Deals wrap: Irish banks soon to march to new drummer
Ireland’s top three banks will soon be answering to a new boss: the Irish government. Ireland is set to take a majority stake in top lender Bank of Ireland as part of a massive international bailout that could leave the state with effective control of the country’s top three banks.
The state’s ownership of Bank of Ireland could rise to near 80 percent from 36 percent now under the EU/IMF-funded bailout, put at up to 85 billion euros ($114 billion), and Allied Irish Bank could join Anglo Irish Bank in being fully nationalized. Both Bank of Ireland and Allied Irish Bank have lost about 40 percent of their value this week as shares plunged on capitalization fears.
But perhaps private investors should not be so quick to flee Ireland – at least that’s the message Wall Street Journal sends to brave investors in a piece that lays out five ways to bet on Ireland now. The list implies there could be money to be made amidst all the chaos, drawing parallels between the current Irish predicament and the similar one the “tiger” economies of Asia faced in 1998.
Meanwhile, South Korea, once counted among the so-called “tigers”, saw its biggest banking acquisition deal ever on Wednesday. Hana Financial Group, a Korean-based financial holding company, said it will buy a 51 percent stake in Korea Exchange Bank for up to $4.1 billion cash, seeking to shut the door on rival bidder ANZ.
Elsewhere in Asia, China’s Xinmao Group moved to dispel doubts over its $1.3 billion offer for Dutch cable maker Draka, saying it had backing from a Chinese bank for its proposed takeover. A recent Economist article points out that Chinese buyers have made up a tenth of cross-border deals by value this year.
While the Chinese are looking beyond their own borders, the United States seems to be increasingly turning its view inward as a massive three-year investigation of insider trading on Wall Street continues to expand. Federal agents arrested network executive Don Ching Trang Chu on Wednesday as part of the ever-widening probe. The New York Times has published a copy of the government’s complaint against Chu.
from Breakingviews:
Uncle Sam’s AIG exit likely to be drawn out
There's no quick way for the U.S. government to exit American International Group <AIG.N>. Converting $49 billion of preferred stock to common shares and selling them would, like the government's exit from Citigroup <C.N>, take a while. And that's assuming other share sales, needed for separate repayments relating to AIG, go smoothly.
As of June 30, AIG owed the government just over $100 billion -- though a further $4 billion has since been repaid. AIG has also made progress offloading assets. Big examples include the IPO of AIA, the Asian unit currently expected to debut on the Hong Kong market in the next month or so, and the $15.5 billion sale to MetLife <MET.N> of American Life Insurance, or Alico, which is winding its way towards closing. The New York Fed converted debt into preferred shares in these entities worth $16 billion and $9 billion, respectively, and the deals will help pay that off.
Back at AIG itself, there are around $49 billion of preferred shares owned by the Treasury. The Citi example shows how that block of prefs might be swapped into common equity and then sold, over time. In the Citi case, the government is turning a profit on its shares, potentially making the idea interesting for AIG as well.
But it looks like selling the government's Citi stake -- initially nearly 30 percent -- will take longer than the anticipated nine months from March. Offloading the Treasury's stake in AIG could take far longer, because the government already effectively owns 80 percent of the company, and converting the prefs could take that nearer to 90 percent.
Unfortunately, that's not all. A planned sale of AIA to the UK's Prudential <PRU.L> -- abandoned in June -- would have brought in a big slug of cash, but an IPO probably won't raise enough to pay back the New York Fed's preferred interest in AIA right away, let alone give AIG any proceeds to apply to its own obligations. Meanwhile the Alico sale will come with only $6.8 billion of cash. So the government will depend on further sales of AIA and MetLife equity interests to get its money back.
And there's more. Ahead of all that, at least in strict credit priority, is another $20 billion-odd, including accrued interest, that AIG still owes the New York Fed under a credit facility. The insurer might at some point be able to refinance that. But put the pieces together, and taxpayers could wait a long time before enough shares in enough different companies are sold for them to be made whole.
AIG’s mysterious Schedule A finally revealed
The heavily-redacted regulatory filing that spells out the details of the New York Federal Reserve’s controversial bailout of American International Group is a secret no more.
Reuters has obtained a copy of the five-page document the giant insurer and the New York Fed had asked the Securities and Exchange Commission to keep confidential. The effort by the New York Fed to keep the document under wraps has sparked a furor on Capitol Hill and was the subject of a hearing on Wednesday by House Committee on Oversight and Government Reform.
