Stephen’s Posterous

The government’s capital infusion into banks aimed at getting them lending again has achieved only part of its goal, according to a monthly bank lending survey released by the Treasury Department today.

While the banks gave out more home mortgages in February than in January in 2009, they extended less credit to businesses for such purposes as capital expenditure and acquisitions, the survey shows.

The survey reviewed data reported by 21 banks including Bank of America, JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group and Morgan Stanley & Co. It found that the median increase in home mortgage lending from January to February was 35% among the banks, showing that lower mortgage rates had spurred demand for such loans.

But commercial and industrial lending saw a median decrease of 13% for new commitments and a 14% decline for renewal of existing accounts.

“Uncertain economic conditions have resulted in borrowers reducing expenses, paying down debt, and delaying capital expenditure,” the Treasury said in a report. “Also contributing to the lower demand was lower overall merger and acquisition activity.” The survey didn’t break down business lending for different purposes.

Bank of America leads the banks with highest amount of both loan renewal and new commitments, lending $11.7 billion and $10.2 billion, respectively in February. JPMorgan comes in second, with $10.7 billion in loan renewal and $8.9 billion in new lending. Wells Fargo is a solid third, with $9 billion in loan renewal and $4.8 billion in new lending.

By comparison, three other large banks lent much less in February, with $2 billion in new loans for Morgan Stanley, $422 million for Goldman Sachs, and $416 million for Citigroup.

“New loan origination has been substantially limited as the current economic environment makes very few deals viable,” Citigroup said in a report to the Treasury.

Source.

Despite a fabled brand name and an affluent, free-spending clientele that is the envy of the charge-and credit-card business, American Express has gotten caught in the same downward vortex as the rest of global financial industry.

Indeed, its once-highflying stock crashed to under 10 in early March 2009 from more than 50 last spring, before rebounding to 18.83 on Aparil 9, 2009. Negatives seem to abound. A poor economy caused card usage, both business and personal, to slow, and in some categories, to drop.

Amex credit-card delinquencies and charge-offs hurtled to higher levels both in the second half of 2008 and the first two months of this year. And an ill-fated company decision to push credit cards on folks with multiple mortgages resulted in Amex dramatically increasing its exposure to customers in the epicenter of the home-price collapse in California and Florida.

Not even American Express (ticker: AXP) thinks things will improve much for at least the next three quarters, or so Amex Chairman and CEO Kenneth Chenault said in recent shareholder communications; company officials were unavailable to comment to Barron's, since Amex is in a "quiet period" before releasing first-quarter earnings.

Yet American Express' outlook isn't nearly as hopeless as is commonly thought on Wall Street. For one thing, unlike its peers, the company gets the bulk of its revenue and earnings from fee income generated by transaction volume, not the extension of credit. This is because charge cards, which are supposed to be paid off monthly, make up a substantial share of American Express' volume. AmEx therefore has substantially less credit risk.

Likewise, the company has addressed its credit-card mistakes with some vigor since the fall, and should be able to stem the surge in defaults in the next couple of quarters. Not least, with the help of various government bailout programs, AmEx seems to have ample liquidity to ride out the current economic downturn without having to dilute shareholders by selling stock.

To be sure, plenty of uncertainties remain for the New York-based company. The outlook for home prices and unemployment levels weighs heavily on any credit-card lender like AmEx, and remains a wild card in a weakening economy. As a result, analysts' estimates for AmEx are all over the place.

Consensus forecasts for this year vary from a profit of $1.65 a share to a loss of $1.11, with the average of 19 estimates coming in at 55 cents. Next year has spawned even wilder inconsistencies in earnings forecasts. The average forecast of $1.16 includes high and low estimates of $2.79 and negative 27 cents.

Yet William Ryan of the financial-industry research boutique Portales Partners recently issued a Buy on the stock at 15, after rating AmEx a Hold since it traded above 60 in July 2007. He reasoned that even with higher credit-card charge-offs coming in the near term, the stock is a great buy in the longer term.

"Look, we never know until after the fact when the inflection point comes, as low valuation finally trumps near-term fundamentals," Ryan says. "Most people are going to miss the party if they wait for the turn in credit losses."

Ryan and Portales refrain from giving out target prices. But an analyst at a large, low-profile hedge fund that has been loading up on American Express wasn't so constrained. "I think AmEx is at least a double over the next year or two," he avers.

Much of Amex's resilence to tough times comes from a business model that emphasizes lower-risk transaction-fee volume rather than lending, according to Fox-Pitt Kelton analyst Bill Carcache. Last year, for example, AmEx cardholders used their charge and credit cards to buy $683 billion worth of goods and services, a volume that dwarfed that of their competitors.

Chief among the transaction fees generated by this prodigious volume is the industry-high 2.5% fee that AmEx typically charges merchants for access to AmEx's big-spending cardholder population.

AmEx gets to keep the bulk of this fee income, since unlike most card sponsors, the company runs a closed-loop network in which it issues and markets cards, handles all transaction processing and even "acquires" and directly pays off all its merchants around the globe. Most bank issuers have to share their merchant fees with the likes of Visa (V), MasterCard (MA) and First Data.

Credit risk from customers stiffing credit-card companies looms smaller at AmEx. It had extended $72 billion to cardholders as of year-end 2008, less than half the total in cardholder receivables carried by competitors Citigroup (C), Bank of America (BAC) and JPMorgan Chase (JPM).

