July 2009 Archives

July 31, 2009 6:00 PM

Fannie and Freddie Unlikely to Repay Bailout Funds

  by AVI KLEIN

Fannie Mae and Freddie Mac are unlikely to repay the $85 billion in government assistance they received as part of the bailout program, the agencies' top regulator said Thursday.

"Their book is so large," James Lockhart, director of the Federal Housing Finance Agency, told the National Press Club. "It's hard for me to see that they will be able to repay all of that."

Lockhart said that, contrary to the behavior of financial firms that have eagerly sought to repay bailout money, Fannie Mae and Freddie Mac were likely to need further financial assistance in the future.

Lockhart's comments were reported by numerous news outlets.

The two agencies, which are regulated by the federal government but expected to meet expenses without taxpayer assistance, guarantee home loans. Both suffered major losses connected to the collapse of the real estate market, and some critics have criticized them for loose lending practices that inflated prices.

When the government offered to bail out the agencies, some argued that the transactions - which paid 10 percent interest -- could be profitable for taxpayers. Lockhart's remarks, however, cast serious doubt on whether the agencies will be able to repay the initial capital investment at all.

"Unfortunately, I guess we have to look at it as an investment by the taxpayer to stabilize the mortgage market," Lockhart later told Bloomberg Television.

Fannie Mae and Freddie Mac together have posted losses of $150 billion since the third quarter of 2007. Lockhart said he expects they will continue to lose money
"for at least the next year or so" and are unlikely to book "strong profits" for another two to three years. In the meantime, the government will likely have to provide additional financial assistance, he said.
July 30, 2009 5:15 PM

Changes Afoot at Midwest Banc Holdings, Inc.

  by SONYA HUBBARD  for Footnoted.org Logo

In early December, Illinois-based Midwest Banc Holdings, Inc. got $84.8 million from the Treasury Department's Troubled Asset Relief Program in exchange for preferred stock and warrants.

 

When the government rolled out its $700 billion program to shore up capital levels at healthy banks, one point that many bankers grumbled about were the restrictions on executive compensation.  They argued that compensation limits might cause talented employees to flee for more lucrative jobs (although clearly those jobs wouldn't be at competitor banks that also took TARP money, since they would be subject to the same restrictions).

 

But some interesting changes were disclosed in an 8-K that Midwest Banc Holdings filed yesterday with the Securities and Exchange Commission.  First, we learned that three members of the board of directors resigned, reducing its size from 11 members to eight. No explanation was given for those resignations.

 

In the very next paragraph, we learned that on Tuesday of this week, the Company implemented a "cost reduction initiative."  The salaries for named executive officers will be reduced by 7 to 10 percent, effective August 3.  Of course, even after the reductions, they'll all still make between $205,046 and $450,000.  But the largest cut - the 10 percent reduction to President Robert Herencia's salary - was accepted by a man who just joined the company two months ago.

 

Midwest Banc Holdings is the parent of Midwest Bank and Trust Co., which operates 26 full-service community banks in the Chicago area and has $3.6 billion in assets.

 

Midwest Banc Holdings also amended its severance policy. It said in its annual report in March that it would make those changes once the final compensation rules for TARP recipient were issued.

 

In addition to reducing costs, the company is also trying to raise more capital.  This press release spells out some of those efforts, which include (among other things) restructuring debt, converting preferred stock into common stock, and - last but not least - seeking $138 million from the Treasury's Capital Assistance Program (CAP) that would be used to redeem the preferred shares given to the government in exchange for the original TARP aid.

 

The money in December came from another Treasury initiative called the Capital Purchase Program (CPP).

 

Midwest Banc Holdings reported a second-quarter loss of $76.5 million on Tuesday, an amount that was exacerbated by two "legacy issues"; one pertained to losses from investments in Fannie Mae and Freddie Mac, and the other related to a 2007 decision to finance an acquisition with debt and preferred securities (a decision the company said, in hindsight, "at the time seemed prudent").

 

While the results from the company's new plans will be seen in due time, the executives' decision to cut their own salaries signals that they're willing to sacrifice to improve the bank's financial condition.
July 30, 2009 4:29 PM

Report: Bank Compensation De-Linked From Performance

  by AVI KLEIN

Compensation structures at large banks bear no relation to their financial success or the performance of their employees, undercutting a central defense of the banking industry against restrictions on executive pay, according to a new report.

Released as part of New York Attorney General Andrew Cuomo's ongoing investigation into the cause of economic problems in the banking industry, the report found "no clear rhyme or reason" to why some banks awarded large compensation packages.

Cuomo's office examined historical data on corporate performance and executive pay at the first nine companies to receive government aid as part of the Troubled Asset Relief Program. They also interviewed executives, compensation consultants, and employees who received bonuses.

The team found similar behavior among differently situated firms, with all paying far more in bonuses than they reported in net income last year. Goldman Sachs Group Inc., for instance, turned a $2.3 billion profit in 2008 while paying out $4.8 billion in bonuses, while Morgan Stanley earned $1.7 billion and paid $4.4 billion in bonuses.

Companies that suffered large losses also paid large bonuses to their employees. Citigroup Inc. and Merrill Lynch & Co. each lost approximately $27 billion in 2008, with the former paying out $5.33 billion in bonuses and the latter $3.6 billion.

 "When the banks did poorly, their employees were paid well," the report found. "And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished."

Critics have long said that executive compensation structures at major banks reward excessive risk-taking. The findings undercut a central industry defense, that the system is self-regulating because employees, as one industry executive cited in the report explained, "share in the downside when overall performance is weak."

If employees are rewarded no matter what happens, then the compensation structure would appear to present a temptation for employees to book risky investments, the report noted. "In other words," it said,  "bank compensation structures lacked consistent principles and tended to result in a compensation system that was all "upside."

The attorney general's report recommended that the banking industry reexamine its compensation practices to bring them into line with stated principles. Should private actors fail to do so, Cuomo said,  "such reform should be discussed as part of the federal regulatory reform effort, and, where appropriate, taken into account by the Obama Administration's pay czar.
July 30, 2009 1:15 PM

AMEX Pays $340 Million for Warrants

  by AVI KLEIN

In a deal experts said was good for taxpayers, American Express Co. paid the Treasury Department $340 million for stock warrants it sold it last year in exchange for bailout funding.

The company, which has already repurchased the $3.39 billion in preferred shares it sold the government under the Troubled Asset Relief Program, is the latest to strike a deal with Treasury over the valuation of the warrants.

How to value the warrants has been a sticky question since the program began. Because they permit the holder to buy common shares at a specified price, some have argued that the government should hold on to them until the financial sector recovers.

Under that scenario, taxpayers might make a significant profit. And selling them at the price they might make on the open market today would mean the taxpayers aren't compensated for the risk they took in accepting them in the first place.

Last month, with banks clamoring to leave TARP and escape a perceived unfriendly regulatory environment, Treasury announced the procedure by which it would price the warrants.

Under the announced terms, banks that have already redeemed the stock they sold the government submit their own valuation of the warrants.

Treasury then has 10 days to accept the bank's valuation or initiate a cooperative appraisal process in which both the bank and Treasury name independent appraisers to evaluate the claim. If the two fail to agree, a third independent appraiser is to be named and "a composite valuation" of all three will determine the final value.

In the case of American Express, it appears that an agreement was reached rather quickly. In a statement, the company said that the price it paid for the warrants, when added to the $74.4 million in dividend payments in paid for its redeemed stock holding, resulted in a "annualized 26 percent return" for the government.

Experts agreed, saying that the final price was a "good deal" for taxpayers.  "It seems that congressional pressure and the threat of auctions has significantly stiffened the negotiation stance of the U.S. Treasury," Linus Wilson, a finance professor with the University of Louisiana at Lafayette, told Bloomberg News.

BailoutSleuth reported last week that Goldman Sachs Group Inc. had paid $1.1 billion for its warrants after it's first offer of $500 million was rejected. Other companies that have redeemed warrants and made a final exit from the TARP program include U.S. Bancorp, BB&T Corp., and State Street Corp.
July 29, 2009 4:27 PM

Spurned Investors Criticize CIT Refinancing Deal

  by AVI KLEIN

CIT Group Inc. failed to give due consideration to a $6 billion alternative debtor financing plan before accepting a more expensive offer, a group of spurned investors says.

The commercial bank, which made improvident investments in derivatives tied to the real estate market, faced the prospect of bankruptcy before striking a deal with six creditors for emergency financing.

The creditors involved included Allianz SE's Pacific Investment Management Co., Oaktree Capital Management LLC and Centerbridge Partners L.P.

Under the terms of that deal, CIT received $3 billion in loans at an interest rate of at least 13 percent and agreed to buy back $1 billion in outstanding bonds. It also paid $100 million in transaction fees and promised most of its assets as collateral.

The company is paying 5 percent on the $2.3 billion in taxpayer capital it received earlier this year under the Troubled Asset Relief Program.

But a better, less expensive option was available, says a different group of creditors.

"We never received a meaningful response to our proposal," Thomas Lauria, an attorney representing CIT investors holding approximately $2 billion in debt, wrote in a letter to CIT's board of directors.

According to Luria, his clients were willing to provide as much as $6 billion in immediate funding, also at a base interest rate of 13 percent. But the transaction fees would have been much less, 3 percent of the value of the deal versus 5 percent on the deal that CIT accepted.

