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| Tuesday, February 9, 2010 |
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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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February 11, 2009 2:29 PM ET
Investors are not nearly as clueless as much of the press made them out to be yesterday. Indeed, the decidedly negative investor reaction on Tuesday to the Treasury Department’s new bank bailout plan may not have been fueled by concerns about the scheme’s lack of detail, which is how most media outlets painted the picture. Instead, investors were more likely worried about the strings that the Obama Administration attached to government aid. Sure, one pundit after another complained about the vagueness of the Financial Stability Plan, as the Troubled Asset Relief Program has been renamed. But in fact, the new plan was very specific about the price that shareholders would have to pay for further taxpayer largesse: Banks are barred from paying dividends above a penny a share, buying back stock, or purchasing rivals until taxpayers are repaid (or unless a bank gets specific regulatory approval). Oh, and the preferred shares that will be issued from now on in return for taxpayer capital will be convertible to common equity. Given those provisions, it was only rational for shareholders to sell on the news. Granted, the part of the plan for ridding banks of bad assets definitely lacked detail. So it’s unclear just how much taxpayers will be on the hook for there. But in his speech outlining the plan, Treasury Secretary Timothy Geithner specifically ruled out the loan guarantees that news reports had predicted were coming. Instead, the plan calls for up to $1 trillion in financing from the Federal Reserve for a “private-public” partnership that will buy the bad assets and warehouse them until they can be sold to private investors. “The federal government is taking them onto its balance sheet,” noted Viral Acharya, a finance professor at the London School of Business and NYU’s Stern School of Business. If that’s not a guarantee, it’s still quite a subsidy. But Mr. Archarya pointed out that the federal government can borrow long-term right now, unlike private investors. And he said that could help the Fed turn a profit for investors by selling the assets to those investors after the economy recovers in three or four years. Much, of course, depends on the price the Fed pays to take over the banks' toxic assets. And if the Obama-ites really plan to make good on their promises to treat taxpayers better than the Bush administration did when bailing out banks, they’ll drive a hard bargain when buying the bad loans. Toward that, the plan calls for Uncle Sam to conduct “stress tests” for all banks with more than $100 billion in assets. As MIT professor Simon Johnson put it today on his blog, The Baseline Scenario, “Weakening the big banks and their bosses should not be seen as an unfortunate side effect of beneficial medicine. It is exactly what we need to do under these circumstances. Unless and until these banks’ economic and political influence declines, we are stuck with too many people who know exactly what they can get away with because their organizations are too big to fail.” Mr. Johnson went on to note that weakening these banks—and in some cases, letting them go out of business—is not such an awful prospect. In fact, breaking up teetering banks, including asset revaluations at market prices and a complete recapitalization program, “will help return the credit system to normal.” But while that would be good for taxpayers, not to mention the overall economy, it would be bad for shareholders, at least in the short run. “Wall Street was hoping for another multi-billion, no strings attached, taxpayer funded giveaway,” wrote money manager Barry Ritholtz today on his site, The Big Picture. “Instead, they got something much tougher than they expected.” What’s puzzling is why anyone would expect Wall Street to applaud such an approach. On the contrary, as President Barack Obama put it yesterday, “Wall Street, I think, is hoping for an easy out on this thing, and there is no easy out.” In an interview with ABC News that will air tonight, however, Mr. Obama ruled out temporary nationalization of the banks, an alternative that would most clearly put taxpayers’ interests ahead of investors'. The economist Nouriel Roubini, however, insisted on his blog that nationalizing the banks remains a possibility if, as he expects, banks’ assets continue to deteriorate. Mr. Roubini said that the president likely decided against this alternative because it is politically unfeasible at this point and would scare investors away from banks that are still healthy. Mr. Roubini, for one, thinks the picture will look much different in six months. Yet even without nationalization, investors can no longer expect a free lunch on bank bailouts. And they can hardly be expected to applaud that fact.
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