The New York Times reports that S&P held an investment conference yesterday at which leading bankers complained about a rule that requires them to report accurately the value of securities on their books that nobody else wants to own. They complain because this reporting has resulted in $300 billion of losses so far. That cuts into bank earnings and their own bonuses.
Banks naturally don't like having to mark down assets simply because the markets have frozen up. Bob Traficanti, head of accounting policy and deputy comptroller at Citigroup Inc. (NYSE: C), suggested that some assets could be marked as if they would be held until they matured. But this ignores economic reality. If nobody wants to buy an asset, then it has no price. Therefore, for those free marketeers out on Wall Street, the assets have no value at all.
So, as I posted, banks are left trying to make up a value for the assets using computer models on complex spreadsheets. Not surprisingly, different banks use different spreadsheets to value the same kinds of assets. One of the conference participants suggested that regulators should allow banks to get together and compare spreadsheets so they can become more consistent.
Citigroup Inc. (NYSE: C) is unmanageable. That's my conclusion after trying to understand its latest quarterly report. The concept behind this 100-armed corporate octopus is that people like to buy all their financial services in one place and therefore it makes sense to be able to sell them a full line of products from stocks to bank accounts. But I suspect that customers don't want all their financial eggs in one basket, so the concept is fatally flawed.
Moreover, its financial performance reveals that Citi is a complex mess whose many different businesses do not diversify its earnings streams. According to its quarterly report, Citi lost $5.1 billion. Most of the losses came from its Securities and Banking (-$6.4 billion), Alternative Investments (-$509 million), and U.S. Consumer (-$476 million) units. Two bright spots were $1.3 billion in earnings from International Consumer and $732 million in Transaction Services.
But wait, there's more in its huge, risky portfolio. Citi has $40 trillion in derivatives -- enormous bets on interest rates and currencies. And it has $1.2 trillion worth of off-balance sheet entities (remember Enron?). Nobody really knows what these are worth or how much they'll cost. And that doesn't even get us to the $262 billion in Level 3 assets -- illiquid, difficult-to-value securities -- which are 2.1 times Citi's $128 billion in capital. That's a pretty thin cushion for future write-downs.
Big French bank Crédit Agricole is planning to raise over $9 billion after huge losses in its investment bank, which made big bets on subprime related debt, resulted in a big write-down and lower profit.
According toThe Wall Street Journal, "Crédit Agricole said it will launch an action plan to refocus the corporate and investment banking division on its core activities and to reduce risk." It may be a little late for that. Much of the damage is already done.
What it is not too late for is the realization that with each new round of bank earnings, the mortgage securities problem is not going away. Several large American banks say they see some light at the end of the tunnel. But if the US mortgage market continues to be marked by defaults and falling housing prices, that point of view may be deeply flawed.
Another point of view is that banks like Crédit Agricole and Citigroup (NYSE: C) are raising money to make up for losses in the past. The more ominous look at the trouble is that they are bringing in capital in anticipation of future problems.
Douglas A. McIntyre is an editor at 247wallst.com.
Just a few weeks ago, it looked like the $19.4 billion buyout of Clear Channel Communications (NYSE: CCU) was dead. But in the deal market, things can change quickly.
Just today, the New York Supreme Court said there will be a stay on the litigation on the deal. According to CNBC, it looks like the parties are engaged in heavy settlement talk.
No doubt, a trial could be problematic for the banks that are on the hook for $22 billion in debt financing. These banks include: Citigroup (NYSE: C), Credit Suisse (NYSE: CS), Morgan Stanley (NYSE: MS), Royal Bank of Scotland, Deutsche Bank AG and Wachovia (NYSE: WB).
Now, they may be willing to fund the deal.
Why? Well, it looks like the debt markets are improving and the major banks have worked hard to boost their balance sheets.
In other words, the US credit crunch may be thawing. If so, we may see some more dealmaking – which would be a relief for Wall Street banks eager to get some juicy fees.
So far in today's trading, Clear Channel's shares are up 9.5%.
