Reuters Breakingviews
Trillion-dollar CMO market looks vulnerable
By Agnes Crane
Investors in U.S. collateralized mortgage obligations were badly burnt by interest rate hikes in 1994. Some of the contributory factors are again in place. Banks and other investors in the little-known trillion-dollar market for CMOs could be set for a spill.
CMOs sound and look a lot like CDOs, the structured products that helped bring the financial market to its knees in 2008. But there’s one big difference. CMOs are built out of mortgage bonds guaranteed by government-run agencies Fannie Mae, Freddie Mac and Ginnie Mae. Should defaults on the underlying securities mount, these agencies — and ultimately the government — will keep investors whole.
Thanks partly to this backing, $176 billion of CMOs were issued in the second half of 2009, well above the $44 billion in the same period the prior year, according to Thomson Reuters. There are around $1 trillion of the instruments outstanding, according to Barclays Capital. Some banks and other investors have been buying them partly — and somewhat ironically — because they can’t find what they need in the mortgage-backed securities market, thanks to a Federal Reserve MBS buying program.
Prius recall puts Toyota troubles into overdrive
Toyota’s troubles have shifted into overdrive. The embattled Japanese automaker is recalling more than 400,000 hybrid vehicles, including its iconic Prius, following problems with 8.1 million others with regular combustion-engines in recent weeks. It’s not that the immediate cost will be punitively high — somewhere between $50 million and $220 million, according to analysts’ estimates. It’s the longer-term price that is more worrisome.
Sure, the gas-pedal fault that prompted the initial recall was bad enough. That put a large dent in the firm’s reputation for producing quality products. It also erased about a fifth of the value of Toyota’s shares, or $34 billion. That’s equal to what Volkswagen is currently worth and just shy of Ford’s market cap.
Toyota’s initial problems weren’t unusual. Ford, for one, recalled 4.5 million vehicles last fall because of a cruise-control button that could catch fire. While there may be a whiff of protectionism in the U.S. reaction, and the company could have been quicker off the mark, it was all still relatively manageable.
But the Prius problem could really strike at the company’s hard-earned reputation. First, it makes it seem as if Toyota’s quality problems are endemic. That may be unfair — one of the issues with the brakes, that they lack as much power as conventional cars, may just be a matter of differing performance and has not yet been deemed to breach safety regulations. But potential customers may not make, or care about, the distinction.
John Thain checks into career rehab at CIT
John Thain has checked into rehab — career rehab that is, at U.S. midmarket lender CIT. While a step down from the heights Thain has scaled on Wall Street in his career, this looks a good match. After its quick spell in bankruptcy, CIT needs a motivated financial technocrat, not an expert in the art of corralling bankers with big egos. This combination plays to Thain’s strengths — and offers him a chance at redemption, which he deserves.
Success won’t come easily. CIT is freshly emerged from bankruptcy and should be able to run its existing loan book down profitably. But figuring out how to generate new business is more difficult. The brand is tarnished and the firm cannot borrow on the same attractive terms available to rival banks or even GE Capital. Yet there is a continuing need among small businesses for capital, while competition is limited.
Thain’s grasp of capital markets — including stints running Merrill Lynch, the New York Stock Exchange and Goldman Sachs — should serve him well in re-establishing CIT’s funding sources. And his ability to escape larger strategic traps to the benefit of investors shouldn’t be underestimated — after all, he sold Merrill for a juicy premium when it was on the verge of collapse.
Even if Thain can’t fully solve CIT’s funding problems, his prolific deal-making experience also holds out the possibility he could find safety in the arms of a larger rival. Either way, the patina of success that would accrue from successfully mending CIT would go a long way to offsetting any dings his reputation suffered while at Merrill. That is, as long as he makes a date with IKEA when it comes to refurbishing his new office digs.
