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Zacks Analyst Blog Highlights: American Express Co., Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc. and Capital One Financial Corp. – Press Releases

Zacks Market Commentaries — Wed, 18 Nov 2009 13:15:18 +0000

For Immediate Release

Chicago, IL – November 18, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: American Express Co. (AXP), Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Capital One Financial Corp. (COF).

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Here are highlights from Tuesday’s Analyst Blog:

Mixed News for Credit Card Issuers

Consumers remain under stress as a result of the weakness in the housing market, combined with job losses. Recently, Fitch has also expressed its concern about the credit card issuers in the U.S. Fitch expects U.S. credit card issuers’ earnings to remain challenged over the near term as a result of soaring unemployment, bankruptcies and losses.

The default rate (or charge-off rate) has improved in October from the prior month. For American Express Co. (AXP) it was down 60 basis points (bps) to 7.8%, while for Bank of America Corp. (BAC) the rate dropped 103 bps to 13.22% in October. The situation was the same for JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Capital One Financial Corp. (COF). JPMorgan’s default rate declined 10 bps to 8.02%, Citigroup’s defaults fell 136 bps to 8.79% and Capital One's charge-off rate decreased 73 bps to 9.04%.

However, we are concerned about the rise in delinquencies which increased 34 basis points to 5.72% in October at Capital One, 26 bps to 4.95% at JPMorgan and 6 bps to 7.59% at Bank of America. However, delinquencies remain unchanged at American Express.

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Mixed News for Credit Card Issuers – Analyst Blog

Zacks Market Commentaries — Tue, 17 Nov 2009 17:53:45 +0000

U.S. credit card issuers have reported a drop in the default rate for October, though delinquencies are rising as a result of continuing stress on consumers. While a decrease in the default rate reflects a decline in late payments in the first half of the year, the increase in delinquencies is bad news for the sector as it implies that the companies could experience more charge-offs in the coming quarters.

Consumers remain under stress as a result of the weakness in the housing market, combined with job losses. Recently, Fitch has also expressed its concern about the credit card issuers in the U.S. Fitch expects U.S. credit card issuers’ earnings to remain challenged over the near term as a result of soaring unemployment, bankruptcies and losses.

The default rate (or charge-off rate) has improved in October from the prior month. For American Express Co. (AXP) it was down 60 basis points (bps) to 7.8%, while for Bank of America Corp. (BAC) the rate dropped 103 bps to 13.22% in October. The situation was the same for JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Capital One Financial Corp. (COF). JPMorgan’s default rate declined 10 bps to 8.02%, Citigroup’s defaults fell 136 bps to 8.79% and Capital One's charge-off rate decreased 73 bps to 9.04%.

However, we are concerned about the rise in delinquencies which increased 34 basis points to 5.72% in October at Capital One, 26 bps to 4.95% at JPMorgan and 6 bps to 7.59% at Bank of America. However, delinquencies remain unchanged at American Express.

Credit card defaults and delinquencies are highly correlated with the unemployment rate. Hence, with the jump of U.S. unemployment over 10%, credit card issuers are continuing to face severe losses. The unemployment rate increased 40 bps to touch 10.2% in October. It is also expected that the rate will remain above 10% through 2010. Consequently, consumers are expected to increasingly fall behind on payments and hence, the losses for credit card issuers could worsen further.

Additionally, the Credit Card Accountability, Responsibility and Disclosure law signed in May 2009 to protect consumers from sudden rate hikes, hidden fees and other deceptive practices could have a significant negative impact on the credit card issuers' earnings.
Read the full analyst report on "AXP"
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Zimmer to Sell Notes – Analyst Blog

Zacks Market Commentaries — Fri, 13 Nov 2009 19:18:11 +0000

Zimmer Holdings, Inc. (ZMH) recently decided to raise $1 billion by selling its senior unsecured notes in an underwritten public offering in two separate transactions. The transactions involve selling $500.0 million of 4.625% notes due 2019 and $500.0 million of 5.75% notes due 2039. The public offering is expected to close on Nov 17, 2009.

Zimmer has already filed an automatic shelf registration statement on Form S-3 with the Securities and Exchange Commission for the public offer. Citigroup Global Markets Inc., a division of Citigroup, Inc. (C); Banc of America Securities LLC, a division of Bank of America Corp. (BAC); and J.P. Morgan Securities Inc., a division of JPMorgan Chase & Co. (JPM) are the active joint book-running managers of the offering. The offer will be made to the public through the prospectus.

The 2019 notes yield 118 basis points above the Treasury benchmark and the 2039 notes yield 135 basis points above the Treasury benchmark. Zimmer will use the net proceeds of the offering to repay its outstanding credit balance under its credit facility and for general corporate purposes like the company’s stock repurchase program. Zimmer already had cash and cash equivalents of roughly $440 million at the end of the third quarter of 2009.

Zimmer is a global leader in the design, development, manufacture, and marketing of reconstructive implants, and trauma and related orthopedic surgical products. The company competes in the orthopedic market with players like Stryker Corp. (SYK), Wright Medical (WMGI), and Smith & Nephew (SNN).
Read the full analyst report on "ZMH"
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Read the full analyst report on "JPM"
Read the full analyst report on "SYK"
Read the full analyst report on "WMGI"
Read the full analyst report on "SNN"
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Stock Market News for November 9, 2009 – Market News

Zacks Market Commentaries — Mon, 09 Nov 2009 14:07:48 +0000

U.S. stocks posted modest gains Friday even as a surprisingly weak jobs report failed to deter investors from taking a broader view that the economy is improving. Analysts’ upgrade of General Electric and Amazon.com helped the market keep its head above water as many on the Street averred the worst for the labor market was over. Although the unemployment rate – at its highest level in 26 years – aggravated concerns about consumer spending, it nevertheless reassured some investors that the Federal Reserve will keep interest rates near historically low levels in the near future.

On Friday, the Dow Jones industrial average rose 17.46 points, or 0.2%, to 10,023.42 and the Standard & Poor's 500 index added 2.67 points, or 0.3%, to 1,069.30. The Nasdaq composite index advanced 7.12 points, or 0.3%, to 2,112.44. For the week, the Dow and the S&P 500 index advanced 3.2%, while the Nasdaq rose 3.3%.

On the New York Stock Exchange, 1.1 billion shares exchanged hands Friday as advancing shares narrowly edged ahead of those that declined in price. Surprisingly, as investors' apprehension in front of the key economic and earnings data grew, the CBOE volatility index declined over 20%, closing at 24.19 on Friday.

Analyst upgrades helped a number of stocks Friday. Analysts at Bernstein raised their ratings on both General Electric (NYSE:GE) and Amazon.com Inc. (NASDAQ:AMZN) to “outperform," sending shares in those companies up 6.2% and 4.6%, respectively, and helping give major averages a lift. General Electric, which also received a rating upgrade from Oppenheimer, was the leading gainer in the Dow average as analysts saw reduced risks to its finance unit. Lowe’s Cos (NYSE:LOW) jumped 4.3% and Home Depot (NYSE:HD) added 1.8% after analysts at Bank of America Corp. (NYSE:BAC) raised the two companies to “buy" from “underperform."

The coming week, though devoid of any substantial economic event, does contain a number of corporate posts that are likely to give an indication about the health of the consumer as markets enter the key holiday season. Disney (NYSE:DIS) and Wal-Mart (NYSE:WMT) report their numbers on Thursday. Wal-Mart (NYSE:WMT), which has not been posting monthly comparable sales reports, will be watched closely for how the retailer fared during the third quarter. Kohl's (NYSE:KSS) also reports on Thursday, with Macy's (NYSE:M) numbers expected on Wednesday and JC Penney's (NYSE:JCP) on Friday. Most analysts expect favorable results, as shoppers remain on a bargain hunting spree. Setting the fire to the latest advance in stocks was the estimate-topping numbers from 80% of the S&P500 firms that have so far reported their numbers.

This morning’s futures suggest stocks are likely to open with gains of at least 1%. The healthcare package passed the House by the narrowest of margins, with much wrangling still expected before any decision is reached within the Senate. The G-20 meeting of Finance Ministers promised extended government stimulus measures. Meanwhile, the Moody's Investor Services (NYSE:MCO) upgraded its rating on China and Hong Kong to positive from stable.

Zacks Investment Research

Stock Market News for October 22, 2009 – Market News

Zacks Market Commentaries — Thu, 22 Oct 2009 14:28:44 +0000

Weak global economic conditions and a downgrade of Well Fargo by prominent banking analyst Richard Bove spooked investors even as Morgan Stanley and Yahoo reported better-than-expected earnings. The Dow Jones industrial average slipped below the 10,000 level yesterday as markets pulled back in the final hour of trading.

Bove of Rochdale Securities said earnings at Well Fargo (NYSE:WFC) were helped by mortgage-servicing fees rather than improving business trends, and trimmed his rating on the bank to “sell" from “hold." However, Well Fargo and Morgan Stanley (NYSE:MS), which reported its first quarterly profit in a year, were behind the market’s strength earlier in the session. Bove also cited accelerating loan losses at the firm for the downgrade. After Bove’s cut, FBR slashed its rating on the firm to "underperform," questioning Well Fargo's earnings quality.

The Dow Jones industrial average fell below the psychologically important 10,000 level, declining 92.12 points, or 0.9%, to close at 9949.36. Earlier in the session, the index had risen to as high as 10,119.47. The broader S&P 500 index declined 9.66 points, or 0.9%, to 1081.40 and the tech-laden Nasdaq was off 12.74 points, or 0.6%, to 2150.73. The Treasury’s 10-year note fell 12/32, to 101 31/32. The yield rose to 3.39%, from 3.34% late Tuesday.

Meanwhile, China said its economy grew 8.9% during the third quarter, up from 7.9% in the second quarter and 6.1% in the first.

Eight of the ten S&P500 sectors finished lower, led by declines in consumer services (-1.8%), financials (-1.8%), health care (-1.4%) and industrials (-0.9%). Utilities remained flat, and telecommunications edged up 0.01%. Selling was broad-based. The weakness in financial sector saw shares of JPMorgan Chase & Co. (NYSE:JPM), Bank of America Corp. (NYSE:BAC) and Goldman Sachs Group Inc. (NYSE:GS) each declining at least 2.9%. Merck & Co. (NYSE:MRK) led the Dow average lower, declining 3.1% to $32.68.

The greenback fell to fresh 12-month lows against a basket of currencies, falling through $1.50 against the euro for the first time in 14 months. The greenback's fall sent crude prices higher, with prices touching an intraday high of $82 yesterday, its highest since October 9, 2008. Government inventory figures showed a large drawdown in US gasoline stockpiles to 2.3 million barrels last week - more than the 800,000 anticipated. Price cuts from Wal-Mart (NYSE:WMT) also dampened holiday sales hopes. Wal-Mart declined 2.1% to $50.63.

Today's calendar covers another heavy dose of corporate reports including before-the-open releases from: 3M (NYSE:MMM), Black & Decker (NYSE:BDK), Bristol-Myers Squibb (NYSE:BMY), Dow Chemical (NYSE:DOW), McDonald's (NYSE:MCD), Schering-Plough (NYSE:SGP), and UPS (NYSE:UPS). Also reporting are American Express (NYSE:AXP), Amazon.com (NASDAQ:AMZN), and AT&T (NYSE:T).

Zacks Investment Research

Boston Properties Reduces Debt – Analyst Blog

Zacks Market Commentaries — Mon, 12 Oct 2009 18:49:12 +0000

Boston Properties Inc. (BXP), a real estate investment trust (REIT), has recently raised net proceeds of approximately $694 million by selling 5.875% senior unsecured notes due 2019.

The debt offering was managed by Bank of America Securities LLC, the investment banking arm of Bank of America Corp. (BAC), Citigroup Global Markets Inc., the brokerage and securities arm of Citigroup Inc. (C) and Deutsche Bank Securities Inc., the U.S. investment banking and securities arm of the German banking colossus Deutsche Bank AG (DB).

The senior unsecured notes were priced at 99.931% of the principal amount to yield 5.884% to maturity. Boston Properties plan to utilize the proceeds to reduce its huge debt. At the end of the second quarter, the company had about $6 billion in debt maturing by 2015.

Boston Properties develops, redevelops, acquires, manages, operates, and owns a diverse portfolio of Class A office, industrial, and hotel properties in the U.S. The majority of the company’s income comes from office properties, which are primarily concentrated in large, high-barrier urban markets that usually fare better in a faltering economy.

Read the full analyst report on "BXP"
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Zacks Investment Research

Declining Dollar Strengthens Energy, Bolstering Stocks

QualityStocks — Mon, 12 Oct 2009 15:06:05 +0000

Markets advanced Monday morning, with oil reaching a 6-week high above $73 a barrel, a rally in European stocks after Royal Philips Electronics announced its glowing earnings report, and a general sense of economic recovery. Going into a foreseeably light Columbus Day of trading, a weaker dollar has pushed all major energy and commodities sectors [...]

FDIC Suspects Citigroup Review – Analyst Blog

Zacks Market Commentaries — Fri, 09 Oct 2009 14:45:33 +0000

The U.S. Federal Deposit Insurance Corp (FDIC) is challenging positive conclusions given to Citigroup Inc.'s (C) management in a government-requisitioned review.

Some FDIC officials are suspicious about the report, following the interviews of Citi's management who rated the effectiveness of their colleagues. Uncertainty surrounding the integrity of the report may lead the FDIC to assign the report little weight during the next regulatory assessment of the company’s management.

The review was conducted this summer for Citi's board by recruiting and consulting firm Egon Zehnder International. It was triggered by the government's stress tests on top banks. Companies found to be in need of additional capital were required to conduct assessments of their management and report the findings to federal regulators.

The FDIC, which had concerns about the qualifications of Chief Executive Vikram Pandit and his top management team, required Citigroup to hire an outside firm to perform the review.  The report, delivered to Citigroup's board on last Friday, gave overall strong marks to Citigroup's management team and to CEO Vikram Pandit in particular. The review, however, gave less-favorable reviews to at least two of Pandit's lieutenants, Vice Chairman Lewis Kaden and Chief Administrative Officer Don Callahan.

Citigroup's board met on Tuesday morning to start discussing the findings and ways to respond to them. The company needs to inform the regulators this month about Egon Zehnder's findings and how the board is responding to them. Options include removing certain executives and reassigning or clarifying their job responsibilities, but Citigroup directors could not come to a conclusion as yet.

One of the key factors used by regulators to determine financial-health ratings of U.S. banks is the management efficiency. Such ratings help determine whether banks should be kept on a more stringent regulatory control. The announcement last week that Bank of America Corp’s (BAC) Chief Executive Ken Lewis will leave the company spurred speculation that Citigroup’s Pandit could suffer the same fate.

The FDIC is likely to treat the management review as one factor in a broad assessment of Citigroup's overall financial health. The report's supportive spirit comes as a sharp contrast to the frustration building among some analysts, investors and Citigroup executives regarding Mr. Pandit's leadership since he became CEO in December 2007, where he had become known to overly rely on a small group of advisers.  

The FDIC's relationship with top Citigroup executives, especially Mr. Pandit and Vice Chairman Ned Kelly, has been strained since last year, when Citigroup's plans for a government-assisted purchase of most of Wachovia Corp. fell apart.  Citigroup, once the largest U.S. bank by assets, fell behind last year after a series of acquisitions by rivals. The bank has been severely hurt by billions in losses and write-downs of problem loans and toxic assets.  

The U.S. government injected $45 billion in bailout funds into the bank, $25 billion of which was recently converted to a 34% equity ownership stake. Top-level management at the company is conceiving plans to downsize the government's stake in the company through a multibillion-dollar stock offering.  

Citigroup will release its third quarter 2009 earnings on Oct. 15, 2009 with a conference call scheduled later in the day to discuss its results. Ahead of its results, we maintain our Neutral recommendation on the stock.
Read the full analyst report on "C"
Read the full analyst report on "BAC"
Zacks Investment Research

Pay Czar Seeks to Limit Salaries – Analyst Blog

Zacks Market Commentaries — Wed, 07 Oct 2009 22:41:06 +0000

In the course of the review of the aptness of the richest pay packages proposed by seven financial firms that received $200 billion in government aid, the U.S. pay czar Kenneth Feinberg is planning to cut the annual cash salaries for many of the top executives whose firms accepted bailout funds.

As an alternative to paying large cash salaries, the pay czar is planning to shift a large portion of an employee's annual salary to stock that cannot be accessed for several years. The percentage of salary to be diverted to stock is not yet clear, but it could be above 50% in some cases.

The stock compensation would be in addition to salaries and cash bonuses. This will be an incentive for the executive to make good long-term decisions about the company.

By mid-October this year, Feinberg expects to issue his judgment on compensation packages for 175 of the most-highly compensated executives and employees at the seven firms that received substantial support from the Troubled Asset Relief Program (TARP).

The seven firms whose compensation plans are under scrutiny are Citigroup Inc. (C), American International Group Inc. (AIG), Bank of America Corp. (BAC), Chrysler Financial, Chrysler Group LLC, General Motors and GMAC Inc (GJM).

The pay czar has already used his concept with Robert Benmosche, the new chief executive of American International Group. Benmosche's salary was broken into two parts. Benmosche will annually receive $3 million cash salary and $4 million in AIG stock that cannot be accessed for five years.

On the other hand, the move could be very sensitive for BofA, which is searching for a new CEO to replace Ken Lewis, who announced plans to resign as chief executive of the company last week.

The Federal Reserve is planning to propose risk-based guidelines later this month. These guidelines would impact tens of thousands of bankers’ payment structure.

Some large financial firms that have already repaid government funds are JPMorgan Chase & Company (JPM), Morgan Stanley (MS), Bank of New York Mellon Corporation (BK), Goldman Sachs (GS), U.S. Bancorp (USB), American Express Company (AXP), BB&T Corporation (BBT) and State Street Corporation (STT). However, for many other firms the repayment of TARP money is unlikely for a long time as they face very difficult situations.

We think that the repayment of government money can be viewed as a sign of recovery of the institutions as well as the economy. Also, the full repayment of government money will enable bailed-out firms from having their executive compensation packages reduced. Restrictions on pay rules as a result of using government money were a major competitive disadvantage for those firms in retaining talented employees.
Read the full analyst report on "C"
Read the full analyst report on "AIG"
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Read the full analyst report on "GJM JPM"
Read the full analyst report on "MS"
Read the full analyst report on "BK"
Read the full analyst report on "GS"
Read the full analyst report on "USB"
Read the full analyst report on "AXP"
Read the full analyst report on "BBT"
Read the full analyst report on "STT"
Zacks Investment Research

Hidden Traps Make Bank Stocks a Bad Deal

Contrarian Profits — Tue, 06 Oct 2009 18:02:43 +0000

pBillionaire investor George Soros said yesterday (Monday) that the U.S. recovery would be a slow one because of all the “basically bankrupt” financial companies impeding it./p pU.S. Federal Reserve Chairman Ben S. Bernanke and Congress agreed Friday that the financial system – not the American taxpayer – should bear the costs of bank bailouts. a href="http://en.wikipedia.org/wiki/Sheila_C._Bair"Sheila Bair/a, head of the a href="http://www.google.com/finance?cid=14918074"Federal Deposit Insurance Corp/a. (FDIC), a href="http://www.moneymorning.com/2009/09/29/fdic-banks/"wants the banks to ante up $45 billion/a – three years’ worth of deposit-insurance premiums – to bail out the fund that insures bank deposits./p pWhen it comes to bank stocks, we all know that there were a number of strongema href="http://www.moneymorning.com" class="alinks_links"Money Morning/a/em/strong readers shrewd enough to buy Citigroup Inc. (NYSE: a href="http://www.google.com/finance?q=NYSE%3AC"C/a) shares when the foundering giant’s stock price was below#8230;/p

Boom, Bust and Rebuild: Bank of America and the Kenneth Lewis Legacy

Contrarian Profits — Fri, 02 Oct 2009 19:27:54 +0000

pKenneth D. Lewis There are many ways to view Kenneth Lewis’ eight-year reign as Bank of America Corp. (NYSE: a href="http://www.google.com/finance?q=NYSE%3ABAC"BAC/a) chief executive, but two seem to hold the most landscape. /p pOn one hand, the $130 billion he spent on acquisitions – FleetBoston Financial Corp., MBNA Corp., LaSalle Bank Corp., Countrywide Financial Corp., Charles Schwab Corp.’s (Nasdaq: a href="http://www.google.com/finance?q=schw"SCHW/a) U.S. Trust private banking unit and Merrill Lynch – that more than tripled the size of Bank of America, making it the largest U.S. lender both by assets and deposits./p pOn the other, his open-wallet policy and the example it set forth almost perfectly encapsulates the boom, bust and nascent rebound of the U.S. housing and banking crisis – which later became the financial#8230;/p

Long-Term Stock-Market Uptrend to Continue

Contrarian Profits — Mon, 28 Sep 2009 17:15:04 +0000

pStocks moved lower for the third consecutive day on Friday, something that hasn’t happened in more than three weeks, as the bulls just couldn’t capitalize on a short-term overbought condition. Measures of selling pressure eased as the bears rested their knuckles after a two-day pummeling./p pInvestors are worried. The big question – as always – is whether the primary uptrend remains intact./p pAnd the answer is yes./p pTo understand just what that target should be, let’s take a look at where we are right now./p pJust before Wednesday’s sell-off, measures of the supply of stocks moved to new lows, while demand moved to new highs. This means bull-market-trading rules remain in effect. But as the cyclical bull market matures a little, we need to#8230;/p

Today in Russian Business – September 28, 2009

Robert Amsterdam — Mon, 28 Sep 2009 09:18:40 +0000

Ria-Novosti reports that first deputy prime minister Igor Shuvalov believes the path towards a customs union with Belarus and Kazakhstan is clear. Bank of America Corp. has increased Russia's economic growth forecast for 2010 to 3.9% from 2.4%. Citigroup Inc....