The competing proposal also offered a lower exit fee, which CIT would have to pay if it repaid its loan before the term expired.

Having accepted a smaller financing package, CIT is now heavily reliant on the results of its debt buy-back program. The Wall Street Journal, which reported the contents of Mr. Luria's letter, said that so far "few of the bonds" had been tendered and that the company would extend its deadline for buying them back at its most attractive terms.
July 28, 2009 11:59 AM

Hudson City Bancorp a Throwback to "the Good Old Days"

  by SONYA HUBBARD  for Footnoted.org Logo

With the focus so often aimed at struggling and failing banks, it's easy to forget that there are banks that have weathered the economic storm with apparent ease.  One such bank is Hudson City Bancorp Inc., the holding company for Hudson City Savings Bank, which Forbes pronounced the "Best-Managed Bank in America" in 2007 and 2008.

In a lecture that the company's chairman and chief executive, Ronald Hermance, gave at the Chautauqua Institution last week, a PowerPoint presentation set the tone with the title slide:  "10 Straight Years of Record Results:  Our Year to Shine."  (The presentation is available here as an attachment to an 8-K the company filed last week with the Securities and Exchange Commission.)  

The company, which was founded in 1868, describes its core values as "Conservative and Efficient Service". Assuming that its numbers are correct, those claims are supported by some impressive results.

According to slide 9, the bank was founded to offer people a safe place to put their money and to fund housing needs; it makes and keeps home mortgages in its portfolio; and it relies on underwriting instead of credit scores to determine an applicant's creditworthiness.

Refreshing?  There's more.

Its assets ($7.9 billion) vastly exceed its loans ($3.7 billion). A shareholder who bought shares in the company's IPO ten years ago has reaped a 69.5 percent return on his or her investment. Comparing first -quarter performance from 1999 to the same quarter in 2005, assets increased by 167 percent and loans grew by 222 percent.  Deposits for the same period grew by 70 percent.  

Slide 22 notes that 99 percent of the company's portfolio consists of first mortgages on 1- to 4-family buildings. Hudson City requires a minimum 20 percent down payment on all mortgages, and at origination the average down payment on the portfolio is about 39 percent.

Compared to two of its peers (Huntington Bancshares Inc. and  Zions Bancorporation), its assets and market cap are higher, (slide 21) and its staffing is dramatically lower.

And while the share of conventional mortgages at least three payments past due is 4.70 percent nationally and 4.26 percent in New Jersey, the figure for Hudson City is only 1.05 percent.

Hudson City seems like a throwback to earlier, simpler times.  Slide 29 says that it still lists its the phone number for each bank branch, and its employees are instructed to focus on customer satisfaction rather than sales and production goals.  Also - amazingly - the company generally rewards employees by adding more than 40 percent of their salaries to their ESOP accounts each year.

Given those results, we're probably not the only ones who are feeling a little nostalgic for the days before subprime loans and credit default swaps.  And we're also betting that the competition for jobs at Hudson City Savings Bank just got a whole lot tougher.

July 28, 2009 10:15 AM

Banks Save $24 Billion on FDIC Loan Guarantees

  by AVI KLEIN

A government program to guarantee new corporate debt by bailed out financial services firms will save those companies at least $24 billion over three years.

The savings are partly responsible for a jump in banking profit in the last quarter. According to an analysis of the Temporary Liquidity Guarantee Program, one of the lesser-known elements of the bailout package that Congress passed late last year, eight banks have cut their interest payments by $2.2 billion in the second quarter alone.

Under the TLGP program, the Federal Deposit Insurance Corp. guarantees the payment of certain types of senior unsecured debt, as well as certain noninterest-bearing transaction accounts. The intent, as with other parts of the bailout, was to encourage banks to return to normal business activities by mitigating the uncertainty of the credit markets.

So far, the FDIC has guaranteed $339 billion in corporate debt under the program, which is scheduled to come to a close at the end of October. The FDIC has earned $6.9 billion in fees from participating institutions.

The program has been good to the companies involved. The Wall Street Journal, which reviewed the program, reported that Citigroup Inc., already the recipient of $50 billion in more direct bailout funding, saved almost $600 million in interest in the latest quarter - approximately 14 percent of its overall quarterly profit of $4.28 billion.

Similarly, Goldman Sachs Group Inc. stands to save $205.5 million every three months by selling its debt through the TLGP program rather than on the open market, the Journal reported. J.P. Morgan Chase & Co. will likewise save $246 million per quarter.
July 27, 2009 11:24 AM

Pay Czar to Press Firms to Renegotiate Excessive Contracts

  by AVI KLEIN

The Treasury Department official charged with overseeing compensation practices at bailed-out companies is preparing to force renegotiations of some of the more generous pay packages.

Kenneth R.  Feinberg, the so-called pay czar, has authority over salaries and bonuses paid to the top-earning 100 employees at seven large companies that received money under the Troubled Asset Relief Program.

The issue of whether executives at firms that received taxpayer money to stay afloat has been a lingering source of public outrage since American International Group Inc. attempted to pay hundreds of millions of dollars in bonuses to employees of the same derivatives unit seen as responsible for the firm's eventual collapse.

The firms subject to Feinberg's oversight include AIG, Citigroup Inc., Bank of America Corp., General Motors Corp., Chrysler Group LLC, GMAC LLC and Chrysler Financial LLC.

Feinberg cannot void employment contracts out of hand, but he can force the companies to renegotiate them to conform to public standards of appropriateness. In the case of an employee who was guaranteed a $1 million dollar bonus for 2009,  Feinberg might insist that that sum be deducted from any 2010 employment contract, the Wall Street Journal reported.

"Mr. Feinberg can certainly put all types of informal pressure on firms to get them to renegotiate," John Olson, a partner with the law firm Gibson, Dunn & Crutcher LLP, told the paper.

This type of moral suasion may be necessary with a profit-sharing contract between Citigroup Inc., which received $50 billion under the TARP program, and Andrew J. Hall, an energy trader who stands to make $100 million in bonuses by the end of 2009.

The Journal reported that Feinberg would be certain to try to convince Citigroup to reduce the compensation package, but if that was not possible would demand that the company charge the bonus off Hall's future earnings.  Nevertheless, Citigroup is currently in negotiations to sell Hall's energy trading unit. So long as his contract is not sold to a TARP recipient, he might well end up being paid in full.
July 25, 2009 6:58 AM

Regulators Close Seven More Banks

  by CHRIS CAREY

Regulators shut down seven more banks, including six Georgia institutions that were under common ownership.

 

The latest closings bring the total this year to 64, compared with 25 for all of 2008.

 

The Georgia Department of Banking and Finance seized six subsidiaries of Security Bank Corp. of Macon, Ga. The Federal Deposit Insurance Corp. was appointed as receiver, and arranged for State Bank and Trust Co., of Pinehurst, Ga., to take over all of the failed banks' deposits.

 

The six banks had a total of $2.79 billion in assets.

 

Regulators also closed Waterford Village Bank in Clarence, N.Y.., and arranged for Evans Bank N.A. to take over its deposits and operations.

 

The Georgia banks closed Friday were:

 

--Security Bank of Bibb County, which had $1.2 billion in assets and $1 billion in deposits. 

 

--Security Bank of Jones County, which had $453 million in assets and $387 million in deposits.

 

--Security Bank of Houston County, which had $383 million in assets and $320 million in deposits.

 

--Security Bank of Gwinnett County, which had $322 million in assets and $292 million in deposits.

 

--Security Bank of North Metro, which had $224 million in assets and $212 million in deposits.

 

--Security Bank of North Fulton, which had $209 million in assets and $191 million in deposits.

 

In addition to assuming all the deposits of those banks, State Bank and Trust took over their 20 branches and acquired $2.4 billion of their assets. The FDIC entered into a loss-sharing arrangement with State Bank and Trust on roughly $1.7 billion of those assets.

 

As part of the deal, State Bank and Trust also received a $300 million capital infusion from a group of 26 investors, the FDIC said. Joe Evans, a longtime banking executive, led the group and became State Bank's chairman and chief executive.

 

The FDIC estimated that the Security Bank closings would cost its insurance fund around $807 million. It estimated that the failure of Waterford Village Bank would cost the fund $5.6 million.

 

The New York State Banking Department shut down Waterford Village Bank, a one-branch bank with $61.4 million in assets and $58 million in deposits. Evans Bank, based in Angola, N.Y., agreed to assume all of the deposits and nearly all of the assets.

 

It entered into a loss-sharing deal with the FDIC on $56 million of the assets.

July 24, 2009 9:34 AM

Goldman Pays $1.1 Billion to Reclaim TARP Warrants

  by AVI KLEIN

After first attempting to haggle over the price, Goldman Sachs Group Inc. has paid $1.1 billion to repurchase stock warrants from the Treasury Department. The move comes a month after Treasury announced new procedures for determining the value of such financial instruments.

Goldman Sachs last month repaid $10 billion in public money it received in October through the Troubled Asset Relief Program. It also paid Treasury $318 million in dividends payments on the preferred stock it issued the government.

But clearing its books of the stock warrants issued as part of the TARP package  proved more complicated, with some government officials showing concern that the taxpayers would be underpaid for what could be a lucrative investment, while others argued that the government should extricate itself from the banking sector as quickly as possible.

