Stephen’s Posterous

FINalternatives reported that GLG Partners first-quarter revenue plunged 61% from 2008. Assets under management fell by almost 50%.

The hedge fund firm said its assets under management totaled US$14 billion at the end of March 2009, down 43% from the same period last year. Investors fled GLG last year after the departure of its top hedge fund manager, Greg Coffey, for Moore Capital Management.

GLG said that it had modestly positive inflows in the first quarter, but that these were wiped out by performance losses. The assets do not include those of Société Générale’s British asset management business, which GLG agreed to acquire in April 2009.

The firm also announced that its quarterly loss fell by more than US$100 million quarter-on-quarter to US$120 million. The loss is due entirely to compensation costs stemming from its initial public offering a year and a half ago.

GLG announced that it had reached an amended credit agreement with lenders that would eliminate covenants, one of which with Citigroup, would have been violated by its assets dropping below US$15 billion. GLG will have to raise at least $150 million in capital and cut its debt and said it would buy back some loans and issue US$180 million in convertible subordinated debt to do so.

In a Financial Times article, Noam Gottesman, chairman and chief executive of GLG, said, “We made substantial progress in the first quarter ... Our hedge funds performed well and our long-only strategies generally performed well.”

Its hedge funds returned an average of 4.4 per cent during the quarter, rising to 6 per cent in the four months to the end of April 2009.

From Mohamed El-Erian, Chief Executive of Pimco

With the banking system still under stress, financial markets are waiting with great anticipation for the release by Washington of the results of stress tests for major US banks. Some believe the tests, scheduled to be released in early May, are excessively hyped. They are wrong.

The stress tests will accelerate the redefinition of the financial landscape, with a meaningful impact on future economic growth and welfare. However, whether the impact is for good or ill depends on how the results of the tests, and policies that flow from them, are pursued.

Rightly or wrongly, the February stress-test announcement was interpreted by markets as signalling a comprehensive process through which the government would evaluate the soundness of banks and decide on sustainable solutions for the sector – a sector critical to the economy’s prospects.

In particular, the tests suggested a concrete way to differentiate between the solid institutions that can raise private capital, and those that will (and must) feel a heavy government hand. They could also lead to a way to reconcile the multiple initiatives designed to stabilise a highly disrupted sector that is contaminating many sources of job creation, nationally and internationally.

The US government now has to deliver on those expectations; and it will not be easy. The outcome will be decided by more than the design and execution of the stress tests for the 19 selected institutions. It also depends critically on the announcement, context and follow-up.

To maximise the prospects for a good outcome, or at least minimise the risk of damage, it would be prudent for US policymakers to take seriously the following five factors:

First, transparency is key. Whether the government likes it or not, hundreds of analysts around the world will reverse engineer the stress tests. The government would be well advised to assist the process through clarity. Obfuscation would result in damaging market noise and further derail the real economy. At the minimum, policymakers need to provide credible details on the methodology, the underlying assumptions and scenario analyses.

Second, the results of the stress tests must be part of a comprehensive, forward-looking package to resolve problems at banks. Out-performing banks should be provided with exit mechanisms from the exceptional government support that they have been receiving and, presumably, no longer need. At the other end, there must be clarity as to how capital-deficient banks that no longer have access to private capital will be handled.

Third, the banks’ recovery and rehabilitation efforts must be co-ordinated closely with other efforts to put the banking system back on a viable road. In particular, they need to work together with the implementation of initiatives aimed at lowering funding costs (such as federally-guaranteed borrowings and Federal Reserve facilities), and facilitating the removal of the overhang of toxic assets. This will require a level of co-operation among US agencies that, historically, has not come easily or effectively.

Fourth, the government should arrest and counter the recent erosion in key parameters of the market system. Specifically, it must work hard to resist the temptation to override contracts, to undermine the sanctity of the capital structure and to treat differently stakeholders with similar legal rights. Indeed, seemingly attractive and politically expedient financial engineering, such as that used in the third Citigroup bail-out, risks undermining long-standing principles that have served the US well for years.

Finally, the US must never lose sight of the international dimensions of its policies. Its response must be consistent with efforts to upgrade a deeply challenged infrastructure for cross-border harmonisation of regulation and bank capital. The aim is to ensure a degree of global consistency that clarifies accountability and responsibility.