Awaiting the Depression

Bill Bonner — Thu, 24 Sep 2009 19:03:42 +0000

pThe inflation/deflation debate is hot#8230; It crackles and pops like a pine fire. But it gives off little helpful light. strongAbe Lincoln may have read by the light of an open fire. But when we tried it, we singed our eyebrows./strong It made us suspicious of Old Abe; maybe he wasn’t quite as truthful as he pretended to be. Later, we realized he was a mountebank. But that’s another story#8230; /p pToday, we light a candle and try to interpret the shadows on the wall#8230;/p pYesterday, the Dow fell 81 points. Gold dropped $5 to $1009./p pWill the feds succeed in causing inflation? Or will they fail? Will the dollar continue to go down? Or will it prove to be a safe haven currency#8230;/p

Cousins to Record Charge in Q3 – Analyst Blog

Zacks Market Commentaries — Tue, 15 Sep 2009 19:10:10 +0000

Real estate investment trust Cousins Properties Inc. (CUZ) recently said it would record an impairment charge of $39 million, or 74 cents per share, in the third quarter relating to its joint venture interest in Terminus 200. This 565,000 square feet office building in Atlanta, in which Cousins holds a 50% stake, was completed last month.

The company said the impairment charge would not impact its ownership interest in the project and it would continue to be the property manager and leasing agent of the asset.

In a separate development, Cousins announced a public offering of 32 million common shares and an underwriter option to purchase an additional 4.8 million shares. The company plans to use the proceeds to repay its debt under the revolving credit facility and for general corporate purposes. J. P. Morgan of JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Morgan Stanley (MS) are the joint book-running managers for the offering.

Cousins acquires, finances, develops, manages and leases office, retail and industrial properties throughout the U.S., including Atlanta, Charlotte, Austin, San Francisco, Los Angeles and Washington DC. The company also provides leasing and management services to third-party investors.

Market fundamentals are deteriorating for office and retail landlords throughout the country due to the continued economic downturn. With high market vacancies and no job growth, rental rate growth on new leases will also be non-existent for some time. Consequently, with no short-term growth indicators, we expect continued volatility in the sector.

Read the full analyst report on "CUZ"
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Read the full analyst report on "JPM"
Zacks Investment Research

AmEx Diversifies Funding – Analyst Blog

Zacks Market Commentaries — Tue, 15 Sep 2009 17:10:24 +0000

On Monday, American Express Co. (AXP) launched a new line of certificates of deposit (CD) in order to diversify its funding sources as the financial crisis has tightened overall lending.

The saving lines are available in a range of maturities from three months to five years. The Federal Deposit Insurance Corporation (FDIC) will insure these saving lines by up to $250,000.

Failing financial institutions have significantly stretched the regulator's deposit insurance fund. The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. When a bank fails, it reimburses customers for deposits of up to $250,000 per account. As of June 30, the fund corpus had touched $10.4 billion, the lowest since 1993, from $13 billion in the prior quarter.

Like other credit card issuers, American Express has traditionally arranged its funding through credit card asset-backed securities. But of late, funding from credit card asset-backed securities has been hurt by the financial crisis. As a result, the company needed an alternative source of funding.

American Express is also not strong with respect to retail deposits to fund its operations. This is a competitive disadvantage for the company as many of its peers like JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C) hold a strong retail deposit base.

In the second quarter, 22% of American Express' funding came from short-term debt, short-term and long-term retail deposits and institutional deposits. The company estimates those sources to represent up to 55% percent of its funding needs in the coming years.

Though the last few quarters benefited from successful re-engineering efforts and a diversified business model, American Express experienced continued weakness in card-member spending and high levels of loan losses. We expect continued benefits from the company's diversification and cost-cutting efforts, but the ongoing global crisis and a strong US dollar will continue to impact the results in the coming quarters. However, the new funding initiative will bring some stability to the company's funding options.

Read the full analyst report on "AXP"
Read the full analyst report on "JPM"
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Read the full analyst report on "C"
Zacks Investment Research

GenVec’s TNFerade Nears NDA Status (NASDAQ:GNVC)

Michael Vlaicu — Wed, 09 Sep 2009 06:06:14 +0000

GenVec, Inc. (Public, NASDAQ:GNVC) StocksHaven Investments profiles a clinical stage biopharmaceutical company developing gene-based therapeutic drugs and vaccines. Its lead product candidate, TNFerade biologic (TNFerade), is being developed for use in the treatment of cancer, and is currently undergoing Phase III trials which are expected to be completed by Q1 2010. In addition to its therapeutic product [...]

Finance Jobs Going Where the Growth Is – Asia

Jason Simpkins — Fri, 04 Sep 2009 17:07:51 +0000

China is Investing Billions in Renewable Energy One firm has already built China’s largest wind turbine manufacturing factory. And it’s working with the Chinese Science Academy to develop new wind, solar, and geothermal technologies… for which it will own 70% of the rights. But this company’s business reaches far beyond the Chinese border, with operations [...]

Bailed-Out Firms Under Review – Analyst Blog

Zacks Market Commentaries — Wed, 02 Sep 2009 21:38:38 +0000

The U.S. pay czar, Kenneth Feinberg, has started a 60-day schedule to review the aptness of the richest pay packages proposed by seven financial firms that received $200 billion in government aid.

Feinberg has started his review on pay packages for 25 of the most highly compensated executives at firms that received substantial support from the Troubled Asset Relief Program (TARP).

The seven firms whose plans will be scrutinized are Citigroup Inc. (C), American International Group Inc. (AIG), Bank of America Corp. (BAC), Chrysler Financial, Chrysler Group LLC, General Motors and GMAC Inc.

On Monday, Feinberg, who has been verifying the submissions since they were due at the Treasury, sent letters to all seven institutions informing them that the pay plans they submitted were deemed substantially complete. The government has laid out general principles that will guide Feinberg's decisions. Also, the Treasury wants the pay plans to be liberal enough to make the firms profitable in order to repay taxpayer investments by retaining top talented people.

According to government officials, they will partly focus on the pay packages to change the way these are designed. The will also try to give executives long-term incentives to help the company benefit in the long-run.

Bank of America is in the process of partly paying back some TARP funds so it will no longer be considered as an exceptional bailout recipient. It may start with the repayment of $20 billion of additional aid it had received in January to absorb loss making investment bank Merrill Lynch & Co.

In addition to the TARP money, in January the government agreed to absorb a major portion of losses on a $118 billion pool of assets owned by BofA and Merrill. The bank would issue $4 billion in preferred stock to the Treasury carrying an 8% dividend in exchange for this protection. Total cost to the bank for this deal would be about $320 million a year. Also, the bank would pay $236 million to the Federal Reserve.

Citigroup would also look to pay back a $20 billion capital investment it received from the government. It also would need to relax an asset guarantee deal it had with the government, which guarantees limits to losses from a $301 billion pool of its toxic assets.

However, for the other firms the repayment of TARP money is unlikely for a long time as they are in a very difficult situation.

We think that the repayment of government money can be viewed as a sign of recovery of the institutions as well as the economy. Also, the full repayment of government money will enable bailed-out firms from having their executive compensation packages reduced. Restrictions on pay rules as a result of using government money were a major competitive disadvantage for those firms in retaining talented employees.
Read the full analyst report on "C"
Read the full analyst report on "AIG"
Read the full analyst report on "BAC"
Zacks Investment Research

Judge Questions BofA Settlement – Analyst Blog

Zacks Market Commentaries — Wed, 26 Aug 2009 18:00:48 +0000

U.S. District Judge Jed Rakoff in Manhattan ordered federal regulators to explain why they didn't investigate whether executives at Bank of America Corp. (BAC) misled shareholders about bonuses paid by Merrill Lynch.

Rakoff delayed the approval of Bank of America's proposed $33 million settlement with the Securities and Exchange Commission (SEC) over the bonus affair, which arose after the bank’s acquisition of Merrill Lynch in September 2008 for $50 billion.

The SEC charged that a proxy statement by Bank of America in November misled investors as it stated that Merrill Lynch would not pay year-end bonuses without Bank of America's consent. However, Bank of America had already authorized Merrill Lynch to pay up to $5.8 billion in bonuses and didn't share that information with shareholders. That rendered a statement Bank of America mailed to 283,000 shareholders of both companies about the Merrill Lynch deal materially false and misleading.

The Securities and Exchange Commission reached the settlement with the bank last month. Bank of America agreed to pay $33 million in proposed fine to settle the charges. However, it neither admitted nor denied the allegations. Both, the SEC and the bank defended the settlement as fair in their filings.

Merrill Lynch paid a huge $3.6 billion in bonuses last year, even though it lost $27.6 billion in the same year. Those losses in turn affected Bank of America's bottom line after its takeover was completed.

The SEC said in a filing that the evidence it gathered did not support additional corporate charges against Bank of America or charges against individual executives arising from the bonus payouts. The SEC mentioned that it was not able to determine whether Bank of America’s executives deliberately violated securities laws as the terms of the takeover of Merrill Lynch as well as the bonus payments were laid out in documents prepared by outside attorneys for the two companies.

Rakoff responded that the lawyers should be held legally responsible if they actually made the decisions that resulted in a false (disclosure) statement.

Bank of America indicated that disclosure of bonuses would not have made any material effect on the outcome of the shareholder vote to approve the Merrill Lynch acquisition. The company had presented the strategic logic of the Bank of America and Merrill Lynch combination to its shareholders, and the shareholders approved the transaction based on that logic. Bank of America also suggested that shareholders should have already known about the bonuses given the media attention surrounding its takeover of Merrill Lynch.

Rakoff has set a deadline of Sept 9 for the two parties to file the next round of legal briefs so that he can decide whether to approve the settlement. After a period of review, Rakoff could rule or order additional hearings.
Read the full analyst report on "BAC"
Zacks Investment Research

Zacks Analyst Blog Highlights: Procter & Gamble Co., Forest Laboratories, Bank of America Corp, JPMorgan Chase & Co. and Credit Suisse – Press Releases

Zacks Market Commentaries — Tue, 25 Aug 2009 13:15:17 +0000

For Immediate Release

Chicago, IL – August 25, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: Procter & Gamble Co. (PG), Forest Laboratories (FRX), Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Credit Suisse (CS).

Get the most recent insight from Zacks Equity Research with the free Profit from the Pros newsletter: http://at.zacks.com/?id=5513

Here are highlights from Monday’s Analyst Blog:

P&G Finds Buyer for Drug Business

Warner Chilcott, a specialty drug maker, recently announced plans to acquire Procter & Gamble Co.’s (PG) prescription drug business for about $3 billion.

Last December, P&G had announced its intention to restrict making new investments in the pharmaceutical division and divest its interest in the healthcare brands. It decided to focus more on over-the-counter products such as Pepto Bismol, Prilosec, Vicks cough medicines and other personal care brands. Management stated that the pressure from generics was also one of the reasons for it to consider divestiture of this business.

Warner Chilcott, which makes birth control, female hormone therapies and dermatological products, believes this acquisition will be a strategic fit to its existing business. The deal is expected to expand its market share in the women’s health market. Warner Chilcott will run the newly acquired business as its 100% subsidiary.

Private equity firm Cerberus Capital Management and drug maker Forest Laboratories (FRX) had also shown their interest in purchasing P&G’s prescription drug business.

Several banks, including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Credit Suisse (CS), among others, are expected to provide about $4 billion in financing for the deal. Out of this, Warner Chilcott will use $3 billion for the acquisition and the remaining $1 billion for refinancing its existing debt.

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Zacks Investment Research

P&G Finds Buyer for Drug Business – Analyst Blog

Zacks Market Commentaries — Mon, 24 Aug 2009 15:45:35 +0000

Warner Chilcott, a specialty drug maker, recently announced plans to acquire Procter & Gamble Co.’s (PG) prescription drug business for about $3 billion.

Earlier in fiscal 2008, P&G sold its Folgers coffee business to J.M. Smucker Inc. (SJM) and added beauty and grooming businesses to its portfolio. The company’s prescription drugs division comprises products such as Actonel for osteoporosis (which generates more than $1 billion in revenue) and Enablex for the treatment of overactive bladder.

Private equity firm Cerberus Capital Management and drug maker Forest Laboratories (FRX) had also shown their interest in purchasing P&G’s prescription drug business.

Six banks, including Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), Credit Suisse (CS), Citigroup (C), Morgan Stanley (MS) and Barclays (BCS) are expected to provide about $4 billion in financing for the deal. Out of this, Warner Chilcott will use $3 billion for the acquisition and the remaining $1 billion for refinancing its existing debt.

The deal is the largest leveraged loan transaction so far this year, providing an indication of reviving credit markets and a positive development in the loan market, especially after the collapse of Lehman Brothers.

Read the full analyst report on "PG"
Read the full analyst report on "SJM"
Read the full analyst report on "BAC"
Read the full analyst report on "JPM"
Read the full analyst report on "CS"
Read the full analyst report on "C"
Read the full analyst report on "MS"
Read the full analyst report on "BCS"
Read the full analyst report on "FRX"
Zacks Investment Research

How Over-Regulating Goldman Sachs Will Lead to Higher Oil and Commodity Prices

Contrarian Profits — Fri, 21 Aug 2009 20:19:19 +0000

pAfter earning hefty profits on its commodities trading for nearly 18 years, heavyweight trader Goldman Sachs Group Inc. (NYSE: a href="http://www.google.com/finance?q=gs" target="_blank"GS/a) now finds itself on the hot seat, defending this crucial source of revenue. And while that may not be good for Goldman, it’s also bad for investors. Let me explain…/p pIt all started back in 1991, when a href="http://en.wikipedia.org/wiki/Goldman_Sachs#1980.E2.80.931999" target="_blank"J. Aron #38; Co/a., Goldman’s commodities-trading division, recommended that a large institutional client invest about $100 million in commodities. The vehicle “du-jour” was Goldman’s own investment vehicle, the Goldman Sachs Commodity Index (now the a href="http://www2.goldmansachs.com/services/securities/products/sp-gsci-commodity-index/tables.html" target="_blank"S#38;P GSCI Commodity Index/a)./p pThe GSCI is a 24-commodity dollar-weighted index, comprised of 70% energy (oil and natural gas), 8% industrial metals (aluminum, copper, lead, nickel and zinc), 3% precious metals#8230;/p

Will This Week’s Earnings Reports Reflect a Recovery or a Relapse for the U.S. Economy?

Contrarian Profits — Mon, 17 Aug 2009 21:00:21 +0000

pSeveral key second-quarter earnings reports could either validate or undercut assertions that the U.S. economy is poised for recovery./p pAfter the Commerce Department reported last week that retail sales fell 0.1% in July from June, and 8.3% year-over-year, retailers will stay in the limelight this week as several high-profile companies report second-quarter earnings.strong Target Corp. (NYSE: a href="http://www.google.com/finance?q=tgt" target="_blank"TGT/a)/strong, strongLimited Brands Inc. (NYSE: a href="http://www.google.com/finance?q=NYSE:LTD" target="_blank"LTD/a)/strong, and strongGap Stores (NYSE: a href="http://www.google.com/finance?q=NYSE%3AGPS" target="_blank"GPS/a)/strong are among the big-name retailers set to report./p pMeanwhile, the strongHewlett-Packard Co’s (NYSE: a href="http://www.google.com/finance?q=hpq" target="_blank"HPQ/a) /strongreport will provide a further glimpse into the world of technology, and strongThe Home Depot Co.’s (NYSE: a href="http://www.google.com/finance?q=NYSE%3AHD" target="_blank"HD/a)/strong results a href="http://www.moneymorning.com/2009/07/30/housing-market-bottom/" target="_blank"will confirm or counter claims that the recent housing rebound is for real/a. On that note, the upcoming economic releases include July housing starts and#8230;/p

With One of the Hottest Economies on the Planet Brazil is Finally Living Up to Its Promise

Jason Simpkins — Wed, 12 Aug 2009 18:29:13 +0000

“First Ounce Bounce” Set to Pay 1,100% Government filing NI 43-101 is mandatory in Canada. It shows the proven reserves of any company intending to mine gold. The latest filing from a small renegade company we’ve just uncovered lists their reserves at an astounding 10.1 million ounces. It’s the biggest gold strike in Canadian history [...]

Beware of the Obama Stimulus Trap

Contrarian Profits — Fri, 31 Jul 2009 21:00:44 +0000

pUpbeat headlines have been everywhere in recent weeks, and they all seem to point to a single conclusion: The U.S. economy is in the early stages of a very rapid recovery./p pIn fact, when you peruse the news it’s difficult to come to any other conclusion. For instance:/p ul liA number of key earnings reports have been much better than expected, and company executives buttressed those profit figures with positive comments about the next 18 months./li liThe trading operations of Goldman Sachs Group Inc. (NYSE:a href="http://www.google.com/finance?q=NYSE%3AGS" target="_blank"GS/a) and JPMorgan Chase #38; Co. (NYSE: a href="http://www.google.com/finance?q=NYSE%3AJPM" target="_blank"JPM/a) a href="http://www.moneymorning.com/2009/07/17/jpmorgan-chase-accounting-mirage/" target="_blank"both just reported record profits/a./li liU.S. housing prices rose in May a href="http://www.moneymorning.com/2009/07/30/housing-market-bottom/" target="_blank"for the first time in three years/a. Initial jobless claims have plunged 15% since their April peak. The Conference Board’s Index of#8230;/li/ul

Bank Stock Outlook: Will First-Half Gains Give Way to Second-Half Pain?

Money Morning — Wed, 29 Jul 2009 20:05:53 +0000

[Editor's Note: After more than a year of chaos and controversy, some of the leading U.S. banks saw their stock prices soar during the second quarter. As part of its mid-year forecast series, Money Morning examines the outlook for U.S. banks for the rest of this year. To see earlier stories from our mid-year forecast [...]

Invest Like Buffett: Dump Moody’s and Snatch Up These 11 Stocks

Contrarian Profits — Fri, 24 Jul 2009 20:48:25 +0000

p class="MsoNormal"Warren Buffett’s Berkshire Hathaway Inc (NYSE:BRK.A) is finally starting to offload its 20% stake in ratings agency Moody’s Corporation (NYSE.MCO). /p p class="MsoNormal"Here are listed sales in the filing, courtesy of 24/7WallStreet.com:/p p class="MsoNormal" /pp class="MsoNormal"· 7/20/09… 1,817,000 at $28.7269 average in open market sale./p p class="MsoNormal"· 7/21/09… 3,915,100 at $26.9188 average in open market sale./p p class="MsoNormal"· 7/22/09… 2,254,200 at $26.6425 average in open market sale./p p class="MsoNormal" /pp class="MsoNormal"What took Buffett so long to start selling Moody’s? We have no idea. Moody’s runs one of the biggest scams on Wall Street. It charges the companies whose securities it rates (just like Standard #38; Poor’s and Fitch also do)./p p class="MsoNormal"So what do you think these ratings agencies did when presented with a whole load of junk mortgage-backed securities to rate? They assigned them investment#8230;/p

Market Recoils as CIT Edges Toward Bankruptcy

Contrarian Profits — Mon, 20 Jul 2009 15:00:22 +0000

pThe probably bankruptcy of strongCIT Group Inc. (NYSE: a href="http://www.google.com/finance?q=cit" target="_blank"CIT/a) could/strong have major implications on the retail and manufacturing sectors this week, as many related companies are reliant on the financing giant./p pWith options running out over the weekend, CIT advisors began preparations for a bankruptcy filing. As of Sunday, strongJPMorgan Chase #38; Co. (NYSE: a href="http://www.google.com/finance?q=jpm" target="_blank"JPM/a)/strong and strongMorgan Stanley (a href="http://www.google.com/finance?q=ms" target="_blank"MS/a) /stronga href="http://www.bloomberg.com/apps/news?pid=20601103#38;sid=aAxblWMCEuDg" target="_blank"were talking with other banks about a debtor-in-possession loan/a, used to fund a company’s operations after it seeks court protection from creditors, strongemBloomberg News /em/strongreported./p pBondholders held calls last week to discuss whether to swap some claims for equity to reduce indebtedness. Thomas Lauria, a lawyer at White #38; Case LLP, told strongemBloomberg/em/strong that a group of CIT creditors he represents offered to provide $3 billion in new loans to bridge CIT to#8230;/p

Discounts for TARP Repayers – Analyst Blog

Zacks Market Commentaries — Mon, 13 Jul 2009 18:47:48 +0000

On July 10, 2009, according to a report by the Congressional Oversight Panel, (created by Congress under the Emergency Economic Stabilization Act of 2008 to oversee the Troubled Asset Relief Program [TARP]) the Treasury decided to sell stock warrants back to recipients of TARP funds at a 34% discount on their fair-market value. The Treasury intends to take such action as the warrants provide opportunity for taxpayers to participate directly in the increase in share prices of recipients.

The Congress initiated the Troubled Asset Relief Program (TARP) in late 2008 to even out the financial system. During that time, Congress authorized $700 billion to cure the financial turmoil and decided that taxpayers should have the opportunity to share in the potential upside if the banks returned to profitability.

To verify whether the valuation of the warrants by the Treasury maximizes the taxpayers' investment in the companies, the panel conducted its technical valuation of the warrants held by Treasury. According to its evaluation of the warrant repurchases, the Treasury already approved, 11 banks have repurchased their warrants for an estimated amount of 66% of current market value. As a result, taxpayers would have recovered $10 million more.

The largest banks have received the Treasury approval for TARP repayment, as they are now able to tap the debt markets without FDIC's support and also access the equity markets as investor confidence returns to the stronger banks.

Among others, Bank of America Corp. (BAC) received a total of $45 billion and Wells Fargo & Co. (WFC) received a total of $25 billion from TARP.

The Treasury is just about to start the warrant repurchase program. We expect that the Treasury will take further steps for the recipients to allow them to repurchase their warrants from the Treasury in future but not at the expense of public interest in financial stabilization and economic growth.
Read the full analyst report on "BAC"
Read the full analyst report on "WFC"
Zacks Investment Research

Citigroup Shuffling Deck Chairs – Analyst Blog

Zacks Market Commentaries — Fri, 10 Jul 2009 14:22:13 +0000

Considering the state of affairs at Citigroup (C), movement in its management team is not unrealistic -- this company has been among the hardest hit banks by the credit crisis and ongoing recession.

