Distressed investors say TGIF
Roman Catholics have fish Fridays. Boxing fans have Friday Night Fights. For distressed investors, like Jon Winick, president of Clark Street Capital, there’s Friday night Failure. “You can count on Friday failures for the next six to twelve months,” Winick said at a distressed investing conference in New York this week. He forecasts bank failures to rise to 200 through next year. There have been 14 bank failures so far this year, according to the Federal Deposit Insurance Corp, with filings every Friday since Jan. 16 after the year end and New Year’s Day holidays. The FDIC seized 25 banks last year. In just the first seven weeks of 2009, the 14 bank failures mean the FDIC is on pace to close more than 100 banks in 2009. Distressed investors say they are expecting a record wave of bankruptcies this year, marking unprecedented opportunity for investors and a feeding frenzy on Fridays. The filings on Fridays are procedural, as the FDIC posts the failures at the end of the week. That allows the declaring bank to give regulators the weekend to sort things out, and it prevents a big run on the bank because branches are closed. Brad Hunter, national director of consulting at Metrostudy, a housing industry research firm, thinks things are just getting started. He said bank takeovers ultimately could exceed 1,000. “Option ARM loans are coming due, and that will trigger another wave of foreclosure,” he said.
Who’s your boss, Mr. Liddy … and for how long?
Edward Liddy was appointed chief executive of insurer American International Group Inc within hours of a Sept. 16 government rescue, averting the 89-year-old insurer’s collapse.
On Monday, fifty-five days after stepping into the corner office, Liddy unveiled the company’s biggest-ever loss. Concurrently, the U.S. government restructured most elements of its initial AIG bailout in favor of a new better-for-AIG scheme, overshadowing the bad quarterly news.
Under the revised plan, AIG gets easier repayment terms and, most importantly, the U.S. Treasury will sink $50 billion into a fund that will buy and hold mortgage derivatives, including those underlying AIG credit default swaps — a thorny area that has led to massive losses for the insurer.
That leaves the government, not AIG, most exposed to potential future losses if markets for these securities grow darker still. If things go the other way, a clause baked into the new agreement means the insurer will get a portion (a third in the case of credit default swaps) of gains as market values rise.
“We’ve tried to thread that needle as best we can so that we are protected from the downside and have some opportunity on the upside,” Liddy told investors on Monday.
Any way you cut it, the U.S. now has the most to gain or lose.
Public company CEOs typically answer to a board of directors, and make decisions based on what is best for shareholders. For Liddy, that basically means the U.S. taxpayer, since the government is entitled to a 79.9-percent stake as part of the AIG bailout, which has already heavily diluted those holding stock before the bailout.
AIG says to report ‘earnings’. Really???
American International Group, the once giant insurer which has become best known as a sinkhole for government money, says it will report third-quarter results on Nov. 10.
Most notable was how AIG described what almost certainly was one of the ugliest reporting periods in financial history: “AIG’s earnings release and financial supplement will be available in the investor information section” of its website.
Earnings? According to the Merriam-Webster dictionary the use of the word “earnings” means money was earned during the quarter, or that the company will report there was money left in the coffer after pay outs. That is unlikely, at least based on analysts’ expectations.
Analysts’ on average expect AIG to report a loss of $1.69 a share in the third quarter, according to Reuters Estimates. It will be the insurer’s fourth-consecutive quarterly loss.
Maybe the insurer should have stuck with the word “results.” It would likely be more accurate and sounds better than the other alternative, “loss report.”
The company’s quarterly report will be its first since it accepted a $85 billion federal bailout on Sept. 16. Since, the insurer has been extended more federal aid, putting a total of $123 billion in taxpayer funds at its disposal.
So much for unbiased journalism. Did the author chew on a lemon before writing such a bitter-tongued article?
Money for Nothing
UBS said it made a huge loan to Blackrock so that the U.S. asset manager could buy $15 billion of distressed assets from the Swiss bank, easing the strain on UBS’s balance sheet, but not freeing it from the risk. This must have been a tough one for UBS’s credit department to swallow. Citigroup took a similar tack to offload subprime assets. UBS said it had provided 75 percent of the funding used by Blackrock to buy the portfolio. Blackrock raised $3.75 billion in equity from investors to pay for the rest of the package, UBS said. UBS’s stock was down about 4 percent, but traders said that was because of concerns the bank may have to increase the size of its rights issue.
