DealZone

DB pulls off surprise

AIADeutsche Bank, the underdog in the race to run the IPO of a large AIG unit, has come out on top.

The German bank has been chosen as one of two global coordinators to run the IPO of American International Assurance (AIA), beating out Goldman Sachs and Citigroup, which ran the aborted auction of the Asian life insurer earlier this year.

Morgan Stanley, the other global coordinator, is no surprise. The bank has been advising the Fed since the September implosion of AIG, and on top of its own expertise, regulators wanted it in.

At a time when few deals are gettting done, the AIA flotation will be a big one. In fact, it will be the biggest Hong Kong IPO since April 2007 and a fee bonanza for the banks. Coordinators and bookrunners typically earn around 3 percent in fees — so a $5 billion IPO could produce at least $150 million in fees split between the banks. More than 30 banks applied for the job.

Deutsche, of course, is no babe in Asian IPO woods. As our colleague Michael Flaherty in Hong Kong points out, Deutsche was the joint global coordinator of China Life’s $3.48 billion IPO in December 2003, and was among the banks that handled the $19.1 billion IPO of Industrial and Commercial Bank of China in October 2006. 

Goldman sells China

Goldman Sachs, putting together the pieces of its TARP repayment, is taking a page from Bank of America’s book and selling off at least some of its China exposure. The stake of Industrial and Commercial Bank of China is being sold at a discount and should raise $1.9 billion – or about a fifth of what it owes in TARP.

Goldman, along with Morgan Stanley and others applied last week to repay the government. This may have more to do with Chinese bank assets being big and, presumably, more liquid than others Goldman has in its vast pool of assets. A more alarming analysis could be that asset quality at Chinese banks is as bad as it ever was.

Interesting that news of the sale should come from a bank that launched so many careers at the U.S. Treasury just as Treasury Secretary Tim Geithner touches down in China.

Will UnTARPed Banks Boost M&A?

News that top investment banks want to pay back their TARP funds is welcome news for the M&A market. Though the tens of billions of dollars in capital that will slosh out of the banks and into government coffers may sap the banks of the funds to make big buys, the fact that most post-stress-test capital-raisings have gone smoothly must be encouraging for dealmakers.

Plus, banks that are unable to pull themselves from the government teat will have a whole lot less pricing power. It was interesting to see HSBC commenting on Tuesday that it expects industry consolidation in the second half of this year and in 2010. Though they may be looking more closely at non-U.S. assets, given the burns on their fingers from their foray into the U.S. mortgage market, that big global may sit out the next round of mergers. Will they be missing the boat, particularly given the conviction of many analysts that the U.S. economy will be the earliest to recover?

A key question that could rain on any M&A party is asset quality, and the radiation emitting from the toxic assets still poisoning the financial system. While most of it has been moved to the bomb shelter balance sheet of the U.S. taxpayer, there is little conviction that valuations will have the golden glow of yesteryear, and plenty of lingering fear that the glow is the toxicity of the lost decade.

U.S. bank failures in 2009

As the U.S. government prepares to reveal the results of stress tests to asses the ability of the nation’s largest 19 banks to cope with worse-than-expected financial conditions, worries continue about the sustainability of recent better-than-expected results from banks.

Bank of America reported a big increase in troubled loans, and shares of Citigroup tumbled after analysts at Goldman Sachs said credit losses at the bank continued to grow at a rapid rate.

Regulators closed banks on Friday in Missouri and Nevada, bringing the total of U.S. bank failures this year to 25 and matching the number that failed throughout all of 2008, as the struggling economy and falling home prices take their toll on financial institutions.

Barclays’ moves to escape bailout

BRITAIN-BANKS/Investors have welcomed the prospective £3bn (US$4.4 billion) sale of iShares by Barclays, which gives strong hope that the bank can avoid accepting a UK Government bailout and its implicit restrictions.

Since the deal announcement, Barclays’ shares have risen by 26 percent to 198.8p, their highest point since October, when a rescue £7.3bn financing was arranged with royal potentates from Qatar and Abu Dhabi. These Gulf investors agreed to subscribe for an effective 31percent stake through separate issues at 153.3p and 197.8p. Now, both slugs are “in the money”. However, that cash has not come cheaply.

The £4.3 billion of mandatorily convertible notes, which must be converted into shares at 153.3p by the end of June, receive a 9.75 percent coupon. And the £3 billion of reserve capital instruments pay 14 percent annually, or £420 million, for 10 years. They have warrants convertible at 197.8p.