Clearly, after Citigroup received $45 billion in aid from the government in the fall of 2008 (part being converted to a 34% equity stake in the bank), pressure has definitely increased for its CEO, Vikram Pandit, to improve operations and return the entity to profitability and improve operations, which has resulted in some instability in the executive management ranks.

Even though the U.S. government is one of the largest shareholders, we would not expect these changes to be the result of it flexing its voting potential, but we suspect a close eye is being kept on the situation.

What has resulted are the following shuffles:

The current chairman of Citi Holdings (since March) and Citigroup’s former chief financial officer Gary Crittenden is out.

Edward Kelly (56) is in as vice chairman of Citigroup. In his new position, Mr. Kelly will be responsible for strategy and mergers and acquisitions. Previously, Mr. Kelly served as chief financial officer since March 2009.

John Gerspach (56) is also in as the third individual to hold chief financial office this year. Previously, Mr. Gerspach served as controller and chief accounting officer at Citi.

And finally Eugene McQuade (60) is in as CEO of Citibank NA (C’s primary banking subsidiary). Most recently, Mr. McQuade served as vice chairman of Merrill Lynch and president of Merrill Lynch Banks, but left the position in February 2009, a month after the investment bank was acquired by Bank of America Corp (BAC).
Read the full analyst report on "C"
Read the full analyst report on "BAC"
Zacks Investment Research

Top FBR Funds – Mutual Fund Education

Zacks Market Commentaries — Fri, 10 Jul 2009 06:50:15 +0000

FBR Large Cap Financial (FBRFX) was founded in December 1996. The investment seeks capital appreciation. It is non-diversified.

The fund normally invests at least 80% of its assets in securities of large capitalization companies that are "principally engaged" in the financial services sector and have a market capitalization of $3 billion or more.

J.P. Morgan Chase & Co. (JPM), KeyCorp (KEY) and Bank of America Corp. (BAC) are among the fund’s top holdings.

FBR Small Cap Financial (FBRSX) seeks long-term capital appreciation by investing primarily in the equity securities of small-cap domestic financial services companies.

The fund employs a consistent, fundamental, bottom-up investment process for selecting companies that meet the criteria necessary for inclusion in the portfolio. It focuses on financial services companies that invest in real estate, usually through mortgages and other consumer-related loans.

David Ellison has been lead manager at the fund since its inception in December 1996. The fund has topped the total returns of its benchmark index in the last 1-, 3-, and 5-year periods.

FBR Focus (FBRVX) seeks long-term capital appreciation by investing primarily in equity securities of small and mid-cap domestic companies.

The fund may invest up to 20% of its total assets in equity securities of companies with larger market capitalizations. As of January 2009, its portfolio turnover was 17%.

Unit holders need to make a minimum initial investment of $2,000 to enter this Zacks #1 Rank (“Strong Buy") fund. The fund distributes dividends and capital gains, if any, annually.

Zacks Investment Research

Will Week of Controversy Undermine Financial System Overhaul That Calls for Broad Expansion of Central Bank’s Power?

Contrarian Profits — Mon, 29 Jun 2009 17:45:17 +0000

div class="entry" pDocuments brought to light by key by congressional investigators hightlight real disagreement between top-level U.S. Federal Reserve officials about how it should address the strongBank of America Corp.(NYSE:a href="http://www.google.com/finance?q=NYSE%3ABAC" target="_blank"BAC/a)/strong acquisition of strongMerrill Lynch #38; Co. Inc/strong. are almost certain to fuel the ongoing congressional debate over a href="http://www.moneymorning.com/2009/06/18/obamas-financial-system/" target="_blank"the central bank’s push to expand its authority over the U.S. financial system/a./p pThis a href="http://online.wsj.com/article/SB124606477050863921.html" target="_blank"growing concern/a manifested itself Thursday, when Fed Chairman Ben S. Bernanke; was grilled by Capitol Hill lawmakers during a congressional hearing looking into the central bank’s conduct in BofA’s buyout of Merrill Lynch. Bernanke’s failure to resolve some of the most-pointed questions posed by congressional leaders – (especially Republicans) who wanted to discover whether the Fed overstepped its authority and interfered with merger-related decisions – may undermine a#8230;/p/div

Will Week of Controversy Undermine Financial System Overhaul That Calls for Broad Expansion of Central Bank’s Power?

Contrarian Profits — Mon, 29 Jun 2009 17:45:17 +0000

Words from the (investment) wise for the week that was (June 22 – 28, 2009)

Prieur du Plessis — Sun, 28 Jun 2009 08:37:06 +0000

“Words from the Wise” this week comes to you in a shortened format as I do not have access to my normal research resources while on the road in Europe. Although very little commentary is provided, a full dose of excerpts from interesting news items and quotes from market commentators is included.

On grilling the Fed Chair

James Hamilton — Sat, 27 Jun 2009 15:26:19 +0000

I got a bit angry at accounts of the latest appearance of Federal Reserve Chair Ben Bernanke before the U.S. Congress.

The Wall Street Journal reports:

Bernanke faced open hostility from lawmakers who barraged him during a Congressional hearing over his handling of the financial crisis and the central bank's role in reshaping the banking system.
Setting aside the deferential tone usually reserved for Fed chairmen, members of the House Committee on Oversight and Government Reform repeatedly interrupted Mr. Bernanke at Thursday's hearing to review the Fed's role in engineering a government aid package for Bank of America Corp. The lawmakers pored over internal Fed emails subpoenaed by the committee and projected on a screen in the hearing room.

It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.

These interrogations reveal more about those doing the grilling than they reveal about Bernanke. I see this as pure political theater, and I don't like it.

If Congress wants to explore more usefully the wisdom and motives behind some of the decisions that have been made, it might want to investigate why some legislators are now pushing for Fannie and Freddie to guarantee a riskier category of mortgage condo loans.

MBIA Cut to Deep Junk Status – Analyst Blog

Zacks Market Commentaries — Fri, 26 Jun 2009 16:36:37 +0000

MBIA's rating slashed to deep junk status, litigation worries continues

On Thursday, June 25, bond insurer MBIA's (MBI) senior debt rating was lowered by Moody's Investors Service to Ba3 -- three levels below investment grade -- from Ba1. The downgrade cited expectations of further portfolio deterioration due to its exposure to risky mortgage-backed securities coupled with the uncertainties associated with the ongoing litigation over the company's restructuring that happened last February.

Moody's also changed the rating outlook of MBIA Insurance Corp. to negative. Additionally, Moody's affirmed the investment-grade Baa1 rating of National Public Finance Guarantee Corp., MBIA's dedicated municipal-bond insurance company.

Investors and world's 18 largest banks, including JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) have sued MBIA, claiming a fraudulent restructuring in February this year. They have alleged that MBIA's transfer of $5 billion in cash and securities from its main insurance unit to National Public Finance has left less money to pay off claims from souring mortgage securities.

Rival bond insurer Ambac Financial Group's (ABK) ratings was also lowered by S&P on Wednesday, June 24, citing negligible prospects for writing new business. S&P lowered Ambac Assurance Corp three notches to BBB, while Ambac Financial's rating was also downgraded three notches to BB from BBB.

Companies such as ABK and MBIA have been hit hard by losses from mortgage-related securities.

Given the uncertainty associated with this litigation, new business writings at National Public Finance remain significantly constrained. We believe that the rating downgrades will dissipate MBIA's accessibility to various markets to build its capital levels.

The company is still losing money on risky mortgage-backed securities that it insured at the height of the U.S. housing bubble. Given the prolonged uncertainty for the group, we maintain our Sell rating on the shares of MBIA.
Read the full analyst report on "MBIA"
Read the full analyst report on "ABK"
Zacks Investment Research

G8 Finance Chiefs Express Cautious Optimism About the State of the World Economy

Contrarian Profits — Mon, 15 Jun 2009 14:20:15 +0000

div class="entry" h4Top financial officials from the a href="http://encarta.msn.com/encyclopedia_761589420/Group_of_Eight.html" target="_blank"Group of Eight/a (G8) industrialized nations on Friday issued an upbeat evaluation of the global financial crisis, describing signs that markets were stabilizing around the world and warning that it was necessary to devise “exit strategies” to disengage from stimulus programs that have been put in place.br / /h4 pThe G8 met for two days in Lecce, Italy. Eight world finance ministers – including U.S. Treasury Secretary Timothy F. Geithner, and his global counterparts from Britain, Canada, France, Germany, Italy, Japan and Russia – also agreed to create #8220;a href="http://www.washingtonpost.com/wp-dyn/content/article/2009/06/13/AR2009061301479.html?hpid=sec-business" target="_blank"a set of common principles and standards/a governing the conduct of international business and finance,#8221;strongemThe Washington Post/em/strong reported./p pIn a communiqué called #8220;the Lecce Framework#8221; – which described the strategy for obtaining those goals –#8230;/p/div

Obama Administration Wants New “Pay Czar” and Shareholder Vote to Reign in Executive Compensation

Don Miller — Thu, 11 Jun 2009 15:02:43 +0000

div class="entry" pThe Obama administration yesterday (Wednesday) continued its assault on highly paid Wall Street executives, announcing plans to appoint a “pay czar” to oversee compensation at financial firms receiving Troubled Asset Relief Program (TARP) funds. /p pThe government also will create a new program to give shareholders at nonparticipating firms a vote on executive pay packages./p pPresident Barack Obama has targeted executive pay practices as part of a larger effort to overhaul regulations and prevent a repeat of the worst financial crisis since the Great Depression./p pObama will unveil a “a href="http://www.bloomberg.com/apps/news?pid=20601109#38;sid=aV0wrDNqSfck" target="_blank"series of specific proposals/a” on June 17 designed to streamline and reorganize regulations, White House spokesman Robert Gibbs told strongemBloomberg News/em/strong./p pThe administration originally proposed regulations in early February to put a $500,000 per year lid#8230;/p/div

Obama Administration Wants New “Pay Czar” and Shareholder Vote to Reign in Executive Compensation

Don Miller — Thu, 11 Jun 2009 15:02:43 +0000

Any Limit to Bank Arrogance? – Analyst Blog

Dirk Van Dijk — Wed, 27 May 2009 20:34:07 +0000

Highlights include JP Morgan Chase & Co. (JPM), Citigroup Inc. (C) and Bank of America Corp. (BAC).

Apparently there is no limit to the arrogance and sense of entitlement at the nation's largest banks. From today's Wall Street Journal we get this:

"Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves. Banking trade groups are lobbying the Federal Deposit Insurance Corp. (FDIC) for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program (PPIP). PPIP was hatched by the Obama Administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets."

Let's recap a bit. Banks make a ton of bad loans and come to the brink of insolvency. The government has to guarantee their debt and injects billions and billions of dollars to shore up their capital base on extremely generous terms. Then the banks all whine and complain that the government might want some say about how much of that capital goes out the back door in the form of mega-sized bonuses to the very same people who lead the world to the edge of the economic abyss.

The ever-powerful Bank Lobby leans on Congress so that it will lean on the Financial Accounting Standards Board (FASB) to substantially ease the mark-to-market accounting rules, so they do not have to reflect the market value of the toxic assets on the balance sheet. The claim was that the bids in the market did not represent "true value," but were a fire-sale price.

It is true that there was not a lot of activity going on in the mortgage-backed securities market, especially the non-GSE backed paper that was created by the investment banks that held the worst loans. In an attempt to revive this market, Treasury Secretary Geithner came up with the PPIP program, where the government would invest side-by-side with private investors to buy up this bad paper.

Then, another arm of the government -- the FDIC -- would guarantee loans so the private/public investment partnership could leverage things way up. If the deal goes south, the private investor can then simply walk away from the deal.

The underlying assumption was that the reason there was no market for this stuff was that there were no buyers -- not that the sellers could not afford to sell at the "true value" of the assets. The latter is far more likely to be the case. They have the real motive to try to pretend that the assets are worth more than they actually are.

Buyers, on the other hand, would be inclined to bid against each other until a rational price level was found. In any case, the idea was to get this paper off the books of the banks.

Now the banks want to be able to buy the stuff themselves, with the government (FDIC) backing. This is insane. Any bank that is selling this stuff should be absolutely prohibited from buying it -- not only the assets on their own books, but from any other institution as well. A shell game where J.P. Morgan (JPM) buys the toxic assets from Citigroup (C), which then buys the assets of Bank of America (BAC), which in turn buys the assets of J.P. Morgan is not significantly different from the banks buying their own bad paper.

The PPIP program, if properly carried out, does have some advantages over the original ex-Secretary Paulson "Cash for Trash" plan that was at the heart of TARP when it was first passed. On any individual deal, if the private investor makes money, then the government will also make money. However, given the leverage and the non-recourse nature of the debt, the private side will make out like a bandit and the government will make a modest return.

On an individual deal that goes south, the private side will lose what they put in, but that is a small fraction of the total loss, so the government will get kicked in the teeth. This structure does give an incentive to the private investor (who will make the investment decisions) to bid as low as possible on each asset to maximize their potential return. If the banks are allowed to bid on their own assets, or engage in wash-sale transactions with other banks, then there is no such incentive. Indeed the incentive is for them to overpay as much as possible. They get the cash up front from selling the asset, and then when the paper goes bad, the government takes most of the loss.

Incidentally, if the government were to truly follow the rule of law, they are required to fight this idea. The money for the public side of the public private partnership comes from the TARP program. The authorizing legislation for the TARP states:

(e) Preventing unjust enrichment. In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. 12 USCS § 5211(e).

This would seem to be a clear-cut case of unjust enrichment that Congress was trying to prevent when it put this language into the law. I know that the rule of law has become "quaint" when it comes to the bailing out of the banks, but there has to be a limit somewhere. After all, if the banks participated in kidnapping for ransom, would we allow that to happen simply because the proceeds would help out their balance sheets?

FDIC Chair Shelia Bair needs to tell the bank lobbyists a resounding NO to this proposal, if not call security and have them thrown out of her office for being so arrogant as to suggest such a thing. Adding to the amount of toxic sludge on the balance sheet is not the way to unclog the balance sheets of the banks.

If the banks get their way, it will turn the potentially promising PPIP program into yet another rape of the American taxpayer by the banks. Enough with the Welfare Queens of Wall Street. It is time for someone in Washington to stand up against the bankers. That would be change we could believe in.
Read the full analyst report on "JPM"
Read the full analyst report on "C"
Read the full analyst report on "BAC"
Zacks Investment Research

FDIC Fund Running Dry – Analyst Blog

Dirk Van Dijk — Wed, 27 May 2009 19:18:20 +0000

We highlight JP Morgan Chase & Co., Inc. (JPM), BankUnited Financial Corp. (BKUNA), Wells Fargo & Co. (WFC) and Bank of America Corp. (BAC).

As the FDIC has had to step in to take over more and more insolvent banks, the fund has dwindled to dangerously low levels. At the same time, the number of problem banks continues to grow at a rapid pace.

At the end of the first quarter there were 305 "problem institutions" with a total of $220.0 billion in assets, up from 252 institutions and $159.4 billion in assets at the end of 2008. At the end of the quarter, the Deposit insurance fund was at just $13.0 billion, or 0.27% of insured deposits, a decline of 24.7% in the quarter alone.

The first graph (from http://www.calculatedriskblog.com/) shows the steep drop in the coverage ratio. Just a year ago, the fund was equal to 1.01% of covered deposits. The current level is its lowest since the first quarter of 1993, when we were digging out from the S&L fiasco.

However, don't worry about losing the money in your checking account if your bank goes under. Congress has already approved a $500 billion line of credit to the FDIC. Without a doubt, that line of credit is going to have to be tapped. This does emphasize the insanity of having the FDIC provide the guarantees for the PPIP [Public-Private Investment Program]. The fund simply does not have the resources available to do it. The money for the inevitable large losses that the fund will take on the program will come from that line of credit.

The prospect of the FDIC paying back that loan anytime soon from increased assessments on the banks is extremely remote. This is simply a back-door bailout of the FDIC, structured as a line of credit so it does not increase the reported budget deficit.

Using the FDIC to backstop the PPIP program is simply a way to bypass Congress. There is no way that Congress could not have approved the line of credit and let the FDIC become insolvent. By all rights, the assessments on the banks should be raised to make up for the shortfall in the FDIC, but now is not exactly the time to do it, since it would simply deplete their capital at a time when they desperately need to improve their capital base.

To bring the fund up to a more normal 1.2% of insured assets would require $44.8 billion, not counting the losses that the fund has incurred so far in the second quarter, or any subsequent losses. That would be a pretty hefty tax for the banks to pay. Still, fairness demands that it be paid by the banks, not by the general taxpayer.

During the quarter, 21 banks with $9.5 billion of assets failed, at an estimated cost to the fund of $2.2 billion. In the 12 months to 3/31/09 there have been 44 failures with $381.4 billion in assets at a total cost to the fund of $20.1 billion. The 5.3% of failed assets cost to the fund over the last year is somewhat misleading since by far the largest failure was Washington Mutual, which was bought by J.P. Morgan (JPM) at no cost to the FDIC (but very generously backstopped by the Fed).

It is noteworthy that Wamu never showed up on the "problem bank" list. This is a good reminder than not all problem banks fail, and not all failures are identified as problem banks before they go under. The 23.2% cost of failed assets in the first quarter is much more representative of a typical bank failure.

Since the end of the first quarter, 15 more banks have failed, and one, BankUnited (BKUNA) had more assets ($12.8 billion) and cost the fund more ($4.9 billion) than all the failures of the first quarter combined. It is thus very likely that the fund is already approaching a single-digit basis-point coverage ratio of insured deposits.

If we simply subtract out the $4.9 billion from the $13.0 billion at the end of the quarter (very generously assuming that assessments coming in equal the cost of the other 14 smaller failures) the fund is down to just $8.1 billion, or 3.7% of identified problem assets. As commercial real estate tanks, hundreds of smaller banks with massive exposure to it will be in danger of failing.

It is very likely that the list of problem banks and their assets will continue to grow. When looking at the second graph (from the FDIC, by way of http://www.calculatedriskblog.com/) note that the difference between the last bar and the second to last bar is only a quarter, while the other bars are annual differences. Thus the increase in the assets of problem banks is actually accelerating by increasing $60.6 billion in the first quarter, almost twice the $34.3 billion average increase per quarter during 2008.

Similarly, the quarterly increase in the number of problem institutions, 53, is significantly higher than the average quarterly increase during 2008, which was 44. In short, we still have many significant problems in the banking system, and the rate of increase shows no sign of slowing down.

While the big boys like Wells Fargo (WFC) and Bank of America (BAC) may be in the process of raising enough capital to repay the TARP, there are many smaller banks which are in deep trouble. While individually they do not pose a systemic risk, collectively they will prove to be a significant drag on any economic recovery.

Read the full analyst report on "WFC"
Zacks Investment Research

As GM Cruises Toward Government Deadline, U.S. Automakers Must Learn to Deal With a Permanently Smaller Market

Contrarian Profits — Tue, 26 May 2009 12:30:52 +0000

pstrongGeneral Motors Corp. (NYSE: a href="http://www.google.com/finance?q=gm" target="_blank"GM/a) /strongis closing in quickly on its June 1 deadline to finish overhauling its operations, or opt for Chapter 11 bankruptcy. Because that deadline is actually one week from yesterday (Monday), analysts and investors will be watching GM closely this week./p pNo matter which path GM chooses – conventional restructuring or bankruptcy – the U.S. Big Three of GM,strong Ford Motor Co. (NYSE: a href="http://www.google.com/finance?q=f" target="_blank"F/a) /strongandstrong a href="http://www.google.com/finance?cid=4090940" target="_blank"Chrysler LLC/a/strong will have to adjust to the U.S. auto market’s post-financial-crisis “new reality.” Automakers will sell only 10 million cars and trucks in the U.S. market this year, the worst in at least 30 decades – and roughly 38% less than the 16 million vehicles that were sold in the United States annually in#8230;/p

An Unwarranted Sweet Deal – Analyst Blog

Dirk Van Dijk — Fri, 22 May 2009 21:34:16 +0000

Highlights include Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), JPMorgan Chase & Co. (JPM), Morgan Stanley (MS), Citigroup Inc. (C) and Goldman Sachs Group Inc.(GS).

Many of the banks want to repay the TARP funds. One of the things that the government got for its largess was warrants at each of the banks, in addition to the preferred stock (at a rate well below market -- a sweet deal that meant that we the taxpayers were immediately in the hole to the tune of $76 billion on the first $350 billion doled out, according to Elizabeth Warren, the head of the Congressional oversight panel for TARP). A warrant is like a long-dated option contract. Bloomberg has this little tidbit:

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

"While 17 financial institutions have repaid TARP funds, only two have 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. The first was Old National Bancorp in Evansville, Indiana, which gave the Treasury Department $1.2 million last week 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. (BAC) would save $2.03 billion, followed by Wells Fargo & Co. (WFC) at $1.48 billion and JPMorgan Chase & Co. (JPM) at $1.46 billion. Morgan Stanley's (MS) benefit would be $983 million, (C) would come in at $965 million and Citigroup Inc.'sGoldman Sachs Group Inc. (GS) would have $693 million, according to the data compiled by Bloomberg."

This is simply incomprehensible to me. I agree with Rep. Miller, we can't make a bad deal for the taxpayers get any worse. If the Treasury wants to get rid of the warrants, it should sell them off in the open market, not negotiate with the banks. That way the taxpayers would be far more likely to get the true value rather than just one more huge raid on the Treasury.

Also, if the warrants were sold on the open market, they would remain outstanding, which means when they were exercised, the bank would get more capital, while buying them back depletes their capital. Given the generally undercapitalized state of the banking system, more capital is better than less capital, even if it means potential dilution to the bank shareholders. We need a strong banking system -- the government has no interest one way or the other in the eventual level of any given banks share price (especially if it does not have the warrants any more).