These are stringent requirements. Yet there is really no alternative. The US is already embarked on a journey to a “new normal” that includes reduced private credit intermediation and lower capacity for sustained, non-inflationary growth. Adherence to these five principles would help to ensure that the damage caused by past market failures is not compounded further by stress-test policy failures.

The writer is the author of ‘When Markets Collide: Investment Strategies for the Age of Global Economic Change’, winner of the 2008 FT/Goldman Sachs Business Book of the Year

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IS Bank's defender of stablity by Delphine Strauss, FT.com

At the back of a cupboard, Ersin Ozince keeps a piece of paper he was given when he began his career at Is Bank more than 30 years ago, a 19th century tract, written in the United States, setting out the basic rules of banking.

It has, it seems, served him well. Is Bank, founded in 1924 at the birth of the Turkish republic, remains both a national institution and the country’s largest publicly traded bank by assets. As chief executive, Mr Ozince occupies one of the most prominent positions in the sector and one that brings with it leadership of Turkey’s banking association.

Getting back to basics is uppermost in the minds of financiers and regulators around the world. Having watched the global crisis unfold from the lofty vantage point of Is Towers in Istanbul’s financial district, Turkey’s tallest building and a powerful statement of the bank’s self-image, Mr Ozince offers some trenchant opinions on both causes and remedies.

“We have to restructure the first rules of financial markets which were done in the 18th and 19th centuries,” he says. “I’m totally against the idea of speculation in capital markets. That’s the evil we have to control.”

Now in his mid-50s, Mr Ozince has spent his working life, since graduating from Ankara’s Middle East Technical University in 1975, moving between companies within the bank’s empire while climbing through its formidable bureaucracy.

Perhaps unsurprisingly, he views the effects the crisis has had on some emerging markets as a vindication of Is Bank’s highly conservative strategy and culture.

In the past few years, foreign investors piled into Turkey’s financial sector, paying ever higher prices for stakes in the biggest institutions or ownership of smaller banks, all hoping to gain a foothold in a young and increasingly prosperous economy. Is Bank stayed aloof.

“We could have sold it when it reached $20bn ... Even the smallest licences were bought at many times book values,” Mr Ozince recalls.

His caution is now paying off. Turkish banks do not have such acute worries as some eastern European countries about the impact of foreign stakeholders pulling out but, inevitably, there has been talk in the past few months about the commitment of players such as Citigroup, Fortis and UniCredit to their Turkish investments.

Analysts at BCG Partners, in a recent research note, named Is Bank as the safest bet in the sector, citing its solid provisioning against bad loans, strong capital cushion and “local and non-problematic shareholders”.

Mr Ozince says: “With today’s realities in international banking any state has to be much more cautious about the buyers ... You need serious commitment, you need stability in banking.”

Is Bank certainly likes stability: Mr Ozince, appointed when his predecessor departed abruptly after a bad loans scandal, has headed it for a decade. But in praising continuity, he is making a virtue of necessity, as his power to steer the bank in a new direction would have been severely limited by its shareholders.

A stake originally held by Mustafa Kemal Ataturk, the republic’s founder, now leaves 28 per cent of voting rights in the hands of the fiercely secular People’s Republican Party, which would be unlikely to countenance a sale to outsiders. An employees’ pension scheme, initially created to neutralise political influence, owns a 41 per cent stake, giving its chairman a powerful say in decisions on strategy.

Yet Mr Ozince, steeped in the group’s culture, seems to accept these curbs. “That’s how this bank stayed stable – it was the private bank without a boss,” he says.

An enthusiastic talker about Is Bank’s history, he cites its founder Celal Bayar – tasked by Ataturk with giving Turkey its first capitalist institution, who held that the bank should have not employees but kadron, a Turkish word with overtones of civic duty.

“We want to be an institution of this country. We’re not just looking forward to the first interim results and trying to behave,” Mr Ozince says. Is Bank, he explains, consciously emulated companies such as British Telecom, privatised in the 1980s, in marketing its shares to the general public. In a country with a deep mistrust of equity ownership, 10 per cent of Is Bank shares are held by small domestic investors, Mr Ozince says.

With a slightly fastidious disapproval of the free-wheeling financial markets of recent years, he adds: “Bank shareholders can’t be as speculative as the shareholders of other areas. It’s not like betting on a horse or betting on a risk investment ... In areas like this under public licences one has to be serious.”