Fading crisis should galvanize bank boards
Bank regulators haven’t exactly covered themselves in glory. But an earlier defense against bank excesses ought to be their boards. It’s not an easy job, but directors could try harder to control risk-taking. Uncomfortable questions are welcome.
One worth repeating, with the financial crisis slowly fading and 2009 results heralding a possible return to normality for some U.S. and European banks: “Why are we doing so well?”
Boards often discuss problems. But from the UK’s Northern Rock to Countrywide in the United States, greater scrutiny of fast-growing and highly profitable businesses might have revealed weakening standards and optimistic assumptions.
Or how about this: “What could make this institution fail?” Bank bosses should know broadly how the economy, interest rates and the like affect their business. But when the U.S. government ran stress tests last year, it found that an improbably high proportion of banks believed themselves more resilient than average.
Dresdner wins in art where it failed in i-banking
Dresdner Bank has learned a thing or two about men walking over the years. The German bank tried to buy its way into the City of London and Wall Street by acquiring investment banks. Shortly thereafter bankers at both firms walked out the door. But where Dresdner failed in commerce it appears, belatedly, to have triumphed in art.
The sale of a bronze entitled “Walking Man I” by Swiss sculptor Alberto Giacometti fetched 65 million pounds, some $104.3 million, on Wednesday night in London, a record for a work of art at auction. Dresdner bought the piece in 1990 for a price likely to have been in the single digit millions.
The result compares favorably with other shopping excursions undertaken over the years by Dresdner, which last year was sold by German insurer Allianz to Commerzbank. The first of these big splashes was its 1995 acquisition of Kleinwort Benson, the London merchant bank founded in 1786.
Dresdner paid $1.5 billion for the firm, which at the time boasted a strong position in UK corporate broking and M&A.
Bond investors still relatively sweet on Kraft
By Agnes Crane
If Kraft’s stock price is any indication, shareholders are ambivalent about the purchase of Britain’s cherished candy maker, Cadbury. Yet debt investors handed over $9.5 billion to the cheese-and-crackers conglomerate on one of the gummiest days in the markets for ages.
Chief executive Irene Rosenfeld shouldn’t take this confidence, however, as a robust validation of her acquisition strategy.
Shares of the Cheez Whiz maker have congealed at around $28 per share — down from this year’s high of $30.10 but modestly better than the $27 or so during Kraft’s dogged courtship. That’s not surprising given the public lashing Warren Buffett, the company’s top shareholder, gave Kraft over the high price paid for Cadbury.
Movie Gallery’s second flop should be its last
By Agnes Crane
Movie Gallery is in bankruptcy protection for the second time in less than three years. Even back in 2007, it was apparent that the also-ran U.S. video rental store chain was losing a fight against entertainment and technology trends. Some companies should just be put out of their misery.
Two years ago, Sopris Capital Advisors and other creditors of the company got back a fraction of the face value of their claims and some of them ended up owning the company. The current owners shouldn’t now be too surprised that Movie Gallery’s downward trajectory has continued.
When the company got its start in the 1980s, video was at the cutting edge. Suddenly, customers could rent their favorite movies when they wanted, rather than waiting for them to show up on broadcast television. Now, though, that is all a distant memory. High street video stores are little more than quaint reminders of the era of giant shoulder pads and brick-sized cell phones.
…I forgot, I would love a live Radio Reuters in the multimedia section, where the columnists take turns to read news every hour, to also put a voice to a face, and play music non-stop for the other 55 minutes. Requests can be e-mailed or blogged. Everything is so serious and intense, maybe we can have some lighter moments, ‘Oddly Enough’ makes me feel odd in the morn.
Imagine the amount of extra ‘hits’ on the various landing pages.
No Titanic, Avatar or Gone with the Wind songs please.
‘Got Cash’ of Brooklyn Funk Essentials might be my first request, be ready for lots of ‘beeps’.