The unredacted version of the “Schedule A – List of Derivative Transactions” fills out some of the missing pieces in the AIG bailout, in which an entity set-up by the New York Fed effectively funneled tens of millions of dollars to 16 big U.S. and Europeans banks that had bought credit default swaps from the insurer.
The unredacted version of the Schedule A enables some to identify all of the 178 mortgage-related securities, or collateralized debt obligations, that AIG wrote insurance-like protection on.
It’s been known for months that Goldman Sachs and Societe Generale were the two banks who recieved the most money in the dea because they had insured the most CDOs with AIG. But the new information enables traders, investors and the general public to see just which deals the banks had purchased insurance on.
The new information also reveals that of the 178 tranches of CDOs that AIG insured, some 14% were on deals issued after 2005. That’s critical because in December 2007, former AIG Financial Products head Joseph Cassano had said AIG largely got out of the CDS business by the end of 2005.
The newly disclosed information also reveals that Goldman not only bought a lot of CDS from AIG to protect itself; the Wall Street firm also originated a good number of the CDOs that were in SocGen’s portfolio. Some of the Goldman deals in SocGen’s portfolio that AIG had insured includes CDOs with names like Adirondack 2005, Putnam Structured Product CDO 2002 and Davis Square Funding IV.
Sorry, you did post link to sch. A.
This pyramid scheme should be treated as a felony.
GS, ML, and SocGen set this up knowing full well the consequences.
Taxpayer bailout just to pay their bonuses.
Ten years ago their were more people in law school than actual Lawyers.
Where are they now.
The law and the justice department are a joke. Inspiring criminals everywhere to do the same.
Haider’s heirs disown troubled Hypo bank
When the late Joerg Haider, the hard-right populist governor of the southern Austrian state of Carinthia, sold most of his government’s stake in Hypo Group Alpe Adria in 2007, he said, beaming: “Ladies and Gentlemen, Carinthia is rich.”
BayernLB, which like many other German landesbanken appears to have never met a toxic asset it didn’t like, had just paid 1.65 billion euros for a 50 percent stake in Hypo. Around half of that went into Haider’s government’s coffers.
True to his pork-barrel politics, Haider used the funds to, among other things, subsidise Carinthian teenagers’ driving licence fees, scrap kindergarten fees, and pay out cash to Carinthian families to “offset inflation” in 2008, conveniently timed shortly before an election.
This worked to cement Haider’s image as the generous leader looking after the man on the street. But since his death in a car crash last year, it shows that the basis of this policy was not sustainable. Hypo is now in urgent need of another year-end emergency capital injection of more than 1 billion euros, after it went cap in hand to the Austrian government and BayernLB for 1.6 billion euros last year already.
Hypo’s breakneck expansion in the former Yugoslavia is the main reason for its continued losses this year. Haider and his confidante, ex-CEO Wolfgang Kulterer, started and presided over this expansion, which let Hypo’s balance sheet balloon to more than four times what it was in 2002. (This is the same Kulterer who pleaded guilty last year of false accounting during his time as Hypo CEO.)
But Haider’s heirs in Carinthia, which still owns 12 percent of the bank, refuse to tap into the proceeds from the Hypo sale to help BayernLB prop up the bank’s balance sheet. They call for the Austrian federal government to step in.
Reflections on B of A’s rough year
One public-relations lesson for Bank of America <BAC.N> after a year of crisis and a pummelling in the court of public opinion: Don’t always listen to the lawyers. That’s the word from James Mahoney, director of communication and public policy at the country’s largest bank. B of A has taken a beating over everything from its pay scale and lending practices to the fees it charges consumers. It’s humbling for the institution that a year ago was the country’s “leading bank,” Mahoney told a trade conference sponsored by by Financial Research Corp of Boston. “Two words emerged: bonus and bailout. It’s been all downhill ever since.” He said the bank’s lawyers barred it from offering a single narrative on the decisions leading up to its takeover of the investment bank Merrill Lynch at the height of the financial crisis just over a year ago. The lawyers fretted that executives might stray from the script during any future depositions to investigators, Mahoney said. But that left B of A exposed to a lot of attacks and with no easy way to protect its flank. The lesson? “Don’t listen to lawyers if you’re trying too manage the public reaction.” Mahoney had a receptive audience for a rare peek under the hood at the bank’s rough year. While B of A sorts out its leadership with the pending departure of longtime chief executive Ken Lewis, Mahoney’s said the bank has taken more than its share of PR black eyes because of its size. “I think we really became the target of a lot of the anger that’s out there because (the bank) is a highly visible, convenient place to vent,” he said. (Reporting by Ross Kerber)
One thing, and one thing only, saves companies’ reputations during times of crisis: total honesty. Why no one seems ever to learn this simple and powerful lesson is absolutely beyond me, but there you have it.