This old-fashioned ethos does not stop Is Bank being an aggressive competitor in retail and investment banking. At smaller brokerages, rivals complain it acts arrogantly and uses its size to drive commissions down to wafer-thin margins.

And despite having sat out the last round of consolidation, Mr Ozince, in common with the management of most Turkish banks, has ambitions to win a bigger share of a market where economies of scale are becoming increasingly important. “The bigger the better ... Turkey has to bring out a bank with perhaps double the size – anything that’s over $150bn or €100bn in the size of balance sheet.”

He believes Turkey’s big private sector players are “too expensive” even at current, depressed prices, but suggests “privatisation of state banks may be a consideration”.

The global financial crisis forced Turkey’s government to delay selling a further stake in the state-controlled Halkbank, but it will return to that plan and perhaps to privatisations of Vakifbank and the agricultural specialist Ziraatbank, once conditions improve.

A perennial question Is Bank faces is whether to sell off its extensive industrial holdings. These which range from strategic stakes in profitable glass and telecoms businesses, to more haphazard interests such as a private hospital and food company, some stemming from bad loans made in the run up to Turkey’s 2001 banking crisis.

A few days after the interview, Mr Ozince dispatches a sample of one of the bank’s more altruistic sidelines: a historical novel and a rather denser account of Ataturk’s social reforms, from an imprint Is Bank started at a time of scanty Turkish publishing.

Mr Ozince has floated the prospect of holding IPOs for unlisted units or increasing publicly traded stakes in some of these subsidiaries once market conditions improve, but maintains there will be no change in overall strategy.

Instead, he seems prepared to argue that Istanbul’s financial sector can gain from its close ties with industrial partners in a post-crisis world that will pay less attention to financial wizardry, and give more respect to conventional bricks-and-mortar business.

“Some of the balances are seriously changing in today’s financial markets,” he says. “A country and a city which has serious conventional ties and conventional potential may play a better performance.”

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Jim Rogers Isn't Buying a U.S. Stock Rocovery by John Kimelman, Barron's Online

Bank executives and investors can breathe a sigh of relief: Jim Rogers has covered the short positions on financial stocks he put in place ahead of last year's massive meltdown.

But just because this influential investor isn't betting that big banks will fall much further doesn't mean he's confident they will stage a lasting rally either. He feels similarly about U.S. stocks in general.

"I am skeptical about the rally, and the world economy for the next year or two or three," he says. "But if stocks go down, I can make money with commodities."

Rogers, now 66, gained fame as George Soros' hedge-fund partner in the 1970s and 1980s. After retiring from professional money manager in his late 30s, the Alabama native tooled around Europe, Asia, Africa, and Latin America visiting emerging markets, one by one. His resulting book, Investment Biker, helped to popularize emerging market investing at the outset of a bull market for the sector.

He also helped to popularize commodity investing, which for decades was the province of niche investors. In the 1990s, he developed commodity indexes based on futures contracts that in recent years have been turned into exchange-traded funds available to all investors. His 2004 book, Hot Commodities, came ahead of a surge prices for energy, metals, and agriculture.

Since its inception in July 1998, the Rogers International Commodities Index has gained 158%, while the S&P 500 has fallen 23%. And that gain for the commodities index comes despite the fact that it's lost more than half of its value since last July. At these levels, Rogers has been a buyer.

These days, Rogers, now 66, is sticking close to home in Singapore with his wife, Paige Parker, and two small daughters. He's about to release his latest book, A Gift to My Children: A Father's Lessons for Life and Investing in which he encourages other people's children to travel widely and learn Mandarin so they can reap the rewards of China's economic boom.

Recently, Rogers talked to Barrons.com by phone from his Singapore home.

When you last did a lengthy interview with Barron's magazine a year ago you were lightening up on emerging markets investments. Well, you called that one right. But now that many of those markets have fallen from their highs of recent years, are you more optimistic?

No. I've sold all emerging markets stock except the ones in China. I bought more Chinese shares in October and November during the panic, but I have not bought China or any other stock markets including the U.S. since then. I'm not buying anything in China right now because the Chinese market ran up maybe 50% since last November.

It's been the strongest market in the world in the past six months and I don't like jumping into something that has been that run up. Still, I'm not thinking of selling these stocks either. I think if it goes down I'll buy more. I think you will find that it's the single strongest market in the world since last fall.

