Altria’s (MO) purchase of UST (UST) has passed regulatory review. Altria today announced that the Federal Trade Commission has granted early termination of the initial waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and therefore no further regulatory review by the federal antitrust authorities is required in connection with Altria’s acquisition of UST for $69.50 per share in cash.
Completion of the transaction remains subject to UST shareholder approval and certain other customary closing conditions. UST is in the process of scheduling a special shareholder meeting for on or about December 4, 2008, during which UST’s shareholders of record as of the close of business on October 23, 2008 will vote upon the proposed transaction. Details of the shareholder meeting will be contained in the proxy statement which UST expects to mail during the week of October 27th. If approved and all other conditions to closing are satisfied, the transaction is anticipated to close no later than January 7, 2009.
for those who have not noticed, buying Altria shares now will give you a 6.7% (and growing) yield on your invested money. Earnings, about as stable as they come will grow 10% plus through product sales and share repurchases.
No matter what the economy, folks are still lighting up and chewing.
National City Bank (NCC) CEO Peter Raskind said Wednesday that it’s “simply too soon to say” if the bank will avail itself of government assistance — and if it did, what the impact of that help would be.
“We’re closely studying the potential implications, you bet we are,” Mr. Raskind said. “We’re deeply engaged in that process, that analysis. We’re going to take a little more time than that.”
Mr. Raskind spoke to a crowd of nearly 200 people at a weekly lunch for chartered financial analysts sponsored by the CFA Society of Cleveland. Organizers said the meetings usually attract about 70 people and that Mr. Raskind’s talk was the best-attended event the group has held.
It continued:
In his speech, Mr. Raskind also addressed rumors that the bank will be sold by saying that while he would not comment about speculation, he is “quite optimistic” about the future of the company.
National City has been steadily reducing its exposure to products sold through brokers and Mr. Raskind said “significant changes” to the bank’s businesses and leadership teams give him reason to be confident.
Still, he said, National City’s board of trustees understands its responsibility to shareholders and would seriously consider selling the bank if that was in shareholders’ best interest. The board considered selling National City in March but decided that the capital infusion was the better choice. Mr. Raskind said that decision has turned out “quite clearly” to be the case.
I bought NCC shares at the beginning of the month for $2 (read why here). The reasoning behind the buy still hold.
Buyout talk. There is something there. Now that Wells Fargo has Wachovia (WB), Citigroup (C) which needs to expand its capital base has no dancing partner. They remain the most likely candidate as JP Morgan (JPM) and Bank of America (BAC) busy digesting recent acquisitions.
What is it doesn’t happen? I still think shares are worth $6 short term and much more long term. I also think that perhaps the reason a buyout has not happened is because NCC is not in the same position both Wachovia and Washington Mutual (WM) were. Because of that, the bargain basement price buyers of those institutions got will not be had for NCC. It may be something a potential buyer has to get over.
NCC is the “best of what’s left” as far as takeover candidates. If it happens or it doesn’t, shareholders (recent ones) will do just fine.
So why isn’t the San Francisco-based lender doing more to beef up its cushion against loan losses as the country slips into a recession?
As investors sift through banks’ third-quarter numbers, they will be focusing on the strength of their loan-loss reserves, which exist to absorb losses from defaulted loans. Wells allowed a key measure of reserve strength to drop considerably.
If it had held that measure at its second-quarter level, Wells’s third-quarter earnings would have been half the 49 cents per share it reported Wednesday. At a time when bad loans are expected to continue rising, it makes sense to compare a bank’s loan-loss reserve with past-due loans.
Many of those won’t return to health and will lead to a loss.
In the third quarter, Wells’s $7.87 billion reserve was 1.57 times as big as its $5 billion in past-due loans. That’s down from 1.81 times in the second quarter. Maintaining that ratio at 1.81 times in the third quarter would have taken an extra $1.18 billion out of earnings.
After tax, that would work out to 24 cents a share.
Wells’s defenders might argue that some loan portfolios are not deteriorating as fast as they had been, allowing the bank to ease up a bit on this reserve measure. But that’s a bold step in a faltering economy.