AIG (NYSE: AIG) is a sinking ship, at least as far as the stock market is concerned. It posted a loss of close to $8 billion last quarter and said it would have to raise over $12 billion. Not a healthy picture for one of the world's largest insurance companies.
Now, one of AIG's key divisions would like to go out on its own. According toThe Wall Street Journal, "Officials at powerhouse International Lease Finance Corp. have grown increasingly concerned that the company will be weakened by its parent's financial woes." ILFC, as the company is known, is the largest aircraft leasing company in the world. If AIG has a drop in its credit rating, ILFC will find it more difficult, and more expensive, to raise money.
The ILFC raises, once again, the issue of whether financial services firms put together over the last two decades benefit shareholders at all. What does the aircraft leasing business have to do with insurance? Across town in NY, the board at Citigroup (NYSE: C) is probably asking what relationship Smith Barney has to the bank's international consumer service business.
The more quarterly results that come out from financial giants the clearer it is that some very good operations are trapped inside troubled parents. Why wouldn't shareholders want a piece of the action by having these businesses spun out? The answer is they do want a piece of the success, and there is no reason they should not get it.
Douglas A. McIntyre is an editor at 247wallst.com and author of the Ten Stocks Under $10 letter.
TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.
AIG's (NYSE: AIG) (Cramer's Take) making everyone's life difficult today. That's in part because AIG had been the biggest proponent of "super senior," meaning they repeatedly said that their collateralized debt obligation (CDO) exposure was of the kind that was intelligent, measured and thoughtful. They talked endlessly about how their due diligence made the difference and that unlike all of the other buyers, they kicked the tires three times and never bought the plain ol' CDOs. Then they brought in professors from Wharton to be sure that even if all heck broke loose and they were being too aggressive, they would be hedged.
They also were the first to give you the percentages of how much could go bad and that even in the worst-case scenario, they were overcapitalized. And, most important, they were insurers, no need to mark to market, they can play it all out.
Plus, they touted their own struggles. They made the point that because of the turmoil at the top, they hadn't bought any bad stuff and stopped buying residential real estate products after 2005. What they did buy -- they assured us in that big teach-in dog-and-pony show in December -- was the extra-special nature of their particular buys and that, unlike everyone else, risk officers scrutinized every single piece of paper that went into their super senior insurance, meaning only the top-top part of a CDO-squared, the part where everything had to default ahead of it; they made a point of how impossible that would be.
Gas Prices Rattle Americans Record high gas prices are prompting Americans to drive less for the first time in nearly three decades, squeezing family budgets and causing major shifts in driving habits, federal data and a USA TODAY/Gallup Poll show. Gas prices rattle Americans - USATODAY.com
Reuters reports that Citigroup (NYSE: C) is poised to announce today the sale of $400 billion worth of assets -- that's 18% of the total. We'll need to wait to find out which assets it plans to sell and how much of a loss (or profit) Citi will take when it sells them. But the New York Times reports the company's deciding based on industry growth trends, market positions, geographic growth rates, business plans and financial results.
I worked for a global bank during a credit contraction and part of my job was to figure out which assets to sell. From that experience, I know that Citi's challenge is to find assets that don't fit with Citi but are worth more to another owner. That's because often the assets that make the most sense to sell strategically are the ones that nobody else wants to own. And the ones that make the most sense to keep are the ones that could generate the biggest profit, if sold. Citi's challenge is to sell the $400 billion worth of assets that make strategic sense to sell and will fetch an attractive price. In today's market, that is a challenge.
So what Citi assets could be on the block? Reuters notes that Citi's U.S. student loan business may make sense to sell, after recent legislative changes and turmoil in the securitization market have made it less profitable. Citi may sell Primerica, a consumer sales network for life insurance and investments. And Citi should sell assets on its trading books, which have contributed to much of the $45 billion write-downs that Citi has taken so far.
The Wall Street Journal reported that, in an attempt to toughen its regulation standards, SEC chairman Christopher Cox said earlier this week the agency would push Wall Street investment houses will have to reduce borrowing and rely less on short-term financing.