Bank of America’s Chalice: Poison or Red Bull?
For months, as he endured hearings on Capitol Hill and fought off a series of lawsuits, Bank of America CEO Ken Lewis trudged through a post-apocalyptic financial landscape against a steady drumbeat of questions about his future. The deal he had called “the strategic opportunity of a lifetime” — his purchase/salvage of Merrill Lynch — had swung from an act of patriotism, keeping the American way of banking from utter ruin, to a scandal over Merrill losses and bonuses.
Perhaps he should have seen the writing on the walls of the vacant houses financed by Countrywide, the mortgage lender Lewis purchased/salvaged just six months before the Merrill deal. The two transactions may have been strategic gems, but they were laced with political poison as the economy floundered toward its dramatic deleveraging and taxpayers pumped $20 billion into Bank of America to fund the Merrill deal.
“It was only a matter of time,” Campbell Harvey, a professor at Duke University’s business school, told Jon Stempel. “There is too much collateral damage.” As Stempel reports, Lewis spent north of $130 billion on acquisitions, including FleetBoston Financial Corp, the credit card issuer MBNA Corp, LaSalle Bank Corp, Countrywide, Charles Schwab Corp’s U.S. Trust private banking unit, and Merrill. In buying Merrill, he added a giant investment bank to what was already the largest U.S. retail bank, credit card issuer and mortgage provider. (Wells Fargo & Co has since become No. 1 in mortgages.)
Lewis plans to be gone by the end of the year and leaves no immediate successor, so Bank of America has only a few months to figure out who to anoint. Though his demise is a cautionary tale, odds are good that the bank’s worst days are behind it. An incoming chief can blame Lewis for any ill-conceived agreements surrounding Merrill. More importantly, with economic recovery apparently at hand, Lewis’ deals of a lifetime have a better chance than ever of paying off.
If BofA can harvest 45 billion of operating profit per year post 2011 as Mr. Lewis suggests- these aquisitions of distressed brands could make Mr. Lewis one of the shrewdest dealmakers ever.
‘New GM’ Gets a Visit from a Shareholder
“Think about it. If you are a member of the union right now, you’re spending all your time negotiating about health care. You need to be spending some time negotiating about wages, but you can’t do it,” he said.
In fact, the UAW locked itself into a contract limiting wages and changes to health care, without the ability to negotiate with a threat of strike, until 2015. These stands were agreed to by the union at the prodding of the Obama administration, which demanded that union autoworkers accept lower wages — as a condition to the bailout that saved Lordstown — to match non-union workers at Toyota plants in Kentucky and Honda plants in Ohio.
Even so, Lordstown is something of a success story for both the UAW and GM, and Obama’s remarks were punctuated with enthusiastic applause. After winning deep concessions from the UAW in 2007, GM agreed to invest $500 million to retool the plant to make a new fuel-efficient small sedan, the Chevy Cruze.
Mixed messages from Goldman’s first family?
This probably wasn’t what Lloyd Blankfein had in mind when he reportedly asked Goldman Sachs employees to cut back on conspicuous displays of consumption.
The New York Post, which screamed the news about Blankfein’s order to exercise restraint from its front page on Tuesday, reported on its Page Six gossip column Wednesday that his wife sent a rather different message at a charity event in the Hamptons last Saturday.
According to Page Six, Laura Blankfein and Susan Friedman, wife of Richard Friedman, a Goldman managing director, “caused a huge scene” as they waited with lesser donors for the doors to open for a charity event for ovarian cancer research.
“Their behavior was obnoxious. They were screaming,” one witness told the Post, who added that Blankfein said she wouldn’t wait with “people who spend less money than me.”