Goldman steps up to save America

USA/Not much rides on Goldman Sachs‘ success at shedding TARP – just the future of Wall Street, the recovery of the U.S. and global economies, and saving whatever shreds remain of the American Dream. Though it may take some financial finagling to extricate itself from the government’s grip, Goldman’s storied stable of financial savants is as capable as any of casting off the yoke of socialism.

For Wall Street, Goldman fights for the right to pay people whatever the market will bear, enshrining the guiding principal of the marketplace that it is not how much money one earns, but how much more than the other guy. For the economy, everyone knows we need a healthy banking sector to run our particularly high-octane form of capitalism. As for the American Dream, what this country needs most in this time of financial peril is a hero, someone who can stand up to the regulatory Frankenstein shambling from the wreckage of such spectacularly failed government efforts as AIG and Lehman Brothers.

The only question really for Goldman shareholders is how big a bonus Lloyd Blankfein should get if he manages to achieve these lofty goals.

Dow Chemical: Official Rainmakers’ Punching Bag

Poor Dow Chemical.

Not only did the company end up having to buy Rohm and Haas at basically the same steep price it agreed to last year, but it has also become the favorite target of lawyers, bankers and maybe even judges at the Tulane Corporate Law Institute, an annual gathering of top dealmakers.

Timothy Ingrassia, head of Goldman Sachs mergers and acquisitions business in the Americas struck the first blow on Thursday morning.

 ”You’ve already had Dow Chemical’s unique interpretation of the merger agreement. There was never a transaction that made Apollo look better,” Ingrassia said, referring to private equity firm Apollo’s previous efforts to get out of an agreement to buy Huntsman Corp. 

Goldman: short East, long West?

FINANCIAL/GOLDMANSACHSFew can claim to have ever gotten very rich betting against Goldman Sachs. The bank is reported to be cutting its stake in Industrial and Commercial Bank of China and perhaps buying into exchange-traded funds provider iShares.

The Wall Street Journal reports Goldman and ICBC have been talking. Goldman’s 4.9 percent stake in ICBC is worth about $8.5 billion. The timing of a sale seems right, as a lock-up period tying Goldman’s hands ends late next month. The Journal reported Goldman could raise more than $1 billion by selling 15-20 percent of its holding.

Over the last few months, others have also beaten a retreat from China and other points East as risk aversion has grown to dizzying heights. But other financial heavyweights, notably Citigroup, had to repair tattered balance sheets, while Goldman appears to be acting from a position of relative strength. The New York Times reports Goldman plans to pay back the $10 billion it borrowed from U.S. taxpayers last fall — perhaps within the next month.

The Trouble with Bailouts part deux

USA/Yes, Senator Charles Grassley suggests that bonus-wielding AIG execs resign or drive swords into their guts. But cooler heads may yet prevail in the drama playing out in the American outrage arena. The Wall Street Journal argues that politicians are focusing on the bonuses because the tougher question about why contractual obligations to banks should be paid is far trickier and more costly than the somewhat spurious argument that AIG needs to retain top talent.

According to the Journal, counterparties – well, at least Goldman Sachs – were hedged against losses from credit default swaps written by AIG. So if AIG had gone bankrupt, voiding these contracts, the damage to the global banking system may not have been as catastrophic as had been feared.

Why these counterparties should be getting tens of billions of dollars in bailouts if they were hedged anyway is a question that needs to be answered. Investors who bought AIG-written CDS as investments rather than insurance, whether they be French banks or freewheeling U.S. hedge funds, would hardly be surprised to have lost their money in this environment. Might they have been even more puzzled to be paid off?

The Trouble with Bailouts

MARKETS-JAPAN-STOCKSSo AIG is honoring its contracts using bailout money. Pundits, sputtering with rage that the corporate world engaged in contractual bonuses, are basically rehashing the argument about whether AIG should have been allowed to go bankrupt. After all, the government decided that allowing AIG to pay its bills was better for the world than letting it break or renegotiate its contracts.

French bank Societe Generale has gone public defending the fact that it got $11.9 billion in bailout funds from AIG. France’s third-biggest bank by market value said it had acted within its rights to call on AIG for cash. This speaks directly to the rationale for the bailout — if AIG had been allowed to fail, a global systemic collapse in payments would have followed.

Keep in mind, too, that if it had resisted paying the contractual bonuses, AIG likely would have been dragged into court, spent millions on legal fees, and then been forced to pay up anyway. However ludicrous the concept of a contractually guaranteed bonus may be, they were legally binding contracts.