Much of the investor concern over AmEx arises from the sudden surge in delinquencies and, even more damaging, loan charge-offs in excess of the company's competitors. This wasn't supposed to happen at American Express, given the company's more affluent customer base.

Yet after lagging behind industry averages for most of 2008, charge-offs at AmEx began to skyrocket in the fourth quarter, according to closely watched monthly performance data taken from the company's major credit-card-receivables securitization. By February of this year, charge-offs in the AmEx trust had vaulted to 9.31%, far above the industry's monthly average of 7.76%.

The jump in AmEx loan defaults, however, may not be as telling as it first appears. The rates of late have been pushed higher by a wicked denominator effect, as management began reducing outstanding credit to U.S. consumers in the second half of last year by cutting credit lines and raising interest rates and fees on accounts. The company even offered some account holders with outstanding balances a $300 gift card in exchange for closing the accounts.

The efforts earned AmEx some bad press for its hard-nosed tactics but enabled the company to reduce its U.S. credit-card receivables total (the denominator of the charge-off data) to $57.8 billion at the end of February from $65.9 billion at year-end 2007. This also magnifies the default rate vis-á-vis peers who were less aggressive in paring back their credit exposures.

Other factors also may work to blunt the recent vertiginous rise in AmEx's U.S. charge-offs. After closely examining the February trust data, Portales' Bill Ryan sees some favorable developments. While charge-offs surged in the month, loan delinquencies, the raw material for future charge-offs or defaults, were far better-behaved.

Total delinquencies in the trust rose just 12 basis points, 12 hundredths of a percentage point, to 5.40% of total U.S. credit-card receivables or borrowing, compared with a sequential monthly jump of 42 basis points in January. But even more telling, according to Ryan, was the fact that in February, early-stage (31-to-60-day) delinquencies actually dropped from the month before by nine basis points, to 1.38%, while mid-stage (61-to-90-day) delinquencies rose but five basis points, to 1.23%.

Early-stage delinquencies normally drop some in February, for the simple reason that many cardholders labor hard to pay down swollen balances quickly from the holiday season. But the drop this February was larger than usual.

As a student of the credit cycle, Ryan thinks that yet another factor may soon steady AmEx's fortunes. AmEx currently is paying the price for its promiscuous extension of credit and bad underwriting practices of recent years that saw its U.S. card-lending jump from $39.9 billion at the end of 2004 to the aforementioned peak of $65.9 billion at the end of 2007.

AmEx was looking for love in all the wrong places, oblivious as were most Americans of the approaching financial and economic tsunami.

Yet, says Ryan, the losses AmEx is now suffering from bad underwriting decisions tend to be short-lived and violent, compared with losses that creditors suffer from economic weakness, with its attendant rise in unemployment and drop in consumer spending.

"I'm not saying that credit losses at AmEx won't continue to rise some in the months ahead, but the deterioration in charge-offs compared to that of its peers will be tempered somewhat as the underwriting mistakes are quickly washed through AmEx's system," says Ryan.

Liquidity has been yet another concern of investors, about AmEx specifically and the financial industry in general. Beaten-up stock prices in the sector make stock offerings punishingly dilutive to current stockholders. Even more damaging has been the freezing-up of the all-important asset-backed securitization market, which allowed lenders like AmEx to bundle vast hunks of their credit-card receivables and sell them off to investors in the form of bonds.

At the end of last year, such securitizations accounted for some $29 billion of the $72 billion in credit that AmEx had extended to cardholders in both the U.S. and abroad.

After the collapse of global credit markets following the Lehman bankruptcy last September, AmEx, like other U.S. financial institutions, has made ample use of the panoply of U.S. government liquidity and credit facilities to fill in the financing breach. It received an injection of $3.4 billion under the now somewhat notorious Troubled Asset Relief Program.

AmEx also availed itself of $5.9 billion in borrowings under the government-guaranteed Temporary Liquidity Guarantee Program. In addition, AmEx has plenty of unused credit capacity, including $7.4 billion under the TLGP, $8.7 billion under its bank facilities and a $5 billion credit conduit that won't expire for several months, according to a recent report by JPMorgan analyst Andrew Wessel.

All of this has left AmEx with about $25 billion in cash and readily marketable securities, which more than covers its liquidity needs for the next 12 months. They include some $20 billion in long-term debt and asset-based-securitization maturities.

American Express seems to have ample capacity to weather the current financial storm and survive comfortably until charge-offs abate and the all-clear sign is posted for the economy. Among other things, the company recently exhibited its confidence by affirming its current dividend-payout level, which costs it some $200 million a quarter.

And as AmEx recently observed on its Website, its ratio of tangible common equity to risk-weighted assets was 8.5% at year end, "higher than that of most bank holding companies, and all our regulatory ratios are comfortably above the 'well-capitalized' thresholds."

The government facilties eventually will expire. Yet AmEx is hard at work developing other funding sources should its access to traditional capital markets remain difficult. It is now availing itself of retail certificates of deposit pushed by traditional brokerage houses like Merrill Lynch as an investment alternative to high-net worth customers. This program has yielded some $8.8 billion in funding since last fall.

The company also plans to roll out a new program this quarter designed to attract direct deposits to American Express using direct mail, the Internet and other forms of advertising. With the cachet of the American Express name, the company should have no trouble using these channels to replace the securitization market as a source of cheap funding.