Memo to Geithner: You now work for the U.S. taxpayers, not the banks like you used to when you were heading up the N.Y. Fed (100% owned by the banks). You have a responsibility to get as much as possible for government assets when you sell them off. Given the massive size of the deficit, we could use that $10 billion. Either sell them on the open market or keep them and see if they will be worth substantially more in three or four years. If the banks don't like it, so what? Screw 'em.
Read the full analyst report on "WFC"
Zacks Investment Research

FDIC Can Increase Borrowing – Analyst Blog

Zacks Market Commentaries — Fri, 22 May 2009 20:42:08 +0000

We highlight Bank of America Corp. (BAC), Citigroup, Inc. (C) and Wells Fargo & Co. (WFC).

FDIC's new insurance coverage extended through 2013

On May 20, 2009, President Obama signed a bill that increases the FDIC's borrowing authority for its bank deposit insurance to $500 billion until the end of 2010. The legislation also increases the agency's permanent borrowing authority from the Treasury to $100 billion from $30 billion and extended the agency's new deposit-insurance limit of $250,000 through 2013.

Earlier in October 2008, the Emergency Economic Stabilization Act had temporarily raised the limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor, which was effective through December 31, 2009.

In all, 34 banks have failed this year, significantly higher from 25 in 2008 and just three in 2007. As the economy continues to worsen (though at a decelerating pace now) and unemployment continues to rise, the banks will continue to fail, sapping the FDIC's deposit insurance fund. The fund stood at $18.9 billion at the end of 2008 (its lowest level in almost 25 years), compared with $52.4 billion at the end of 2007. FDIC expects that bank failures will cost the insurance fund around $65 billion through 2013.

Yesterday's federal seizure of Florida thrift BankUnited Financial Corporation is expected to cost the FDIC $4.9 billion, the second-largest hit to its insurance fund since the financial crisis. The costliest was last year's seizure of IndyMac Bank, on which the FDIC is estimated to have lost $10.7 billion.

While the nation's 19 biggest banks, including Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC), "passed" the stress tests earlier this month, and are now busy filling the capital holes, the banking system as a whole is still very fragile. With deteriorating commercial real estate, rising credit card losses, and still declining housing prices, we can expect the banks' woes to worsen, though the massive efforts by the Fed and the Treasury appear to be helping them now.

We advise the bank depositors to ensure that their deposits are under FDIC insurance limits (please keep in mind that the current limit is not permanent, it is only through the end of 2013, as of now) and keep paying attention to the news about their bank.

Read the full analyst report on "WFC"
Zacks Investment Research

Investment News Briefs Friday, May 22, 2009

Contrarian Profits — Fri, 22 May 2009 13:00:22 +0000

pBofA Fast Tracks TARP Payback; Brazil Unemployment Reverses in April; Taiwan GDP Falls 10.24%; Emirates Airline Posts 80% Profit Nosedive; Dollar Swoons Against Euro, Yen; GM and UAW Reach Tentative Accord; Leading Indicators Surge to 4-Year High; Copper Slumps on Poor Sentiment/p ul type="disc" listrongBank of America Corp./strong (NYSE: a href="http://www.google.com/finance?q=bac"BAC/a) intends to a href="http://www.ft.com/cms/s/0/74f80dca-4568-11de-b6c8-00144feabdc0.html?nclick_check=1"pay back $45 billion in loans it borrowed/a from the U.S. government through the Trouble Assets Relief Program (TARP) by the end of the year, strongemThe Financial Times /em/strongreported. And it intends to do so by accelerating its program to raise capital. Sources told the strongemFT/em/strong that BofA is on track to raise more than $35 billion by the end of September./li /ul ul type="disc" liBrazil’s a href="http://www.bloomberg.com/apps/news?pid=20601086#38;sid=aiHPPvoWIYgo#38;refer=latin_america"unemployment rate fell to 8.9% in April/a from 9.3% in March, strongemBloomberg/em/strong reported. “The#8230;/li/ul

Lowe’s & HD Make Improvements – Analyst Blog

Zacks Market Commentaries — Thu, 21 May 2009 14:45:25 +0000

Highlights include Lowe's Companies, Inc. (LOW), The Home Depot, Inc. (HD), Citigroup Inc. (C), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), U.S. Bancorp (USB) and American International Group, Inc. (AIG).

The Relationship of Home Improvement Heavyweights to the Financials

Early this week, both Lowe's (LOW) and Home Depot (HD) released better-than-anticipated results. Moreover, the comments made by Lowe's Chief Executive Robert Niblock that "with consumer confidence having rebounded off its historic lows and some encouraging signs in housing, we may have hit the bottom" helped to rally the markets and financial stocks in particular.

However, what the markets did not pay attention to is how long could we bounce along the bottom.

We think the results put up by both home improvement giants on the surface may have been a bit misleading. First, remember that after the several month moratorium on the process, foreclosures have been expanding. Foreclosed property sales or Other Real Estate Owned by financial stocks remains high. Buyers of these properties may have to make anywhere from minimal improvements to massive restoration efforts to make the acquired properties habitable.

Unfortunately, with the level of foreclosures expected to continue, home prices may not rebound. We would also point to the fact that any improvement in the level of home prices would tend to be the result of foreclosures moving upstream to the McMansion type of dwellings.

We believe both home improvement suppliers benefited from the need for recently acquired previously foreclosed dwellings needing repairs. With financial entities such as but not limited to Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) and US Bancorp (USB) keeping a fairly tight leash on credit quality, the willingness to lend remains slim (versus none back in October 2008-January 2009).

Add to this mix that unemployment remains extremely high , also that the government thinks there is reason to utilize the remaining Troubled Asset Relief Program (TARP) funds to potentially prop-up a number of insurance companies -- as much as $100 million will be set-aside to help out investors of AIG (AIG). Therefore, we remain a bit more conservative in our expectations over the near term at least.
Read the full analyst report on "WFC"
Read the full analyst report on "USB"
Zacks Investment Research

Another Government Agency? – Analyst Blog

Zacks Market Commentaries — Wed, 20 May 2009 18:36:33 +0000

Highlights include Visa, Inc. (V), MasterCard, Inc. (MA), American Express Co. (AXP), Capital One Financial Corp. (COF) and Bank of America Corp. (BAC).

Oh Great -- Potentially Another Government Agency

Based on Treasury Secretary Timothy Geithner's comments that extensive changes are needed to see that the current financial crisis (arguably the worst in past 50 years) never is revisited, it appears that the Obama Administration is considering the concept of creating a new agency to focus on consumer financial products such as credit card, mortgages, mutual funds and 401K programs from such companies as but not limited to Visa, Inc. (V), MasterCard (MA), American Express (AXP), Capital One (COF) and Bank of America (BAC).

We have long agreed with Elizabeth Warren, head of the Congressional Oversight Panel (Troubled Asset Relief Program), in her argument that the government needed to enhance its efforts of protecting consumers of increasingly complex financial products. Presently, these efforts are spread across a number of federal and state agencies, including the Federal Reserve, the SEC and the Federal Trade Commission.

However, any new agency, with all the overhead that would be added, may not be the right approach at this moment considering the issues at hand. To use the SEC for example, during the 1990's when Arthur Levitt was in charge, he stated that that he not given all the tools necessary to properly execute the commissions duties. Now most recently, SEC employees have been accused of trading in their personal accounts some of the companies that they were reviewing.

Therefore we think the government should correct certain know deficiencies and streamline various agencies and commissions before rushing to create a new and dubiously needed new agency, which would saddle the taxpayers with an even more bloated budget deficit. Zacks Investment Research

A Financial Products Regulator? – Analyst Blog

Zacks Market Commentaries — Wed, 20 May 2009 15:28:01 +0000

Highlights include American International Group, Inc. (AIG), Bank of America Corp. (BAC), JP Morgan Chase & Co. (JPM) and Citigroup, Inc. (C).

The Obama Administration is currently discussing the creation of a regulatory authority with broad powers to regulate financial products (such as mortgages and other consumer-oriented financial products) as part of the government's broader overhaul of financial regulation, as per reports in several newspapers this morning.

The discussions are reported to be in an advanced stage, and the plan is expected to be unveiled in the next couple of weeks. It is unclear if the administration will propose creating a new federal agency or place new powers within an existing agency.

Under the current complex and uneven regulatory system, the responsibility of oversight of financial products is shared by a number of state and federal agencies, including the Federal Reserve, the Securities and Exchange Commission, the Federal Trade Commission and others. Further, there are many gaps in oversight and some financial products are not regulated at all.

Broad overhaul of financial markets regulation is one of the top priorities of the Obama Administration. The comprehensive framework for regulatory reforms proposed by the Treasury Secretary Geithner in March had four broad components, one of which was "Protecting Consumers and Investors."

Other proposals included establishment of a systemic risk regulator, with authority to seize and restructure impaired firms like AIG (AIG) before they threaten the broader system, and fostering International coordination so as to ensure international rules for financial regulation are consistent with the standards being implemented in the United States.

Such coordination is critical to properly oversee the risks of financial behemoths like Bank of America (BAC), JP Morgan Chase (JPM) and Citigroup (C), which have operations all over the world. Zacks Investment Research

B of A Shares Now Worth Less – Analyst Blog

Charles Rotblut — Wed, 20 May 2009 15:00:58 +0000

Bank of America Corp. (BAC) shareholders, your shares are now worth less than they were just two weeks ago.

Yesterday, the banking conglomerate announced that it sold 1.25 billion shares at an average price of $10.77.

The most obvious takeaway is that the sales were transacted at below market prices, or at least below the average closing price of the past 2 weeks. In other words, the buyers didn't think that BAC shares were worth the current price of $11.25. That's not good, but it gets worse.

Thanks to the secondary offering, existing shareholders now own less of BAC. To fully understand the implications, let's look at the math.

As of April 30, Bank of America had 6.40 billion shares outstanding. Multiplying this number by the consensus earnings estimate of 44 cents per share gives us a projected net income figure of $2.816 billion.

The net income figure does not change, whether there is 1 share outstanding or if there are 10 billion shares outstanding. What does change, however, is what portion of income each shareholder is entitled to.

The secondary offering increases shares outstanding to 7.65 billion shares. Dividing this number into the net income figure of $2.816 results in earnings per share of 37 cents per share -- a 15% decrease.

Remember, the net income pie has not change, just your slice of it. And your slice is now 15% less than what it was just 2 weeks ago.

Worse yet, BAC still remains far short of meeting the funding requirements required by the stress tests. None of this is good news for shareholders. Zacks Investment Research

Investment News Briefs Tuesday, May 19, 2009

Contrarian Profits — Tue, 19 May 2009 14:00:57 +0000

pChina Ramps Up Oil Refining; Lowe’s Tops Forecasts; Toshiba Raising $3 Billion in Stock Sale; AIG Fast-Tracking Asian Subsidiary IPO; Obama Sets First Pollution Limits on Cars; Homebuilder Confidence Highest in 8 Months; State Street Sells $1.5 Billion in Stock to Repay TARP Funds; Oil Spikes on Africa Violence, U.S. Refinery Fire/p ul type="disc" liChina will a href="http://www.bloomberg.com/apps/news?pid=20601089#38;sid=ayv.2RuaMe1k#38;refer=china" target="_blank"increase its annual oil refining volume by 18%/a over the next two years to meet expected long-term demand. China’s State Council also said that it would boost stockpiles and encourage petro companies to merge operations, strongemBloomberg /em/strongreported./li /ul ul type="disc" listrongLowe’s Cos. Inc. /strong(NYSE: a href="http://www.google.com/finance?q=NYSE%3ALOW" target="_blank"LOW/a) reported a href="http://www.reuters.com/article/newsOne/idUSTRE54H26820090518" target="_blank"an analyst-beating quarterly profit/a and raised its full-year forecast. The No. 2 home improvement retailer cited improving consumer confidence and signs the housing market may be bottoming,#8230;/li/ul

Buffett Buys Into More Banks – Analyst Blog

Zacks Market Commentaries — Mon, 18 May 2009 17:07:30 +0000

Highlights include Berkshire Hathaway (BRK.A and BRK.B), U.S. Bancorp (USB), Wells Fargo & Co. (WFC), M&T Bank (MTB), SunTrust Banks Inc. (STI), Bank of America Corp. (BAC), Goldman Sachs Group, Inc. (GS), Johnson & Johnson (JNJ) and Iron Mountain (IRM).

Basically, the last of the Buy-and-Hold intrinsic value investors, Warren Buffett, through his investment entities Berkshire Hathaway (BRK.A and BRK.B) was out bargain-hunting during 1Q09.

While Berkshire officials are typically tight-lipped, based on documents filed with the Securities and Exchange Commission recently, Berkshire's holdings as of March 31, 2009 showed financials high on the list.

True to his comments made at Berkshire's annual shareholder meeting earlier this month -- where Mr.Buffett stated that US Bancorp (USB) and Wells Fargo (WFC) were extremely strong banks and that he would be willing to invest in them at current prices -- Berkshire bought nearly 12.4 million shares of Wells Fargo, up 4.3% to total 302.6 million shares, and purchased approximately 1.5 million shares of U.S. Bancorp, up 2.2% to total approximately 69.0 million shares. But the holdings of M&T Bank (MTB), SunTrust Banks Inc. (STI), Bank of America (BAC) and Goldman Sachs (GS) remained unchanged during 1Q09.

As for non-financials, Berkshire bought 3.9 million shares of Johnson & Johnson (JNJ), up 13.6% to total 32.5 million shares. And it appears that Berkshire closed out its entire holdings of Iron Mountain (IRM) -- a total of 3.4 million shares.
Read the full analyst report on "USB"
Read the full analyst report on "WFC"
Read the full analyst report on "JNJ"
Read the full analyst report on "IRM"
Zacks Investment Research

Even the Uber-Rich Are Crying – Analyst Blog

Zacks Market Commentaries — Mon, 18 May 2009 16:26:47 +0000

We highlight Citigroup, Inc. (C), Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM), U.S. Bancorp (USB) and Sun Trust Banks, inc. (STI).

The bad news -- the price reductions experienced by the multitudes have migrated upstream to the seven-to-eight figure luxury homes across the nation.

The good news -- If you have the readies, you can probably get an amazing deal.

From San Francisco to the Hamptons, the prices of these luxury homes have been reduced by upwards of 10's of millions. Most of these homes have remained on the market 180-plus days despite the price cuts as buyers wait for further cuts. Even though most the "uber"-wealthy probably purchased their homes for cash can probably wait out the stifled housing market, we suspect a number of the owners may be like most of the rest of the country and be over-leveraged.

As such it would not take many of these properties to go into foreclosure to significantly take a toll on a financial entities financial statement. As such, we could envision several operations such as Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), US Bancorp (USB) or even possibly Sun Trust (STI) potentially making a disclosure at some point if things do not improve.
Read the full analyst report on "USB"
Zacks Investment Research

Gov’t Pressuring BAC to Revamp? – Analyst Blog

Zacks Market Commentaries — Fri, 15 May 2009 20:46:03 +0000

Highlights include Bank of America Corp. (BAC), General Motors Corp. (GM), Freddie Mac (FRE) and Fannie Mae (FNM).

Is the Government Pressuring BAC to Revamp its Board?

The federal regulators have advised Bank of America Corp. (BAC) to revamp its board of directors, according to a report published in the Wall Street Journal this morning.

Per the report, the government officials also suggested that independent directors lead a reshuffling of the board, and that the board "needed more members with banking experience."

There is no doubt that the board was negligent in carrying out its duties, while the bank continued to make risky bets, which ultimately resulted in its bailouts by the government. And we believe that there is a pressing need to revamp the Corporate Governance practices at the banks.

But the question is, can the government create pressure for changes at the board level of a private company? Is that not the prerogative of the company's shareholders?

Bank of America shareholders voted in late April to oust Ken Lewis as chairman of the board, but they voted to keep him as the CEO and also the rest of the board.

Though the government has invested $45 billion in BAC, the investment is in the form of preferred shares which do not carry voting rights. Further, most of its current woes stem from its acquisition of Merrill Lynch, reportedly on government's behest.

According to a testimony by Ken Lewis to the New York Attorney General, he was pressured by Fed Chairman Bernanke and former Treasury Secretary Paulson to not disclose the huge losses at Merrill Lynch that and not to invoke the material adverse change clause in the agreement in order to get out of the deal.

The government had adopted a different strategy in bailouts of General Motors (GM), Freddie Mac (FRE) and Fannie Mae (FNM) when the CEOs were ousted following the bailouts, however in case of banks, the CEOs were allowed to remain in office.
Read the full analyst report on "GM"
Read the full analyst report on "FRE"
Zacks Investment Research

Trimming the Fed Borrowings – Analyst Blog

Zacks Market Commentaries — Fri, 15 May 2009 14:16:54 +0000

Highlights include Citigroup Inc. (C), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), JPMorgan Chase & Co. (JPM), Fannie Mae (FNM), Freddie Mac (FRE) and American International Group Inc. (AIG).

Over the past week, financial institutions trimmed their borrowings from the Federal Reserve's emergency lending program. The program was started as a result of investors shifted into safer Treasury securities over lending to financial entities. However, so far these financial institutions have been effectively hoarding significant portions of their cash, rather than lending it to each other or customers, which has contributed to the recession (the longest since World War II).

While the institutions have not been identified, we would expect the list to include but not be limited to Citigroup (C), Bank of America (BAC), Wells Fargo (WFC) and JPMorgan Chase (JPM).

For the week, commercial banks averaged $39.9 billion in daily borrowings, down from $40.9 billion for the previous week, while investment firms drew just an average of $482.0 million, down from $643.0 million for the previous week. These emergency borrowing are at a 0.50% interest rate.

The Fed's net holdings of commercial paper (crucial short-term debt which companies use to pay everyday expenses) averaged $166.9 billion for the week -- an increase of $2.2 billion over the previous level. Since the Fed started buying this paper for the first time effective Oct. 27, 2008, when the credit problems began to intensify, it now holds approximately $1.3 trillion worth of commercial paper.

The Fed purchased an averaged $384.1 million in mortgage-backed securities guaranteed by Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae, up $18.3 billion from the previous week. These purchases, which started January 5, 2009, were an attempt to stimulate the crippled mortgage-finance and housing markets.

While mortgage rates have dropped since the beginning of the year, we would view the financial institutions' sentiment to lending has moved to "slim" from "none."

At this time, the Fed Reserves' balance sheet stands at $2.12 trillion, up from $2.04 trillion in the previous week, with the balance sheet doubling since September 2008. This significant increase over the past nearly nine-months reflects the many unconventional efforts of various programs to lend or buy debt taken by the Fed in attempts to mend the financial system and revive the economy out of recession.

Some would view the trimming of the borrowings as a hopeful sign that some credit problems are being to ease. However, others worry the Fed's actions have put billions of taxpayers' dollars at risk considering that assets the Fed acquired last year following the bail-outs of Bear Stearns and insurer American International Group Inc. (AIG) have moderated in value.
Read the full analyst report on "WFC"
Read the full analyst report on "FRE"
Zacks Investment Research

Video-o-rama: Gloomy economic reports rein in investors’ optimism

Prieur du Plessis — Fri, 15 May 2009 08:34:18 +0000

A batch of gloomy economic reports suggested that recent optimism about a global recovery might have been premature. Video clips produced during the past few days provided comments on this, as well as on a host of other topical issues. Click through to the post to view the selection.

Geithner Double-Speak Continues – Analyst Blog

Zacks Market Commentaries — Wed, 13 May 2009 16:36:20 +0000

We highlight Citigroup, Inc. (C), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), U.S. Bancorp (USB) and JPMorgan Chase & Co. (JPM).

Comments made by the U.S. Treasury Secretary Timothy Geithner to the annual meeting of the Independent Community Bankers of America on Wednesday left us a bit bewildered.

If -- by Mr. Geithner's assessment -- the U.S.'s Financial System is improving, then why is there a need to extend the expected repayments of Temporary Asset Relief Program (TARP) from the largest U.S. financial institutions to small financial institutions?

We think his comment, "The more vulnerable parts of the nonbank financial system no longer exist ... and the financial system has already completed a big part of the painful adjustment away from its excessively leveraged state," pertains to relatively subjective and sliding scale approach of the "stress test" on the 19 largest U.S. financial institutions (to include, but not be limited to Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), U.S. Bancorp (USB) and JP Morgan Chase (JPM) included the temporary modification of the mark-to-market to permit the individual financial institutions the ability to assess their own internal valuation.

We do not consider this to be in the true spirit of the Financial Accounting Standard Board's (FASB) mandate to be independent as the legislative branch ordered "by hook or by crook" this entity to come up with a recommendation that the legislative branch wanted -- or else.

We would contend the real reasoning for the 19 largest institutions to find alternative funding sources and repay the TARP funds is so they are able to pay their respective managements what they believe is acceptable multi-million-dollar packages.

Per Mr. Geithner's comments, financial institutions with total assets under $500 million will be able to apply during a six-month window for TARP funds. This would include current participants as well. Why? To ensuring these smaller institutions had sufficient resources to continue making loans even as the economy weakened and credit losses rose.

If, by Mr. Geithner's assessment, lending has started to improve, then why are foreclosures and credit card defaults still on the rise?

We think that lending has improved, but it is to "slim" from "none."

To that, we suspect that the vast majority of the lending has been done through mortgage brokers under FHA programs, and not the financial institutions themselves.
Read the full analyst report on "WFC"
Read the full analyst report on "USB"
Zacks Investment Research

Big Surge in Secondary Stock Offerings Will Lead to a Major Uptick in IPO Profit Plays

William Patalon lll — Wed, 13 May 2009 10:00:08 +0000

By William Patalon III Executive Editor Money Morning/The Money Map Report In an odd bit of capitalist irony, the U.S. banking crisis could end up as the catalyst that finally jump-starts the... Money Morning is here to help investors profit h...