Goldman, for its part, wanted to pay the lowest possible price.

Stock warrants give the holder the right to buy stock at a certain price in the future. Now that Goldman's operations have bounced back from the depths of the economic crisis, the warrants held by the government could yield significant gains.

Goldman's shares closed at $93.57 on Oct. 28, the day that Treasury finalized its investments in that company and eight other large financial firms. Its stock is now trading at more than $165.

Treasury got roughly 12.2 million Goldman warrants as part of the TARP deal. They are exercisable at $122.90 a share, meaning the government currently has paper profits of roughly $520 million.

Last month, with banks clamoring to leave TARP and escape a perceived unfriendly regulatory environment, Treasury announced the procedure by which it would price the warrants.

Under the announced terms, banks that have already redeemed the stock they sold the government have 15 days to submit their own valuation of the warrants.

Treasury then has 10 days to accept the bank's valuation or initiate a cooperative appraisal process in which both the bank and Treasury name independent appraisers to evaluate the claim. If the two fail to agree, a third independent appraiser is to be named and "a composite valuation" of all three will determine the final value.

Although neither Goldman nor the Treasury would comment on the negotiations, outside observers estimated that Goldman initially offered to pay $500 million for the warrants.  This offer was evidently refused, prompting Goldman to relent and offer $1.1 billion rather than go through the independent appraisal process.

Elizabeth Warren, the head of the Congressional Oversight Panel overseeing the TARP program, said she thought the price was fair. "I think that means oversight works," she told a Congressional panel.
July 23, 2009 11:29 AM

TARP Recipients Continue Lobbying Spending

  by AVI KLEIN

Financial institutions that received federal bailout money continued to spend heavily on lobbying efforts in 2009, while auto companies cut back on such expenditures by approximately one-third.

 

Eight major banks - Citigroup Inc., JPMorgan Chase & Co, Bank of America Corp., Goldman Sachs, Morgan Stanley, Wells Fargo & Co., State Street Corp. and Bank of New York Mellon Corp. -- spent a total of $12.4 million on lobbying in the first half of the year.

 

That was a touch more than what they spent in the corresponding time period a year ago, The Hill newspaper reported. JP Morgan led the group, spending $3.07 million from January through June. Citigroup came in second with $2.9 million in lobbyist spending.

 

Lobbying by bailed-out companies has been controversial. Critics have said that banks that receive taxpayer money should not be allowed to turn around and use that money to influence lawmakers.

 

"They should not be allowed to lobby,'' Craig Holman, a government affairs lobbyist for Public Citizen, told McClatchy News Service. "As long as they hold on to a very substantial portion of public funds, and are publicly owned essentially, they should not be using any of their funds for lobbying purposes or campaign contributions."

 

The banks have said that they have not used bailout money for lobbying purposes and that the fees are paid from other business sources. "We don't use TARP funds," Shirley Norton, a spokeswoman for Bank of America, told McClatchy.  "We're very sensitive to the issue of using government funds.''

 

Unlike the banking sector, however, lobbying by the automobile industry declined by a significant margin in 2009 -- a clear sign that banks, having survived an initial panic, are far more confident in their future prospects than Chrysler LLC and General Motors Corp., both of which are in the middle of wholesale restructurings that included brief stops in bankruptcy court.

 

GM spent $5.56 million on lobbying in the first six months of 2009, down from the $7.08 million spent in the same period in 2008. According to The Hill, Chrysler spent $1.42 million, compared with $2.78 million the year before, and auto and mortage lender GMAC LLC spent $660,000 versus $1.15 million in the same period in 2008.

 

Some companies have shut down their lobbying operations altogether. American International Group, Inc., which once had an impressive army of lobbyist on Capitol Hill, no longer has a single lobbyist working on its behalf.

July 23, 2009 9:59 AM

Private Equity Stake in Flagstar Could Pay Off Well

  by SONYA HUBBARD  for Footnoted.org Logo

By now, we know that even $700 billion in government money can't fix every problem that U. S. banks have.  But after the Great Depression of the 1930s, the federal regulators promulgated a rule that only bank holding companies could operate banks.  The rule was created to prevent future bank owners who found themselves in economic turmoil from taking resources from the bank and using them for other, non-bank ventures.

Lately, though, some investors have been allowed to operate by a different set of rules, and that has alarmed some legislators and market watchers.

This all came to light when the Office of Thrift Supervision (OTS) allowed a private equity firm to buy a majority stake in Flagstar Bancorp, Inc., the holding company for Flagstar Bank.

Based in Michigan, Flagstar had 177 banking centers in Michigan, Indiana, and Georgia at the end of March. It also operated 61 home loan centers in 18 states.

According to this article, this "unprecedented move" to allow the private equity deal put the OTS at odds with the Federal Reserve, whose rules "state that private equity firms cannot own a majority stake in a lender because they are not registered as a bank."  The concern was that other private equity firms would try to follow suit.

Flagstar's case is interesting.  It applied to participate in the Treasury Department's Troubled Asset Purchase Program, but was advised that getting the $266.7 million in government money it sought was contingent upon also getting a $250 million capital infusion from an affiliate of MatlinPatterson Global Advisers LLC. MatlinPatterson is based in New York and bills itself as a "global distressed private equity firm" (and - unless you have a log-in ID and password - that's about all that the company's web site wants to tell you).

The pieces fell into place, and on January 30, it was reported that Flagstar received $523 million in new capital, It got $266.7 million from the TARP Capital Purchase Program in exchange for preferred stock and warrants; $250 million came from the MatlinPatterson affiliate, MP Thrift; and $5.32 million came from Flagstar Chairman Thomas Hammond (bio. p. 39), President Mark Hammond and other members of management.  Flagstar also announced that MatlinPatterson had agreed to raise another $100 million in equity during the first quarter of 2009.

In return for MatlinPatterson's $250 million, it reportedly got 250,000 shares of convertible preferred stock that it exchanged for 312.5 million shares of common stock at a conversion price of $0.80 per share.  That gave MatlinPatterson an approximately 70 percent stake in Flagstar.  The stake increased by the end of June, when Flagstar reported that MP Thrift had invested the additional $100 million in capital in exchange for more preferred stock that can be converted into common stock at a discount to the prevailing market price, which stood at 82 cents as of July 22. The same press release also said that the trust preferred securities Flagstar issued to MatlinPatterson will pay a dividend of 10 percent, mature on September 15, 2039 and are callable by Flagstar beginning in 2011.

A 10 percent dividend might be enough to turn Treasury Secretary Timothy Geithner green with envy.  That's because that is twice the dividend rate that Flagstar must pay the Treasury Department on the preferred stock the government holds. According to this Fact Sheet published by the Michigan Banker's Association, "For the first five years, a CPP recipient must pay quarterly a 5 percent annual dividend to the Treasury on the capital. This must be paid before any other dividend may be paid to any other shareholder. After the first five years, the dividend increases to 9 percent annually."

Granted, MatlinPatterson has more at stake in Flagstar than the government does at this point, but one could argue that it benefited greatly from the Treasury Department aid.

Sen. Jack Reed (D-RI), who chairs the Senate Banking subcommittee on securities, insurance, and investments, took issue with the way the Flagstar deal occurred.  According to this article, Reed sent a letter to  Geithner, Federal Reserve Chairman Ben Bernanke, and others, and said:  "These activities represent another, particularly dangerous, example of regulatory arbitrage whereby institutions and firms are shopping around a potentially risky activity until they find a regulator who will allow it."  Reed advocates consolidating the regulators so that this version of "forum shopping" would not succeed.

The article reports that Reed's concerns paid off.  It said, "The Federal Reserve has since indicated it won't approve similar deals and the FDIC, which oversaw the sale of BankUnited to buyout firms including WL Ross & Co. and Carlyle Group, said last week it will provide 'policy guidance' for private-equity firms looking to buy ailing banks after global losses from the credit crisis topped $1.4 trillion."

While it's fair for private equity firms like MatlinPatterson to expect a return on risky investments in struggling banks, kudos to Sen. Reed for pushing for a uniform set of rules that will govern the conditions under which they can make those investments.
July 22, 2009 4:17 PM

CIT Considers Restructuring Options

  by AVI KLEIN

CIT Group Inc., which succeeded earlier this week in staving off bankruptcy by securing an emergency loan from its creditors, intends to restructure "to a shadow of its formal self," the Wall Street Journal reported.

In documents filed with the Securities and Exchange Commission, CIT said that it had agreed to pay its most recent creditors an interest rate of at least 13 percent -  higher than the 10.5 percent previously reported.

The company is paying 5 percent on the $2.3 billion in taxpayer capital it received earlier this year under the Troubled Asset Relief Program.

These mounting debt obligations have forced the company to begin evaluating ways to quickly raise cash and reduce its obligations. Earlier this week it began a debt repurchasing program, offering up to $850 for bonds worth $1,000. Overall, CIT will face $10 billion in debt payments through 2010.

Selling assets is one of the company's most obvious choices, experts said. CIT owns a bank in Utah, and regulators have raised major concerns about its ability to maintain sufficient capital ratios. Last week the Federal Deposit Insurance Corp. issued a cease and desist order limiting its ability to pay out dividends and sell certain financial instruments.