Given the necessity of carrying a larger capital base even after the economy improves, AmEx said in its annual report that in the future it expects to deliver a return on equity of more than 20%, instead of meeting its old goal of better-than-33% ROE. Of course, 20% is a return that most companies would die for.

Investors could do a lot worse than shares of American Express, especially at current price levels, even if it no longer aspires to be the fastest car on the track.

Source.

The financials sector has surged in recent weeks but investors still remain cautious. Still, Kenneth Mertz, manager of the Forward Banking and Finance Fund (ticker: HSSAX), is upbeat about the smaller regional banks that constituted 62% of the fund at the end of 2008.

The fund didn't have a prosperous 2008, as total return was down 21.4%, according to Morningstar. Yet that was still 22.5 percentage points better than the average among its specialty-finance peers. Also, the 10-year annualized return through Feb. 28, 2009, was 4.72%, placing Forward Banking in the top 3% of its category.

While no one can be sure when the economic recovery will begin, Mertz expresses confidence in his long-only portfolio and the role that small-bank stocks play in it. "The banks are going to participate in any recovery that we have on a longer-term basis," he reasons.

Barrons.com: What do you see in store for financials?

Kenneth Mertz: We are in a transition year. We are going to be concentrated on cleaning up any loan problems that are out there, and that would apply to the community banks that I follow. Once the investing public gets comfortable that the bank community as a whole has enough capital to fulfill their business plans, I look for financials to be part of any economic recovery.

We don't see an economic recovery until late in 2009. But we all know stocks are going to move before you see an economic recovery in terms of positive GDP [gross domestic product] growth.

Q: I'm looking at your top 10 holdings list, and I'm not seeing any household names.

A: We do small-cap investing, so there are not a lot of others in my peer group of financial-services funds that do what we do. There are several very good ones but most people that manage a financial-services fund would buy Citigroup (C) and Bank of America (BAC) -- that's not what we do.

Q: Tell me about your top holding [as of Dec. 31], Texas Capital Bankshares (TCBI).

A: Texas Capital is a businessmen's bank based in Dallas. They have a very fine management team, and we think they have historically showed great underwriting skills, have low nonperforming assets on their books. They take market share away from their bigger competitors. They do banking in a relationship manner with their borrowers. That keeps their deposit levels quite high and gives them some nice spread business. So their whole business is a spread business on that lending relationship that they have.

Q: What do you like about PrivateBancorp (PVTB) [second-largest holding as of Dec. 31]?

A: PrivateBancorp is headquartered in Chicago. It's very much a bank that, again, deals in relationships with high-net-worth individuals. Management changed within the last year when they brought in the executives from LaSalle Bank, which was taken over by Bank of America, and really created a middle-market-geared institution.

They have to continue to raise capital to support growth, and they've run into a little bit higher nonperforming [assets] than we would have liked to see. The bullish case that we have for them is that they are going to be able to outgrow some of their problems.

Q: Regional banks' dividends are definitely a lot more secure than the bigger institutions. Are dividend yields a barometer for you?

A: No, not really. Texas Capital doesn't have a yield. They are using all their capital to continue to grow the bank in terms of growing their assets, so they have adopted a model that doesn't pay a dividend. I think the nature of your question is correct that these institutions are probably not that vulnerable to dividend cuts because they have the adequate capital right now.

But we are in an environment where the very largest and much-respected companies out there were able to drop their dividends. That may happen to some of these regional banks across the country, but with the smaller ones I don't think you will probably see that. If you don't need TARP [Treasury Department's Troubled Asset Relief Program] you are probably not cutting your dividend, either.

Q: What have you bought recently?

A: A small company in South Dakota, HF Financial (HFFC). It is an S&L [savings and loan institution] with less than $100 million market cap. They are doing business in their community, which is very sound. Low nonperforming assets. The negativity around the group has caused some banks and thrifts like this to present themselves as higher-quality, good institutions to hold.

Q: What names have you been selling or trimming back on?

A: Affiliated Managers Group (AMG). It owns a bunch of asset managers. The fourth quarter was obviously devastating across all asset classes as the market was going down we didn't want exposure to market assets. That was the reason why we were trimming ourselves out of that. We still have some exposure though.

We also trimmed back in the fourth quarter in Sterling Bancshares (SBIB). It's a Houston bank. It has a lot of exposure to commercial-real-estate lending. Just from a risk perspective, we were trimming out of that. I think that is probably still the remaining overhang on regional banks across the nation.

A: Thanks.

Source.

In recent years the FBR Large Cap Financial Fund has lost a lot of money, but outperformed the vast majority of its peers, in great part because its skipper, David Ellison, ramped up his cash position. The same holds true for FBR Small Cap Financial (FBRUX), which Ellison also runs.

Over the past year, the large-cap fund (FBRFX) was down 31% through March 18, 2009, while besting the Standard & Poor's 500 by 7.6 percentage points and outpacing 83% of its Morningstar peers. None of this is cause for celebration.

But Ellison, 50 years old, whose tenure at Fidelity included learning from the estimable money manager Peter Lynch, maintains there are some very good opportunities in the financials, given their dirt-cheap valuations.

Ellison, who is chief investment officer of FBR Equity Funds, recommends buying a basket of these stocks, rather than picking one or two, though he thinks there is probably downside before things turn around in the sector.

Barron's: You have been very aggressive about raising cash in your financial-services funds. How much cash do you have now in those funds?

Ellison: It has come down a bit. It is about 50% in the small-cap fund, and it is in the high-30s for the large-cap fund.