Bank of America Planning Stock and Asset Sales to Appease Government Requirements

Contrarian Profits — Mon, 11 May 2009 15:15:47 +0000

pBank of America Corp. (NYSE: a href="http://www.google.com/finance?q=bac" target="_blank"BAC/a) plans to sell assets and issue more common stock after being told by the federal government that it must raise $33.9 billion to adequately guard against “more adverse” economic conditions./p pBank of America a href="http://www.moneymorning.com/2009/05/08/bank-stress-test-results-4/" target="_blank"was one of 10 banks told by the government to raise more capital following the so-called stress test/a. The government concluded that BofA faces a potential $136.6 billion in losses from troubled loans and investments in 2009 and 2010. The bank’s $34 billion capital shortfall was more than twice that of Wells Fargo #38; Co. (NYSE: a href="http://www.google.com/finance?q=wfc" target="_blank"WFC/a), which had the second greatest capital need./p pBofA Chief Executive Officer Kenneth Lewis said Thursday that his company will start closing the capital shortfall by raising#8230;/p

“Billing Rights” or Bill of Rights? – Analyst Blog

Zacks Market Commentaries — Fri, 08 May 2009 16:44:11 +0000

Highlights include Bank of America Corp. (BAC), Citigroup, Inc. (C), Capital One Financial Corp. (COF) and Wells Fargo & Co. (WFC).

"Credit Card Bill of Rights" vs. "Billing Rights"

Over the past several months, the media has been reporting what has been deemed so-called "unfair business" practices by credit card operations with respect to the lack of notification prior to the raising of interest rates on existing balances or the lowering of limits. Both actions have pushed many credit strapped U.S. consumer to the brink. To correct the issue, first the House of Representatives has passed and now the Senate is reviewing a "Credit Card Bill of Rights" to give some relief to the consumer.

However, recently we -- like many others who use a Bank of America (BAC) credit card -- received a very interesting correspondence. It seems that BAC has sent out a "Billing Rights Statement." This clever play on words is BAC's way of conveying its new fee structure.

Effective June 1, 2009, BAC will now charge a 4.0% transaction fee on top of the interest rate it will charge for a number of transactions via the credit card (ATM cash advances, balance transfers, bank cash advances, cash equivalents, direct deposit cash advances, and wire transfer purchases). Also, "Foreign Transactions" -- to include transactions in U.S. dollars if made or processed outside the U.S. -- will be subject to a 1% fee on each U.S. dollar amount of each such transaction, in addition to any other applicable transaction fee.

If these actions are not revolting enough, if a customer has a problem with the quality of the property or service purchased with a credit card, and have made "good faith" attempts to correct the problem and do not want to pay the reaming amount due on the property or service, there are two limitations. First, the purchase must have been made within your home state or within 100 miles of your current mailing address, and second, the purchase must have been for greater than $50. In today's on-line society, the majority of purchases would not be covered. So caveat emptor!!

While we have yet to hear of other institutions alerting their customers of the change, we would suspect that Citigroup (C), Capital One (COF), Wells Fargo (WFC), and others. So if they have not sent out similar notices, we don't expect they would be far behind.

With the legislative and executive branches of our government so keyed up with making it so the U.S. consumer can afford their previous lives, it would seem that everyone is forgetting that they may not be able to afford the future.

By the way, the aforementioned fees are being assessed on BAC's Premier Account Customers, as well.
Read the full analyst report on "WFC"
Zacks Investment Research

Bernanke on Regulation – Analyst Blog

Dirk Van Dijk — Thu, 07 May 2009 17:43:56 +0000

Highlights include American International Group, Inc. (AIG), Citigroup, Inc. (C), JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and Bank of America Corp. (BAC).

This morning, Fed Chairman Ben Bernanke gave a speech on the topic of financial regulation and the lessons learned from the recent disaster. Here is a key section of the speech, with my thoughts interspersed:

"Looking forward, I believe a more macroprudential approach to supervision--one that supplements the supervision of individual institutions to address risks to the financial system as a whole--could help to enhance overall financial stability. Our regulatory system must include the capacity to monitor, assess, and, if necessary, address potential systemic risks within the financial system. Elements of a macroprudential agenda include:

"monitoring large or rapidly increasing exposures--such as to subprime mortgages--across firms and markets, rather than only at the level of individual firms or sectors;"

It is sort of surprising that this has not been done already.

"assessing the potential systemic risks implied by evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products;"

Yes, the Fed should not be sitting on its thumb when major financial players leverage themselves up to 30:1 or more (especially if all the off-balance sheet stuff is taken into consideration). Markets evolve and the regulators have to keep up.

"assessing the potential systemic risks implied by evolving risk-management practices, broad-based increases in financial leverage, or changes in financial markets or products;"

I'm looking at you, AIG (AIG). There will always be a high degree of interconnectedness between major financial firms. Someone has to be looking at the "what if" cases should one of them go down.

"ensuring that each systemically important firm receives oversight commensurate with the risks that its failure would pose to the financial system;"

The devil is in the details here. Given the size of the banking behemoths, each one of them should be treated as a nuclear warhead, and should receive the same level of oversight that we have in regard to our stockpiles of strategic weapons. The problem is that "oversight commensurate with the risks that its failure would pose" would require an incredible amount of micro management.

The solution to that is to make sure that no bank gets big enough to pose such a risk. It is time to break them up, both by function (i.e. reimpose a modern equivalent of Glass-Steagall) and perhaps by region. Ten mini Citigroups (C) would each would not pose an overall risk to the system if one of them were to fail.

Of course you would want to keep an eye on them, just as the military keeps an eye on its 1,000 lb conventional bombs. However, the consequences of one of those going missing is much less profound than a missing nuke warhead.

Unfortunately, in the largely ad-hoc response to the crisis, we have been moving in exactly the wrong direction. JP Morgan (JPM) swallows up Bear Stearns and Washington Mutual, Wells Fargo (WFC) takes over Wachovia, and Bank of America (BAC) now owns Countrywide and Merrill Lynch. All of them were too big to fail before this started, and now they are way too big to fail. Either we regulate them extremely closely -- to the point where they will be complaining that every credit card being issued has to be first cleared with the Federal Reserve Board of N.Y. (OK, I'm exaggerating for effect here) -- or we break them up.

"providing a resolution mechanism to safely wind down failing, systemically important institutions;"

This is very important, and is at the core of why all the money that has been poured into American International Group has by and large simply flowed out the backdoor to big foreign banks and Goldman Sachs (GS). If we put them into bankruptcy, it would have been a huge systemic hit to the system, especially coming at almost the same time as the Lehman Brothers collapse.

Without being in bankruptcy, we had to honor the CDS contracts at 100 cents on the dollar. The result was a huge backdoor handout to the banks (a much bigger scandal than the bonuses, IMHO). This would have provided an intermediate step where the new 80% owners of AIG (aka the taxpayers) could have just returned the premiums on the CDS's and rewritten the bonus contracts when we came in.

We can do this with smaller banks, but not with big bank holding companies or huge non-bank financial firms. We need this, and we need it right away.

"ensuring that the critical financial infrastructure, including the institutions that support trading, payments, clearing, and settlement, is robust;"

I agree that boring "financial plumbing" stuff is important and has to be maintained. If it backs up, you have one heck of a mess on your hands. This can easily be handled by a sort of boring "public utility" model of banking. Let's get back to the days when banking was a sleepy part of the economy. Low risk, low reward, and bankers were noted for their low golf handicaps. Keep the higher risk stuff (which the economy very much needs) in separate entities.

"working to mitigate procyclical features of capital regulation and other rules and standards;"

This is a good point. As things stand now, in good times the value of assets goes up, so the capital ratios look better. In bad times the value off assets goes down and banks become undercapitalized. However, rather than pretending the values of assets don't change (i.e. suspending mark-to-market accounting rules), it would be far better to require financial institutions to build up large cushions in the good times, and allow some more latitude on the capital requirements in bad times.

However, somehow I suspect that as soon as good times come back, the banks will flex all their political influence (they have a lot, as Sen. Durbin (D-Il) said of the bankers and the Senate, "they own this place") so the cushion is never built up in the good times. After all requiring more equity will result in a lower ROE, and that might result in bonuses that are only in the seven figures rather than in the eight figures. The horror, the horror!

"and identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole."

Yes, although I think referring to them as simply "gaps" is being too generous. We allowed these big institutions to go around and pick who would regulate them. How else would the primary regulator for the world's biggest insurance company end up being the Office of Thrift Supervision (OTS)?

The OTS actively went looking for more institutions to fall under its supervision, and its key marketing policy was that it would be the most toothless and ineffective of regulators. It was the most gung-ho on deregulation, and many of the biggest failures were firms that it was the primary regulator for, including Washington Mutual, Indymac and of course AIG.

We have to find ways to stop shopping around for your regulator and regulatory capture. The Fed would be a very good place to start. It is not comforting that the head of the New York Fed comes from Goldman, and still holds over ten figures worth of Goldman stock when he is now the primary regulator of the firm. That is more than just an appearance of a conflict of interest.

The board of directors of each of the regional Federal Reserve Banks are all made up of bankers. That is because the Federal Reserve is not owned by the government, rather it is owned (literally, not just figuratively) by the banks. Perhaps it is time we reconsider that arrangement.

The speech is a good start, but it does not go far enough. We need to return to the principals that were behind the financial regulatory reforms of the 1930's. The three-legged stool of good solid accurate information, including of potential conflicts of interest (the SEC), making it safe to keep your money in the bank (the FDIC) and making sure the bank does not take your money and use it to play the tables in Vegas (Glass-Steagall). The precise form will be different than the old regulations, but the new order should embody the same spirit.

Read the full analyst report on "WFC"
Zacks Investment Research

BofA’s Lewis Faces Yet Another Challenge – Zacks Tale of the Tape

Zacks Market Commentaries — Wed, 06 May 2009 20:40:23 +0000

Investors in Bank of America Corp. (BAC) remained confident of the firm's ability to meet about $35 billion in capital shortfalls, that regulatory stress tests reportedly indicated, by selling its assets or converting the government's preferred shares into common stock.

While official results of the stress tests are due Thursday, leaked reports said that executives of the country's largest bank by assets have already objected to preliminary findings on capital requirement.

According to industry experts, the easiest remedy to the Charlotte, North Carolina-based firm's problem would be through conversion of preferred shares it sold to the U.S. Treasury during its takeover of Merrill Lynch & Co. However, converting $34 billion into common shares would not only dilute the bank's existing common shareholders but also make the U.S. government one of its largest shareholders.

Other sources indicate that Bank of America is considering selling a part of its stake in China Construction Bank immediately. Whatever decision the bank finally adopts to fill the large capital hole, it would definitely weigh most on Chief Executive Ken Lewis, who has already been ousted from the chairman's seat by angry shareholders.

Shares of the company were up more than 10% to $11.97 at noon on the New York Stock Exchange. They had touched an intraday high of $12.05 earlier in the session.

"BAC" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Bank of America: Rumors & Denials – Analyst Blog

Zacks Market Commentaries — Wed, 06 May 2009 18:03:43 +0000

Highlights include Bank of America Corp. (BAC), Citigroup Inc. (C), Wells Fargo & Co. (WFC), SunTrust Banks, inc. (STI) and Regions Financial Corp. (RF).

Over the past several days there have been many rumors and "leaked reports" on the need of additional capital by all the banks "stress tested" by the regulators -- and by Bank of America (BAC) and Citigroup (C) in particular. This morning, many newspapers have reported that the capital shortfall for Bank of America is $35 billion.

The report appears to be true, given that The New York Times has quoted bank's chief administrative officer. It also appears that the bank is planning to convert the TARP preferred shares to common equity.

While the amount of shortfall is not shocking, the fact that the bank had recently been denying that it needs additional capital certainly is shocking.

Last week, The Financial Times reported that Bank of America was preliminarily found to be need of more than $10 billion of capital, and that the bank was working on plans to raise fresh funds. The report was termed as "completely inaccurate," by the bank (well, technically it was inaccurate since the actual shortfall was much bigger).

During the 1Q09 Earnings Call, Bank's CEO Ken Lewis stated, "We absolutely don't think we need additional capital." Earlier in March, Lewis had even said that, "[The] request for $20 billion of government money to prop up its acquisition of Merrill Lynch was a tactical mistake."

Now there are two possibilities: either the bank's top management (CEO in particular) was completely unaware of its financial health, or they were hiding the facts from the investors. Both are equally serious issues. The banks are supposed to regularly "stress test" their portfolios, as a form of risk assessment and arrive at an adequate capital cushion to protect against the projected losses.

The bank's assessment should not have been vastly different from the assessment done by the regulators, given how "un-stressful" the Fed's stress tests were. And if the former is not true, then the bank's management is certainly guilty of misleading its investors and shareholders.

The focus now is on other banks being reported to be in need to more capital, including Citigroup, Wells Fargo (WFC), SunTrust (STI) and Regions Financial (RF).

Read the full analyst report on "WFC"
Read the full analyst report on "RF"
Zacks Investment Research

What Are the Banks Haggling Over? – Analyst Blog

Zacks Market Commentaries — Tue, 05 May 2009 19:54:58 +0000

Highlights include Bank of America Corp. (BAC), Citigroup, Inc. (C), Wells Fargo & Co. (WFC), SunTrust Banks, Inc. (STI), Regions Financial Services, Inc. (RF), American International Group, Inc. (AIG) and Morgan Stanley (MS).

The much-awaited results on the stress tests have been delayed till Thursday and the market currently is rife with rumors, speculations, "leaked reports" and denials-on which banks will "fail" the stress test.

Among the banks that are being reported to be in need of more capital are Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), SunTrust (STI) and Regions Financial (RF). The banks are currently negotiating with the regulators over the amount of capital Treasury is going to require them to raise -- in other words, they are trying to convince the regulators that they are healthier and better-capitalized than they actually are.

While it is unclear how flexible the regulators will be about adjusting the assessments, it is being reported that some banks are trying to convince them to use their first-quarter 2009 results to project their revenues for the next two years. This has a potential of further undermining the credibility of the stress tests, which are already being widely criticized for not being "stressful enough."

Many banks had strong first-quarter performances results, which are not sustainable, as the banks themselves have admitted. Near-zero funding costs and a surge in refinancing due to record-low mortgage rates and better revenues from fixed income trading (resulting from the high volatility) helped the results. While we do not expect the rates to go up in the near term, they will not remain at current levels over the next two years. Once the Fed sees signs of inflation in the economy, it will have to raise the rates and also stop/slow down its purchases of mortgage-backed securities. Major banks also benefited from large AIG (AIG) payouts.

And some banks benefited from strange accounting rules. Citi recorded a profit of $2.5 billion, and Bank of America recorded a profit of $2.2 billion, resulting from widening of their credit spreads (worsening of creditworthiness), and on the other hand Morgan Stanley (MS) recorded a loss of $1.5 billion due to the tightening of its credit spreads. So if the credit spreads tighten for Citi and Bank of America in near future (are the stress tests not supposed to increase the confidence in the banking system?), will they not be required to record huge losses?

Read the full analyst report on "WFC"
Read the full analyst report on "RF"
Zacks Investment Research

Markets Await Results of Stress Tests – Zacks Tale of the Tape

Zacks Market Commentaries — Tue, 05 May 2009 18:17:01 +0000

As the Federal Reserve prepares to officially disclose results of the stress tests to U.S. bank executives later today, about half of the largest financial firms subject to those checks are expected to be directed to bolster their capital positions to endure further losses.

While the exact number of banks falling short of regulatory criteria among the 19 lenders under review remains a matter of speculation, reports have indicated that Bank of America Corp. (BAC), Citigroup (C) and Wells Fargo & Co. (WFC) would possibly need fresh capital. The government is scheduled to discuss results from the stress tests publicly on May 7.

When the Obama administration announced the stress tests back in February, investors were concerned that the financial institutions failing to pass muster would be shut down or nationalized. However, regulatory authorities have assured shareholders that none of these banks would be allowed to fail and would have access to emergency government funds if required.

As the day for the final results drew closer, financial markets were hopeful that the capital shortfall at banks will be manageable. Shares of all three banks that are feared to need additional capital have tripled their value since early March.

Administrators have pointed to various options that might help large banks to strengthen their balance sheets without seeking refuge of the Troubled Asset Relief Program. While some like Goldman Sachs Group Inc. are already resorting to new stock offerings, others may sell assets to raise capital. However, whether those assets will have to be sold at steep discounts remains unclear.

Separately, private investors are expected to show renewed interest after reports that the financial downturn is finally easing. Banks also have the choice of meeting capital requirements by converting preferred shares issued to the government last fall into common stock.

"BAC" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Lending Standards Tighten Further – Analyst Blog

Zacks Market Commentaries — Mon, 04 May 2009 21:50:58 +0000

Highlights include Wells Fargo & Co. (WFC), Bank of America Corp. (BAC), Citigroup, Inc. (C), BB&T Corp. (BBT) and JPMorgan Chase & Co. (JPM).

Banks Continue to Tighten Lending Standards

Though demand for prime home mortgages has grown recently, fueled by record-low mortgage rates, more banks are making it difficult for borrowers to obtain new housing loans, according to the Federal Reserve quarterly survey on the bank lending practices released today. Detailed results can be seen here.

The survey shows that about 50% percent of banks tightened their lending standards on prime mortgages, up from about 45% in the survey for the prior quarter. Also, 65% percent of banks tightened lending standards on nontraditional mortgages, up from 50% for the last survey.

Though many banks like Wells Fargo (WFC), Bank of America (BAC), Citigroup (C), BB&T (BBT) and JP Morgan Chase (JPM) reported very high revenues from mortgage originations during the first quarter of 2009, most of the activity was related to refinancing of existing mortgages. Tighter standards for new housing loans will continue to keep housing prices down.

About 40% of the banks reported having tightened their credit standards on commercial and industrial (C&I) loans, down from 65% in the January survey. An uncertain economic outlook, a worsening of industry-specific problems, and a reduced tolerance for risk were reported as the main reasons for tightening credit standards and terms on C&I loans.

About 60% of the banks reported a further weakening of demand for C&I loans, which is not surprising considering the capacity utilization is currently at all time low. The banks also reported weaker demand for commercial real estate (CRE) loans.

Credit card and other consumer loans also saw tightening of lending standards.

Most of the banks expect further deterioration in credit quality for all types of household and business loans -- particularly in credit cards, commercial real estate and non-traditional mortgages -- in the coming months.

The survey shows that government's efforts to get these banks increase lending is not having the desired results. At the same time, given the deterioration in the global economy and the steep rise in unemployment, we cannot blame these banks entirely.

Though we now see some signs of deceleration in the pace of economic slowdown, tightened credit standards and lower lending activity at the banks (coupled with other factors) will force the businesses and the consumers to further cut back on their spending, which may ultimately result in prolonging the recession.

Read the full analyst report on "WFC"
Read the full analyst report on "BBT"
Zacks Investment Research

Economic Reality & Market Illusion – Analyst Blog

Zacks Market Commentaries — Mon, 04 May 2009 21:10:54 +0000

Highlights include Citigroup, Inc. (C) and Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), Fannie Mae (FNM) and Freddie Mac (FRE).

It's All How You Look at It

We are a bit perplexed by what would seem like "irrational exuberance" in the markets today -- in particular, the financial stocks. We are all but too aware of the nuance between "reality" of the economy and the "illusions" that the market clings to from time to time.

As there are always three sides to any story, this is our view:

March pending-home sales up 3.2% month-over-month, better that the 0.4-0.6% expected. With the moratorium on foreclosures lifted last month, our impression is that increase in pending home sales is more a function of financial institutions pushing its inventory of Other Real Estate Owned properties off its books.

We do not think the $8,000 tax "deferment" is the end-all-be-all to getting first-time buyers to step up to the plate. We think it is more of a function of investors, both foreign and domestic, being willing to take a chance. We would also point out that while recent home prices increased nationally a bit, could this be more of a function of the deterioration in the economy resulting in McMansions going into foreclosure?

March construction spending rose 0.3% month-over-month -- better than the 0.9% decline in February but below the 1.0-1.5% expected. There needs to be more clarity with what is and is not included. Our discussions with small developers in the Chicagoland area yielded that financial institutions were willing to extend credit to developers (depending on what percentage of the project was completed) to finish the project. We do not think that there is a market improvement in the economy, but it makes simple economic sense that a building that may go into foreclosure is easier to sell if it is completed.

Where the devil is that darn "stress test"? The whispers are that we will hear the pronouncement this Thursday. Why the delay? Clearly a number of the financial institutions in question vehemently disagree with the findings per closed-door meeting. We were made aware of Citigroup's (C) and Bank of America's (BAC) need for capital last week. Wells Fargo's (WFC) halo appears a little tarnished; it was revealed today that it will also need additional capital.

It is extremely counterintuitive that companies that will in all likelihood need to dilute their shareholder base and their respective stock price should be afforded the type of price appreciation experienced over the past month or so.

By raising capital, it does not necessary mean a translation into loan growth, considering that many of these institutions have downsized their mortgage operations over the past 2 years. We suspect these institutions will be purchasing their loan growth, through independent mortgage brokers or directly from Fannie Mae (FNM) or Freddie Mac (FRE).
Read the full analyst report on "WFC"
Read the full analyst report on "FRE"
Zacks Investment Research

TALF Expanded to Include CMBS – Analyst Blog

Zacks Market Commentaries — Mon, 04 May 2009 19:09:53 +0000

Highlights include JPMorgan Chase & Co. (JPM), Citigroup, Inc. (C), Bank of America Corp. (BAC), American Express Co. (AXP) and Capital One Financial Corp. (COF).

The Federal Reserve announced the expansion of its Term Asset-Backed Securities Loan Facility (TALF) on Friday by including commercial mortgage-backed securities (CMBS) and securities backed by insurance premium finance loans as eligible collateral from June 2009.

The Fed also authorized TALF loans with maturities of five years. Currently, all TALF loans have maturities of three years. The details can be seen here.

The CMBS market had accounted for almost half of new commercial mortgage originations in 2007, but as the broader economic condition worsened, this market almost froze towards the middle of last year. As such, it became difficult for the owners of shopping malls, hotels, etc. to refinance their loans or obtain new loans.

Insurance premium finance loans are extended to small businesses for obtaining property and casualty insurance. The loans which are usually funded through the asset-backed securities (ABS) market had become very expensive since the disruption of ABS markets in late 2007.

