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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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March 24, 2008 12:01 AM ET
National city corp. in recent weeks has been swept up in rumors that it's on the selling block. Though the fall of the Cleveland-based banking giant may seem swift, the seeds of its descent were sown at the turn of the current century. That's when it began implementing a decision made under former chief executive David Daberko to change its business mix by accumulating higher-yielding but riskier loans (most notably, subprime mortgage loans) in its portfolio. Peter Raskind, who succeeded Mr. Da-berko as CEO last July, has had to preside over a company that finds the market for most mortgage loans is, in his own words, “illiquid to non-existent.” The new CEO has not only inherited a devastated loan portfolio, but a capital base further depleted by years of stock buybacks, including $3.2 billion worth in the first half of last year. The bank has scrambled recently to rebuild its capital, raising $2 billion so far this year through new offerings of preferred stock, hybrid-trust preferred stock and convertible debt. National City was also a big beneficiary of last week's $17.9 billion initial public offering by Visa. The bank, a major shareholder in the credit card marketer, has said it expects a pretax cash gain of roughly $450 million from the sale. Its remaining stake could be worth close to $1 billion. Alas, such moves may now be too little, too late to allow National City to retain its stand-alone status. National City spokeswoman Kristen Baird Adams would not comment on reports that the bank is for sale. However, such speculation isn't startling, given National City's weakened condition and a stock trading last week as much as 83% below its 52-week high of $38.32. It reported a fourth-quarter loss of $333 million, and in January slashed its quarterly dividend by 49%. In retaining more mortgages in its portfolio, National City's goal was to increase the spread between the interest income it received from assets such as loans and the interest expense it paid out for deposits. The company was moving away from what it called “thinner-spread assets,” such as student and auto loans. National City took a big step in that direction in the second half of 1999, when it bought subprime originator First Franklin Financial. Rather than issuing mortgages and selling them off to investors, National City began in 2000 to hold a portion of its First Franklin loans in its loan portfolio. A big portion. Mr. Daberko explained the strategy in a letter to shareholders in 2001: “These loans are readily salable to third parties at a premium to origination cost but have greater lifetime value when held on the balance sheet.” At the time, the strategy was clicking. Low interest rates made deposits cheap for banks, offering up easy money to lend. Quickly, National City's residential mortgage business became its biggest lending category, with its daily average balance of such loans more than doubling, to $29.6 billion in 2002 from $14.4 billion in 2000. Subprime drove most of that growth. National City retained more than half of the $10.7 billion in loans First Franklin originated in 2002. And even though it reduced the portion of First Franklin loans it retained to 33% in 2004, its portfolio of subprime loans totaled $18.3 billion at the end of that year, up 21% from 2003. But in 2005, the Fed began to raise interest rates s, and National City's strategy started to unravel. By early 2006, Mr. Daberko acknowledged in his letter to shareholders that subprime mortgage margins “came under increasing pressure as the year progressed.” Still, he insisted mortgages “are an essential core banking product” at National City and stated, “We plan to be well positioned when conditions in the mortgage market improve, as they inevitably will.” Despite such confidence, National City was backing off its subprime bet. It said in its 2005 annual report that it planned to sell most of the production from First Franklin going forward. The pullback didn't come in time. On Dec. 30, 2006, National City raised a figurative white flag, selling First Franklin to Merrill Lynch. Mr. Daberko, in what would be his last letter to shareholders as CEO, used the company's 2006 annual report to describe “a "new' National City” that he said was “initially somewhat smaller, but less volatile and with less risk on the balance sheet.” Ditching First Franklin didn't put an end to the problems with National City's loan portfolio. The effort to unload mortgages has been difficult as soured subprime loans killed investor appetite. And now, if it is to survive, National City may be left hoping there is a buyer in the market with an appetite for a Midwest bank that apparently failed to heed one of the most important maxims in lending: He who lives by the spread, dies by the spread. —Mark Dodosh is editor of Financial Week sister publication Crain's Cleveland Business Additional reporting by Financial Week's Matthew Quinn
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