Why the reduction?

Primarily because some of these stocks were so cheap, relative to book value and relative to assets. I figured if they are all going to go to zero, I wasn't going to have a job anyway. So I might as well see what happens.

How far along is the repairing of the banking system?

The big collapse of the system has been taken off the table, primarily because of the trillions of dollars the government has put into it, along with other things that they have done. So we don't have to worry about a collapse, and that is a big step.

Now, the question is: Will the government allow these banks enough time to earn their way into the appropriate capital ratios and the appropriate reserve positions? Or is the government going to try to rush it?

In what way?

If you were to mark to market everything that the big banks hold on their books, they would all be technically insolvent in terms of their nonperforming assets. But that isn't how the world works. Not everybody is born a millionaire; they have to earn it.

So, in a sense, the banks have to earn their way out of this. If the government makes some adjustments on capital requirements, mark-to-market accounting and a few other things to give the banks more time, they will, in almost every case, be able to earn their way out of this crisis.

What is the outlook for equity investments in the sector?

The government clearly wants to keep as much of the banking system intact as it can, and certainly doesn't have any interest in shutting these big companies down. They want to keep the infrastructure in place. So now the question is: When is new private capital going to start coming into the business?

I'm looking for the first bona fide recapitalization where a company comes in and says, "We have taken our losses, we have circled the wagons, we have taken the appropriate charges, and we are really thin on capital. But we have cut our expenses, downsized our assets, and now we need new capital to grow."

There will be plenty of new shares to buy, and you will have a chance to buy on these recapitalizations. If that works, we have a banking system that can now start to grow again. Once that begins, you have a real opportunity because you have plenty of names to choose from. The valuations aren't as good as they were earlier this month, but you have plenty of opportunities in the sector. It is just a question of not being in a hurry.

So the return of private capital to the banking system is crucial?

Absolutely. The problem is that these banks have lost so much, and they need to have private capital come into the system and create the necessary discipline. In a sense, many of the banks have done a lot already, as they have gone from paying dividends to not paying dividends.

They have gone from thinking about growth to thinking about growing appropriately, and everybody has cut expenses dramatically. The underwriting process is being examined across the entire industry, which is a good thing for the equity players. That means they are setting themselves up for a period of much better loan quality over the next five to 10 years.

There is a widely held view that there are too many banks in the U.S. and that the industry needs more consolidation. Is that an investing theme to look at?

You are going to see more consolidation. The past five or six years were very quiet because, until fairly recently, everyone had been doing well. Nobody has needed to sell and, of course, the banks that did sell did quite well by getting big prices, which haven't been good for the buyers.

If you are a buyer now, you are in position to buy from others' weakness, as opposed to their strength. Their weakness is not having enough capital, pressure from the FDIC [Federal Deposit Insurance Corporation] or whatever.

That is a good thing for people like me because I own the stock. I don't want to see every bank go down, but I see the potential for tremendous opportunities.

Where in particular do you expect to see M&A activity?

For a Bank of America to buy a $2 billion bank doesn't mean much. But for a $3 billion bank to buy a $2 billion bank from the FDIC at no cost and therefore it is incredibly accretive you probably want to own that $3 billion bank.

How is the first quarter shaping up for the banks?

Nonperforming assets will be up and spreads, that is, between the yield on loans and the cost of deposits, will be stable. Fee income is going to be uneven, depending on the type of company. Expense cuts are going to be a little better than expected, because everybody is working really hard to cut expenses.

And these banks are going to have to continue to build their reserves. Nobody is going to really care if they make money, because it is really all about repairing the balance sheet and preserving book value. If you can break even and use all of your core profitability to build reserves and take care of severance costs and charge-offs, that is good.

This year is about getting the balance sheet repaired; last year was trying to figure out how bad it was going to be...and it is bad now.

What is your advice to investors when it comes to bank stocks?

This isn't the get-rich-quick option; it is going to take time. If you have patience and are willing to sit with a portfolio of bank stocks, that makes more sense than buying one or two stocks. I would try to buy 10 to 20 stocks. Having said that, we could give back the recent rally, especially if the quarter is worse than expected or unemployment goes a lot higher or the government does something stupid.

With financial stocks, you make most of your money going from bad to good, not from good to great. The recent rally aside, everybody knows that all of these stocks are near their 52-week lows and that conditions are bad. Everybody is losing money. Companies need government bailouts. So this is as bad as it gets. But things are going to get a lot better. Still, you have to say to yourself that if you buy today, you may go down 20% before you go up 200%.

Where have you been nibbling lately?

In the past couple of months, I have owned and added to names like KeyCorp [KEY]. But as I mentioned, now is the time to buy a portfolio of names, because if I give you one name out of the 10, it would be the one that will underperform. That is the Peter Lynch rule: Give a lot of names, and your chances of being right are pretty good.

Good Advice. So what do you like about KeyCorp, a large regional bank?

KeyCorp isn't quite as cheap as it has been, and the same is true for SunTrust Banks [STI]. But both are true value propositions. There is nothing unique about these companies in the sense that they all have balance-sheet issues and the stocks have come way down. On a price-to-book basis, these banks are trading as low as you are going to get them.

They have cut their dividends, and they have built their reserves. Right now, it is all about what the managements are doing to correct things. They are working on that. A big question for many of these banks is whether their stocks are cheap enough. Another is: Do they have enough capital to survive a severe write-down so they don't have to raise a whole bunch of additional equity that would dilute my equity holding?