The inclusion of CBMS and insurance premium ABS in TALF is expected to ease the flow of credit in these markets.

TALF was initially launched as a $200 billion program for the purchase of new auto, student and small-business loans. The program was expected to help major credit card issuers like JP Morgan Chase (JPM), Citicorp (C), Bank of America (BAC), American Express (AXP) and Capital One (COF). However, later the Treasury announced its plans to expand to facility to $1 trillion and also to include commercial mortgage-backed securities, residential MBS and for purchase of legacy assets under Public-Private Investment Program (PPIP).

As we mentioned in our blog How Risky is the Fed Balance Sheet? the extension of TALF to CMBS -- and also possibly toxic assets later -- further increases the risk to the Fed’s balance sheet.

Minutes from the March 17, 2009 meeting of the FOMC show that some of the committee members also expressed concern over possible extension of TALF to include "older and lower-quality assets."

At the same time, there are concerns regarding the lukewarm response to TALF as the investors remain wary of legislative interference, tedious paper work and other issues. Just $1.7 billion in loans were requested for funding in April, down 64% from $4.7 billion in March, when TALF was launched.

Zacks Investment Research

Market Moves Will Remain on Hold Until Bank Stress Test Results Are Released Thursday

Contrarian Profits — Mon, 04 May 2009 18:27:37 +0000

pBarring some dramatic – and unforeseen – news this week, expect investors to tread water until Thursday, when the government is expected to release the results of the bank stress tests it conducted on the 19 largest U.S. banks./p pThe stress-test results are expected to show that the 19 banks may have to raise between $100 billion to $150 billion – or even more – in new capital. Investors will cause the shares of the strong players to zoom northward, and will likely savage the shares of the weakest players./p p#8220;I can’t think of a time since I’ve been watching banks when there’s been so much uncertainty about the true value of a key set of assets,#8221; Douglas Elliott, a fellow at#8230;/p

“Stress Tests” Nothing New – Analyst Blog

Zacks Market Commentaries — Mon, 04 May 2009 16:11:30 +0000

Highlights include American International Group, Inc. (AIG), Citigroup, Inc. (C), Bank of America Corp. (BAC) and Freddie Mac (FRE).

Stress Tests: A Rose By Any Other Name...

The perhaps unfortunately named "stress test" sensitivity analysis are nothing new to the financial markets. By its simplest definition, such statistical analysis has long been relied upon in fixed income markets to price debt securities and analyze credit quality.

As recently as a decade ago, before the Internet bubble burst and the market crashed, a major Street debate was that mark-to-model was a more effective method of pricing debt securities than mark-to-market.

Mark-to-model is comparable to stress-testing all types of fixed income securities based on assumed statistical ranges of values for such variables as interest rates, credit spreads, default rates, prepayment rates, etc. As time goes on, markets have more accurate data ranges to use in analyzing current debt obligations.

It is clear that realized data occasionally falls outside assumed acceptable ranges of risk. In such extreme cases, as we're experiencing, model pricing will disappoint, as will market pricing.

US Federal Reserve Banks have also always been actively involved in analyzing banks in this manner, although not in as publicly publicized as they do today.

While the apparently obscenely extravagant bonuses paid out by American International Group (AIG) greatly offended many investors -- and that is admittedly an understatement -- it should give comfort to at least some investors that AIG, Lehman Brothers, Citigroup (C), Bank of America (BAC), Freddie Mac (FRE) and most, if not all, banks had similar models in place to analyze debt purchases before transacting. While traders at such firms may or may not be gifted Vegas gamblers, they are also adept at probability analysis.

Ultimately, when history of this recession is written, the media over-reaction and premature public perception of Wall Street will be revealed for what really happened...and Wall Street will be exonerated.
Read the full analyst report on "FRE"
Zacks Investment Research

New Trend in Bank Seizures? – Analyst Blog

Zacks Market Commentaries — Mon, 04 May 2009 14:33:29 +0000

Highlights include Citigroup Inc. (C), Bank of America Corp. (BAC), SunTrust Banks, Inc. (STI), Wells Fargo & Co. (WFC) and BB&T Corp. (BBT).

New Trend in Bank Seizures, or Just a One-Off Event?

It has become de rigueur -- if it's a Friday, there's going to be another bank or thrift being seized by the U.S. Banking regulators (the Office of the Comptroller of the Currency).

And this Friday was no exception, with two banks seized: Citizens Community Bank in Ridgewood, NJ and Silverton Bank in Atlanta, GA. This brings the number of seized banks and thrifts to 29 for 2009.

However, Silverton was a commercial bank that provided correspondent banking services (credit card operations, clearing accounts, investments, consulting, purchasing loans and selling loan participations) to its client banks and did not take deposits directly from the general public -- nor did it make loans to consumers (with $4.1 billion in assets and $3.3 billion deposits from 1,400 client banks in 44 states, and operated six regional offices) was the largest bank failure so far this year and the largest seized since Downey Savings & Loan (which had $12.8 billion in assets).

While we have yet to see anywhere near the levels of banks and thrifts seized by the regulators achieved during the problems of the late 1980's-early 1990's, so far this year there have been 1.69 seizures per week. If we stay on this trend, we could see 80-100 institutions seized by the end of this year.

Our concerns following the delay of the release of the "Stress Test" of the 19 largest financial institutions (please see Neena Mishra's blog for greater detail), to include but not limited to Citigroup (C), Bank of America (BAC), SunTrust (STI), Wells Fargo (WFC) and BB&T (BBT) has not been mitigated our concerns for the industry and the economy as a whole. We would anticipate that the rationale for not releasing the information was that a number of the institutions in question vehemently disagree with the findings of the tests, are challenging the results and/or looking for alternative avenues of capital raises to achieve the required levels as they are still considered too big to fail. (And perhaps if several were to go under or be seized, the drain on the FDIC reserves would wipe out the fund.)

Clearly banks are not wanting to be in a position to make additional loans anywhere near the level they had been able to even early last year. Foreclosure rates and defaults have begun to rise again following the lifting of the government's moratorium.

In addition, commercial real estate has been becoming more of a concern. Unless something is done to get the financial institutions back in the business of lending, we could only conclude that recent glimmers of economy improvement are not sustaining and the markets' rebound may only materialize into a bear-market rally.

Read the full analyst report on "WFC"
Zacks Investment Research

Bank of America, Citigroup Told to Boost Capital as Validity of Bank Stress Tests Is Called Into Question

Contrarian Profits — Fri, 01 May 2009 17:30:53 +0000

pBank of America Corp. (BAC) and Citigroup Inc. (C) were told by federal regulators to raise more capital after government #8220;stress tests#8221; revealed that the banks were not adequately protected against additional deterioration in the economy, published reports said yesterday./p pOfficials insist that neither Bank of America nor Citigroup should be viewed as insolvent, but people familiar with the situation told The Wall Street Journal that the capital shortfall amounts to billions of dollars at BofA. It is not clear how much of a shortfall Citigroup faces./p pAnalysts anticipate that some regional banks also will be required to raise more capital./p pBanks that need more capital will have six months to accumulate the additional infusions by selling assets, selling more shares, or converting#8230;/p

Stress Test Results Delayed – Analyst Blog

Zacks Market Commentaries — Fri, 01 May 2009 16:28:52 +0000

Highlights include Bank of America Corp. (BAC), Citigroup Inc. (C), JP Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and PNC Financial Services (PNC).

According to a report published this morning in Bloomberg, the Federal Reserve is postponing the release of stress tests results. The results, originally scheduled for release on May 4, now may not be released until toward the end of next week, and a new release date is expected to be announced soon.

The regulators conducted the stress tests on 19 banks with assets exceeding $100 billion, including Bank of America Corp. (BAC), Citigroup Inc. (C), JP Morgan Chase & Co. (JPM), Wells Fargo & Co. (WFC) and PNC Financial Services (PNC).

The methodology of the tests was released on April 24, and on the same day the results were shared with the respective banks. The regulators and the banks' managements are currently discussing the results. It appears that many banks have disputed the Regulator's assessment of the projected losses, expected revenues (to cover those losses) and the resulting capital requirements, which may have caused the Fed to delay the realease.

There are reports that while some banks will be asked to raise capital, others will be asked to improve the quality of their capital by increasing the common equity. We think that it will not be easy for the banks to raise private capital in the current environment and as a result, they will either receive bailout money, or the government will convert its existing preferred capital into common equity.

The government now also appears to be open to the idea of converting the bank debt (bonds) into equity, though so far it had protected the bondholders.

As of now, we do not know how much disclosure will be made. Earlier, these were reports that only summary results will be released, but now it appears that we will see more details on individual banks' capital assessments -- though this has a potential of causing a sharp sell-off in the shares of weaker banks.
Read the full analyst report on "WFC"
Zacks Investment Research

BofA’s Lewis Makes Way for New Chairman – Zacks Tale of the Tape

Zacks Market Commentaries — Thu, 30 Apr 2009 18:52:38 +0000

Bank of America Corp. (BAC) shareholders voted to unseat Kenneth Lewis as chairman of the largest U.S. bank in a move which industry experts said could weaken his powers as chief executive and eventually lead to his being stripped off that title as well.

At the Charlotte, North Carolina-based firm's annual meeting on Wednesday, a third of shareholders opposed Lewis' re-election to the board. While Bank of America assured that Lewis would remain in the driver's seat in terms of daily administration of the company, 16-year board veteran Walter E. Massey was named as his replacement in the chairman's role.

The annual meeting continued for 4 hours as angry shareholders held the management accountable for accepting two government bailouts and not providing them with enough disclosure on deepening losses at Merrill Lynch before signing the deal.

Massey, who has been appointed with the responsibility of overseeing Lewis, is not an experienced financial executive, but an academic. He has also been seen as someone likely to back Lewis on key decisions. Investors, however, applauded the move and took shares up nearly 5% to $9.10 in midday trading on the New York Stock Exchange.

"BAC" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

BofA CEO’s Future Unclear – Zacks Tale of the Tape

Zacks Market Commentaries — Wed, 29 Apr 2009 20:55:06 +0000

The fate of embattled Bank of America Corp.'s (BAC) Chief Executive Kenneth Lewis remained a matter of speculation on Wednesday afternoon after the company asked for more time to count the votes from its annual meeting in Charlotte.

Meanwhile, Lewis defended his decisions before shareholders who had criticized the largest U.S. bank's acquisition of Countrywide Financial Corp. and Merrill Lynch & Co. At the annual meeting, investors voted on a proposal to separate the posts of chairman and CEO at the firm.

"This has been an incredibly difficult and painful year for all of us," Lewis told shareholders, "But we are building this company for the long term." Lewis had earlier indicated that regulators did not allow him to back out of the deal that required $20 billion in federal loans.

Bank of America believes Merrill would help the bank in the long run due to the strength of its financial advisers.

While some investors complained about not being informed about the state of Merrill's losses, others backed the management for its decisions made during the worst financial downturn since the Great Depression. Some news sources claim that all 18 directors were re-elected to the board by shareholders but the vote tally on Lewis' chances of reclaiming the chairman's title were too close to call.

Bank of America might release the final results later on Wednesday. Shares of the company were up more than 4% to $8.52 in New York trading.

"BAC" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Secretive Bank Stress Tests Heighten Investor Stress

Shah Gilani — Wed, 29 Apr 2009 10:05:39 +0000

By Shah Gilani Contributing Editor Money Morning The bank stress test of the nation’s 19-largest financial institutions is a flawed exercise that threatens to elevate the very ... Money Morning is here to help investors profit handsomely on...

Will the FDIC Be Super-Regulator? – Analyst Blog

Zacks Market Commentaries — Tue, 28 Apr 2009 22:30:01 +0000

Highlights include American International Group, Inc. (AIG), Citigroup, Inc. (C) and Bank of America Corp. (BAC).

In a speech to the Economic Club of New York yesterday, the Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair suggested that her agency was best suited to handle broad new powers being considered by the government to seize and restructure impaired, systemically important financial institutions before they threaten the broader system.

Government bailouts of companies like AIG (AIG), Citigroup (C), Bank of America (BAC) and others involving billions of taxpayer dollars have brought into focus the need to better handle the problem of "too big to fail" financial institutions. Regulatory reforms currently being considered include close supervisory oversight of risk-taking, risk management and the financial condition of such institutions.

Regarding the mechanism for resolution, Ms. Bair suggested the "good bank-bad bank model," where viable parts can be placed into the "good bank" using a structure similar to the FDIC's bridge bank, and the nonviable parts can be placed in a "bad bank" until they can be unwound or sold.

She stated that there is no need for another government agency to run the resolution program since the FDIC already has many years of experience resolving banks and closing them.

While the policy-makers are still debating whether such authority should go to the Federal Reserve or the FDIC or to a new stand-alone agency, this was the first time Ms Bair has explicitly stated that FDIC is best equipped to do the job.

We are not sure whether the Federal Reserve or the FDIC is better suited for this job, but there is a need to move ahead as soon as possible on the broader legislation for the "Systemic Risk Regulator" or a "Super Regulator" for the financial system. This could -- in addition to being the resolution authority for the "too big to fail" financial companies -- coordinate amongst the various regulatory authorities supervising the various components of the financial system, and also look at the big picture of risk. Zacks Investment Research

Each Real Estate Market’s Different – Analyst Blog

Dirk Van Dijk — Tue, 28 Apr 2009 21:32:06 +0000

Highlights include Citigroup, Inc. (C) and JPMorgan Chase & Co., Inc. (JPM), Bank of America Corp. (BAC) and Hudson City Bancorp (HCBK).

Realtors will tell you that every real estate market is different. While there is some truth to that, the decline we are seeing in housing prices is very broad-based.

The graph below (larger version available at http://www.calculatedriskblog.com/) shows the decline from peak levels in each of the 20 markets followed by the Case Schiller index. Every market is off by at least 10%, but it is clear that Dallas, Charlotte and Denver have been holding up the best so far. On the other hand, seven areas -- more than one third of the markets -- are down more than 40% from peak levels.

Phoenix is in ashes with a decline of more than 50%; time will tell if it can live up to its name and rise again. What is striking is that the three cities where Finance is the most prominent industry -- New York, Boston and Charlotte -- are all towards the least damaged end of the spectrum.

So is there anything we can tell from the pattern of price declines across these different markets? Was it a question of how big the bubble was in the first place? Perhaps -- Dallas was the second-least-bubbly market based on its peak CS index level of 126.47, and Charlotte was number four at 135.88 (all the indexes equaled 100 1/2000). Cleveland (123.24) Detroit (127.05) and Atlanta (136.47) round out the remainder of the non bubbly quartile, and only Detroit is down more than 40% from its peak.

A strong case can be made that given the troubles of the Auto industry that it is a special case. Cleveland and Atlanta have fared somewhat better than most cities, but not by a huge margin. On the other hand, the most bubbly markets are well represented in the biggest declines from peak group. Miami was the most bubbly with a peak index value of 280.87, followed by L.A. (273.94), Washington D.C. (251.07), San Diego (250.34) and Tampa (238.09). Three of those cities are in the down over 40% club and Tampa seems to be applying for membership.

In addition to the top five, four other cities had peak index values of over 200, and three of them are in the down 40% club (Phoenix, Las Vegas and San Francisco). New York is the one anomaly there. It is the one true bubble market that has not popped hard.

In general, the hardest-hit markets also hit their peaks earlier than the ones that have held up better. Four cities peaked out in late 2005, of which only Boston is holding up better than most. San Diego, San Francisco and Detroit were the other early peakers.

Five cities, on the other hand, did not hit their peak until the summer of 2007 -- Charlotte, Portland, Seattle, Dallas and Atlanta -- all of which are clustered towards the least affected end of the graph. Are they just behind the curve? I suspect that may be the case.

I suspect that the New York market is the most vulnerable at this point. The Pacific Time Zone cities have already seen most of the damage done. Dallas, Charlotte, Atlanta and Denver never got too out of hand on the upside. New York, and to a lesser extent Boston, did experience full-scale bubble pricing, but have yet to really feel the pain.

This would be very bad news to banks with big exposures to those two markets. Citibank (C) and J.P. Morgan (JPM) have very large presences in New York, and Bank of America (BAC) has a big share in Boston. However, perhaps the most vulnerable would be a smaller bank like Hudson City Bancorp (HCBK).

Read the full analyst report on "HCBK"
Zacks Investment Research

Stress Tests: BAC, C Underfunded? – Analyst Blog

Zacks Market Commentaries — Tue, 28 Apr 2009 16:57:21 +0000

Highlights include Bank of America Corp. (BAC), Citigroup, Inc. (C), Fifth Third Bancorp (FITB), Regions Financial Corp. (RF) and Wells Fargo & Co. (WFC).

The Stress Tests conducted by the regulators on Bank of America (BAC) and Citigroup (C) revealed that these banks need more capital, according to a report in the Wall Street Journal this morning. The shortfall is estimated to be "billions of dollars," for BAC, but the report did not pin down an amount for Citigroup.

Both these banks have already received $45 billion from TARP funds, and of late they have been claiming that they do not need additional help from the government. It is reported that both banks dispute the regulators' assessment and are in discussions with the regulators. Final capital assessment will be announced by the government on May 4.

We are not surprised by the reports. Though 1Q09 results for both these banks were better than the estimates, we pointed out in our blogs: Citigroup: Any Reason to Cheer? and BAC Beats Median Consensus that the results mainly benefited from the accounting profits resulting from the widening of their credit spreads (worsening of credit worthiness).

While BAC recorded $2.2 billion in gains related to mark-to-market adjustments on Merrill Lynch structured notes as a result of credit spreads widening, in case of Citigroup, the gains recorded were 2.5 billion. BAC also had a pre-tax gain of $1.9 billion on the sale of China Construction Bank shares.

Further, the near zero funding costs and surge in refinancing due to record low mortgage rates and better revenues from fixed income trading helped the results. These conditions are not sustainable, as banks themselves have admitted.

On the other hand, the credit quality had deteriorated sharply, especially in the housing and credit card portfolios and further deterioration is expected in the coming quarters.

As a result of the losses, the capital levels (specially the Tangible Common Equity, which will be seen by the regulators as a measure of capital adequacy) had come down below comfortable levels for both these banks. So any meaningful capital assessment exercise would have revealed a need for further capital.

In addition to these two, there are speculations over Fifth Third (FITB), Regions Financial (RF) and Wells Fargo (WFC) found to be in need of more capital.

With the TARP bailout funds now left at approximately $100 billion, we are not sure whether the government will be able to provide enough capital to these banks without approaching Congress for more funds. Alternatively, the regulators may consider converting TARP-preferred capital to common equity (as is already being done in the case of Citigroup) or converting debt (bonds issued by them) to equity.

Read the full analyst report on "FITB"
Read the full analyst report on "RF"
Read the full analyst report on "WFC"
Zacks Investment Research

Housing Prices Continue to Tumble – Analyst Blog

Dirk Van Dijk — Tue, 28 Apr 2009 16:32:39 +0000

Highlights include Citigroup, Inc. (C) and Bank of America Corp. (BAC).

The S&P Case Schiller index, the best measure of housing prices, showed prices were still declining in February. The 10-city composite was down by 2.1% for the month, 18.8% year over year and is 31.6% off its peak (May 2006). The 20-city composite has a shorter history but tells much the same story -- it was down 2.2% for the month, 18.6% for the year and is off 30.7% from its peak (also May 2006).

As the chart below (larger version available at http://www.calculatedriskblog.com/) shows, the most positive thing that can be said is that the year-over-year rate of decline has started to slow a bit, particularly for the 10-city composite. This was the first time in over two years (20-city composite, 16 months for the 10-city composite) that the year-over-year decline did not set a record. For the month, housing price indexes were down for every one of the 20 metropolitan areas followed. For eight of the 20 cities, the monthly declines were at least 3.0%.

The worst-hit cities for the month included many of the usual suspects, which means that the hardest hit places continue to get hammered. For the month, Cleveland registered a 5.0% decline, followed by Phoenix with a 4.5% drop and Detroit with a 3.8% decline. The other hard-hit cities include (in order of monthly declines) Las Vegas, Chicago, San Francisco, Minneapolis and Miami. The only city to have less than a 1.0% decline for the month was San Diego.

However only two cities have housing prices below January 2000 levels (when the indexes were all at 100) -- Detroit and Cleveland. The three cities with the highest current index levels are New York (178), Washington D.C. (168) and Los Angeles (163). Only time will tell if they are simply behind the curve, or are more resilient than other areas. I suspect the former.

The level of house price decline is one of the key metrics for the so-called "stress tests." As the second graph shows, the "more adverse" scenario under the stress tests is the one that most closely matches the economic reality.

The baseline scenario is not even worth considering, for it involves no stress at all. Any bank that cannot pass the baseline scenario should be avoided by investors at all costs (depositors are fine up to $250,000, for at least as long until the FDIC runs out of money, but even then the Treasury or the Fed will bail it out). Such a bank is insolent, not just illiquid, insolvent. They will need to raise very large amounts of capital that will severely dilute the existing shareholders.

Passing the "more adverse" scenario means that the bank should be able to make it, provided there are no major exogamous shocks to the system -- like, say, a worldwide flu pandemic.

The decline in housing values is really at the core of the current economic troubles. To be more precise, it was the unwarranted rise in those housing values (which are now returning to earth) that was the core problem -- it is just that the pain is felt on the downside of the bubble.

The continuing decline in housing prices will lead to more people being underwater on their homes. That will lead to more foreclosures (and rising unemployment will speed that process along). Those foreclosures will cause more pressure on bank balance sheets.

Since the administration seems intent on being extremely nice to the bankers, it means that there will be more taxpayer money flowing to the coffers of the banks to shore them up. It certainly does not come as a surprise that Citigroup (C) and Bank of America (BAC) are likely to need to raise more capital. However, if recent history is any guide (under both the Obama and Bush administrations), they will probably get it from the government on extremely preferential terms, with the government going out of its way to asset any ownership rights that might protect the taxpayers.

