Commentaries

Now raising intellectual capital

Calling all banks honoring California IOUs

-

So far, I have Bank of America, Wells Fargo and Chase saying they will honor the California IOUs until Friday.

WSJ also puts Citi in the mix.

Here press releases from some others:

http://www.tcbk.com/documents/State-Issued-IOUs-Tri-Counties-Bank.pdf

https://www.cathaybank.com/a_SpecialNotice.asp

http://www.heritageoaksbank.com/

https://www.americanriverbank.com/policy_CA_registered_warrants

https://www.bankofthesierra.com/custom/bankofthesierra/pdf/CA-State_RegWarrants-070609.pdf

The conditions of acceptance also vary:

Heritage Oaks Bank will only accept warrants from customers that have been with the bank for one year.

Tri Counties gives a July 10 cutoff, and says it will only accept warrants made payable directly to customers.

Hybrids securities come home to roost

-

It’s not just consumer and real estate loans that have wreaked havoc on the banking system, but another favorite financial product championed by big banks during the boom years: hybrid securities.

The Wall Street Journal reports that these securities, which are a blend of equity and debt, helped fell six family-controlled Illinois banks that imploded last week. During the boom, hybrid securities, or trust preferred securities, became a perfect product for banks that wanted to raise funds that would count toward their Tier 1 capital cushion without diluting common shareholders. Investors who typically invested in debt loved hybrids because they offered higher yields at a time of extraordinary low returns in traditional investments like corporate debt.

Sheila Bair gets it right

-

FDIC Chairman Sheila Bair last month told a US Senator her agency would “get it right,” in coming up with a set of rules to govern private equity investments in failed banks. And it appears that’s what Bair has done.

The FDIC’s new proposed guidelines on PE investments in failed banks are tough and smart. The new regulation should discourage the worst of the PE crowd only interested in making a quick buck by taking on the deposits and assets of a failed bank.

PE bank rules–now that’s news

-

Glad to hear the FDIC is getting close to issuing tough rules for allowing private equity firms to buy the assets of lenders taken over by the regulator. The Wall Street Journal reports on the development today.

Then again, none of this is really news to readers of this blog. Back on June 18, I reported that FDIC Chairman Sheila Bair had sent a letter to Rhode Island Sen. Jack Reed saying the regulator was in the process of developing “applicable policy guidance” for prospective investors. (A hat tip goes out again to Freedom of Information Act requester extraordinaire Ken Thomas for unearthing the Bair letter).

Bankslaughter

-

There are criminal investigations into the events of the recent financial crisis. The two managers of the Bear Stearns hedge funds that blew up in the summer of 2007 have been indicted in Brooklyn, and more cases in other venues and more charges against executives will certainly be brought.

Yet there is still a palpable public frustration that the wheels of justice are moving too slowly or that it will be too difficult to prove fraud when really recklesness or incompetence were to blame. Several commentators in Britain have suggested that a lower standard of criminal culpability be established when banks die. There is a name for this crime: bankslaughter.

Wall Street rebound likely to be impressive

-

The Wall Street Journal has the rundown on how old-fashioned  trading and underwriting is likely to give big banks like JPMorgan, Goldman Sachs, Morgan Stanley and Bank of America their best quarter yet since “the credit crisis erupted” (not sure when they’re dating that exactly though since you could go back to June or Aug 2007 on that one.)

Investor confidence in the debt markets fueled issuance of $1.5 trillion globally from the start of the second quarter through Monday, according to Dealogic. That was slightly lower than in the first quarter, but the latest results showed a rebound in high-yield issuance.

It’s not over till it’s over

-

Over at The Big Picture, Jack McHugh makes some interesting comparisons between the calm seen in the markets now as banks and investors wrap and the quarter and a year ago. His takeaway though is don’t expect a repeat of last year’s second half meltdown.

…A venerable investment bank had disappeared, stocks had set a major low in March before rallying smartly, the VIX had fallen by more than 50% off its March peak, and both Wall Street executives and Washington policy makers were claiming, “the worst is now behind us” Though it seems like a lifetime ago, the moment in time to which I refer is the end of 2Q 2008, but it could just as easily be Q2 2009. During May and June of last year, I wrote ceaselessly that the financial crisis was not “contained” and that the worst was still ahead of us….

Still talking about those pesky legacy loans

-

For all the stabilization in the financial markets and talk about the ECB and Federal Reserve weighing exit strategies from the massive amount of stimulus they’ve pumped into the system, the U.S. still hasn’t come up with a viable solution for the toxic plague on bank balance sheets. Though markets don’t seem too bothered since the big banks have been able to raise tens of billions of dollars, it’s the fate of smaller banks that are exposed to construction and development loans that are a real worry.

WSJ reports that government’s grand plan to address the toxic legacy issue, the Public-Private Investment Program,  PPIP, has stumbled and lost momentum, which could have implications for the economy’s revival. And since the program has been revamped, it’s small banks that are likely to suffer the most.

Commercial real estate in the dumps

-

David Bodamer over at Clusterstock has some interesting color from a commercial real estate conference where the mood was decidedly grim. Rather than being cheered by the hope that the Fed’s inclusion to commercial mortgage bonds its TALF program will alleviate the stress, participants seem resigned that the worst is yet to come.

I, too, am doubtful that central bank policy will be able to do much to stem the pain. The double-whammy of loose lending standards and overly optimistic assumptions during the boom coupled with the severe downturn in the economy mean the big losses are yet to come.  The commercial sector typically lags other parts of the economy.

  •