As part of plans to reduce costs and restore profit growth, people close to the situation said that Citigroup Incorporated (NYSE: C) is likely to today identify up to $400B in non-core assets that could be sold. Additionally, the Financial Times reported that Citigroup CEO Vikram Pandit will confirm his pledge to cut the bank's cost base by about 20% at a meeting with analysts today. Sources familiar with the matter believe Pandit will dismiss calls for a break-up of the company.
Stock futures were once again lower this morning, setting up stocks for a sharp decline after AIG reported a big $7.8 billion loss and oil set a record above $125 a barrel. With credit crunch concerns resurfacing and inflation worries on investors' minds, futures point to heavy losses today.
On Thursday, U.S. stocks ended higher despite another surge in oil prices following better-than-expected April sales reports from many retailers including Wal-Mart and Costco. The Dow industrials ended 52 points, or 0.41%, higher, the S&P 500 rose 5 points, or 0.37% and the Nasdaq Composite rose 12 points, or 0.52%.
Without much economic news set for today except for the March U.S. trade gap, investors will focus on AIG's results and their implication on the financial and credit market as well as on oil prices.
American International Group (NYSE: AIG) reported a quarterly $7.8 billion loss after the market close Thursday. AIG also said it will raise $12.5 billion in the coming months as its capital base has deteriorated due to the crisis in the credit markets. Shares of AIG have declined over 7.2% in premarket trading, but the real affect of its results can seen across the financials as fears have resurfaced once again about the impact of the credit crunch on financial firms.
As if that was not enough, adding to the negative sentiment is oil. Crude oil for June delivery climbed as much as $1.43, or 1.3%, to $125.12 a barrel. While prices have retreated somewhat, they remained near $125 at around $124.8 a barrel. For the week, oil has risen 7.4%, making Wall Street nervous about inflation. Mind you, 55%of 372 petroleum industry executives surveyed by KPMG LLP said they think the price of a barrel of crude will drop below $100 by the end of the year.
Citigroup (NYSE: C) is recently down 21 cents to $24.27. C will host an onsite Citi Investor/Analyst Day on May 9. Deutsche Bank says, "We are maintaining our Sell rating. We do not expect a grand strategic scheme." C call option volume of 116,539 contracts compares to put volume of 49,498 contracts. C May 25 straddle is priced at $1.47. C June option implied volatility of 40 is near its 26-week average according to Track Data, suggesting non-directional price risk.
Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
TheStreet.com's Jim Cramer says the exchange rate plus massive undervaluations make the great brands prime targets.
There's always been a groupthink in Europe about currencies. The companies that want to buy American companies have, at times, seemed to care more about the currency, or at least not buying a company in a country whose currency is in decline, than they care about the actual target.
That's what it looks like now that a large German company and now a large Italian company have decided to start splurging. It is no coincidence that Deutsche Tel (NYSE: DT) (Cramer's Take) and Finmeccanica are exploring Sprint (NYSE: S) (Cramer's Take) and DRS (NYSE: DRS) (Cramer's Take). These companies are selling for something like 40% off for those bearing euros, and neither potential acquirer has debt problems or subprime issues, so the deals don't have big borrowing problems.
That's what I am thinking about when I see the better-than-expected figures today from Unilever (NYSE: UL) (Cramer's Take) and the other day from Nestle. These companies are part of that same groupthink. They are looking, no doubt, at a Heinz (NYSE: HNZ) (Cramer's Take) and thinking, "Wait, that's about a $10 billion company that's a global leader."
According to senior industry sources, the Financial Times reported that the Ministry of Defense could ask General Dynamics Corporation (NYSE: GD) to provide the vehicle design for a new generation of armored vehicles for the army. It is unclear whether General Dynamics, in competition with Nexter and Artec, will be awarded the contract or will be named the preferred bidder.
Following the collapse in March of The Bear Stearns Companies Inc (NYSE: BSC), the Financial Times also reported that the SEC will soon require Wall Street banks to publicly disclose more details about liquidity and capital positions. Cox also urged lawmakers to pass legislation that would allow the SEC, or another regulator, the "explicit mandate to supervise" investment banks.