Even after getting $25 billion under the government’s financial-rescue plan, Wells still wants to raise another $20 billion of capital on its own to support its planned purchase of Wachovia (WB).
Here is CFO Howard Atkins on the results and Wells capital situation:
So, who to listen to? I am not overly concerned about this an don’t see it a the big deal some are trying to make it out to be. The tone is that Wells is doing something sneaky in its reserves. I think to many folks are trying to be Perry Mason.
Wells is saying that it has taken the most of the losses on the worst of the loans and that while loan losses will continue to grow as the economy worsens, the size of those losses will not significantly grow. The home equity portfolio, where most of the losses are has portions being liquidated and Atkins did say that liquidation is “going orderly”
Now, Atkins did say that the Wachovia deal will “double the size of the bank” and that they “didn’t need the $25 billion from the gov’t”.
So, in August Berkkshire’s (BRK.A) Warren Buffett, Wells largest shareholder he was either buying shares in Wells or American Express (AXP). At the time I speculated it was Wells (still feel that way) and soon enough we will find out. Wells Chairman at first refused the TARP money from Treasury until Hank Paulson force fed it to him.
What can we discern from that? One of three things. Management is either: 1- Spectacularly stupid 2- Slyly dishonest 3- On top of the situation.
We can eliminate #1 as it is clear Wells Fargo and JP Morgan (JPM) are the class of the industry. Buffett has little patience for #2 and unless he believed management was being totally upfront, he would not have even alluded to increasing his stake in the company.
That leaves #3. Based on results for the past two decades, until proven different, I got to go with that…
Sherwin Williams (SHW) beat “analyst” expectations by 23 cents a share or 18%.
– Sales increased 3.3% to a record $2.269 billion in 3Q08 and 2.1% to a record $6.280 billion in first nine months – EPS was $1.50 in 3Q08; $.05 above the 3Q08 guidance range of $1.20 to $1.45 – Net operating cash in the first nine months was $592.6 million; an improvement of $28.8 million over the first nine months last year – EPS guidance range of $.40 to $.60 for 4Q08 and raising full year guidance range to $3.97 to $4.17
All segments experienced sales increases: * Net sales in the Paint Stores Group increased $9.5 million, or 0.7%, to $1.410 billion in the quarter and decreased $20.6 million, or 0.5%, to $3.797 billion in the first nine months. The sales increase in the quarter was due primarily to increased sales from acquisitions of 1.5% and selling price increases that were partly offset by sales volume reduction * Net sales of the Consumer Group increased $6.2 million, or 1.8%, to $355.7 million in the quarter and decreased $20.8 million, or 2.0%, to $1.026 billion in the first nine months. The sales increase in the quarter was due primarily to selling price increases and an increase in sales of 0.4% related to a 2007 acquisition. * The Global Finishes Group’s net sales stated in U.S. dollars increased $55.8 million, or 12.5%, to $500.8 million in the quarter and $170.1 million, or 13.3%, to $1.452 billion in the first nine months due primarily to volume gains, selling price increases, favorable currency translation rate changes and acquisitions.
The Company acquired 793,135 shares of its common stock through open market purchases during the quarter and 7.0 million shares during the first nine months. The Company had remaining authorization at September 30, 2008 to purchase 20.0 million shares.
CEO Christopher Connor said, “During the fourth quarter of 2008, we anticipate consolidated net sales growth, in percentage terms, will be plus or minus in the low single digits from last year’s fourth quarter. We expect diluted net income per common share for the fourth quarter will be in the range of $.40 to $.60 per share compared to $.80 per share last year. For the full year 2008, we anticipate consolidated net sales will be slightly higher than 2007. At that sales level, we are raising our expectations for diluted net income per common share for full year 2008 to a range of $3.97 to $4.17 per share compared to $4.70 per share earned in 2007.”