In your latest book, you talk of China as the great investment opportunity of the 21st century, just as the U.S. was in the 20th century. What percentage of a typical American investor's portfolio should be in China?

If they can't even find China on a map, I don't think they should have anything in China. They should know something about China before they invest there. If they have the same convictions that I do then they should probably have a lot. If you asked me that question in 1909 about the U.S. stock market, I would have said to put 100% of your money in the U.S.

Might it make sense to have a greater weighting in a diversified mix of Chinese stocks than in U.S. stocks?

Well yes. Just as in 1909, if you were German or Chinese, you should have had the largest percentage of your money in the United States. The idea of investing is to make money, not to have some sort of political agenda.

That being said, you currently think Chinese stocks are bid-up now, so you're not buying at these levels. So what have you been buying lately?

I have been buying commodities through the Rogers commodity indexes I developed because my lawyer won't let me buy individual commodities. I recently bought the all four Rogers indexes, the Elements Rogers International Commodities Index (ticker:RJI) as well as the three specialty indexes, the International Metals (RJZ), the International Energy (RJN), and the International Agriculture (RJA.)

That's how I invest in commodities and that's what I bought last week. I have been buying these shares since last fall and up to last week.

Though you got out of emerging markets last year before they fell hard, you seemed be caught by surprise by the fall-off in commodity prices last year. Is that right?

Yes, I was surprised. I did not expect commodities to go down that much and in retrospect it was a period of forced liquidation for many (professional) investors. You know AIG went bankrupt, which was huge in commodities. Lehman Brothers was big in commodities.

But at least I was shorting the investment banks at the time and other financials such as Citigroup and Fannie Mae. So I was hedged by being long commodities and short the other things such as financials and as you know most of them were down from 80% to 100%, so I more than made up on my shorts than I lost on my longs.

So thank God for (the stock decline in) Citigroup and thank God (for the decline) in Fannie Mae.

Now despite the recent stock-market rally that started in March, many U.S. stocks are trading well off their 2007 highs. How come you see no value to this market?

I am not buying U.S. companies mainly because I think we may have seen a bottom but I don't think we have seen the bottom. I am skeptical about the rally, the world economy for the next year or two or three. But if stocks go down, I can make money with commodities. In the 1970s, commodities went through the roof even though stocks were a disaster. In the 1930s, commodities rallied first and went up the most long before stocks pulled it together.

Can you summarize the reasons for your bullishness about commodities?

It depends on the supply and demand. And we have had a dearth of supply. Nobody has invested in productive capacity for 25 or 30 years now. The inventories of food are the lowest they have been in 50 years and you have a shortage of farmers even right now because most farmers are old men because it has been such a horrible business for 30 years.

And as for metals, nobody can get a loan to open a mine as you know. Who is going to give you money to open a zinc mine? It takes at least 10 years to open a mine so it's going to be 15 or 20 years before we see new mines come on. Nobody has been opening mines for 30 years and they are not going to.

And in the meantime reserves are declining. As for oil, the International Energy Agency came out recently with a study showing that oil reserves worldwide were declining at the rate of 6% or 7% a year.

That does not mean that if suddenly the U.S. goes bankrupt that everything won't collapse in price. But I would rather be in commodities because it's the only thing I know where the fundamentals are improving.

They are not improving for Citibank or General Motors but the supply situation in commodities is such that when demand comes back, then commodities are going to be the best place to be in my view.

What do you think of bonds?

I am anticipating shorting bonds, the U.S. long bond. It's about the only real bubble around that I can see right now -- other than the U.S. dollar. I am not shorting bonds at this moment because I've shorted plenty of bubbles in my day, and I have learned that you better wait because they go up higher than any rational person can anticipate. But my plan is to short the long bond in the U.S. sometime in the foreseeable future.

I've read that you think the penchant of the last two presidential administrations for bailing out failing U.S. companies is a big mistake and will contribute to prolonging this recession. You argue that it's best to let these companies all go bankrupt. How bad can the economy get?

Yes, politicians are making mistakes. In Japan, the problem has lasted for 19 years. I hope that it doesn't last 19 years in the U.S. The approach that works is to let them (U.S. banks and automakers) collapse and clean out the system.

The idea that phony accounting is the solution (through changes in mark-to-market rules) is ludicrous. And the idea that a debt problem and an excessive spending problem can be cured with more debt and more spending is ludicrous.