OTHER PAPERS:
According to the New York Times, Citigroup Incorporated (NYSE: C) will move senior investment banker Alberto Verme to Dubai by the end of the month in the hopes of establishing a stronger foothold in the region, a crucial area for global banks.
The New York Times also reported that several large oil companies, including BP Plc (NYSE: BP), ConocoPhillips (NYSE: COP) and Chevron Corporation (NYSE: CVX), agreed to pay nearly $423M in cash in order to settle a lawsuit that alleged water contamination from methyl tertiary butyl ether, a gasoline additive. Under the terms of the deal, the oil giants also agreed to pay 70% of the future cleanup costs for the next 30 years. Exxon Mobil Corporation (NYSE: XOM) and several other companies named in the suit did not agree to the deal.
It was not enough that Citigroup (NYSE: C)'s CEO Vikram Pandit sold the bank a hedge fund business which lost most of it value, now he is being accused of being too slow in coming to decisions and making it difficult to turn the bank around. Investors can always hope he will be pushed out. It would probably add $5 to Citi's share price.
According toThe Wall Street Journal, "Even executives who praise his cautious, deliberative approach express concern Mr. Pandit is taking too long to make decisions." Add to that the concern that Pandit has not disclosed his longer-term plan for the business.
The attacks on Pandit appear to be lead by the founder of the modern Citi, Sandy Weill. The deal-maker created the complex company and would probably be best to keep his thoughts to himself. He bears at least as much responsibility for Citi's problems as his hand-picked successor Chuck Prince.
None of that lets Pandit off the hook. He has made no real attempt to streamline the company by selling off any major assets. Is Citi a stock broker though Smith Barney, an investment bank, a consumer bank, or a corporate lender? As Warren Buffett recently pointed out, some large financial companies have become too complex to run. Pandit needs to sell-off some assets and focus the firm on two or three core operations.
Right now, it looks like Citi may have three bad CEOs in row.
Douglas A. McIntyre is an editor at 247wallst.com.
Three years into its $35B takeover of Nextel, the Wall Street Journal reported that Sprint Nextel Corporation (NYSE: S) is considering selling or spinning off the troubled unit. Few details were available and a deal is not imminent.
The Wall Street Journal also reported that pressure is mounting on Citigroup Incorporated's (NYSE: C) CEO Vikram Pandit to show that he can turn around the troubled bank. Executives believe Pandit, who has been praised for his cautious and deliberate approach, has been taking "too long" to make crucial decisions.
WEB SITES:
According to a person close to Google Inc (NASDAQ: GOOG), Reuters reported that Google and Yahoo! Inc (NASDAQ: YHOO) are still "hammering out the intricacies" of a potential advertising and search deal. The source said no final agreement has been reached yet.
ABC News learned that if Rupert Murdoch does not testify in a lawsuit accusing one of his companies of "corporate espionage," it may cost News Corporation (NYSE: NWS) hundreds of millions of dollars, a federal judge overseeing the trial said. News Corp has denied any wrongdoing, and lawyers maintain Murdoch had no direct knowledge of the unit's alleged hacking into EchoStar Corporation's (NASDAQ: SATS)/DISH Network Corporation's (NASDAQ: DISH) security code and posting it on the Internet.
The New York Times reports that S&P held an investment conference yesterday at which leading bankers complained about a rule that requires them to report accurately the value of securities on their books that nobody else wants to own. They complain because this reporting has resulted in $300 billion of losses so far. That cuts into bank earnings and their own bonuses.
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Stock futures were once again lower this morning, setting up stocks for a sharp decline after AIG reported a big $7.8 billion loss and oil set a record above $125 a barrel. With credit crunch concerns resurfacing and inflation worries on investors' minds, futures point to heavy losses today.
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Comfort Zone Investing: One thriving area of real estate: Apartments
Just how high will U.S. gasoline prices rise?
Nordstrom and Kohl's post smaller-than-expected Q1 profit declines