Would I be a buyer of Sherwin shares here? No. Not because they are not a great company or their shares are not undervalued, it is just that I think there are some extreme values out there currently and Sherwin is not an extreme value. The dividend yield at 2.8% is good, but again, far below the 7% at Dow Chemical (DOW), 6% at GE (GE) and 5.8% at Harley Davidson (HOG). Now, should share dip into the mid 40’s ($45) then I would have to take a close look.
Also, despite the title of the post, Sherwin is tied to housing and that is not going anywhere but flat or down for at least a year, maybe more. That being said, Sherwin’s results will remain stable due to fantastic management and it’s brilliantly timed international expansion so the downside from here is limited. Should shares be sitting here at these levels 6 months to a year from now, perhaps they then warrant a buy.
There are just to many truly magnificent bargains out there now…
On average, analysts were expecting Harley Davidson (HOG) to record a 79 cents per share on revenue of $1.42 billion. HOG had exceeded analysts’ profit estimates in three of the last four quarters.
Shipments are down are credit has further tightened.
Milwaukee, Wis., October 16, 2008 — Harley-Davidson, Inc. (NYSE: HOG) today announced its results for the third quarter ended September 28, 2008. Revenue for the quarter was $1.42 billion compared to $1.54 billion in the year ago quarter, a 7.7 percent decrease. Net income for the quarter was $166.5 million compared to $265.0 million in the third quarter 2007, a decrease of 37.1 percent. Third quarter diluted earnings per share were $0.71, a 33.6 percent decrease compared to last year’s $1.07.
“In the U.S., dealer retail sales of new Harley-Davidson motorcycles in the quarter were in line with our expectations,” said Jim Ziemer, Chief Executive Officer of Harley-Davidson, Inc. “Although Harley-Davidson retail motorcycle sales in international markets overall continued to grow double digits in the quarter, unit sales in several European countries slowed more than we anticipated during September as a result of deteriorating economic conditions. We continue to carefully monitor all markets in light of the potential impact of the current economic realities.”
For the full year 2008, the Company has narrowed its shipment expectations to 303,500 to 306,000 Harley-Davidson motorcycles. The Company has narrowed its expectations for diluted earnings per share for the full year to $3.00 to $3.10 from the prior range of $3.00 to $3.18.
“We also have been able to maintain Harley-Davidson Financial Services’ position as a stable, consistent source of financing for dealers and retail customers during these turbulent conditions in the credit markets,” Ziemer said. “Prudent management and customer access to credit will continue to be priorities at HDFS.”
“During the third quarter, we completed our acquisition of Italian motorcycle maker MV Agusta Group, expanding our opportunities in Europe. Our 105th Anniversary Celebration at the end of August drew tremendous, highly enthusiastic crowds. And we opened the Harley-Davidson MuseumTM, with its broad appeal to riders and non-riders alike. So even in the midst of economic uncertainty, we continue to broaden our appeal, plant seeds for the future and give people unparalleled experiences and reasons to ride,” Ziemer said.
“Going forward, we expect the global economy and consumer concerns to continue to create challenges for Harley-Davidson through the end of the year and in 2009. I remain confident about our future as we continue to manage and reinvest in the business,” said Ziemer.
Motorcycles and Related Products Segment – Third Quarter Results
Revenue from Harley-Davidson motorcycles was $1.05 billion, a decrease of $131.7 million or 11.1 percent versus the same period last year. Shipments of Harley-Davidson motorcycles totaled 74,704 units, a decrease of 11,831 units or 13.7 percent compared to last year’s third quarter.
Revenue from Parts and Accessories (P&A), which consists of Genuine Motor Parts and Genuine Motor Accessories, totaled $259.0 million, an increase of $7.5 million or 3.0 percent over the year-ago quarter. Revenue from General Merchandise, which consists of MotorClothes® apparel and collectibles, totaled $84.0 million, an increase of $0.8 million or 1.0 percent over the year-ago quarter.
Gross margin for the third quarter of 2008 was 34.0 percent of revenue compared to 38.4 percent for the third quarter last year. This decrease is primarily due to higher product costs and the allocation of fixed costs over fewer units than last year’s third quarter. Third quarter operating margin decreased to 16.4 percent from 23.2 percent in the third quarter of 2007. Operating margin for the third quarter of 2008 includes the impact of a one-time $16.6 million expense related to the value of acquired in-process research and development at MV Agusta Group.