CIT also owns railcar- and aircraft-leasing companies, both of which could be unloaded without considerable trouble.  It might also sell its business of providing cash advances to manufacturers and retailers, the Journal reported.

CIT's shares fell 22 percent on Tuesday, closing at 98 cents. The stock lost a further 11 percent Wednesday, ending the day at 87 cents. In its most recent SEC filing, it said it would post a second-quarter loss of more than $1.5 billion.
July 22, 2009 11:24 AM

Treasury Puts Final Touches on SBA Plan

  by AVI KLEIN

The federal government is putting the final touches on a $15 billion plan to use bailout funds to buy up small business loans, the latest in an evolving series of efforts to spark liquidity in the credit markets.

The credit market for small businesses has improved since the plan was announced in broad form in March, with loan volume up 45 percent for one of the most popular lending programs.  

But regulators say that easing the market for Small Business Administration loans, which are issued by private banks but backed by the federal government, will inspire confidence in the system and act as a backstop in case credit freezes up again.

"Despite the improvement we have seen in part due to the announcement of our policy, we feel that with small businesses facing such an uncertain economic environment, a strong secondary-market policy is still a critical piece of any larger effort to help small businesses lending," Gene Sperling, a senior Treasury Department advisor, told the Washington Post.

A number of rules imposed by Congress on the distribution of money from the Troubled Asset Relief Program have caused delays in getting the SBA program off the ground.

Among these rules is a requirement that the government take an ownership stake in any company from which it buys SBA loans. This is impossible in certain cases because some of the firms involved are privately held and have no shares to sell, while others are merely divisions of larger publicly traded companies but do not issue shares in their own names.

To work around this problem, the companies will "issue stakes to the government and then repurchase them immediately," the Post reported. Although details about the mechanics remain vague, officials told the paper they thought this would satisfy congressional mandates.
July 21, 2009 5:35 PM

Catching up with Fifth Third Bancorp

  by SONYA HUBBARD  for Footnoted.org Logo

Several things have happened since we last posted about Fifth Third Bancorp,  the $119 billion financial holding company that operates more than 1,300 bank branches in 12 states.

At the end of last year, Cincinnati-based Fifth Third got $3.4 billion through the Treasury Department's Troubled Asset Relief Program in exchange for preferred shares of stock and warrants.

As noted in this recent filing with the Securities and Exchange Commission, the company announced that Charles Drucker, its executive vice president, had resigned to become the president and chief executive of Fifth Third Processing Solutions LLC.

That announcement was made simultaneously with the news that Boston-based private equity firm Advent International Corp. had purchased a 51 percent stake in Fifth Third's processing business.  Fifth Third is expected to gain about $1.0 billion after taxes on the transaction. 

In late June, Bloomberg reported that Fitch Ratings downgraded Fifth Third Bancorp's long-term Issuer Default Rating (IDR) from A to A-.  The article said in part:

Although Fitch views FITB's capital raise favorably, Fitch anticipates that FITB will face elevated levels of credit costs over the next several quarters and pressured levels of core profitability.

FITB has been battling significant ongoing asset quality issues since late 2007 due to extremely challenging residential housing markets in its footprint, most notably in Florida and Michigan. FITB's problem loan portfolios include the homebuilder, brokered home equity, and Florida residential mortgage books, which represent approximately 9% of loans. FITB has taken positive steps to address its credit challenges, such as exiting problematic lending sectors, tightening underwriting criteria, and selling/transferring to sale approximately $1.6 billion in loans. Despite FITB's efforts to deal with its high level of problem assets, Fitch expects FITB to report continued deterioration in asset quality which will make it difficult for the company to return to profitability in 2009.

In a few days, we'll get an idea of the company's progress.  On July 23, Fifth Third will hold a conference call to discuss its second quarter earnings. 

 

July 21, 2009 12:37 PM

CIT Group Secures Emergency Creditor Financing

  by AVI KLEIN

CIT Group Inc. secured an emergency financing package from its creditors, staving off the prospect of imminent bankruptcy.

Under the terms of deal, which the New York Times reported was struck one minute before a CIT-imposed deadline, six of the company's creditors will extend $2 billion in loans as the commercial bank attempts over the next ten days to secure an additional $1 billion.

For the past few weeks, CIT executives have been in a mad scramble to rescue their teetering firm. The company made large investments in housing-related derivatives and has a $2.1 billion payment to creditors looming early next year.

CIT received $2.3 billion in bailout financing last year under the Troubled Asset Relief Program, but federal regulators decided last week against extending further assistance in the form of loan guarantees. As it pursued the latter option, the company also hired a major law firm to prepare for bankruptcy.

The creditors, which include the money management firm Pacific Investment Management Co. and the investment firm Centerbridge Partners, would face significant losses if CIT went bankrupt. To protect their investments, they agreed to further financing but demanded a 10.5 percent interest rate.

CIT is paying 5 percent on the taxpayer money it received through TARP.

CIT also announced yesterday that it had initiated a program to buy back $1 billion outstanding debt. According to the New York Times, CIT will pay $825 for every $1,000 of company bonds redeemed by the end of July. It will pay $800 for every $1,000 afterwards.

Despite the deal with creditors, CIT continues to face serious challenges and bankruptcy remains a distinct possibility. "All they're doing is buying themselves some time," Sameer Gokhale, an analyst with Keefe Bruyette & Woods, told the Times.
July 20, 2009 1:02 PM

TARP Inspector General: Banks Used Bailout Money for Investments, Debt Repayment

  by AVI KLEIN

Numerous banks that received federal bailout money used it to make investments and repay debts instead of lending it, according to the inspector general overseeing the program.

In a report to be released later today, Neil M. Barofsky, the special inspector general for the Troubled Asset Relief Program, said that 110 of the 360 banks to receive assistance used it for investment purposes. Fifty-two of them used it to pay creditors, and 15 used it to buy other banks. Eighty percent of the TARP recipients 80 said they had used at least some of the money to make loans. 

Numerous news outlets provided details of Barofsky's report, which will be released today.

The Treasury Department has provided $200 billion in taxpayer capital to shore up the nation's banks and other financial institutions. When the program began, it was intended to provide liquidity and encourage banks to lend, thereby adding fuel to a sputtering economy.

Whether the recipients have been using the money as intended has been an open question since the $700 billion program began. Critics have noted that other government reports show that lending is down in a number of a key sectors, and have wondered where all the government money injected into the banking system went.

In his report, Barofsky charged the government with failing to hold the banks accountable.

The monthly lending surveys compiled by the Treasury are inadequate, he said, and fail "to recognize that TARP recipients do far more with their TARP funds than simply originating loans: They have also used these funds in a broader array of interrelated activities ... such as making investments, acquiring other financial institutions and simply maintaining the capital as a cushion against future losses."

In a written response, Herbert M. Allison Jr., the assistant Treasury secretary overseeing the TARP program, said tracking bailout dollars was impossible. "Although it might be tempting to do so, it is not possible to say that investment of TARP dollars resulted in particular loans, investments or other activities by the recipient," Allison said. 

July 17, 2009 10:05 AM

Treasury Reports Tepid Lending in May

  by AVI KLEIN

Lending by bailed-out banks remained tepid in May, with total loan balances flat and only a modest uptick in overall originations.

In its monthly survey of lending by the 21 largest financial institutions to receive federal assistance through the $700 billion Troubled Asset Relief Program, the Treasury Department said total originations rose in four categories:  mortgages, credit card loans, commercial real estate renewals and commercial real estate new commitments.  

Total originations fell in home equity lines of credit, other consumer lending products, and commercial and industrial renewals. They were flat among commercial and industrial new commitments.

Total originations for all categories increased 1 percent. Fourteen banks posted increases in originations, and seven banks posted declines.

In a sign that businesses continue to struggle, commercial loan balances decreased in May among 16 of the respondents, with the other five banks saying balances had increased. But there were glimmers of hope for the housing industry as total mortgage originations increased at 15 banks and declined at three, with a median increase of ten percent.

Bankers attributed the rise in mortgage originations to low interest rates in the first part of May. But the Treasury noted "the rise in rates during the end of May contributed to lower pipelines for the coming months."

Some banks have been much busier than others. Morgan Stanley posted the largest increase in total originations at 160 percent, with both Bank of New York Mellon Corp. and American Express Co. posting increases greater than 50 percent.  State Street Corp. and KeyCorp had the biggest reversals of the bunch, with loan originations down 24 and 23 percent, respectively.
July 16, 2009 2:59 PM

Treasury Says No to CIT Group, Bankruptcy Possible

  by AVI KLEIN

The federal government has decided not to offer further financial assistance to CIT Group Inc., casting doubts on the company's viability and marking the major taxpayer loss from the bailout program.

The company, which has been under severe stress due to its outsized role in the commercial lending market, announced last weekend that it had hired a law firm to explore bankruptcy options. But it said at the same time that it was negotiating with federal regulators in the hopes of securing additional bailout funding or loan guarantees.

Treasury officials told the Wall Street Journal that they conducted a stress test of CIT's balance sheet this week and determined that the firm required at least $4 billion to survive.  But without a solid reorganization plan, officials said they could not risk losing additional taxpayer money. The $2.3 billion in public money that CIT received under the Troubled Asset Relief Program is gone, they told the paper.

"Even during periods of financial stress, we believe that there is a very high threshold for exceptional government assistance to individual companies," a Treasury spokesman said in a statement.