Of course it’s not the first time that Wall Street wives’ high-falutin’ ways have gotten tongues wagging. Former Pan Am stewardess Susan Gutfreund, the free-spending wife of 80′s era Salomon Brothers CEO John, was gossip column fodder, as was Henry Kravis’ ex-wife, fashion designer Carolyne Roehm.
More recently, an anonymous Wall Street spouse penned a column for Portfolio.com entitled “Confessions of a Bailout CEO Wife” that bemoaned the inability to throw birthday parties at “Michelin hotspots” and other sad side effects of her vow of “financial abstinence.”
(reporting by Steve Eder; photo by Reuters)
Barclays’ moves to escape bailout
Investors have welcomed the prospective £3bn (US$4.4 billion) sale of iShares by Barclays, which gives strong hope that the bank can avoid accepting a UK Government bailout and its implicit restrictions.
Since the deal announcement, Barclays’ shares have risen by 26 percent to 198.8p, their highest point since October, when a rescue £7.3bn financing was arranged with royal potentates from Qatar and Abu Dhabi. These Gulf investors agreed to subscribe for an effective 31percent stake through separate issues at 153.3p and 197.8p. Now, both slugs are “in the money”. However, that cash has not come cheaply.
The £4.3 billion of mandatorily convertible notes, which must be converted into shares at 153.3p by the end of June, receive a 9.75 percent coupon. And the £3 billion of reserve capital instruments pay 14 percent annually, or £420 million, for 10 years. They have warrants convertible at 197.8p.
The iShares proceeds could neatly pay off the holders of the reserve capital instruments. Removing that shackle is the aim of chief executive John Varley, and Barclays Capital boss Bob Diamond in particular. Then dividends could flow freely again. Diamond’s other goal is to make Barclays Capital an investment bank to challenge the few remaining serious players with global scope, such as JP Morgan, Goldman Sachs, Morgan Stanley, Deutsche and the Swiss banks.
The purchase of Lehman’s US advisory business, together with heavy recruitment across the Middle East and Asia, are helping Barclays catch up. But Goldman is extending its lead, after Monday’s strong first-quarter results and $5 billion share sale plans. The money Goldman raises will help pay back US Government funds. Barclays wants to pay off its Gulf rescuers too. However, the iShares sale will only add £1.5 billion net to Barclays balance sheet, bearing in mind iShares’ £1.5 billion book value.
So to pay off the reserve capital instruments and keep Tier 1 capital above the expected 7.2 percent, a higher bid needs to be found. The novel “go-shop” deal structure gives Varley and Diamond until June 18 to solicit such offers. However, a higher bid is unlikely. CVC has offered a generous 10 times historic EBITDA and Barclays is already putting up debt worth 70 percent of the sale price.
Selling all of Barclays Global Investors is an alternative. That could raise £6.73 billion on the same valuation as CVC’s offer for iShares, the smaller but higher margin part of the business.
The Value of Experience
(Corrected – Bank of America did not purchase Countrywide early this decade)
Now that the nation’s top public servant is wielding The Donald-like powers over chief executives of bailed-out companies, expectations are high that more heads will roll, and Bank of America CEO Kenneth Lewis is looking like the next contestant on a new economic prime-time drama: The Executive.
Rick Wagoner, ousted as General Motors CEO, had spent more than three decades in the company and had been in the driver’s seat for most of the last one. He also presided over the era of the energy-unfriendly Sport Utility Vehicle and is criticized for sticking with trucks far longer than he should have.
Lewis has been Bank of America CEO for about eight years. He bought CountryWide, the biggest lender after the market went crazy for real estate and was ultimately forced to buy Merrill Lynch as the salad days of Wall Street wilted.
By contrast, Citigroup’s Vikram Pandit has been running things for just about long enough to endure the worst of the crisis, and AIG’s Edward Liddy was installed by the government. Perhaps it’s the longevity of characters like Wagoner and Lewis that make them seem so deserving of a presidential pink slip.
Should investors brace for a wave of executive firings? Certainly any chief with enough stripes to remember the good times and who had his hand out for government aid is looking vulnerable.
It is interesting to recall the argument behind AIG’s odious retention bonuses: these are the guys who got their companies into those messes; they should be the best positioned to get them out. If Lewis does get a presidential veto, that argument will be pretty much lost.
Stan, I stand corrected, and have corrected the item. I don’t believe this changes the tenor of the argument.