Motorcycle Retail Sales Data
During the third quarter, worldwide retail sales of Harley-Davidson motorcycles decreased 9.6 percent compared to the third quarter of 2007. U.S. retail sales of Harley-Davidson motorcycles decreased 15.5 percent for the quarter. The heavyweight motorcycle market in the U.S. decreased 3.1 percent for the same period.
Retail sales of Harley-Davidson motorcycles grew 11.3 percent in the Company’s international markets during the third quarter of 2008 compared to the third quarter of 2007. Third quarter retail sales increased 12.4 percent in Canada; the Europe Region was up 2.9 percent; the Asia Pacific Region was up 17.5 percent; and the Latin America Region was up 41.6 percent.
During the first nine months of 2008, worldwide retail sales of Harley-Davidson motorcycles decreased 6.0 percent compared to the prior year. In the U.S., Harley-Davidson motorcycle retail sales decreased 11.9 percent for the first nine months of the year while the U.S. heavyweight market was down 4.0 percent for the same period. International retail sales increased by 12.6 percent for the first nine months of 2008.
Third quarter and year-to-date data are listed in the accompanying tables.
MV Agusta
On August 8, 2008, the Company completed the purchase of the privately-held Italian motorcycle maker MV Agusta Group. The Company acquired 100 percent of MV Agusta Group shares for total consideration of 68.3 million euros ($105.1 million), which includes the satisfaction of existing bank debt for 47.5 million euros ($73.2 million). As a result of the acquisition, the Company recorded $87.9 million of goodwill and the $16.6 million one-time expense related to the value of acquired in-process research and development. These results are included in the quarterly financial data.
Financial Services Segment
Harley-Davidson Financial Services (HDFS) operating income for the third quarter was $35.6 million, a decrease of $13.9 million or 28.0 percent compared to the year-ago quarter. The decrease is primarily due to a $9.4 million write-down of finance receivables held for sale to fair value. In addition, last year’s third quarter included a $3.5 million securitization gain compared to no securitization transaction during the third quarter of 2008.
Income Tax Rate
The Company’s third quarter effective income tax rate was 38.2 percent compared to 35.5 percent in the same quarter last year. The third quarter increase was due primarily to a non-deductible in-process research and development charge for MV Agusta Group and the expiration of the federal research and development tax credit as of December 31, 2007. In October 2008, the federal research and development tax credit was reinstated for two years retroactive to January 1, 2008 continuing through December 31, 2009. The Company expects its full year effective income tax rate in 2008 will be approximately 35.5 percent.
Harley-Davidson, Inc. — Nine Month Results
For the first nine months of 2008, revenue totaled $4.30 billion, a 0.9 percent decrease from the year-ago period. Diluted earnings per share were $2.45, a decrease of 16.9 percent compared to the same period last year.
Through the first nine months of this year, shipments of Harley-Davidson motorcycles were 226,898 units, a 9.0 percent decrease compared to last year’s 249,413 units. Harley-Davidson motorcycle revenue was $3.26 billion, which is down 2.2 percent compared to last year’s $3.33 billion. P&A revenue totaled $706.6 million, a 0.5 percent increase over last year’s $703.1 million. General Merchandise revenue totaled $244.8 million, a 5.5 percent increase compared to $232.0 million during the same period in 2007.
HDFS operating income was $107.7 million, a 38.0 percent decrease from last year’s $173.6 million.
Cash Flow
Cash and marketable securities totaled $504.9 million as of September 28, 2008. Cash used by operations was $221.2 million, and capital expenditures were $153.7 million during the first nine months of 2008. For the full year of 2008, capital expenditures are still expected to be between $235 million and $250 million.
Stock Repurchase
The Company repurchased 2.5 million shares of its common stock at a cost of $100.1 million during the third quarter of 2008. On September 28, 2008, the Company had 232.8 million shares of common stock outstanding.