The White House chief of staff, Rahm Emmanuel, echoed those feelings, calling the decision not to provide further assistance "a symbol of a different phase." Critics have charged the government with being too sensitive about conspicuous bank failures and wasting money on firms that ought to fail owing to bad business practices.

Frustrated in its appeals to the federal government, CIT said it would negotiate with its debtholders in hopes of raising $2 billion to continue operations.

CIT is not among the largest of the companies to received bailout funding, but it plays a critical role in the nation's business community. It is a prominent lender to small and medium-sized businesses - especially retailers - and concern is growing among them that their access to credit will dissolve along with CIT's business fortunes.

Some of these same companies, however, have played a role on hastening CIT's distress.  Once the bank announced it was considering bankruptcy, its customers quickly drew down their established credit lines, exacerbating CIT's cash crunch.
July 16, 2009 7:36 AM

BofA Refuses to Pay Treasury $4 Billion in Merrill-Related Fees

  by AVI KLEIN

Federal regulators say Bank of America Corp. owes taxpayers as much as $4 billion, but the company says that the Treasury Department never signed the deal in question and refuses to pay.

The controversy dates back to Bank of America's purchase of Merrill Lynch & Co. Eager to see the deal through, the Treasury Department offered to participate in a loss-sharing agreement to help the bank swallow Merrill Lynch's distressed balance sheet.

Under the terms of that deal, which Bank of America later announced to its shareholders, the bank would pay the Treasury $4 billion in stock and warrants, plus an annual fee on the $118 billion in bad assets the government offered to guarantee. Treasury had already lent the bank $20 billion to complete the merger

In the end, Treasury never closed the deal, and Bank of America later decided it didn't need the government's assistance. Nevertheless, a number of congressmen now say that the widespread belief that the deal had been consummated provided value to Bank of America for which taxpayers should be compensated.

"This announcement of this so-called 'ring-fencing' of Bank of America's toxic assets provided financial stability to Bank of America at a very crucial time," Rep. Edolphus Towns (D-NY) said in a letter this week to Kenneth Lewis, the bank's chief executive. The letter was first obtained by Bloomberg News.

Rep. Towns did not demand any specific payments, and analysts said that a compromise was possible. Among potential solutions would be for Bank of America to pay one-third of the $4 billion for the third of a year the agreement appeared to be in effect, the New York Times reported. Another would be for Bank of America to pay a fee for breaking the agreement, perhaps equal to 5 percent of the total value of the deal, or $200 million.
July 14, 2009 3:18 PM

Rattner Resigns From Auto Task Force

  by AVI KLEIN

Steven Rattner has resigned his position as head of the federal government's automobile industry bailout effort, as questions swirl about an ongoing investigation into a hedge fund he founded.

Rattner has received mostly positive reviews for his role as lead advisor to the Treasury Department's automobile task force. His efforts to restructure Chrysler Group LLC and General Motors Corp. by pushing them quickly through bankruptcy have won particular plaudits.

It was his role with the Quadrangle Group, however, that caused discomfort among policymakers and outside critics. New York Attorney General Andrew Cuomo has been investigating Quadrangle and a number of other financial firms' practice of paying middlemen known as placement agents to win contracts to manage pension funds. The Securities and Exchange Commission also has an ongoing investigation.
 
Mr. Rattner, who worked at the firm until joining the administration in February, arranged to pay one of these placement agents $1.1 million dollars, according to numerous reports. That agent has since been indicted in New York on charges of bribery.  Neither Mr. Rattner nor his former firm have been charged with any crime or civil offense, but the New York Times reported that the firm faces potential civil charges and "is said to be eager to resolve the matter."

The Obama administration closely vetted Rattner before he was appointed to the auto industry advisory role and felt confident that he had done nothing wrong. But recent reports suggest that Cuomo's investigation has heated up in the past few weeks, raising questions about the timing of Rattner's decision to leave his post.
July 13, 2009 2:22 PM

CIT Group Considering Bankruptcy, Other Options

  by AVI KLEIN

After a weekend announcement that CIT Group Inc. had hired a law firm to explore bankruptcy options, the firm struggled to explain its decision to anxious customers and investors and warned that its demise would "precipitate a crisis" for the retail industry.

CIT received $2.3 billion in assistance late last year under the Troubled Asset Relief Program.

The New York-based commercial bank said on Saturday that it had hired Skadden, Arps to provide legal advice as it considers liquidation. It faces a looming $2.1 billion payment to creditors due early next year, and in April posted a larger than expected $3 billion loss. The stock price has been battered in the past week, and fell more than 20 percent in early trading today.

Fears that the company is exploring bankruptcy threaten to make a bad situation even worse by prompting fearful depositors to withdraw assets and businesses to draw down their credit lines. This would further destabilize the company's balance sheet, make any potential bankruptcy even more likely, and hurt businesses relying on access to loans.

Bloomberg News reported that an internal CIT analysis predicts that in the case of bankruptcy, a "substantial portion" of clients "would not have easy access to additional revolving credit without CIT. This could lead to business failure for those who lack additional liquidity." Some 300,000 retailers could be affected, the report claimed.

In response to concerns, CIT said Sunday that it is in "active discussions with its principal regulators on a series of measures" to improve its short-term liquidity. Among the options it is considering is the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program (TLGP), which would allow the company to issue low cost bonds on the government's guarantee.

If the company is not approved for the TLGP program, it said it would consider "the near-term transfer of assets into CIT Bank through Section 23A waivers and the transfer of its Vendor Finance and Trade Finance businesses into CIT Bank."
July 13, 2009 11:29 AM

Treasury Considers Expanding TARP to Small Businesses

  by AVI KLEIN

In a sign that administration officials are increasingly nervous about the slow pace of economic recovery, the Treasury Department is considering expanding the bailout program to lend money directly to small business owners.

The proposal, which was first reported by the Washington Post, would funnel money from the $700 billion Troubled Asset Relief Program to the Small Business Administration's 7(a) lending program.

Small companies that qualified could use the low-interest funds to manage short-term financial obligations such as mounting credit card bills, inventory or payroll. The government would cover as much as 90 percent of the losses on the loan, the Post reported.

Administration officials said the plan, which has the support of Treasury Secretary Timothy F. Geithner, was in an early discussion stage and officials were uncertain if it would ever be policy. But planners have been looking for some time for ways to expand TARP. Initially intended solely to assist banks struggling with losses on mortgage loans and other housing-related assets, it later was used to bail out car companies and insurers.

Lawrence H. Summers, the director of the National Economic Council, is said to oppose opening the program to small businesses. Officials told the Post the main objections involve concerns that banks would lower their lending standards if they felt that the government would cover most of their losses. Lax credit markets played a major role in creating the current economic downturn, and the Treasury has been wary of creating any more moral hazards.
July 10, 2009 5:19 PM

E*Trade's Application for TARP Funds is Still Pending

  by SONYA HUBBARD  for Footnoted.org Logo

In one of the longest delays that we've seen, E*Trade's application for government capital through the Trouble Asset Relief Program still awaits approval.

After the Treasury Department announced last fall it would provide money to banks and other financial companies in return for preferred stock and warrants, E*Trade applied for $800 million in funding.

From time to time, E*Trade has issued updates about its application.  Early last November, the company issued a press release stating that its application was "currently being reviewed" by the Office of Thrift Supervision.  "We remain optimistic that we will receive approval and expect to make an announcement this month," said Donald H. Layton, E*Trade's chairman and chief executive.

Eighteen days later, it issued another press release stating that E*Trade "continues to work constructively with regulators through each phase of its application for the U.S. Treasury's TARP Capital Purchase Program. The Company remains optimistic that it will receive the necessary approvals and expects to make an announcement in the near future."

That was November 25, 2008.

E*Trade has struggled mightily in the past two years, as have many other online brokers and financial services companies.  Before the economy started unraveling in the fall of 2007, the stock traded at just over $23 a share, compared to today's trading price of $1.19.

After it ended 2007 with a $1.42 billion loss, E*Trade announced a "Turnaround Plan" and said that it expected to return the company "to a full-year profit in 2008."

But 2008 didn't bring the expected improvement. It finished last year with a loss of $512 million, as higher provisions for bad loans took their toll on the bottom line.

E*Trade also absorbed big losses from its heavy  investments in Fannie Mae and Freddie Mac, the government-sponsored mortgage finance companies that were put into conservatorship. Press releases issued last year (available here and here) indicate that E*Trade liquidated its long-held stock in Fannie Mae and Freddie Mac after losing more than $100 million on those investments.

E*Trade took other steps to reduce risk and strengthen the company's cash balance. Since then, there have been successes and setbacks in E*Trade's attempted recovery.  

On Jan. 3, this article reported that E*Trade paid its second fine in less than a year for failing to follow securities trading rules.  Most recently, Financial Industry Regulatory Authority (FINRA) fined E*Trade $1 million for "failing to establish antimoney-laundering policies and procedures that can detect suspicious securities transactions" between Jan. 2003 and May 2007.  E*Trade didn't admit or deny the charges, but it consented to FINRA's findings.  The earlier fine occurred in May, 2008, when E*Trade paid fines for failing to follow audit-related rules.

But the events since then have been more positive.