What are some other names you like?

JPMorgan Chase [JPM] is in the same boat. It is a little more expensive than KeyCorp or SunTrust, based on book value. But JPMorgan has been very proactive in dealing with reserves. You have heard [CEO] Jamie Dimon speak, as I have, and clearly I want to own that company.

I may not want to own the stock right now, but he is doing everything he can to get to the other side. To me, that is the most important part here; there are managements saying, "OK, now it is time to really get to the other side and we are going to do everything we can to get there." You would be surprised what a company's management can do when it is in full survival mode.

Where does JPMorgan Chase trade on book value?

With the stock at around 26.27 last week, it was trading north of tangible book value, which is about 22 a share.

What about Bank of America [BAC]?

I have been nibbling, although it has gone up a lot recently. But they are doing everything they can [to improve]. We can argue about the yin and yang and all the bad stuff there. But Bank of America trades at about half its book value.

That is a huge discount.

Yes, because everybody thinks it is going to zero. Its book value is $10 or $11 a share. The stock was at 3 earlier this month, and now it is over 7. Unfortunately, it has had a significant move recently, which makes things feel a little different.

I also like Wells Fargo [WFC], one of the better-run companies historically. They have made an acquisition of Wachovia that they are going to have some issues with, notably problem loans. But everybody knows that. And Wells Fargo's management is fully engaged in saving this company as it is.

What about Citigroup [C]?

Citi is a little more complicated. I own some, but you have to watch it like a hawk. It is sort of the Enron of the financial-services industry; there is a lot of stuff going on there. I would not recommend that anybody own it who didn't understand the industry really well.

But you own it?

Yes, but it is a small position, under 1%. I would encourage everybody to own more traditional names where they can understand what is happening with a company. Plus, the government [basically] controls Citi, so you have to wonder what they will do. I have never seen that in my lifetime. As an investor, you are given another metric to look at, which is unknown.

How does this downturn for the banks compare to the one in the late 1980s and early 1990s?

Back then, the quality of the managers wasn't anywhere near as good as it is today in the industry as a whole. Unfortunately, you could argue that, if today's managers were so smart, why did they get into these issues?

Exactly. So what went wrong?

It is called 10 years of a very good economy. On top of that, it was 10 years of these companies trying to compete with each other on making their numbers and looking good on CNBC and everything else. They had to compete on underwriting, on price, on volume. And they had to compete for people who want to get paid a lot of money.

But now we are setting ourselves up for a complete overhaul of the intellectual thought process in the business, which had been corrupted by a good economy. The Fed lowered rates and suddenly everybody could borrow money real cheap. That is when the wheels came off and the regulatory climate became looser and looser.

What does that mean for equity investors?

It is a good thing, because now you are going to see more stable returns, more honest returns, and cleaner returns. For the next five or 10 years, this sector is going to be a good place to be, although it may not be good right now, meaning it could go back down a little bit.

Thanks, Dave.

Source.

The purchase of more than eight million Citigroup shares by company insiders would be a more positive sign if the company were more clearly in control of its own future, an observer of insider transactions said.

Anthony Marchese, general partner of Insiders Trend Fund LP, is encouraged by the purchases at Citi, but he said insider buying is less reliable as an indicator when outside influences, which in this case include public sentiment, government policy and the world economy loom large. Still, Mr. Marchese said, he believes insiders see several scenarios in which Citigroup shares rise.

"Why they go higher, I don't think [insiders] could care less, whether it's because the government doesn't take them over, business turns up or the world as we know it calms down," he said.

Citigroup Chief Executive Vikram Pandit wasn't one of the buyers, but he argues that the future is brighter. In a memo to employees disclosed Tuesday, March 10, Mr. Pandit said he is disappointed with Citi's stock price and misperceptions about its finances, but that over time "the markets will recognize the many strengths of Citi."

Mr. Pandit said the company was profitable during the first two months of the year, and shares rallied on Tuesday. A company representative declined to comment further. The purchases last week by four Citigroup insiders came days after the government agreed to a third rescue of the New York company, one that would allow taxpayers as much as a 36% stake in the firm.

Roberto Hernandez Ramirez, chairman of the company's Mexican banking operation, made the largest purchase, buying six million shares for $7.5 million. Manuel Medina-Mora, chief executive of Citigroup's Latin America and Mexico unit, bought 1.86 million shares, Vice Chairman Lewis B. Kaden bought 100,000 shares and Controller John Gerspach bought 65,000 shares.

The insiders paid $1.24 to $1.45 a share, well below the stock's 52-week high of $27.35. Citigroup's stock price has plunged amid the economic downturn and fears that the government will take over the company, wiping out shareholders. Bernard Sussman, chief investment officer at Spectrum Asset Management, of Stamford, Conn., said he thinks the government won't fully nationalize Citigroup and, given time, the recent insider purchases will prove timely.

Mr. Sussman said he believes the purchases are a show of confidence rather than a public-relations move, because the insiders have put up their own money to buy shares at a time when their personal wealth has probably suffered significantly with Citi's beaten-down stock price.

"With the stock trading at $1 a share, they don't have much downside," Mr. Sussman said. The buying at Citi reflects a pattern of insider buying at large financial firms, including Bank of America Corp. and J.P. Morgan Chase & Co. Purchases by those insiders haven't yet proved prescient, Mr. Marchese said.