As of September 28, 2008, there were 16.7 million shares remaining on a board-approved share repurchase authorization. An additional board-approved share repurchase authorization is in place to offset option exercises.
So, the bottom line is that if you are selling anything that requires credit to purchase it, things are going to be tough. The question then is, what is management doing to position the company for the inevitable improvement? CEO Zimmer is buying back shares at depressed prices, making international acquisitions at reduced prices and expanding the company’s product line.
All these are great moves while the company remains solidly profitable. Merchandise and parts revenue continue to grow. International sales are growing double digits. The drag is US domestic sales and HDFS. Eventually we get an improvement here. Even if 2009 just manages to be stagnant in the US, the other segments will propel EPS growth for the year.
Another point, at current levels ($24 and change), the shares carry with them a 5.38% yield that is very safe. The company will spend roughly $310 million next year on dividends and are buying back about $400 million a year of stock. The buybacks will be stopped before the dividend is threatened. Let’s not forget they also trade at 8 times earnings…8….
When I look for investment opportunities, I look primarily for 3 things:
1. Management 1. Are they aligned with shareholders? 2. Are they smart, proven? 3. Do they run the business like an owner?
2. Business 1. Is it a good business? 2. Is it easy to understand, for me at least?
3. Valuation 1. How much do I think it’s worth and how much below that value is it selling for?
How does Sears stack up?
1. Management 1. Effectively Eddie Lampert through his hedge fund, ESL, controls Sears, through a majority stake of common shares. In short, he’s staked his personal fortune, his hedge funds fortune, his reputation, etc. on the Sears common shares, which by the way represent the majority investment of his hedge fund portfolio. 2. Yes, Eddie Lampert is smart. Ivy league graduate, self-made billionaire, etc. Is he proven? He has racked up decades of 20%+ returns, so he’s a proven investor. Even a proven retail investor, but not necessarily a proven operator. A yellow flag in my opinion.
2. Business 1. Retail is a decent business. Not rocket science. 2. Retail is easy to understand, though Sears has many facets, which I think are often overlooked, or at least currently by the market.
3. Valuation 1. The short answer is I think Sears is worth A LOT more than $8 billion dollars. Why? Well, here are some of the juiciest parts: 1. Brands – Kenmore, Craftsman, LandsEnd, Diehard, and even Sears itself have very solid brand equity. Even after years of being ignored and poorly run, these brands are respected and valued throughout North America. 2. LandsEnd – Beyond the brand, this is a good business in its own right that has been churning out record years with one of the highest converting retail websites in the country. Sears bought it a few years back for shy of $2 billion. Probably worth at least that much. 3. 70% stake in Sears Canada, which has been doing very well. 4. Cash – $1.5 billion last quarter on its balance sheet 5. Sears.com – one of the largest, fastest growing, and improved websites of any major retailer. Still work to be done, but improvements galore. 6. Servicing network – Largest appliance and lawn equipment repair service in the country. I like a business where they sell you the washer and dryer once, and then get paid to maintain and repair to too. 7. Eddie Lampert – You get one of the world’s best capital allocators for free. Over time this will matter significantly, as it does in all businesses. 8. Real Estate – This frankly is the least interesting asset to me because it only becomes valuable if the rest of the business is failing, which it isn’t. Sears is profitable on a reported earnings and cash flow basis. However, Sears does own somewhere between $7-$20 billion in real estate depending upon who you believe.
And as a kicker, today you can buy Sears for LESS than Bill Ackman, Monish Pabrai, Bruce Fairholme, Bill Miller, and several other brilliant investors. It’s tied to the economy like everything and everyone, so it may not being going anywhere fast, but… What are some potential catalysts? Eddie Lampert making a great acquisition, earnings surprise, faster economic recovery. I think it’s a Blue Light special, but it’s up to you to cast your own votes.
This is a follow-up to a post from July. Isn’t it funny how when we need the money the politicians are not screaming about this anymore? In fact, one could make the argument they are begging for SWF Investment now.
File this under “be careful what you wish for, you just might get it”. The good news? SWF’s are not investing large sums in US businesses. The bad news? SWF’s are not investing large amounts in US businesses.