The decline in housing values also means that those still with positive equity in their houses will have less of it, further diminishing retirement nest eggs for millions. This will keep the pressure on for people to try to save out of current income. That is a good thing over the long run, but the savings will come at the expense of consumption, and the lower consumption will further depress the economy.

On the bright side, young people (and renters) may actually be able to afford a house in the near future. They will need a low monthly mortgage payment given the amount of taxes they will have to pay in the future given the debt the country is taking on to make sure that bankers can live in the style that they have become accustomed to.

Zacks Investment Research

BofA, Citi Weigh on Wall Street – Zacks Tale of the Tape

Zacks Market Commentaries — Tue, 28 Apr 2009 16:01:39 +0000

Bank of America Corp. (BAC) and Citigroup Inc. (C) shares slumped on Tuesday morning after the government's stress tests reportedly indicated that the banking giants may need to raise additional capital.

Citing people familiar with the matter, the Wall Street Journal said capital the shortfall at Bank of America amounts to "billions of dollars". It also said executives from both banks would meet regulatory authorities to dispute the initial findings. Citigroup and Bank of America have each received $45 billion in emergency funds from the federal government.

Results of the stress tests are scheduled to be made public on May 4 after regulators ascertain which of the 19 largest U.S. banks require more capital to fight the global recession.

While shares of most financial firms that underwent the stress test were trading lower in the morning, concerns over the swine flu outbreak also weighed on the broader markets. Citi fell nearly 5% to $2.93 and Bank of America shed more than 7% to $8.29 in morning trade on the New York Stock Exchange.

"BAC" Free Stock Analysis: Buy? Sell? Hold?
"C" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Gov’t Double-Speak Continues – Analyst Blog

Zacks Market Commentaries — Tue, 28 Apr 2009 15:30:16 +0000

Highlights include Citigroup, Inc. (C), Bank of America Corp. (BAC), Huntington Bancshares Inc. (HBAN), Wells Fargo & Co. (WFC), U.S. Bancorp (USB), Regions Financial Corp. (RF) and Goldman Sachs Group, Inc. (GS).

Government Double-Speak on Bank Capital Levels Continues

Late last week, the Federal Reserve release its broad-brush methodology for the long-awaited "stress tests" on the 19 largest financial institutions in the country. In a White Paper, the Federal Reserve stated that while most U.S. banking organizations currently have capital levels well in excess of the amounts required to be well capitalized, losses associated with the deepening recession and financial market turmoil have substantially reduced the capital of some banks.

The conclusion: it would be prudent for large financial institutions to hold additional capital to provide a buffer against higher losses than generally expected, and still remain sufficiently capitalized over the next two years -- and able to lend to creditworthy borrowers. We would have to say this would be completely reasonable given the current economic environment we are in currently.

However, it seems that regulators may have instructed told both Citigroup (C) and Bank of America (BAC) that based on the early results of the "stress tests," they may need to raise capital. If this holds true, we would not be surprised -- we have suggested for a while the lack of lending exhibited by the banking system may be more an attempt to preserve capital to meet requirements.

We would expect any additional capital raises should be expected to have a dilutive effect on the operation. We would not be surprised if other institutions such as (but not limited to) Huntington Bancshares (HBAN), Wells Fargo (WFC), US Bancorp (USB) and Regions (RF) could also be looking to add additional capital.

We think this will create an opportunity for Goldman Sachs (GS), with its newly minted bank charter, to acquire a deposit-gathering operation at bargain pricing.
Read the full analyst report on "HBAN"
Read the full analyst report on "WFC"
Read the full analyst report on "RF"
Zacks Investment Research

Bank of America’s Lewis Says Paulson, Bernanke Forced Merrill Takeover

Contrarian Profits — Mon, 27 Apr 2009 18:09:02 +0000

pBank of America Corp. (a href="http://www.google.com/finance?q=bac" target="_blank"BAC/a) Chairman and Chief Executive Kenneth Lewis said in testimony before New York#8217;s attorney general that Federal Reserve Chairman Ben S. Bernanke and former Treasury Secretary Henry M. Paulson pressured him not only to move ahead with a merger with Merrill Lynch despite reservations, but also to stay quiet about the mounting losses at the crumbling investment bank, strongemThe Wall Street Journal/em/strong reported. /p pTransparency has long been a cornerstone of both democracy and the free market, but Lewis#8217;s testimony that implies the CEO of one of America#8217;s largest financial institutions - an institution that received more than $20 billion in taxpayer money - neglected to alert investors and potential shareholders to the full scope of Merrill#8217;s losses#8230;/p

BofA Loses the Countrywide Tag – Zacks Tale of the Tape

Zacks Market Commentaries — Mon, 27 Apr 2009 16:47:53 +0000

Bank of America Corp. (BAC) formally dropped the Countrywide name from its mortgage operations on Monday after acquiring the troubled home lender last year.

The Charlotte-based company is now renaming its mortgage and home equity lending operations as Bank of America Home Loans, hoping to put behind a past tarnished by risky subprime lending, a series of lawsuits and an FBI investigation. Countrywide, which emerged as the largest U.S. mortgage lender before property prices slumped to a historic low, has often been held responsible for spawning the credit crisis through its business practices.

As part of the new changes, Bank of America would offer customers a one-page loan summary in simple language to explain one's mortgage commitments, including interest rates, monthly payments and payment terms.

Shares of the company were nearly flat at $9.11 in morning trade on the New York Stock Exchange.

"BAC" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

G7 & G20: “Gee, Things Are Bad!” – Analyst Blog

Zacks Market Commentaries — Mon, 27 Apr 2009 14:37:49 +0000

Highlights include Citigroup, Inc. (C), Bank of America Corp. (BAC), JPMorgan Chase & Co., Inc. (JPM), Wells Fargo & Co. (WFC) and Morgan Stanley (MS).

Finance ministers from around the world, including U.S. Treasury Secretary Timothy Geithner, have held a sort of economic summit this weekend in Washington D.C. While there appears to be signs that the global economy is in the process of stabilizing, financial ministers remain cautious that the world may not emerge from what is being categorized as the "worst recession in decades" until the middle of next year.

At the day-long meeting of the International Monetary Fund (IMF), stimulus packages, bank recapitalization and other actions taken by governments and central banks to deal with the crisis are beginning to show results, according to many finance ministers from around the world. To paraphrase the IMF's Policy-Steering Committee Chairman and Egyptian Finance Minister Youssef Boutros-Ghali, "We can see a break in the clouds, but things will continue looking negative for awhile -- although at a lesser and lesser pace -- and towards the end of the year we will start seeing the light, start seeing movement toward stabilization and then recovery" by mid-2010.

We would also point out that before the downturn bottoms out, the IMF estimates it could provide nearly $190 billion to recession-battered nations -- more than double the $86 billion provided during the 1997-98 Asian crisis (affecting countries from Thailand to Russia and Argentina.

The head of the IMF, Dominique Strauss-Kahn, stated that there is an absolute necessity for cleansing the financial system of "bad debts or toxic assets" on many of the financial institution's balance sheets -- an important step to unfreeze credit markets.

So far the ministers have agreed on an immediate increase of $250 billion for the IMF's lending coffers so that it can continue to act promptly to make available, substantial resources to member countries with external financing needs, with another $250 billion potentially being added later to an "expanded and more flexible" line of credit known as the New Arrangements to Borrow (NAB).

Currently, President Obama has been seeking congressional approval for up to $100 billion for the NAB, matching commitments for the same amount made by Japan and the European Union.

Some critics suggest that the IMF is headed to becoming a "relic," as it may not have the funds to cover the jump-starting the world economy nor the ability to get all its lofty plans approved. Also, the long global boom resulted in few countries coming less often, seeking assistance.

In addition, emerging economies such as China, India and Brazil have been flexing their influence muscles. Being less than pleased to provide contributions per the original program (favored by the United States and Europe), these countries have pushed for an alternative to provide longer-term loans to the IMF. The result -- the IMF is now willing to sell bonds to raise funds to lend to struggling nations.

As we look back to the U.S., we remain concerned for the pending "stress test" on the 19 largest institutions. In the statement from the Fed last Friday, it would appear that the majority of U.S. institutions are "considered" to be capitalized appropriately. Per an IMF study, losses on U.S. loans and securities are estimated at $2.7 trillion through 2010 (2x expectations of 6 months previous), with global losses estimated at $4.1 trillion.

This begs the question, How accurate will the "stress test" be, as institutions such as but not limited to Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC) and Morgan Stanley (MS) are basically deemed "too big to fail," and may not be scored against the same staff as others?
Read the full analyst report on "WFC"
Zacks Investment Research

Stress Tests Demystified? – Analyst Blog

Zacks Market Commentaries — Fri, 24 Apr 2009 21:16:45 +0000

Highlights include Bank of America Corp. (BAC), Citigroup, Inc. (C), JPMorgan Chase & Co., Inc. (JPM), Wells Fargo & Co. (WFC) and PNC Financial Services (PNC).

To paraphrase a Russian play, the world has been waiting and wondering, "When will the 'stress test' come?"

The Federal Reserve released details about the methodology of the "stress tests" conducted on 19 banks with assets exceeding $100 billion, including Bank of America Corp. (BAC), Citigroup, Inc. (C), JPMorgan Chase & Co., Inc. (JPM), Wells Fargo & Co. (WFC) and PNC Financial Services (PNC). These banks collectively hold two-thirds of the assets and more than one-half of the loans in the U.S. banking system.

Overall, there was very little of substance in the White Paper that had not been released previously, leaving us feeling like a heroin addict on methadone. The White Paper stated that "most U.S. banking organizations currently have capital levels well in excess of the amounts required to be well capitalized," but given the uncertainty around the future course of the U.S. economy and potential losses, it would be prudent for these banks hold additional capital "to provide a buffer against higher losses than generally expected."

We would note that there are well over 7,000 banks in the country, and the paper did not say that most of the big 19 were well capitalized. The statement that most banks are well capitalized may therefore fall into the "true but trivial" category.

The results are being shared with the respective banks, and the final capital assessment will be disclosed on May 4, 2009.

According to the methodology adopted, the banks were asked to estimate their potential losses on loans, securities and trading positions as well as off-balance-sheet items and revenue, and the resources available to cover these losses under two alternative macroeconomic scenarios -- only one of which should really be considered.

The baseline assumptions for real GDP growth, the unemployment rate and housing prices decline for 2009 were -2.0%, 8.4% and 14%, and for 2010 they were 2.1%, 8.8% and 4% respectively. For the more adverse scenario -- real GDP growth -- the unemployment rate and housing prices decline for 2009 were -3.3%, 8.9% and 22%, and for 2010 they were 0.5%, 10.3% and 7%.

Looking at the assumptions vis-à-via the current state of the economy, we think that the more adverse scenario looks more probable in the case of real GDP growth and housing prices decline, while the unemployment rate still looks too optimistic in the more adverse scenario. In other words, the baseline scenario should be disregarded entirely when looking at the results for the individual banks when the information is released.

The assessment submitted by the banks were then reviewed and assessed by the supervisors, and it was then ensured that the firms' projections were also consistent with accounting standards and proposed changes to accounting standards. To determine the capital Adequacy, the regulators looked at various measures including (but not limited to) pro forma equity capital and Tier 1 capital, and a measure close to Tangible Equity Capital.

We anticipate banks shares to remain volatile between now and May 4, as there will be speculation on which banks will emerge as well-capitalized and which ones will need additional capital. As we have seen in recent results declared by the banks, the losses have been rising sharply, and if a meaningful and fair exercise has been conducted by the regulators, then we suspect that at least some of these banks will be found to be in need of additional capital.

We suspect unless there are a couple of institutions noted as having some sort of issue, there will be a reasonably large outcry the "stress test" was nothing more than a classic case of "putting lipstick on a pig."

Read the full analyst report on "WFC"
Zacks Investment Research

World Meets on Economy – Analyst Blog

Zacks Market Commentaries — Fri, 24 Apr 2009 19:39:08 +0000

Highlights include Citigroup, Inc. (C), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC), U.S. Bancorp (USB) and SunTrust Banks, Inc. (STI).

Starting today, finance officials from the Group of Seven Nations (G7) and Twenty Nations (G20) -- which includes major emerging nations such as China, Russia, India and Brazil -- are meeting in Washington for 3 days of discussions on the global economy.

We would characterize the comments made yesterday by Dominique Strauss-Kahn, managing director of the International Monetary Fund (IMF), as an attempt to keep these pending meetings on course. Ms. Strauss-Kahn urged the U.S. and Europe to do more to remove distressed assets from banks' balance sheets, and while "We still have long months of economic distress in front of us, postponing such steps would result in the postponement of a recovery."

To that end, Ms. Strauss-Kahn and Robert Zoellick, the head of the IMF's sister organization, The World Bank, have pledged new resources (cash) to fight what is being viewed as the worst global downturn since the Great Depression of the 1930's. In an effort to meet the needs of developing nations harmed by this downturn an not to repeat the mistakes of the past, the IMF has agreed to double the borrowing limits for 78 of poorest countries and the World Bank will provide $45 billion to support road building and other infrastructure projects in poor nations over the next three years (compared to $15 billion more than it spent on infrastructure efforts in poor nations in the three years prior).

The funds are designed to support job creation which is expected to then aid in jump-starting the recovery from the crisis when these funds from the World Bank are combined with efforts from its arm that supports private sector projects designed to give developing countries the same type of stimuli rich nations are providing to create jobs in the face of massive layoffs caused by the recession, the funding could reach a total $55 billion.

While we would view this a positive for developing counties, both Ms. Strauss-Kahn and Mr. Zoellick warned that the crisis is far from over. In addition, both believe the U.S. and Europe should allow developing countries an enhanced participation in the management of the World Bank. In Ms. Strauss-Kahn's speech Thursday, she state that the IMF's governance should be reformed to permit a great influence from emerging markets and low-income countries. Currently, the IMF forecasts that the world economy could moderate by 1.3% this year, marking the first time a global decline would be registered since World War II.

At some point during his meetings with the G7 finance ministers today, Timothy Geithner, U.S. Treasury Secretary, should be outlining will outline the administration's efforts to clean up the U.S. banking system, in order to get the banks to lend again. If the efforts com to fruition, financial entities such as (but not limited to) Citigroup (C), Bank of America (BAC), Wells Fargo (WFC), US Bancorp (USB) and SunTrust (STI) may be willing to open there coffers to borrowers.
Read the full analyst report on "WFC"
Read the full analyst report on "USB"
Zacks Investment Research

Targeting Credit Card Practices – Analyst Blog

Zacks Market Commentaries — Thu, 23 Apr 2009 19:00:48 +0000

Today, President Obama is meeting with the heads of many large banks/credit card issuers including Bank of America Corp. (BAC), Capital One Financial Corp. (COF), American Express Co. (AXP), JPMorgan Chase & Co., Inc. (JPM) and Citigroup, Inc. (C), to discuss credit card fees and practices.

The House Financial Services Committee yesterday passed the "cardholders bill of rights," which among other things seeks to ban "arbitrary" interest rate increases, prohibit excessive fees and order more disclosure. The bill is expected to go to the full House for a vote next week.

It appears quite unfair that the banks that are getting money at near-zero rates while gouging their customers by increasing rates charged and then also reducing the credit lines. However, do we not expect the banks to have learned from the mistakes they made in housing loans, when they lent money on very easy terms to people who did not have the ability to repay those loans?

We have seen that the credit card defaults are currently at record highs and are expected to increase further as unemployment continues to rise. Most of the banks have reported a spike in the credit card losses during the first quarter of 2009 -- so we should not be surprised to see the banks cutting the credit lines further in the coming months.

The market for securitizing and selling credit-card receivables has also dried up in recent past and the banks are forced to keep those loans on their books now. The Federal Reserve has recently implemented Term Asset-Backed Securities Loan Facility (TALF), which provides term loans to investors against AAA-rated securities backed by recently originated credit cards loans (and other consumer and businesses loans). However, it has been reported that the participation in TALF has been less than enthusiastic, as the investors remain wary of legislative interference, tedious paper work and other issues.

In December 2008, the Federal Reserve had issued rules that address key concerns about credit cards issuers. These rules, which become effective July 2010, among other things restrict issuers' ability to raise interest rates on existing debt and require payments to be applied at least partly to higher-rate card debt. The rules can be seen here:

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20081218a1.pdf

We do not understand the real need for congressional action now in view of the Federal Reserve rules, though the current bill goes a little further than the Fed in some areas by banning the marketing of credit cards to minors and allowing consumers to set their own lower credit limits. Overall, it appears more like a political gimmick.

Zacks Investment Research

FDIC: The Next Big Bailout – Analyst Blog

Dirk Van Dijk — Thu, 23 Apr 2009 15:09:58 +0000

Highlights include Citigroup Inc. (C), Bank of America Corp. (BAC), KeyCorp (KEY) and Fifth Third Bancorp (FITB).

Even before the FDIC gets into the business of insuring loan to the PPIP (there will be no losses there, according to their accountant Lewis Carroll), it looks like the fund is in pretty bad shape. As a percent of insured deposits, it fell to 0.40% at the end of the fourth quarter from 0.76% at the end of the third quarter, and 1.22% at the end of 2007.

Since then, 26 banks have failed -- the same number as in all of 2008. The year-end reserve ratio for the fund was the lowest since the second quarter of 1993, at the tail end of the S&L debacle (back then, banks and S&L’s had separate funds, but on a combined basis).

Given the failures so far this year, there is no doubt in my mind that the reserve ratios have declined sharply since the end of last year. The graph below shows the trend (larger version available at http://globaleconomicanalysis.blogspot.com/2009/04/fdic-woefully-underfunded-problem.html).

Clearly we have not seen the end of bank failures this year. You should count on at least one FDIC pizza party each week for the rest of the year. At the end of last year there were a total of 252 banks that were listed as troubled by the FDIC, up from 76 at the end of 2007 and 50 at the end of 2006.

The assets of troubled institutions has grown even more quickly, to $159.4 billion at the end of 2008, from $22.2 billion at the end of 2007 and just $8.3 billion at the end of 2006. The FDIC historically has been very hesitant about putting banks on the list, for example, none of the biggest disasters of 2008 (Indymac, WAMU, Wachovia) were on the list at the end of 2007. Thus, it is likely that this list significantly understates the problem.

None of the big 19 currently undergoing the so-called "stress tests" are on the list. If the results of the tests come out and they say that all 19 passed with flying colors, the whole world will rightfully yell WHITEWASH.

The AP story yesterday said that the tests are going to take a harder line on whole loans than on securitized investments. This makes no sense to me, except from a political gamesmanship point of view.

Somebody will have to be thrown under the bus, and since it can’t be Citigroup (C) or Bank of America (BAC), it will probably be KeyCorp (KEY) or Fifth Third (FITB). That would be the only reason to be tougher on whole loans (largely held by the regional banks) than on the securitized stuff (MBS, CDO etc). After all, with a whole loan, the banker probably even knows who the borrower is, not so true with the securitized stuff.

If one puts any sort of reasonable loss expectations from the PPIP, it is clear that the FDIC will soon be insolvent. Don’t worry, I’m not trying to start a run on the banks -- your checking account will still be there if your bank goes under (up to $250,000). However, the FDIC will need an emergency loan from the Fed or a bailout from Congress to make sure that happens.

I have no doubt that such funding would come through. However, it is likely to be the next big ticket bailout coming down the line, and it will probably be a doozy.

Read the full analyst report on "KEY"
Read the full analyst report on "FITB"
Zacks Investment Research

Timmy Testifies, We Take Notes – Analyst Blog

Dirk Van Dijk — Tue, 21 Apr 2009 18:17:08 +0000

We highlight Citigroup, Inc. (C) and Bank of America Corp. (BAC).

This morning, Secretary of the Treasury Tim Geithner testified before the Congressional Oversight Panel (COP) headed by Elizabeth Warren. In general, the questions were excellent; unfortunately, the answers were not forthcoming.

One excellent question was, "How does protecting the common shareholders of Citigroup (C) help the economy?" There was no real answer to that question -- just a dance about how it was not appropriate for him to talk about any individual financial institution. The true answer to the question is: it doesn't.

He said in response to questioning about the asymmetric risks and returns in the Public Private Investment Plan (PPIP) that if you had to sell your house immediately but there were no mortgages available, you would not get a very good price. I think that this is fundamentally the wrong analogy to use, and it reflects a flawed assumption that underlies the PPIP program -- namely that the buyers in the market are wrong.

It assumes that the reason that there is no volume in the market for these "legacy assets," the new term for "toxic assets," is that there are no buyers, rather than that there are no sellers. This is an unproven assumption at best, although one of the better features of the PPIP is that it should help answer the question of a lack of buyers vs. a lack of sellers.

A better analogy (or at least one that is equally valid) is: suppose you wanted to sell your home, but it has suffered major water damage and is now infested with termites. However, you owe $500,000 on it, and no buyer is willing to pay more than $250,000 for it, and you cannot afford to sell it at that price. Simply because mortgages are available at reasonable interest rates will not make buyers want to buy your house for anything like $500,000.

The big banks like Bank of America (BAC) are in this situation. The termite damage is the fact that so many of these loans are going into foreclosure, and the losses per foreclosure are much higher than originally modeled. The flood is the fact that the economy has turned sour and there are lots more people who simply can't pay the mortgage now that they are out of work. If they were to sell for a price that reflects the flood and termite damage, then their equity would be wiped out and they would be insolvent.

Geithner's analogy also makes the implicit assumption that these toxic assets are like houses where they must realistically be bought on a leveraged basis. Clearly, if everyone who wanted to buy a house had to pay 100% in cash, there would not be much in the way of real estate transactions. However, there is no reason to think that mortgage-backed securities must be bought using lots of leverage (aka margin).

They are more analogous to stocks or bonds, and most investors buy those without using margin. Indeed, a good part of the problem seems to be that these assets were originally bought using far too much leverage.

These assets are not some obscure pink-sheet company, where one could reasonably say is underpriced due to lack of information being widely known in the market. There is no particular reason for the market to be that inefficient.