"I would look at this as a high-risk bet," he said.

Source.

The story of our economic crisis mirrors every great market bubble in history. Clearly, banks were key participants, but they were not alone. Mortgage lenders, borrowers, regulators, policy makers, appraisers, rating agencies, investors and investment bankers all played a role in pushing economic excesses forward.

The institutions that gave in completely to the frenzy are no longer with us. Those that balanced the need to compete with the need to lend prudently survive today and are helping to stabilize the system.

Amid the turmoil, it has become clear that banks need to make changes in the way they run their business, from risk management to expense control to compensation practices. Most banks are making these changes in a good-faith effort to adjust to new economic realities.

And what role should government play in this? Speculation is rife about whether banks need more capital assistance from the government or whether they need to be nationalized. Unfortunately, our current debate has been riddled with misinformation that will not help us understand our current reality, or help us decide on a sensible path forward.

I would like to provide some clarity on a few key claims that have been repeated so often they are now taken to be fact. They are not.

The banks aren't lending. This claim is simply not true. Yes, banks have tightened lending standards after a period in which standards were too lax. But, according to Federal Reserve data, bank credit has actually increased over the course of this recession, and business lending is trending up modestly so far in 2009.

Also, mortgage finance volume is booming as a result of low interest rates. What's gone from the system is the easy credit that got us into this mess, as unregulated nonbank lenders have disappeared, and the market for many asset-backed securities has all but dried up. Most banks are making as many loans as we responsibly can, given the recessionary environment.

The banks are insolvent. In the past 18 months, we've seen fewer than 50 bank failures. That compares to about 2,000 failures or closings of commercial banks or savings institutions between 1986 and 1991. There may be more to come, but the vast majority of banks will weather this economic storm.

The Troubled Asset Relief Program (TARP) hasn't worked. Not true. Last October, when the TARP was enacted, systemic risk threatened our entire financial system and economy. The point of the program was to stabilize surviving banks, prevent a total meltdown, and enable banks to lend more. The TARP and other government programs have worked, and banks are making more loans as a result.

Taxpayers have given the banks billions and won't get their money back. TARP funds are not charity. Banks that received TARP funds will make about $13 billion in dividend payments to the U.S. Treasury this year. TARP funds are loans yielding anywhere from 5% to 8% interest. This is a win-win: Banks are getting the capital they need, and taxpayers are getting a strong return on their investment.

The banks that caused this mess must be held accountable. In fact, while all banks participated in the bubble economy to some degree, the companies that did the most to cause this mess are gone. The managers and shareholders of those institutions have been held accountable by the toughest, most unforgiving master of all: the free market.

The only way to fix the banks is to nationalize them. This is a misguided premise. The announcement of nationalization would undermine confidence in the financial system and send shudders through the investment community.

Politicizing lending decisions and the credit allocation process would be destructive for the economy. Nationalization also would give the false impression that all banks are insolvent. We agree with Federal Reserve Chairman Ben Bernanke's statement that nationalization of banks is not necessary to stabilize the banking system.

Getting our facts straight as we debate the important issues will help us rebuild a healthy financial services sector that can better support economic growth. I have two thoughts to help us get started.

First, our industry must continue to work in partnership with the government to solve our toughest problems. Congress and the administration have already taken several very positive steps. The Fed is providing sufficient liquidity and has helped lower mortgage rates. The $787 billion stimulus package will help boost economic activity. \

The Term Asset-Backed Securities Loan Facility (TALF) will help liquefy the credit markets. And the administration's housing and foreclosure relief plan will be very helpful to both homeowners and banks as we work to stabilize housing markets across the country.

Second, one of our greatest challenges is balancing the need to extend credit with the need of households to pay down excessive debt. In an economy that became too dependent on debt-driven consumption to create growth, the prospect of household deleveraging is sobering. The answer, in my view, is to let competitive forces lead us back to responsible lending practices, not the type of indiscriminate lending that has created so many problems.

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Bank of America is not Citigroup. It shouldn't need to raise more equity and dilute shareholders. It will post a profit in the first quarter and all of 2009, absent a market meltdown worse than what we're now seeing. And, when the economy recovers, it will be an earnings powerhouse.

That's the message chief executive officer Ken Lewis is delivering to anyone willing to listen. Investors, however, are skeptical. The bank's stock (BAC) was skidding toward $3 late last week, versus $37 a year ago -- off by 91%. Citigroup (C) shares plunged an even more precipitous 95%, dropping from $21 and change to a buck in the same span.

Citi's swoon has been exacerbated lately by the announcement that it will boost its capital base by converting much of its preferred stock into common, diluting the interests of existing common shareholders. That's precisely what bears say will happen at Bank of America . And the coming government "stress test" of banks' financial strength has fanned further doubts about the bank. The test's nature is known; its specifics aren't.

BofA has a chance of averting Citi's fate. The measure of capital adequacy favored by many big investors is tangible equity, equity minus goodwill, as a percentage of tangible assets. It gives them a feel for how much of a cushion a bank has left to absorb losses on loans or securities gone bad.

BofA's tangible equity ratio is 2.68%, and its tangible equity as a percentage of risk-adjusted assets is 3.6%. Lewis theorizes that regulators would like to see banks' tangible equity at 3%, and says that BofA should get there by the end of the year. But 4% is the number often discussed by investors.