The latest Monitor Group analysis is an update to its June 2008 report: “Assessing the Risks: The Behaviors of Sovereign Wealth Funds in the Global Economy.” Key findings of the latest analysis include:
§ In the second quarter of 2008 (Q2 2008), funds in the Monitor SWF transaction database executed 43 deals totaling $26.5 billion. In contrast those funds executed 42 deals totaling $58.3 billion during the previous quarter (Q1 2008).
§ SWFs continued to invest actively in emerging markets. In Q2 2008, more than half the deals and funds invested were in emerging markets (vs 40% in Q1). SWFs carried out 26 deals and invested $15 billion in BRIC and non-OECD countries.
§ Investment in North America dropped dramatically. In Q2 2008, four deals totaling less than $1 billion were received by North America. In contract, this region received seven deals totaling $23 billion during the previous quarter (Q1 2008).
§ Half of the deals by value in Q2 were in real estate (shopping centers and real estate management companies). Real estate had the largest number of deals (12) and the highest investment ($13.7 billion) in Q2 2008.
§ During Q2 2008, investment has shifted away from financial services. SWFs carried out 10 deals and invested $4 billion in the financial services sector during Q2 2008. In the previous quarter (Q1 2008), funds carried out 13 deals totaling $43.4 billion.
“Our transaction data show that SWFs have focused recent equity investment away from volatile geographic markets and sectors, like North America and financial services, and are instead seeking more attractive returns in emerging markets and other sectors, including real estate,” said Drosten Fisher
The country taking the lion share of the business? India. There was heavy investment in the healthcare, consumer and aerospace sectors in India in Q2. This also follows the trend they exhibited in other nations. This is particular distressing to those who are looking for funds to flow to the US. Those are not sectors in the US that lend itself to foreign investment (thing Wal-Nart (WMT), Target (TGT), GE (GE) or United Health (UNH).
But, for shareholders of wither Wal-Mart (WMT), GE (GE) or even Dow Chemical (DOW) who are aggressively expanding into the region, it is good news. A steady flow of funds to the region raises the standard of living for all and by default the sales prospects for those doing business there.
Bill Ackman at the Value Investing Congress commented on “opportunistic capital” (hedge funds and SWF’s). He said that “opportunistic capital is always the first in” when it comes to investment (listen to press conference here). It should be noted that Russia has receive zero deals. For those thinking of investing overseas, if those with the money are avoiding a country, perhaps you ought to think twice before committing funds there? Based on their activity, India and Brazil seem to be the nation’s of choice both for opportunity and safety of capital.
Now, for those afraid of SWF’s, please note the following graph.
A disclaimer: This is my chart and Monitor Group in no way implies the “Bailout” equates the US to a SWF. This chart is purely for comparison purposes.
What is the point? SWF’s are a nice boogey man for people intent on stirring things up but they really are dwarfed not only buy US Mutual funds but what our gov’t itself. Let’s not forget, $250b of the US investment in banks wasn’t an option for the banks….that is not an issue with SWF’s.
Q2 report available by email akrull@racepointgroup.com About Drosten: Drosten Fisher is a principal with the international strategy consultancy Monitor Group. His focus is serving government and commercial clients in the areas of economic competitiveness, national security and international finance. A Middle East specialist, he speaks Arabic and has lived and worked in the region. Before joining Monitor, Drosten was a researcher for former Director of Central Intelligence George Tenet on his memoir At the Center of the Storm.
He was educated at Oxford and Georgetown and is a term member of the Council on Foreign Relations.Drosten is a co-author of a recent Monitor report into sovereign wealth fund investment and is a regular speaker and commentator on Middle Eastern investment, politics and business.
Anyone who has been an even semi-regular reader knows what a fan of Wilbur Ross we are here. Wilbur has been spot on in regards to the current crisis. Both in leading up to it and what has happened during it.