It's laughable on its face, but politicians think they've got to do something. Unfortunately, they are doing the wrong things and they are going to make it worse.

Thanks for your time.

Source.

Mall owner General Growth Properties Inc. sought bankruptcy protection early Thursday, April 16, 2009, in one of the largest real-estate failures in U.S. history, capping a precarious, months-long effort to juggle the crushing $27 billion debt load it shouldered in past acquisition sprees.

The long-anticipated Chapter 11 filing might wipe out what remains of the Chicago company's stock, but it won't result in mall closures. Many analysts suspect General Growth will survive a lengthy bankruptcy intact, but perhaps smaller after selling properties, without resorting to liquidation. General Growth, which owns and manages more than 200 malls, is the second-largest U.S. mall owner by number of properties behind Simon Property Group Inc.

General Growth's board voted Wednesday, April 15, to make the filing in U.S. Bankruptcy Court in New York after efforts to piece together a plan for an out-of-court restructuring with a growing list of creditors failed to gain traction, according to people familiar with the talks.

The filing includes General Growth, its Rouse Co. subsidiary and most of its malls. It doesn't include General Growth's management company or joint-venture holdings. All told, the filing covers roughly $24 billion of debt, these people say. A General Growth spokesman didn't immediately return messages seeking comment.

What finally forced the bankruptcy filing after months of payment-deadline extensions was General Growth's failure to secure a deal with holders of $2.25 billion of its bonds and other lenders to abstain from demanding immediate payment while the company tried to restructure its balance sheet outside of bankruptcy.

Several holders of past-due bonds notified the company this week that they intended to sue for payment. Meanwhile, additional debts came due on an almost weekly basis.

General Growth has since November negotiated with its lenders for reprieves, sometimes ending up at odds with the likes of Citigroup Inc., Deutsche Bank AG and Goldman Sachs Group and occasionally going for weeks at a time with debts that were past due but not called for payment.

The bankruptcy will have far-reaching implications for the mall industry, including putting pressure on the declining property values of U.S. malls, and mall mortgages, if General Growth dumps property. It also could consolidate power in the mall industry if major players like Simon Property, Westfield Group and Taubman Centers Inc. can come up with the capital to pick up choice pieces.

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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.

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Since JPMorgan Chase has sailed through the credit crisis, while famous Wall Street houses have foundered all around it, the reputation of Jamie Dimon, JPMorgan's chief executive, has soared to new heights.

In The House of Dimon, Patricia Crisafulli seems determined to make it soar even higher. She describes Mr. Dimon as "skilled," "gifted," "driven," a "talent magnet" and a "Dimon in the rough." And that's just for starters. She quotes others who describe him as "interesting and impressive," "performance-oriented" and the hardest worker in his company.

But just because praise is fulsome doesn't make it untrue. And whether or not we're seeing the whole picture in "The House of Dimon," anyone who reads Ms. Crisafulli's fiduciary love letter will take away some valuable lessons in running a bank or, for that matter, a business.

How has giant JPMorgan Chase weathered the financial storm while giant Citigroup was overwhelmed by it? The simple answer, to judge by Ms. Crisafulli's book, is that Morgan has been run by a seven-day-a-week number-cruncher who interrogates managers about the risk exposures in individual transactions. Citi, meanwhile, sailed into the howling winds with a lawyer on the bridge.

The master, commander and lawyer atop Citigroup, CEO Charles Prince, missed the signals on the deteriorating housing market and allowed risks to pile up in off-balance-sheet structured investment vehicles, SIVs. He was forced out of Citi in 2007.

A year before, Mr. Dimon's JPMorgan, he had taken over as CEO in 2005, had begun aggressively reducing its exposure to subprime mortgages after Mr. Dimon and others at the bank saw rising default rates at other, less-careful lenders. And Morgan had no use for SIVs.

Tragically for Citi shareholders and the taxpayers who have been forced to invest alongside them, Mr. Dimon might have helped Citi avert such wreckage. In 1986, Mr. Dimon, Sandy Weill and a group of colleagues from New York banking, calling themselves "refugees from bureaucracy," got started with a struggling consumer finance company called Commercial Credit.

They turned it around and set out on an acquisition spree, with Mr. Dimon responsible for integrating the new firms and whipping them into shape. The result was a dynamic cluster of financial companies that eventually merged with Citibank to create Citigroup. Mr. Dimon worked alongside Mr. Weill at Citi until he was forced out of the company in 1998.