Citigroup's tangible equity, now at about 1.5%, is expected to jump close to 4% after it converts its preferred. In contrast, JPMorgan's (JPM) tangible equity is 3.8%, and will improve now that the bank has slashed its dividend by 87%.

To boost tangible equity to 3%, Bank of America would have to raise its equity base by $8 billion, assuming that the total amount of its assets remains unchanged. The equity needed would be lower if the assets were reduced. BofA hopes to reach 3% through a combination of retained earnings, asset sales and shrinking its balance sheet.

"It's our earnings power that people are missing," Lewis says. "We can absorb a lot of [hits] and still be profitable." In fact, Bank of America, which now includes Countrywide Financial and Merrill Lynch, could generate more than $100 billion in revenue this year -- after mark-to-market write-downs. It could also post $45 billion to $50 billion of pre-tax, pre-provision income, out of which it could absorb losses on loans or boost its reserves against them.

Lewis contends that, despite problems at its credit-card unit, Merrill and elsewhere, Bank of America will be profitable this quarter and for all of 2009, unless things get a lot worse. He won't be specific, but Wall Street expects the bank to lose one cent a share in the first quarter and earn 57 cents this year, according to Thomson Reuters. In comparison, Citigroup is seen losing 30 cents a share this quarter and 70 cents this year.

To raise its tangible equity, Charlotte, N.C.-based Bank of America could unload assets. It put First Republic Bank, a private-banking specialist, on the block, and could sell Columbia Management and Balboa Insurance. Columbia and its affiliates oversee more than $386 billion for individuals and institutions.

Thanks to its Merrill Lynch acquisition this year, BofA also owns 49% of BlackRock (BLK), which manages $1.3 trillion in assets. It doesn't need both Columbia and BlackRock. Columbia could fetch $3 billion to $4 billion, even in this depressed market. Balboa, which the bank picked up when it bought Countrywide, could be worth at least $14 million, according to SNL Financial.

Lewis also notes that BofA's Tier 1 capital ratio of 10.6% is well above the 6% level regulators usually deem adequate. This ratio is the bank's core equity capital as a percentage of its risk-weighted assets. However, because this calculation includes preferred stock, many investors believe it overstates a bank's strength. Citigroup's Tier 1 ratio, after all, is 11.9%.

If Bank of America can avoid Citi's fate and the economy and markets improve, stockholders could eventually benefit from something that the crisis has forced: a massive buildup of BofA's loss reserves. At the end of 2008, they stood at $23.5 billion, almost double the year-earlier level. If the need to keep boosting these reserves ended, the bank would boast impressive earnings power.

In 2003, Merrill Lynch earned $4 billion, Countrywide made $2.37 billion and Bank of America had $10.76 billion of net income. The BofA figure doubled three years later, just as the U.S. mortgage madness was peaking.

Add in some $8 billion of cost savings from inefficiencies that have been eliminated by the merger of the three businesses and the new Bank of America could crank out $25 billion, or roughly $4 a share, of after-tax earnings when the good times return. That's an iffy vision, admittedly, but one that makes BofA a decent speculation at under $3.25 a share.

Source.

Ken Lewis, Chief Executive of Bank of America, has grown accustomed to public scrutiny in recent months. Initially lauded as a Wall Street hero for his high-stakes acquisition of Merrill Lynch in September 2008, he was later lambasted for overpaying for the investment bank and for allowing Merrill to pay staff bonuses amid mounting multibillion-dollar losses.

Mr Lewis, 61, who became BofA's chief executive in 2001, has faced criticism for his acquisitions before. When he led BofA's acquisition of Fleet National Bank in 2004, many analysts expressed scepticism over the price of the deal and the bank's ability to wring value out of the combination.

In this interview, Mr Lewis reiterated his belief in the long-term value of BofA's acquisition of Merrill Lynch, but allowed that the size of the government aid to support the deal had been a "tactical mistake" because it put the bank at risk of appearing weak.

He also expressed concern that limits on executive compensation for the 20 most highly paid executives could lead to a loss of revenue-generating talent.

Do you regret your acquisition of Merrill Lynch?

I'd be less than honest to say that I haven't had my moments, but I always try to step back and say don't judge it by this time and look forward. I still think it's a compelling, strategic acquisition and we're going to be awfully happy to have done it over time.

You have been accused of overpaying when you could have picked Merrill up for almost nothing two days later. What was your motivation?

We knew they had another offer to buy about 9.9 per cent of the company from Goldman [Sachs]. We also heard that there was some discussion with Morgan Stanley as well. So we thought rather than getting into a bidding contest later on we should just go ahead and get it done because the strategic reasons for doing it were so compelling.

Was there a moment when you would have preferred to pull out of the deal?

We did in fact think about doing that . . . and consulted with the government about filling the hole [in Merrill's balance sheet] if we didn't get out. We were strongly advised that the best thing to do was to go forward with the deal on time. While we made the final decision, we relied heavily on that advice because we respected the opinions of the various agencies.

Was taking additional Tarp money to support the deal the right thing to do?

I wish we had not taken as much as we did because it put us in a league too far out of some of the others who had not taken as much. Clearly we were doing that in an abundance of caution. So if I had to admit a tactical mistake I would have taken less than we took . . . probably $10bn less.

Have you been surprised by the strings attached to the Tarp money?

I've been surprised at the reaction of the public for those that have taken the Tarp money when we were doing what we thought was in the best interest of the country.

Were you adequately consulted on Merrill's plans to pay bonuses?