Ross is looking at companies that are commodity based that are going to profit from the fall in those prices (although he says oil will not go below $70). Specifically he mentioned carbon based chemical companies (Dow Chemical (DOW)?). He also is continuing to buy mortgage servicing companies. He is buying more shares of many of the companies he already owns ad many trade 505 below recent prices and that there is “nothing fundamentally wrong with them”.
Stimulus checks???”A terrible waste, only about 30% of the last batch got spent”
Watch the video…..there is a commercial in the middle and the interview picks up after it.
Check this out from the JP Morgan (JPM) earnings call
In response to a question on tightening lending standards: “People have gone back to old-fashioned 80 percent L.T.V. (loan to value). Real verified income. More disciplined appraisals. And in some areas, we won’t even go to 80 percent L.T.V. because of expected home decreases. We are not at 80 percent in California, Nevada and Florida — we are at 65 percent.”
The loan-to-value is simply value of an asset to the amount of the loan given out by banks. So, if Joe wants buy a house for $200,000, an $160,000 mortgage would equate to 80 percent L.T.V. ratio. Under some of the newer standards in the above mentioned states, Joe would only be able to get a loan for $130,000 and would have to come up with $70,000 himself.
At the height of housing euphoria, some banks were giving loans with an L.T.V. of 105 percent to customers, meaning the loan covered the entire price of the asset — plus more, to cover closing costs. In this scenario, Joe would walk up and sign and be given the keys without a dime coming out of his pocket…
I can’t get behind a plan that forced private companies to make the gov’t a partner when they actually do not need it….Remember, this is just weeks after had said that injecting capital directly into banks would appear to be a sign of “failure.” From the WSJ:\
During the discussion, the most animated response came from Wells Fargo (WFC) Chairman Richard Kovacevich, say people present. Why was this necessary? he asked. Why did the government need to buy stakes in these banks?
Morgan Stanley (MS) Chief Executive John Mack, whose company was among the most vulnerable in the group to the swirling financial crisis, quickly signed.
Bank of America’s (BAC) Kenneth Lewis acknowledged the obvious, that everyone at the table would participate. “Any one of us who doesn’t have a healthy fear of the unknown isn’t paying attention,” he said.
It continues:
Mr. Paulson said the public had lost confidence in the banking system. “The system needs more money, and all of you will be better off if there’s more capital in the system,” Mr. Paulson told the bankers.
After Mr. Kovacevich voiced his concerns, Mr. Paulson described the deal starkly. He told the Wells Fargo chairman he could accept the government’s money or risk going without the infusion. If the company found it needed capital later and Mr. Kovacevich couldn’t raise money privately, Mr. Paulson promised the government wouldn’t be so generous the second time around.
Essentially this is like Don Corleone “making the banks an offer they can’t refuse”. The message was “make me your partner now, if you don’t and need me down the road, we will crush you”.
I can’t get behind this and shame on both Barack Obama and John McCain for for blessing it based on a 1 day stock market reaction. Their blanket acceptance of it means that one not ought to expect significant improvement when either takes office. Remember, they both backed the previous plan also. These plan are polar opposites of each other, I would think one ought to have a preference.
Now, are there bank who this will save? Yes. Are there bank for whom this is necessary? Yes. They ought to have access to it. But to in no uncertain terms should they threaten a bank (Wells Fargo) that just took the gov’t off the hook for Wachovia (WB) with what, based on all accounts, was a AIG (AIG) action should their help be needed down to road, is wrong.
Let’s not forget that that the people running the show in Washington (both parties) ran Fannie Mae (FNM) and Freddie Mac (FRE), both of whom are at the epicenter of this whole mess. I am hesitant to say they know what is best.
We keep hearing that the “world is flush with liquidity”. So, if that is actually true, why hasn’t it worked so far? It isn’t a question of needing more. It is the fear of the unknown that is seizing markets. Giving banks more money does not eliminate these fears. What is does do is let them sit back more comfortably. Now, if your goal is to just allow them to feel good, then this will work.
But, if your goal is to have them go out and lend and take a certain level of risk, it won’t. The current environment is too risk adverse. If you want that behavior, then you must reduce the fear of the unknown by removing as much if it as possible.