Bankers should be in bonus penalty box
Bankers should be put in the bonus penalty box for 2010. The industry has lost credibility because of its crass approach to pay in 2009. To get back on the front foot, compensation in the current financial year needs to be much lower. Governments and regulators should make this happen — and do so quickly. Delay will just store up trouble for everybody.
The public is now so hostile to bankers that there is a risk of bad regulations being foisted on the industry. The backlash has already produced the ill thought-out “Volcker rule”, which would prevent U.S. banks from engaging in proprietary trading. If bankers’ greed is not checked quickly, the bonus row could poison the pay round at the end of 2010 in the same way that it did in 2009. So long as this dispute goes on, every word uttered by any banker — however sensible — will be heavily discounted.
The way forward is take the whole issue off the table, by making sure that pay in 2010 is meaningfully lower than it was last year. Unless profits collapse — which is possible — the industry isn’t going to do this on its own. Some senior bankers understand the political benefits of reining in pay, and possibly also the advantages for their shareholders. But nobody is going to act unilaterally. They are too scared that rivals will just poach their top people. Meanwhile, they argue that multilateral action orchestrated by the industry would flout anti-trust laws.
That’s why the chairmen of two leading banks have privately called on the U.S. and UK governments to organise a co-ordinated crackdown, Reuters Breakingviews has learned.
Another Government problem. Rewrite the rules and get new rules implemented. Congress and the Government agencies are still acting like Senators ride horses from their home states to Washington.
Russian IPO rush means investors can be choosy
Russian initial public offerings are set for a comeback. Some $20 billion of Russian share sales are forecast this year, including dozens of IPOs. With plenty of options, investors should be able to drive a hard bargain.
Following a two-year lull in activity, bankers are excited at the prospect of a return to the heady days of 2006 and 2007, when Russian companies raised some $37 billion in 42 international share issues. Media group Profmedia plans to raise $500 million in April with a London listing, while iron ore miner Metalloinvest and coal miner SUEK are mulling billion-dollar IPOs in 2010.
Russian new issues have been understandably popular with investors in the past. They tend to be sizeable and offer exposure to high-growth sectors. The Russian stock market also appears less expensive than other emerging markets on some measures.
But issuing companies’ bosses often have inflated estimates of what they are worth. Around two thirds of all Russian IPOs have underperformed the local stock market since issue date, in some cases losing 80 percent of their value, according to data compiled by Renaissance Capital.
This article has no context, ignores issuance costs and prospectus’ contents’ trends. This place has +- 15 times zones and +-150 dialects, I think there is more to it than someone chopping wood on the steppes or heads in Gorky Park.
Bank of New York pays full price for small gain
By Rolfe Winkler
Bank of New York Mellon is growing – at a price. The giant trust bank on Tuesday agreed to buy PNC Financial Services’ back-office operations for $2.3 billion. That works out to 23 times annualized fourth-quarter 2009 earnings. That is a heady multiple for only a marginal boost in market share.
PNC’s shareholders seem to be getting the better end of the transaction. The sale of the PNC Global Investment Servicing (GIS) unit boosts its capital and should help it repay $7.6 billion of bailout money received from the government.
Thanks to the deal, PNC’s Tier 1 capital ratio rises to 6.7 percent from 6 percent. PNC probably needs to raise yet more equity to pay back its Troubled Asset Relief Program funds, but this is a good start.
Big fan of PNC… the Nat City deal would cause heartburn for anyone, but what they’ve managed to build in terms of non-interest revenue generation is really impressive, particularly when it comes to generating revenue from back office activities other institutions simply assume are cost centers.
Not a big fan of the whole registering thing, but I suppose there are reasons.
Beezlebufo, FKA Andrew
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That’s right, if all else fails, invest in chocolate.
I am so ‘disconbubblelated’ from this week’s bubble-hysteria, I hope their milkshakes have lots of froth synergy, because I want to OD on bubbles this weekend.
Warren Bubble gives the Freemasons a bad name.