If the legacy assets were as deeply undervalued as the PPIP implicitly assumes, investors would gradually increase their bids. If the asset were really worth $0.80 on the dollar, why would potential investors insist on bidding only $0.30 on the dollar? Why wouldn't some other investor come along and bid $0.40 on the dollar, and get a lot of these assets and still make a killing? Why stop at $0.40? Is it really because they can't leverage up six to one to do so? Wouldn't a doubling from "true" value be enough to buy them on an unleveraged basis?

The PPIP will only help out the banks if it helps drive up the bids to levels that the banks can afford to accept. To the extent that that price is above the "true" value of the assets, the government (broadly speaking, including the Fed and the FDIC who are providing the non recourse loans) will end up eating the difference.

The Fed will probably deal with the loss by monetizing (turning on the printing press). The FDIC will likely come hat-in-hand to Congress after the fact, looking for a bailout. Zacks Investment Research

Banks Don’t Need Gov’t Help, Really? – Analyst Blog

Zacks Market Commentaries — Mon, 20 Apr 2009 21:48:37 +0000

Highlights include Goldman Sachs Group, Inc. (GS), Bank of America Corp. (BAC), JPMorgan Chase & Co., Inc. (JPM) and Morgan Stanley (MS).

Some of the banks flexing their new profit muscles are showing extreme eagerness to repay TARP money "as soon as possible." The managements' comments range from "it is our duty to repay TARP," to TARP being "scarlet letter" or even "destructive." Many clarify that they did not ask for government money, but were forced by the government to take it.

At the same time, there are reports that the government is planning to convert the TARP preferred shares to common equity to shore up the banks' capital levels without having to ask the Congress for more bailout money.

The fact is that these same banks are enjoying tremendous benefits from some
other lesser-known programs that come without any attached strings.

FDIC's Guarantee Program

In October 2008, the FDIC had created a new program, TLGF (Temporary Liquidity Guarantee Program) through which it provides insurance on debt issued by the Banks, for a small fee. Banks have benefitted a lot as they are able to borrow cheaply and further the program was launched when the credit markets were virtually frozen.

During the last six months, Goldman Sachs (GS) has issued $28 billion in debt under this program while Bank of America (BAC) and JPMorgan Chase (JPM) have issued $40 billion each and Morgan Stanley (MS) has issued $23 billion.

Fed's Lending Programs

During the past eight months, the Federal Reserve has pumped more than $800
billion of cash into the nation's financial system. The central bank's balance sheet now stands at $2.2 trillion, more than doubled since September, 2008, as the Fed continues to buy all kinds of securities. In all, the Fed has created 11 programs to combat the credit crisis.

The Investment Banks, which were earlier not eligible for borrowing from the Fed, were granted access to new discount window after Bear Stearn's failure. Further, the identities of financial institutions that borrow from the Fed emergency lending program are kept secret to "avoid any stigma."

During last week, commercial banks averaged $48.5 billion and Investment firms averaged $12.9 billion in daily borrowing from the Fed program.

Are All Profits Real and Sustainable?

The mega-banks benefited immensely from volatility and wide spreads, which resulted in huge profits in fixed income, currency and commodity trading. These conditions are not going to last forever.

The retail-focused banks made a lot of money in the mortgage originations. With mortgage rates at record lows, the surge in refinancing continues, but the other types of lending are going down as banks continue to be reluctant to lend to individuals and small businesses due to credit concerns.

Further, with capacity utilization at historic low of about 70%, the demand from the large businesses is not likely to pick up substantially any time soon, as the global slowdown continues.

And don't forget Goldman's missing month of December, (not reported in any quarterly results), which had resulted in a loss of a loss of $1.3 billion. Citi had a net income ($1.6 billion), only if we forget the preferred shares and the dividends thereon; after adjusting them, the bank had a loss of $0.18 per share. And the bank's actual loss was much deeper if we remove the accounting profit of $2.5 billion resulting from widening of its credit default swap (CDS) spreads.

Similarly, Bank of America recorded $2.2 billion in gains related to mark-to-market adjustments on Merrill Lynch structured notes and other one-time gains during the quarter, which helped it to "beat the estimates."

Losses Will Continue to Rise

All the banks have seen serious problems in their loan portfolios during the reported quarter. While there are signs of deceleration in the economic slowdown, the unemployment will continue to rise for coming month, and so will the losses on credit cards, home-equity loans and mortgages. We suspect that the at least some of the banks are not providing enough for future losses, which will eat into their earnings.

De-TARP Them but Do Not De-Regulate

The main problem that the banks seem to have with TARP funds is the restriction on executive pay and bonuses. An era of deregulation and a compensation structure that rewarded excessive risk taking created the financial mess that we are in.

Current administration is working on the overhaul of the regulatory structure. We should ensure that even if these big banks are allowed to repay TARP, they should be under greater regulatory oversight (including regulation of pay structure) as soon as possible -- not only because these companies are still enjoying massive government support, but also, if in the future any one of them is in deep trouble, then taxpayers will have to again come to the rescue because of "too big to fail" systemic risks.
Zacks Investment Research

More Stress Over Stress Tests – Analyst Blog

Zacks Market Commentaries — Mon, 20 Apr 2009 21:02:40 +0000

Highlights include Goldman Sachs Group, Inc. (GS), JP Morgan Chase & Co., Inc. (JPM), Bank of America Corp. (BAC) and Citigroup, Inc. (C).

More Stress Over Stress Tests -- Results Leaked

With leading economic indicators expectation to point to a continued recession through the summer, recent financial institution data may not help the situation. On the FDIC`s "Problem List," 252 institutions with assets of $0.2 trillion are considered "Trouble Banks," and 1,816 regional and smaller institutions with total assets of $4.7 trillion are at "Risk of Failure" despite government bailouts, compared to 1,568 with $2.3 trillion in total assets in the prior quarter.

Of late, the U.S Treasury, Office of the Comptroller of the Currency, and other financial regulators continue to be at odds over how much, how to categorize and how to disclose the results from the "Stress Test" of the 19 largest U.S. banks, especially considering how damaging the potential information might be on the valuations of the weaker institutions. Up until now a "Statement of Methods" was scheduled for release later this week (April 24, 2009), with the finding to be released May 4, 2009.

There is considerable uncertainty about the level of detail that they will release. They are afraid that if they let out specific information about banks which "fail" the tests, then it would actually undermine confidence in those institutions. While the Administration has said that there will be no "failures" per se, those that are shown to be undercapitalized will have six months to raise additional capital from the private sector. If they are unable to, then the government will provide the funds.

One of the big questions is if "passing" will be based on the baseline economic scenario, or upon the "more adverse" scenario. If it is based on the baseline, then the whole exercise is just a monumental waste of time. After all, if you look at your personal budget and then assume that a magic pink pony that poops platinum arrives on your doorstep, then you should be able to meet your bills. The baseline scenario is sort of like that -- it is based on an extremely rosy economic scenario.

Even the "more adverse" case might not be adverse enough. The official position, though, is that this is a pass-fail test that no one will fail. Well, if that is the case, then it's not much of a test! If only very general aggregate numbers are released, there will be very little credibility left for the Treasury with the markets, the public and with Congress.

As one un-named administration source said in the New York Times last week, "The purpose of these tests is to prevent panic, not cause it." That is a refreshing blast of honesty, since they were originally sold as a tool to determine just how solvent the banking system really is.

There was rumor about multiple banks failing the stress test, but the source of the rumor is questionable, at best. Furthermore, the rumor is in direct conflict with the expressed desire of many of the largest banks, including Goldman Sachs (GS) and J.P. Morgan (JPM) to get out from under the TARP as soon as possible.

It would, at first blush, also contradict the stream of better-than-expected earnings coming from the big banks -- but only at first blush. The quality of the earnings at the banks has been exceptionally poor, even if the overall levels have surprised to the upside.

For example, both Bank of America (BAC) and Citigroup (C) reported multi-billion-dollar gains from marking their liabilities (but not their assets) to market. In other words, since their bonds are selling below par, they could theoretically go out and buy them back and make a profit.

However, a bond will sell below par for one of two reasons -- either because ambient interest rates have gone up, or because there is substantial doubt about the ability to repay. With the entire yield curve near record lows, it is clearly not the former. Also, most bonds come with covenants that say the bond can not be called (i.e. paid back) before a specific date, and then only at a specified price -- which is usually above par. If such "theoretical profits" are the only thing that put you in the black, you are not in very good shape. Gee, just think about how much money they would make if they declared bankruptcy!

However, we know that there have been huge declines in wealth. A good deal of that decline has most likely been borne by the banking system, for example through foreclosures. These losses are extremely large relative to the levels of bank capital.

It seems likely that there is some truth to the report. If true, then we really do have no other real option than going the "Swedish route." Put the banks into receivership, clean them up -- in the process wiping out the common and preferred shareholders. Bondholders would become the new shareholders and the banks would return to the private sector.

Absent that, we condemn ourselves to throwing endless federal dollars into financial black holes, "zombie banks" that are just barely alive and which will lead us to a Japanese-style lost decade.

Would we and our economy not be better served by the U.S. Treasury, Office of the Controller of the Currency, and other financial regulators would stop their ridiculous bickering and come up with a plausible plan to fix the problem? So far we have wasted the precious little time we have to correct the problem before the potential for financial Armageddon. Zacks Investment Research

More Stress Over Stress Tests – Analyst Blog

Zacks Market Commentaries — Mon, 20 Apr 2009 21:02:40 +0000

JPMorgan Beats First Quarter Estimates, Continues Bank Earnings Rally

Contrarian Profits — Fri, 17 Apr 2009 15:15:56 +0000

pJPMorgan Chase #38; Co (a href="http://www.google.com/finance?q=jpm" target="_blank"JPM/a) beat first-quarter estimates, and its Chief Executive said it has the money to repay the $25 billion the bank borrowed from the U.S. government./p pAfter dividends, the second-largest U.S. bank reported net income of $1.52 billion, or 40 cents a share, on $25 billion in revenue./p pInvestors have been cautiously cheering the performance of the financial sector, whose enormous losses led the stock market into decline. JPMorgan’s quarterly earnings report – like that of Goldman Sachs Group Inc. (a href="http://www.google.com/finance?q=NYSE:GS" target="_blank"GS/a) and rosy estimates from Bank of America Corp. (a href="http://www.google.com/finance?q=NYSE:BAC" target="_blank"BAC/a) – serves as another psychological prop to jaded investors./p pPerhaps the biggest surprise was JPMorgan CEO Jamie Dimon’s claim that the Wall Street bank has the resources to pay back#8230;/p

How to Bank Real Profits by Bucking Wall Street’s Latest Fashion Trends

Contrarian Profits — Fri, 17 Apr 2009 14:13:26 +0000

pInvestors who trade actively and are closely in touch with the ebb and flow of opinion on Wall Street have one enormous barrier to good investment performance: They will often be seduced by what’s fashionable – whether it be in terms of sectors, countries or individual stocks./p pBut in this market, as in all markets, it’s best to look at the unfashionable – sectors that are scorned or ignored by the market and countries whose stock markets have been beaten down by adversity. Of course, it’s difficult to do this if you constantly have an ear to Wall Street. Perhaps that’s why Warren Buffett’s bases his investment business in Omaha, Neb., not New York./p pFashionable investments can do very well in the#8230;/p

Inside Goldman Sachs’ Results – Analyst Blog

Zacks Market Commentaries — Tue, 14 Apr 2009 19:52:26 +0000

Highlights include Goldman Sachs Group, Inc. (GS), JP Morgan Chase & Co., Inc. (JPM), Citigroup, Inc. (C) and Bank of America Corp. (BAC).

Yesterday, after market close, Goldman Sachs Group, Inc. (GS) reported 1Q09 earnings of $1.66 billion or $3.39 a share, up from $1.51 billion, or $3.23 a share a year earlier. The results were way ahead of consensus estimates of a profit of $1.64 per share. A conference call to discuss the results was held this morning.

Higher-than-expected profit was mainly due to strong trading revenue. Of the first quarter net revenues of $9.4 billion, $6.6 billion (34% higher than its previous record) was the contribution from the company's fixed-income, currency and commodities (FICC) group. High volatility (benefiting the Treasury markets and the Dollar), wide spreads in fixed income and reduced competition in the markets were the main reasons for strong earnings.

However, the areas outside fixed income and currency businesses showed weakness during the quarter. Investment banking revenues were down 30% year-over-year, due to the low activity in the capital markets. Asset management revenues also declined 28% to $949 million.

The results also benefited from the change in the timing of the fiscal year by a month, to match the calendar year, as a result of GS becoming a bank holding company. The company reported December results separately, which were a loss of $1.3 billion.

The bank also announced a $5 billion offering of common shares to the public. The proceeds will be used to repay the $10 billion of capital it received from Treasury under the Troubled Assets Relief Program.

With the positive surprise from Goldman, the market's focus has now shifted to other big banks like JP Morgan Chase (JPM), Citigroup (C) and Bank of America (BAC), which are scheduled to report their 1Q09 results soon.

We expect the results to benefit from stronger fixed income revenues, lower funding costs, higher mortgage origination business (as seen in Wells Fargo's preannouncement), as also easing of the mark-to-market accounting rules and AIG payouts (please read Dirk's blog on increase in the forecasts for financials) but these banks have a much larger retail business than Goldman, and will see higher losses there. Zacks Investment Research

“Stress Tests” Not Too Stressful – Analyst Blog

Dirk Van Dijk — Mon, 13 Apr 2009 19:39:34 +0000

Highlights include Citigroup Inc. (C), Bank of America Corp. (BAC) and General Motors Corp. (GM).

By the end of the month, the Treasury will release at least some information on the "stress tests" that the 19 largest banks are going through. It seems very likely that they will only release aggregate info on the banks as a group, and not the results for the individual institutions.

Think of these as sort of like the standardized tests that states put together to see if kids are meeting the "No Child Left Behind" standards. Unless your kid has severe disabilities or goes to a horror show of a school, he should be able to pass. These stress tests are not particularly stressful.

If Citigroup Inc. (C) can't pass the baseline scenario, then it really does deserve to be riding on the short bus. If Bank of America (BAC) passes, that's nice, but please don't treat it as if they won Olympic Gold -- it's more like the participation trophies that six year olds get for playing T-ball.

The table below shows the underlying assumptions that go into both the baseline and the "more adverse" scenarios being tested. We will not have any information about the GDP growth rate until the end of this month, and it is possible that GDP growth will surprise to the upside, given the better net exports data and some indications that personal consumption expenditures have not been collapsing as much as people had feared.

Still, the improvement shown in the out quarters of the baseline scenario are extremely rosy. I don't know how much longer the good net export data will continue. The price of oil has rebounded a bit, and most of the improvement in the trade picture has come from falling imports, not a surge in exports.

Remember that the rest of the world has been affected by the economic crisis at least as much as the U.S. has, and will not be on a buying spree for U.S.-made goods. The "more adverse" scenario should be treated as a most likely case, not as a worst case scenario.

If General Motors (GM) files for bankruptcy, even it will probably be optimistic. As for the Unemployment Rate, we already know that it averaged 8.1% in the first quarter, well above the "more adverse" scenario. The new and continuing claims for unemployment insurance data have not given much indication of a dramatic slowdown in the pace of job losses. In March, the unemployment rate was 8.5%, and revisions to the employment data have been uniformly negative over the past year.

The baseline scenario actually calls for unemployment to start to fall as soon as this month, and to only rise another 0.4% by its peak in the first half of 2010. It seems far more likely that the unemployment rate will rise by 0.3 or 0.4% in April alone. If it starts to plateau there, then it will be in line with the more adverse scenario. I really don't see that happening, even if GM can stay away from the courthouse. If GM files for bankruptcy, as a back-of-the-envelope calculation, add two full percentage points to the unemployment rate to what your base scenario was.

The housing price index is based on the Case-Schiller (CS-10) 10-city composite. It resets it so the fourth quarter of 2008 is 100. The data is available only with a two-month lag, so we only have the information for January. Translating the stress test scenarios to the existing index, then the January reading to be on target for the baseline scenario should have been 159.69. For the adverse scenario it should have been 158.07. The actual reading for January was 158.04, or slightly worse than the "worst case" considered.

Housing prices still have a ways to fall, and that assumes that rents do not start to drop significantly. If they do, the equilibrium price for housing will fall still further.

The fact that the results are being delayed until after earnings season and that the level of detail to be released is very limited is very disturbing. If the tests, as easy as they are, were going well, don't you think that the results would be trumpeted in a major press conference, held at least by Geithner, if not by Obama himself? While I would love the see the baseline scenario work out, I would also love to win $100 million in the Powerball Lotto. I would not base my financial plans based on either of those two things happening.

Read the full analyst report on "GM"
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Zombie Policy Reaffirmed

Contrarian Profits — Mon, 13 Apr 2009 16:45:44 +0000

pTreasury Secretary Tim Geithner is a href="http://www.dailyreckoning.com/inspiring-confidence/"taking his sweet time/a to work out the details of TARP II. But for all the a href="http://www.dailyreckoning.com/regime-uncertainty/"uncertainty/a surrounding his plans, we know one thing: Zombie banks will not be allowed to go under./p pGeithner just reaffirmed this, though not in so many words, in an a href="http://www.huffingtonpost.com/2009/03/10/charlie-rose-interviews-t_n_173720.html" target="_blank"interview/a with Charlie Rose./p pAsked about the possibility of letting a major bank fail, he said, “I’ll say again, they play a critical role in our markets, in our financial system. We want to continue to make sure they play that role. Now, where they need temporary assistance through the government to get through that, we’re going to make sure it comes with appropriately tough conditions so that they emerge stronger and that we’re providing#8230;/p

Wells Fargo’s Pleasant Surprise – Analyst Blog

Zacks Market Commentaries — Thu, 09 Apr 2009 18:41:29 +0000

Highlights include American International Group, Inc. (AIG), JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Bank of America Corp. (BAC).

Wells Fargo & Co., Inc. (WFC) delivered a pleasant surprise to the markets this morning by announcing that it expects a net income of $3 billion, or $0.55 per share, for 1Q09, as against estimates of earnings of $0.23 cents per share. Revenue projection for the quarter at $20.0 billion was also ahead of the estimates of $18.98 billion. The Company will report its financial results on April 22, 2009.

The bank said that the revenue received a boost from exceptionally strong mortgage banking results and strong capital market activities. It appears that the bank benefited from a larger share in the mortgage markets after acquiring Wachovia, and also from the demise of some smaller players.

WFC reported $100 billion in mortgage originations during the quarter, providing loans to more than 450,000 people, for either buying or refinancing a home. With the mortgage rates at their record lows, there is a rush to refinance the existing mortgages.

The bank expects net interest margin of approximately 4.1% for the quarter. With the fed funds rate at nearly 0%, the funding costs of the banks have come down sharply. As such, we expect most banks to report healthier profits on traditional banking businesses.

Further, the relaxation of the mark-to-market accounting rules as well as the passing through of American International Group, Inc. (AIG) bailout funds to some of the large banks also seems to have helped the banks, especially the big ones like JP Morgan Chase (JPM), Citigroup Inc. (C) and Bank of America Corp.
(BAC).

Please read Dirk van Dijk's blog on the big increase in Financials' Q1 Forecasts.

Does this all mean that the banks are out of the woods? The answer is NO. We suspect that the losses on the housing loans, Commercial Real Estate (CRE) loans as well as Consumer loans will continue to rise in the coming quarters, as housing and CRE prices continue on the downslide and unemployment continues to rise.

Deterioration in Commercial Real Estate loans has started rather recently, and the downturn in this class will also probably be very challenging. Further, credit card delinquencies rose to a record high in February and are expected to rise further.

But at the same time, the share prices will get support from the improvement in the accounting profits, mainly resulting from relaxation of the mark-to-market accounting rules.

We currently have a Hold recommendation on WFC.
Read the full analyst report on "WFC"
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Treasury Stressed on Stress-Tests? – Analyst Blog

Zacks Market Commentaries — Wed, 08 Apr 2009 22:06:31 +0000

Highlights include Bank of America Corp. (BAC), Goldman Sachs Group, Inc. (GS), JPMorgan Chase & Co. (JPM), Citigroup inc. (C) and Wells Fargo & Co. (WFC).

Is the Treasury Stressed Out Over "Stress Tests"?

It had been reported by the Reuters that the Treasury Department is planning to delay the release of bank "stress-test" results until after the first-quarter earnings season to "avoid complicating stock market reaction."

The regulators are currently conducting the tests on 19 large banks with assets greater than $100 billion -- including Bank of America (BAC), Goldman Sachs (GS), JP Morgan (JPM), Citigroup (C), Wells Fargo (WFC) etc. -- which represent roughly two-thirds of aggregate U.S. banks assets. The capital assessments are being carried out, under two defined economic scenarios over a two-year time horizon (2009-2010), a baseline scenario and a more adverse scenario. We think that the "worst case scenario" used in the stress test is not "worst" enough, and thus the projected capital requirements may rather be understated.

The tests have been going on for some time and may now be in the final phase of reconciling the regulators' assessments with the banks' internal assessments.

It was already clarified by the Treasury that the result of the test will not be "pass" or "fail" but rather, "How much capital does this bank need in order to meet the credit needs of its borrowers?" It now appears that Treasury may not disclose institution-specific results, but only as a summary.

The Treasury would certainly want to avoid any nervousness in the markets. Any specific information on a bank which is found in need of a lot of capital may not only result in potential investors avoiding that particular bank, but may also case a run on the bank.

We suspect the banks that are found in need of large capital will find it difficult to raise private capital, and ultimately they will have to be bailed out by the government. However, the Treasury has only about $130 billion remaining in TARP funds, and now if the program is expanded to bailout the insurers, the Treasury may not have enough funds to recapitalize the banks.

As such, the Treasury may have to soon approach the Congress for more bailout money. But it may not be easy for the Treasury to get more funds from the Congress -- if they do not provide the details of the results and the capital needs.

In all, it appears that the Treasury must be pretty stressed out over the "stress tests."
Read the full analyst report on "WFC"
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