Time Warner and Time Warner Cable said their boards agreed to split the companies, giving Time Warner $9.25 billion from a special dividend that it will use towards paying down debt. As part of the deal, Time Warner’s stake in the cable operator rises to 85.2 percent from 84 percent. The Wall Street Journal says Time Warner will slash its $34.6 billion debt load, by two-thirds. Time Warner Cable now has a more hefty debt load, borrowing to pay the dividend.
Dutch office supplier Corporate Express is said to be bolstering its defenses against a hostile Staples bid with a deal to buy French rival Lyreco for 1.4 billion euros ($2.2 billion) that the companies say would make it the biggest office supplier in Europe, but is spooking investors. Corporate Express shares fell almost 9 percent. Lyreco says the combined company would better weather weaker economic conditions and demand. “Volume and size helps in this business,” he told reporters. Staples formally launched its 1.5 billion euro unsolicited bid for Corporate Express on Monday, which the company rejected as too low.
Third Point, a $5.7 billion hedge fund headed by activist Dan Loeb, has recently accumulated a stake of over 5 million shares in Yahoo and is supporting investor Carl Icahn’s proxy battle, a source familiar with the matter said. Meanwhile, Microsoft‘s CEO Steve Ballmer, arguably the best source on Microsoft’s intentions, said in Israel, the software giant is not looking to bid to buy all of Yahoo but is in talks about other types of deals with the U.S. No. 2 search engine. “We are not bidding to buy Yahoo,” Ballmer said. “Yet, we are trying to have discussions about deals with Yahoo that might create value, but not a whole acquisition of the company.” A person familiar with the discussions told Reuters earlier this week that Microsoft has made an alternative offer, proposing to buy Yahoo’s search business and take a minority stake in the Web firm.
Insurer Allianz is in talks about the future of its Dresdner Bank unit and sees a real chance for banking consolidation in Germany, its chief executive said in remarks that boosted German bank shares. “Discussions are currently taking place, although these have not yet reached the stage where I should like to report on them today,” Michael Diekmann said in the text of a speech prepared for the group’s annual shareholder meeting. Allianz is splitting Dresdner Bank into two legally separate business segments, one for private and corporate clients and one for its Dresdner Kleinwort investment banking activities, which it aims to complete by the end of the year at the latest. The move, announced earlier this year to prepare Dresdner to play a role in German banking consolidation, has spurred speculation about possible tie-ups among the country’s commercial banks, long hampered by tiny market shares at home that have undermined their ability to compete abroad.
Other deals of the day:
* ArcelorMittal, the world’s top steel maker, is in talks with Australia’s Macarthur Coal after buying a 15 percent stake in the company, setting up a possible bidding war for the A$4.4 billion group and pushing its shares up 14 percent.
Sovereign wealth investors growing fast
Sovereign wealth funds — the increasingly powerful investment arms of governments around the world — are growing at a rapid pace, according to the Preqin Sovereign Wealth Funds Review.
There are currently 46 active sovereign wealth funds worldwide, with aggregate assets at $3.05 trillion, the study says, adding that assets have risen 51 percent from the end of 2006.
The Middle East is the biggest region for SWFs in terms of value, with 41 percent of all capital centered there. Asia has 31 percent of the capital, with Europe laying claim to 19 percent, according to the study.
Boosted by ballooning trade surpluses, these countries have been investing overseas, leading some to fear their strategic intentions. But several fund executives have recently said these funds present little threat to the fund management industry, but rather offer opportunities for asset growth.
Sovereign funds such as Temasek and the Government of Singapore Investment Corp have made high-profile investments in U.S. financial institutions such as Citigroup and Merrill Lynch, who sought billions of dollars after suffering huge subprime-related losses.
About 60 percent of the funds are investing in private equity, the study said.
“Sovereign wealth funds have long-term investment horizons, relatively few restrictions on investment, and are seeing their total assets being driven even-higher by record oil prices,” Tim Friedman, the editor of the study, says.