Earlier this month, this article declared E*Trade's move to swap more than $1.8 billion in debt for bonds that can be converted to common stock a success. The story noted that the swap had the support of Citadel, E*Trade's largest creditor and shareholder and said he believed it was "the best move to keep the discounter from buckling." It  concluded that even though the company expects another loss for 2009 and the "road to recovery [would] be long"... "at least the discounter isn't making the dangerous mistake of standing still."

Another article, published June 23, 2009, noted that Friedman, Billings, Ramsey analyst Matt Snowling upgraded E*Trade from "underperform" to "outperform."  Snowling was quoted as saying, "Although we expect mortgage-related losses to remain elevated, we believe the worst is now behind E-Trade, as the nearly $2 billion of fresh equity capital at the company should alleviate regulators' concerns and take the worst-case scenario off the table."

Just yesterday (July 9), E*Trade confirmed in a Securities and Exchange Commission filing that it had received the required consents for the debt-to-bonds swap.  And the filing gave a clear indication that E*Trade still hopes that the Treasury Department will approve its application for the TARP money.  It said: "The supplemental indentures amend the terms of the 2011 Notes and 2017 Notes to permit the Company to participate in the U.S. Department of Treasury's TARP Capital Purchase Program in the event the Company's application is approved."

July 10, 2009 2:41 PM

Management of Citigroup, AIG Struggle Under TARP Supervision

  by AVI KLEIN

Large financial institutions that took federal bailout money continue to struggle with the burdens of government oversight, with one changing its management team this week and another asking permission to pay out bonuses it already has a right to distribute.

Citigroup Inc. announced that Edward J. Kelly, chief financial officer, had been shifted to an advisory position, vice chairman of the company's board of directors.

John C. Gerspach, chief accounting officer, was elevated to Kelly's position.

Sheila C. Bair, the chairwoman of the Federal Deposit Insurance Corp., had raised concerns about Citigroup's operations and management, the New York Times reported.

Citigroup received $50 billion as part of the Troubled Asset Relief Program, and unlike some other bailed-out companies has not made any movement toward repayment. Those that have exited the TARP program have cited as reasons an uncertain regulatory environment and the fear of government intervention in business decision-making.

The FDIC has become increasingly worried about Citigroup's progress in solving its financial issues and turning around its operations, Times reported. In June, Mr. Kelly made what were perceived as deprecatory remarks about the FDIC - he called it a "tertiary" regulator not on par with the Federal Reserve and the Comptroller of the Currency - while at the same time Treasury officials worried that the company was lagging in its efforts to sell off troubled assets.

Treasury also worried that Citigroup's top leadership lacked sufficient commercial banking experience, and in late June it placed Kelly's role at the top of a list of matters it wanted the company to address, according to the Times.

In related news, American International Group Inc. has asked Kenneth R. Feinberg, the Treasury's recently appointed compensation czar, for permission to pay out millions of dollars in bonuses. A major sticking point, however, is that the firm does not need Feinberg's assent and is asking for it in order to shield itself from public criticism.

AIG, which was approved for $180 billion in bailout funding, came under withering criticism earlier this year when it attempted to pay out $165 million in bonuses to employees of its much maligned derivatives trading desk. The massive outpouring of rage at the decision was mainly responsible for the creation of Feinberg's role as overseer of compensation matters for bailed-out companies.

New rules put in place to limit compensation, however, do not apply to the $2.4 million in bonuses AIG now wants to pay because they were contracted for before the rules were enacted.
July 9, 2009 3:43 PM

Simmons First National Corp. (Finally) Just Says "No"

  by SONYA HUBBARD  for Footnoted.org Logo

Last Oct. 30, Simmons First National Corp. announced in a press release that it had been approved for $40 million in taxpayer capital through the Treasury Department's Troubled Asset Relief Program. (A later document filed with the Securities and Exchange Commission said that the Treasury had "amended its approval" and was willing to provide $59.7 million.)

The company is based in Pine Bluff, Ark., and operates eight Simmons First national Bank branches in its home state.

At the time of the announcement last fall, Chairman J. Thomas May, said that "While our Company is very well capitalized, the cost of capital under the program is favorable given the current market, and it provides us additional capital for potential acquisition opportunities within our targeted markets."

As the months ticked by, Simmons First sought extensions, in essence telling the government that it didn't want the money yet.

This week, Simmons First National said it decided that the TARP funding wasn't necessary, and that taking the money wouldn't be in the best interests of shareholders.

In the press release that accompanied a new SEC filing, May said, "The delay in funding has certainly worked in our favor by allowing us to monitor the economy. As we stated previously, our purpose for applying was simply an issue of insurance, since you can never have too much capital during a period of turbulence."

He added: "After careful consideration and analysis, Simmons First believes there has been considerable improvement in the economic indicators since October. The Arkansas economy is doing well relative to many other geographic regions of our country, and Simmons First continues to have strong asset quality, liquidity and capital.''

Simmons First's first-quarter performance was good relative to many other banking companies. Although earnings were down, net interest income rose 2.6 percent. May said that - given the state of the national economy - he was pleased with the bank's quarterly results.  "Our conservative culture has sustained us well during these turbulent times," he said in a press release.

Simmons First National got some favorable press when it offered a Platinum VISA card with a 7.25% fixed APR.  And in early June, the company was added to the S&P SmallCap 600, replacing Guaranty Financial Group after its market cap fell below the minimum required to be listed on the index.
July 9, 2009 3:25 PM

Winning Financial Firms Gave Big in 2008 Cycle

  by AVI KLEIN

The nine companies and subadvisors chosen to manage the government's purchase of toxic assets donated almost a quarter of a million dollars to President Barack Obama's election campaign.

According to an analysis of campaign finance data provided by the non-partisan Center for Responsive Politics, employees and executives of the selected firms spent $1,812,191 on federal candidates during the 2008 election cycle, much of it to Democratic candidates. Of that, President Obama's campaign received $245,919.

Oaktree Capital Management L.P. was the most generous giver in 2008, donating $390,854 to federal candidates and $12,900 to Obama. Blackrock Inc. was a close second in overall donations with $390,160 to federal candidates. It led all others with $53,350 in contributions to Obama.
 
Wellington Management Co. gave the largest percentage of its overall donations to Obama. The firm's employees and executives gave $99,750 to federal candidate, including $46,150 to Obama.

The Treasury Department said it selected the nine firms based on their capital position, their ability to raise sufficient funding to buy the mortgage-backed securities, and their performance track records. It also said the "criteria were evaluated on a holistic basis and failure to meet any one criterion did not necessarily disqualify an application."
July 9, 2009 2:50 PM

Treasury Goes North to Alaska for Toxic Asset Pick

  by CHRIS CAREY

The Treasury Department looked all the way to Alaska in its search for woman- or minority-owned financial companies to participate in its toxic-asset purchase program.

 

One of the nine woman-owned or minority-owned companies it selected for the $30 billion program was Artic Slope Regional Corp., which is based in Barrow, Alaska, and represents the interests of the Arctic Slope Inupiat tribe.

 

Arctic Slope has a wide range of business holdings, including a venture capital fund, government contracting companies, an oil refinery, an oilfield services firm and several construction businesses.

 

Oaktree Capital Management LP, one of the nine big financial firms selected to run the public-private pools that will buy toxic assets from banks, said in a press release that it would partner with Arctic Slope.

 

Another of the minority-owned companies chosen for the program was Advent Capital Management LLC, a New York firm with $3.5 billion under management. Its founder and president, Tracy V. Maitland, previously worked for Merrill Lynch & Co. Advent is best known for its convertible and high-yield bond funds.

 

Campaign finance records show that Maitland contributed $61,600 to Democratic political causes in the 2008 election , including $28,500 to the Democratic White House Victory Fund and $28,500 to ActBlue. Our check of contributors from the financial sector found that he was one of the biggest individual givers among executives whose firms were picked to participate in the Troubled Asset Relief Program.

 

The seven other woman- and minority-owned firms selected for participation in the toxic-securities program are:

 

--Altura Capital Group LLC

 

Altura provides research and advisory services to a number of large institutional investors, including the California Public Employees Retirement System (CalPERS), the California State Teachers' Retirement System and the Illinois State Board of Investments.

 

The New York-based company is headed by Monika Mantilla.

 

--Atlanta Life Financial Group Inc.

 

Atlanta Life is the parent company of Jackson Securities, founded in 1987 by the late Maynard H. Jackson. He was the first African-American mayor of that city and served three terms in office.

 

Jackson Securities' specialities include municipal finance, asset management and investment banking. Both Atlanta Life Financial Group and Jackson Securities are headed by William A. Clement.

 

--Blaylock Robert Van LLC

 

Blaylock Robert Van was created through a merger last year of Blaylock & Co. and Robert Van Securities LLC. The company, which has headquarters in Oakland, Calif., is partnering in the toxic-asset purchase program with Marathon Asset Management, one of the nine bigger firms selected to create and run the investment pools.

 

Blaylock Robert Van is headed by Eric Van Standifer, who founded Robert Van Securities in 1991.

 

--CastleOak Securities LP

 

CastleOak is a New York-based investment bank whose business includes equity sales and trading, bond sales and trading and financial advisory services. Co-founders David R. Jones, who is president and chief executive, and Nathaniel H. Christian, managing director and general counsel, previously worked for Blaylock & Co.