We knew of the bonuses and the process and we had input into it. The issue was that we could advise, but not make the final decision. There was disagreement on a number of things, but we're in the middle of litigation on that issue so I should stop there.

Has public scrutiny of the uses of Tarp money changed how you operate?

We're very focused on the cosmetics of trips and things of that nature, where meetings are held, personal use of the aircraft. We've changed some policies, but not really in the way we operate the business fundamentally.

Are the limits applied to executive compensation reasonable?

I think it's reasonable for the top five, let's say. There's no push back on me not getting an incentive, but when you start talking about the top 20 you're getting into some revenue producers that can really hurt your company if they leave. There are foreign banks hiring and there are boutique investment banks hiring. So there is a place for the top revenue producers to go and we've got to find a way to be able to pay them and keep them.

Are you confident that Bank of America will pass the stress test?

I think we'll pass the stress test. I don't know anything now to cause me to think that we wouldn't pass.

If a bank fails the stress test, do you think nationalisation is a legitimate government response?

No - I think some rehabilitation will have to take place, but I don't think nationalisation would be the answer. The banks do have six months to remedy whatever the issue would be. So that seems reasonable.

What's your view of this proposed public/private partnership to buy up some of the toxic debt?

Most people like the concept but the devil's in the details. Conceptually, it sounds good.

Is there a way round the problem that banks don't want to sell at too great a loss, but private investors don't want to buy at too high a price?

I don't know how you resolve it. There's a pretty big gap of profit that could be used to strike the right chord between the investor and the seller. Then you've got obviously cheap financing through the government that should make a deal possible. I have optimism that something could be worked out.

Source.

Investment banking is suffering an identity crisis. The industry needs its best talent to get back on a stable footing. Yet the public thinks masters of the universe are overpaid economic saboteurs who deserve punishment. One man embodies the paradox: Andrea Orcel.

Merrill Lynch’s global head of investment banking is said to be the driving force behind an eye-popping $550m of revenue last year – 16% of his division’s total. The $100bn break-up of ABN Amro was his puppy. It’s the biggest banking deal in history – and likely will go down in the annals as the worst.

Orcel’s wits and charm have kept the likes of Banco Santander and Unicredit as repeat customers of Merrill’s services. He enjoyed glowing press coverage. The bigger reward was a $34m bonus for 2008. After Merrill’s sale to Bank of America, an initial demotion was followed by a promotion after senior defections left his new bosses realising they needed Orcel to help save the business before it crumbled completely.

But to the outside world, someone like Orcel is seen as an undesirable. He is now the target of a witch-hunt by New York’s attorney general. It’s easy to see why. Orcel got paid handsomely even as his own firm racked up $28bn of losses and the ABN deal led to the government bailouts of two of the three acquirers. It doesn’t matter that he was hardly alone in thinking the acquisition was a good idea.

Orcel may not have played recklessly with other people’s money the way Merrill’s traders did. But he has encouraged, and benefited from, several foolhardy transactions. His outsize pay in a year of deep cuts reinforces the industry’s greedy image.

All in all, Orcel represents much of what the industry needs to distance itself from. And yet investment banks need client-friendly leaders of his calibre if they are to thrive.

His personification of the crisis will one day make an ideal first slide in a business-school presentation. At this rate, even a die-hard dealmaker like Orcel might be better off deserting the banking battlefield for the serene pastures of academia. Then he could teach the lesson himself.

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The black holes of US capitalism are multiplying and growing larger. American International Group's quarterly loss of $62bn may be the largest in history, but the firm is hardly alone in its extraordinary ability to destroy capital. When large complex financial firms grow unstable and start to collapse, the implosion is nearly impossible to stop. Gigantic amounts of financial matter are being sucked in, maybe never to be seen again.

Outside viewers cannot directly see the tremendous capital destruction – many assets within these firms have no observable price. One must rely on indirect signs such as managerial estimates or governmental bailout packages to gauge the size of losses.

They are huge. Three governmental aid packages totalling $150bn haven’t proven sufficient for AIG. The government was forced to pony up another $30bn worth of aid Monday and there’s little assurance this will be sufficient.

Mortgage agencies Fannie Mae and Freddie Mac are equally impressive. Fannie just reported a $25bn loss for the fourth quarter, and says this year’s results may be worse than 2008. The government has pledged up to $400bn to prop up the two.

Other collapses may prove equally difficult to halt. The US injected $45bn into Citigroup, converted its preference shares for common equity while strong-arming other investors to do the same and guaranteed more than $300bn of its assets, yet the company’s $1.50 stock price suggests more is needed.

Bank of America boss Ken Lewis recently claimed that the Countywide and Merrill Lynch were “stars” in the troubled company’s firmament. An odd, but perhaps apt, word choice if the additional mass from these bodies pushes BofA beyond critical mass. The continuing slide in its share price suggests there’s more bailing out of BofA to come.

The Milky Way of American capitalism has so many black holes because complex financial firms clustered in centers like New York and grew large on cheap monetary fuel. But they exist elsewhere. Indeed, they are also common in the British Isles sub-galaxy, where RBS and Northern Rock have sucked in tremendous amounts of financial matter.

Of course, not every star has the needed mass, leverage or complexity to become a black hole. Yet the future of many firms that avoid falling over the edge is hardly bright. Investors’ distrust of leverage, stricter governmental regulation, and slower economic growth mean they may be doomed to red dwarf status.

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