Such valuable experience made Mr. Dimon "destined" for his job at JPMorgan, according to Ms. Crisafulli, and she may be right. In her telling, the Morgan chief is exactly what shareholders need and want. He spends 80 hours a week examining and refining the operations of the firm, in constant communication with subordinates in various units.

Usually he is asking for numbers, and when he doesn't get them, he writes down the information he is owed on a piece of paper that remains folded in his pocket. When he gets the data he is waiting for, he crosses the item off his list. A former colleague describes the executive culture that Mr. Dimon learned while working for Mr. Weill: "If there is a problem and you tell me, it's our problem. If there is a problem and you don't tell me, it's your problem and you don't want to have a problem!"

One problem Mr. Dimon does not appear to have is a weakness for $1,400 wastebaskets and $87,000 area rugs. When he took over as CEO of Bank One in 2000, he took a relatively modest office among the senior managers and canceled a planned renovation of the executive floor. His cost-cutting was so thorough that he personally called vendors to reduce the firm's phone bill.

When competitive pressures convinced him that bank branches needed to be open longer hours, he was told that longer days would hurt employee morale. Mr. Dimon tells Ms. Crisafulli that he responded by saying, "I don't give a sh -- about employee morale." He quickly adds: "I didn't mean that. What I meant was . . . you've got to compete. Never stop doing the right thing for the business to save a few bucks. Working hard and winning in the marketplace boosts employee morale."

Mr. Dimon also cut executive pay that wasn't tied to performance. To help get decisions made more quickly, he shrank Bank One's board from 22 members to 14. Most important, he sought to prepare the institution for "a rainy day" in credit markets.

Mr. Dimon tells Ms. Crisafulli that when he took over at Bank One, at the height of the dot-com bubble, he was "terrified by the peak of the market." He set about increasing the bank's reserves for loan losses while raising its lending standards. This healthy sense of fear was in short supply nearly everywhere, to say the least, during the recent housing bubble.

In 2004, Bank One merged with JPMorgan Chase. Upon becoming president of the combined entity, Mr. Dimon cut pay, country-club memberships, first-class airline tickets and generous outsourcing contracts, and he cut jobs as well.

When he became CEO the following year, he continued to make sure that the company was prepared for the worst. Thus when government officials came calling in 2008, looking to save an ailing Bear Stearns, Mr. Dimon was in a strong position.

He succeeded in buying Bear for $1.2 billion while the Fed put taxpayers on the hook for $29 billion of Bear's questionable assets. Mr. Dimon was also able to snap up some of Washington Mutual's assets on the cheap when it failed last fall and was taken over by the FDIC.

If Ms. Crisafulli's portrait in "The House of Dimon" is even close to accurate, we appear to have, in Jamie Dimon, a man at the top of a mega-bank who seems never to have grown comfortable with the idea that his firm was too big to fail. And that may be why it didn't.

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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.

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Lee Neibart is the 58 year old CEO of real estate investment firm AREA Property Partners. The New York Observer sat down with Mr. Neibart to discuss the current commerical real estate environment. Mr. Neibart believes that multifamily is the best business to be in at the moment.

Question: One of the biggest things bandied about right now is that there’s capital on the sidelines, waiting to invest. Is that true?

Mr. Neibart: There certainly is capital on the sidelines. We have capital on the sidelines. The interesting question is how much capital really is there on the sidelines because everything’s measured against the liquidity of these investors. Some have lots of liquidity when the stock market’s 14,000; some have less liquidity when the stock market’s 7,000.

So there’s no real measure of the amount of liquidity on the sidelines. But there certainly is a lot; my guess is, it’s not as much as people think it is.

Why do they think it’s out there, then?

Because you hear big numbers raised. You hear that this fund raised that amount of money and this fund raised that amount of money. But if you really do the hard work, and add up the total amount of the actual commitment sizes, it’s probably not the range that people think it is.

When does the capital dive in? A lot of people say 2009’s a write-off.

The difference in this market from the previous down market is people are starting to question tenants. Before, it was an issue of mortgages coming due; in the early 1990s, they were rolled over and extended, but they were backed by very good and solid tenants.

And the problems that are occurring now with tenants such as AIG and Citibank, and the health and welfare of these tenants, against the continued bankruptcy of some retailers, are some of the major reasons why the capital is on the sidelines. People just have to see stability in tenants’ ability to make their rent payments.

