense for cards that truly pay excellent rewards. I would look elsewhere for a different card but would consider paying even $99 under some circumstances.

I am all for reasonable consumer protections like not allowing Banks to reorder transactions to increase overdraft fees. But since credit card debt is unsecured, the government should be very careful with that legislation; otherwise charge card credit will contract at even a faster pace.