 

CastleOak created a dedicated eight-member TARP team last November to offer assistance to the Treasury and its contractors in the acquisition, management and sale of toxic assets through TARP.

 

Congress approved the $700 billion TARP initiative in October.

 

--Muriel Siebert & Co.

 

The publicly traded, New York Stock Exchange brokerage was established by Muriel Siebert four decades ago. It offers discount brokerage services as well as institutional equity trading, underwriting and investment banking.

 

Muriel Siebert remains chief executive of the brokerage and its parent company, Siebert Financial Inc., both based in New York.

 

Park Madison Partners LLC

 

Park Madison has headquarters in New York and provides private-placement services and strategic consulting to real estate developers, owners and investors.

 

Its managing partners are Nancy I. Lashine and Suzanne R. West.

 

--The Williams Capital Group LP

 

Williams Capital Group is the New York-based parent of Williams Capital Management LLC. It provides investment and capital-markets services to companies, government agencies and institutional investors.

 

Williams Capital Management announced in May that it had been selected by Goldman Sachs Group Inc. to manage $1 billion in securities issued by the Treasury and other government agencies.

 

Christopher J. Williams, the company's founder and chief executive, said that deal would help expand its asset-management business and reach new clients.

 

--Utendahl Capital Management LP

 

Utehndahl, which has headquarters in New York, provides institutional bond management services to large companies, public pension funds, endowments and foundations.

 

Chairman John O. Utendahl, a former vice president at Merrill Lynch, established the firm in 1992. It quickly won assignments to co-manage securitization deals for the Resolution Trust Corp. and the Federal Home Loan Mortgage Corp., known as Freddie Mac.

 

The firm's chief executive is Penny Zuckerwise. Its chief investment officer is Jo Ann Corkran.

July 9, 2009 10:14 AM

Treasury Names Nine Firms to Manage Toxic Asset Program

  by AVI KLEIN

The Treasury Department named nine financial services firms to act as fund managers for the federal government's $30 billion effort to buy bad mortgage assets from banks.

The Legacy Securities Public-Private Investment Program was initially seen as a critical element of the bailout package.  With billions of dollars of so-called "toxic securities" weighing down the nation's banks, experts said the government had to create a market for them to get credit flowing and get the economy moving again.

When the Treasury,  the Federal Reserve and the Federal Deposit Insurance Corp.,  first announced the program in March, they said they would make as much as $1 trillion in public money available for asset purchases.  But uncertainty about the effectiveness and efficiency of the program delayed its implementation and lowered its budget.

The firms that won the rights to manage the public-private funds that will buy the toxic securities were AllianceBernstein LP; Angelo, Gordon & Co. LP and GE Capital Real Estate; BlackRock, Inc.; Invesco Ltd.; Marathon Asset Management L.P.; Oaktree Capital Management, LP; RLJ Western Asset Management LP; The TCW Group Inc.; and Wellington Management Company, LLP.

Although each firm will receive an equal allocation of funds from the Treasury to buy assets, under the terms of the management agreements, each is expected to invest as much as $10 billion of its own money. To qualify for the project, the firms had to prove its ability to raise at least $500 million of private capital within twelve weeks and commit to investing at least $20 million of it.

Other requirements included a minimum of $10 billion of "eligible assets" under management and a demonstrated operational capacity to manage the funds.

Pacific Investment Management Co., better known as Pimco, said it withdrew its application to become one of the fund managers in early June. It had been viewed as almost certain pick.

Pimco, which is one of the biggest buyers and sellers in the bond market, did not explain its decision. But some observers had questioned whether the company's extensive trading activities would create too many conflicts of interest with the government's toxic-securities program.

Treasury also qualified a number of small-, veteran-, minority-, and women-owned businesses to partner with the winning fund managers. They included Advent Capital Management LLC; Altura Capital Group LLC; Arctic Slope Regional Corporation; Atlanta Life Financial Group; Blaylock Robert Van LLC.; CastleOak Securities LP; Muriel Siebert & Co. Inc.; Park Madison Partners LLC; The Williams Capital Group LP.; and Utendahl Capital Management.

Treasury did not post copies of its contracts with the financial management firms, though its transparency policy allows it five to ten days since closing to do so.

BailoutSleuth will continue to monitor the story and update readers accordingly.
July 8, 2009 11:27 AM

Treasury Convenes Team to Study Systemic Risk

  by AVI KLEIN

As part of an evolving federal effort to monitor and address systemic risk, the Treasury Department has convened a team to examine potential long-term threats to the nation's economic stability

Government sources told the Washington Post that the group, known as Plan C, is looking closely at community and regional banks, the continuing high rate of delinquencies and foreclosures in the housing lending market, and the commercial real estate market.

"We are continually examining different scenarios going forward; that's just prudent planning," Treasury spokesman Andrew Williams told the Post.

The informal group of policy experts is looking both at emerging problems and potential solutions, the paper reported. The effort is seen as a model for a future government body empowered to examine larger threats to the economy, and congress is currently considering its options.

The Obama administration has made such an office a major priority, though disagreements remain over whether the Federal Reserve or some other agency should be in charge. If the Federal Reserve gets the nod, it may have to give up some other responsibilities, including consumer protection oversight, legislators say.

In addition, the Federal Deposit Insurance Corp. and the Securities and Exchange Commission, not wishing to be excluded, have said they prefer an interagency council of regulators to monitor risk.
July 7, 2009 1:23 PM

Discover Financial Sells Stock, Considers TARP Exit

  by AVI KLEIN

Another large financial institution has decided to sell stock in anticipation of redeeming the bailout funding it received from the federal government.

Discover Financial Services said it has commenced a $500 million common stock offering. In a press release, the bank listed possible uses for the added equity, which in addition to funding normal business operations could, it said, include "possible repurchase of fixed rate cumulative perpetual preferred stock issued by Discover to the U.S. Treasury under its Capital Purchase Program."

Discover received $1.2 billion earlier this year through the Troubled Asset Relief Program. Its largest rival among the bailed-out firms, the American Express Co., got  $3.4 billion, passed the Treasury's stress tests, and has since redeemed the stock it sold the government.

Neither American Express nor Discover is unique in desiring to pay back TARP funding. Since the program began, banks and other financial institutions have chafed under what they perceive as an unfair regulatory environment driven in large part by public outrage rather than good economic sense. Restrictions on executive pay have been particularly rankling.

Selling stock has been a favored first step toward withdrawal. Treasury has said that in deciding whether to permit a bank to abandon the program it must be able to maintain strong capital ratios without the bailout money and prove that it can raise additional capital with government guarantees. A successful open-market stock sale would to some degree satisfy both conditions.
July 6, 2009 4:57 PM

Discover Financial Services braces for rocky times ahead

  by SONYA HUBBARD  for Footnoted.org Logo

In mid-March, Discover Financial Services (DFS) got $1.2 billion through the federal government's Troubled Asset Relief Program in exchange for shares of preferred stock and warrants.

Last Wednesday, the company filed its latest quarterly report.  The numbers in the filing were actually released in mid-June, and there are plenty of accounts - such as this one - that recap the results. 

But what caught our eye were a couple of sections that the company says will affect its bottom line.

First, the company notes that the Financial Accounting Standards Board issued some new standards in June that the company must adopt by December 1, 2009.  The new rules govern the company's "asset securitization activities" and how financial statements are prepared for the company's trusts.  (see pp. 7-8)  Here's the part that caught our attention:

Initial adoption is expected to have a material impact on the Company's reported financial condition. If the trusts were consolidated using the carrying amounts of trust assets and liabilities as of May 31, 2009, this would result in an increase in total assets of approximately $21.1 billion and an increase in total liabilities of approximately $22.3 billion on the Company's balance sheet, with the difference of approximately $1.2 billion recorded as a charge to retained earnings, net of tax. In addition, certain interests in the trust assets currently reflected on the Company's balance sheet will be reclassified, primarily to loan receivables, cash and accrued interest receivable. After adoption, the Company's results of operations will no longer reflect securitization income, but will instead report interest income and provisions for loan losses associated with all managed loan receivables and interest expense associated with debt issued from the trusts. Because the Company's securitization transactions will be accounted for under the new accounting standards as secured borrowings rather than asset sales, the presentation of cash flows from these transactions will be presented as cash flows from financing activities rather than cash flows from investing activities.

Another section addresses how the new Credit Card Accountability Responsibility and Disclosure Act of 2009 (the "CARD Act", passed by Congress on May 22) will affect Discover.  Some of the rules go into effect in August; the rest become law next February.  

Discover said that while "a number of the CARD Act's requirements reflect our existing practices and will not require modifications of policies or procedures," other provisions will require the company "...to make fundamental changes to our current business practices."  

According to this article, Discover is "generally more forgiving than many rivals" when it comes to raising customers' interest rates and reducing their grace periods.  The same piece also cited a report by  investment bank Keefe Bruyette & Woods that said "Discover has lower exposure to California and Florida and is less likely to be hurt by credit card reform, partly because it doesn't focus on the deep subprime segment and is less active in student marketing."

In addition, the article said KBW thinks that in the future, Discover's management might sell part or all of the company.  It quoted the KBW report as saying: "While it's tough to envision an M&A scenario involving Discover in the current environment, considering that most banks are strapped for cash, we believe Discover is attractive to a number of financial institutions when conditions improve."