That might be a long while.

That may be a long while, but there are lots of examples of people who dove in in 2008, when the prices were 20 percent lower than they were in 2006; and they, in fact, made a mistake by doing so because those prices have fallen further.

What kinds of investors are on the sidelines?

It runs the [gamut] from pension funds and sovereign wealth funds to private-equity funds and private investors. No one wants to dive in unless they can start to understand what backs the cash flow or the rents that they’re receiving in these buildings. And those diagnostics are going and analyzing and understanding [tenants’] ability to pay rents. That’s what’s going on now.

Your firm was involved in the development of this building, Time Warner Center.

We were the co-developer with Related.

Could a building of this size and grandeur and location happen today?

No. Projects like this are definitely on the shelf, I would guess, at least for another five years and maybe even longer.

What sorts of conditions would need to arise to allow them to happen?

Mixed-use projects like this, you’d have to be able to sell condominiums that exceeded the cost of building them. We were lucky enough to have Time Warner as our anchor; so you’d have to find a major user like that who, in fact, needed 900,000 or a million square feet of space. And, in fact, the quality of the retail tenants has to duplicate itself, and be available to expand into other mixed-use projects like this.

What about commercial development in general?

Very, very few commercial developments are happening. You see the postponement of major projects in midtown Manhattan, and I would expect those to continue to be postponed. No one will be able to get what they call a ‘spec loan’ or a ‘spec construction loan’ without some type of pre-leasing. Even today, having a building 50 percent pre-leased to a major tenant may not be able to get you the financing to build the building.

What about the CMBS markets? What opens them up?

I think what opens them up is basically that the buyers of these securities feel comfortable that they are investing in monies that have the proper loan-to-value ratio. No one’s going to jump in if there’s this continued uncertainty.

Should the ratings agencies be trusted when it comes to these securities?

I think that, as part of the total re-analyzing of the entire CMBS process, all aspects of this will be reexamined.

How long will that take? I guess I’m asking about a sort of return to normalcy.

I think the return to normalcy and the absence of exotic and different types of securities, I think we’ve quickly reached that point. Investors, lenders will go back to the way they used to do business in terms of lower leverage and more coverage on the loans, and it’ll be just a return to safety across the board.

You’ve been around for a while. How would you compare the boom market to previous eras?

This was, by far, the craziest three- to four-year period that I’ve ever seen. I started in 1974—we never saw cap rates reach these low levels of rates of return; we never saw situations where the rates of return were less than the interest costs on the mortgage. So, sometimes you have to be careful what you wish for because what we created was something that was unrealistic, not sustainable, and, in fact, has caused great pain.

What’s AREA working on right now?

AREA is working on about four different types of funds. We’ve raised a new opportunity fund which will be investing in distressed assets, distressed loans; so we’re actively working on that in the U.S. We also have a value-added fund that works on properties that are half-leased and in need of repositioning. We have an urban fund which works on rental apartments in major cities, improving them for renters. And we also have a major European fund that is involved with opportunistic and with value-added investing.

And what’s your general opinion of the federal stimulus and its effects on commercial investment?

I haven’t seen any real evidence of there being any loosening up of credit for lending institutions to lend money for commercial real estate. We’ve not seen it.

Wasn’t that supposed to have happened as part of it?

You would hope so.

Do you expect it to happen?

I would expect that it may happen, and it’s going to happen much slower than we think; because even the size of the stimulus, given the amount of mortgages out there, can only do so much.

You went to the University of Wisconsin, correct?

I did.

So did my dentist. And he was saying to me the other week that what’s going to happen is stuff is going to cost what it’s supposed to cost. Do you think, during the boom, certain commercial assets were just simply inflated? If so, what caused that? And will the assets’ prices come down more to in line with the market?

The assets will certainly come back to a much lower level, and I think a lot of that will strictly be a reflection of what tenants can pay. So, law firms, accounting firms, public-relations firms, major corporations, banks will only be able to afford a certain amount of rent. That will then dictate the value of the building. If, in fact, the rents get too high, they’ll move out.

What is the most desirable commercial real estate investment right now?

At the risk of my competitors hearing this—they know it already—we feel the multifamily is the best business now to be in; because the values have come down and they’re still very well leased. So, on a risk-adjusted basis, we think multifamily represents the best bet today.

Source.