It may be a while before those conditions do improve.  Just this morning, Discover announced that it is cutting 55 jobs at a call center in New Albany, Ohio.

Discover said that it expects unemployment rates and bankruptcy cases to provide continued challenges in 2009 and 2010.  And it added that even if the numbers of unemployed and bankruptcy petitioners decline, the company's charge-offs "may continue to rise as improvements in charge-offs historically have lagged improvements in underlying credit performance factors such as unemployment."  The company also noted that it won't get any more money from the Visa and MasterCard antitrust litigation settlement.

July 6, 2009 11:51 AM

Treasury to Take Hands-Off Approach as Shareholder

  by AVI KLEIN

The Treasury Department intends to take a hands-off approach in exercising its rights as a shareholder in the numerous companies that have received taxpayer funded bailouts.

Although the Treasury holds large stakes in banks, car companies, and insurers, it intends to limit its involvement to "approving board members and major transactions," Bloomberg News reported.

The decision is in keeping with the Obama administration's repeatedly stated disinterest in managing the businesses that exchanged stock and other instruments for part of the $700 billion Troubled Asset Relief Program.

Critics of the program have feared that the government would use its leverage to micromanage large concerns such as General Motors Corp. and the American International Group Inc. Unlike some other countries that maintain government-owned industries or sovereign wealth funds, the United States has a long tradition of non-governmental involvement in business decision-making.

Nevertheless, Treasury has already come under criticism for imposing strict rules on executive compensation and dividend payments for bailed-out companies. An increasing number of large banks have since moved to leave the program in order to avoid government interference in their day-to-day operations.

The Treasury will formally announce its shareholder policy soon, Bloomberg reported, but officials have said that in most cases it will track its previously announced policy regarding its 34 percent share in Citigroup Inc.

The government has said it will only vote its interest in Citigroup in "the election or removal of directors, approval of mergers or consolidation, the sale of 'substantially all' of the assets, dissolution, the issuance of securities or amendments to the bank's charter or bylaws," Bloomberg reported.

In the case of less critical or more controversial proxy matters such as environmental responsibility or unionization, the Treasury will "mirror" the votes of other shareholders and distribute them proportionately so as not to effect the outcome. This approach is sometimes used by brokers for large institutional investors who do not wish to get deeply involved in corporate governance.
July 3, 2009 12:08 PM

FDIC Proposes Tightened Capital Rules for Privately-owned Banks

  by AVI KLEIN

On the same day that regulators shut down seven struggling banks, the Federal Deposit Insurance Corp. proposed new rules governing the acquisition of such banks by private equity firms.

The proposed rules require banks owned by private equity firms to maintain a Tier 1 leverage ratio of 15 percent, lock in their investments for three years, and be generally more open about their financial health than privately run firms prefer.

The FDIC said it was concerned that bank owners "have the experience, competence, and willingness to run the bank in a prudent manner, and accept the responsibility to support their banks when they face difficulties and protect them from insider transactions."

A major concern is that a privately held bank might stop funding operations in the face of economic hardship. Because the FDIC insures deposits at both privately and publicly held banks, it has a major interest in ensuring that they are being managed for the long haul. More than 50 banks have failed so far this year.

Private equity firms lashed out at the new rules and said that if adopted they would make it less likely that troubled banks would be bought up at all. "I think it could guarantee that there will be no private equity coming into banks," Wilbur Ross, the head of a private equity group that recently bought Florida-based BankUnited Financial Corp., told the Wall Street Journal.

The FDIC said it was seeking public comment on the proposed rules and "seeks the views of commenters on the appropriate level of initial capital that will satisfy concerns relating to both safety and soundness and the economic viability of the terms of investment in insured depository institutions."
July 2, 2009 11:19 PM

Regulators start fireworks early, closing seven more banks

  by CHRIS CAREY

Regulators shut down seven more banks Thursday in a pre-holiday sweep that pushed the number of failures this year to 52.

 

Six of the banks closed Thursday were in Illinois. According to the Federal Deposit Insurance Corp., all six were controlled by a single family and had similar business models that created a concentration of risk around collateralized debt obligations and other holdings.

 

The Illinois Department of Financial and Professional Regulation shut down Founders Bank, of Worth, Ill., and appointed the FDIC as receiver. It arranged for The PrivateBank and Trust Co. to assume the failed bank's 11 branches and roughly $849 million in deposits.

 

PrivateBank paid a 1.5 percent premium for the deposits. It also agreed to buy $888.4 million of the failed bank's assets, with $617 million of that amount subject to a loss-sharing deal with the FDIC.

 

Founders Bank had suffered heavy losses on securities and loans and had been ordered to raise $50 million in new capital. It was the biggest of the banks that were seized.

 

The others were First National Bank of Danville, in Danville, Ill.;  Elizabeth State Bank, in Elizabeth, Ill.; First State Bank of Winchester, in Winchester, Ill.;  Rock River Bank, of Oregon, Ill., John Warner Bank, of Clinton, Ill., and Millennium State Bank of Texas, in Dallas.

 

First National Bank of Danville's seven offices and $146 million in deposits were taken over by First Financial Bank N.A., of Terre Haute, Ind.

 

Elizabeth State Bank's branches and deposits were taken over by Galena State Bank and Trust, of Galena, Ill., while First State Bank of Winchester's operations were assumed by the First National Bank of Beardstown, in Beardstown, Ill.

 

Rock River Bank's branches and deposits were sold to Harvard State Bank, in Harvard, Ill., and John Warner Bank's operations were taken over by the State Bank of Lincoln, in Lincoln, Ill.

 

Millennium State Bank's lone office, its deposits and virtually all of its assets went to State Bank of Texas, in Irving.

 

The FDIC said the closings would cost its insurance fund around $314 million.

July 2, 2009 12:07 PM

Fifteen Small Banks Receive Bailout Funding

  by AVI KLEIN

Fifteen community banks received bailout funding last week, continuing a trend of smaller banks being as eager to join the Troubled Asset Relief Program as large banks are to escape it.

Chicago-based Metropolitan Bank Group Inc. received $71.5 million from the Treasury, the most of any bank in recent weeks. A related bank, NC Bank Inc. received $6.8 million. Together, the two banks have $3.5 billion in assets and more than 100 branches in the city and suburbs of Chicago, the Chicago Business newspaper reported.

California-based Fremont Bancorporation received $35 million, the second largest infusion of capital. The decision to accept bailout funding, however, may have come to a surprise to local residents. In May the company was a subject of an article in the Contra Costa Times about banks that were strong without government assistance.

At the time, the bank boasted of plans to expand quickly into the mortgage origination business -- plans that may have fallen through as the California housing market continues to struggle. Fremont Bancorporation originated $800 million in new home loans during the first three months of 2009, but first quarter earnings of $5 million in the first quarter were 35.7 percent below the same period the year before.

Other banks receiving bailout money include Stearns Financial Services Inc. ($24.9 million), FC Holdings Inc. ($21 million), Security Capital Corp. ($17.4 million), Alliance Financial Services inc. ($12 million), M&F Bancorp Inc. ($11.7 million), Gulfstream Bancshares Inc. ($7.5 million), Waukesha Bankshares Inc. ($5.6 million), Fidelity Resources Co. ($3 million), Signature Bancshares Inc. ($1.7 million), and Gold Canyon Bank ($1.6 million).

The ongoing interest of small banks in the bailout program stands in marked contrast to the attitude of large financial institutions, many of which have rushed to return the funding they received late last year. Most have cited an unpleasant regulatory environment, including restrictions on executive pay and dividend distribution, as reasons for leaving the program. Smaller, closely held banks do not seem as concerned by such issues.
July 1, 2009 8:58 AM

Sen. Inouye Owned Stock in Bank He Helped Get Bailout Funding

  by AVI KLEIN

A struggling Hawaiian bank received $135 million in bailout funding in January after the office of a U.S. Senator with large stock holdings in the company called federal regulators.

Central Pacific Financial Corp. "was an unlikely candidate" for assistance under the Troubled Asset Relief Program by the time the Federal Deposit Insurance Corp. received a phone call from the office of Sen. Daniel Inouye, according to a joint report by the Washington Post and Propublica.org.

According to the report, Central Pacific Financial was suffering significant capital losses and had already received a preliminary rejection from the FDIC, which forwarded the application to an office focused in resolving "marginal cases." But two weeks after the call from Inouye's office, the FDIC approved the bank for funding.

The senator's financial disclosure forms show that at the end of 2007 he held Central Pacific shares worth $350,000 to $700,000. That stock amounted to at least two-thirds of his total reported assets. The Honolulu-based company's shares have lost almost 80 percent of their value since then.

Experts told the Post and ProPublica that the phone call did not violate any laws.

But the matter recalls a similar incident with a California bank and Los Angeles congresswoman Maxine Waters. As BailoutSleuth has reported, Rep. Waters repeatedly contacted the Treasury Department about OneUnited's problems and later arranged a meeting between regulators and a bank executive during which the latter "seized the opportunity to plead for special assistance for his bank."

OneUnited later received $12 million in TARP funding. At the time, Rep. Waters' husband owned OneUnited shares worth $250,000 to $500,000.  According to a report in the Wall Street Journal, he had received "interest payments from a separate holding at the bank, also worth between $250,000 and $500,000.''
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