bank run blog

Senior Obama administration officials have confirmed that attempts to stave off a Chrysler bankruptcy filing have failed because of the intransigence of a minority group of bondholders. The Treasury will now try to use the courts to force a settlement in what the administration hopes will be an abbreviated period in Chapter 11 protection. The Associated Press reports :

“The Obama administration had long hoped to stave off bankruptcy for Chrysler LLC, but it became clear that a holdout group wouldn’t budge on proposals to reduce Chrysler’s $6.9 billion in secured debt, according to the officials, who spoke on condition of anonymity because the filing plans are not public. Clearing those debts was a needed step for Chrysler restructure by the Thursday night deadline.

Bankruptcy doesn’t mean the nation’s third largest automaker will shut down. And the privately-held Chrysler is expected to sign a partnership agreement with the Italian company Fiat as early as Thursday as part of its restructuring plan. A Chapter 11 bankruptcy filing would allow a judge to decide how much the company’s creditors would get.

President Barack Obama is expected to discuss the nation’s auto sector at noon Eastern.”

The New York Times reported late last night on the breakdown of negotiations between the Treasury Department and the minority holdout contingent, some 40 hedge funds that control only 30 percent of Chrysler’s debt :

“The battle over how to restructure Chrysler appeared likely to shift from closed-door conference rooms to a bankruptcy court on Thursday, as the carmaker and the Obama administration failed to win the near-unanimous consent they were seeking from Chrysler’s secured lenders.

If that happens, there could be a public brawl between the government, which is effectively propping Chrysler up with billions of dollars in loans, and a group of its recalcitrant lenders over who has claims to the company’s assets.

Many of the holdout lenders, primarily distressed-debt hedge funds who bought portions of Chrysler’s $6.9 billion of bank debt at a discount, are likely to argue that they have the first claim to the carmaker’s assets that were pledged for those loans, people briefed on the matter told DealBook.

They argue that they would see greater recovery in a liquidation of the car giant, which they contend would yield about 65 cents on the dollar. The most recent plan proposed Wednesday by the Treasury Department and Chrysler’s four main bank lenders — JPMorgan Chase, Citigroup, Morgan Stanley and Goldman Sachs — would have given the creditors about 33 cents on the dollar.

Because they hold ‘first lien’ debt, these creditors are at the front of the line to be repaid, and they have the first claim on the plants, equipment and brands that served as collateral to loans tied to Chrysler’s 2007 sale to Cerberus Capital Management.

These creditors hold a more senior position than the government holds for its Chrysler debt. Indeed, because so much of Chrysler’s collateral is already pledged out, the government is likely to provide debtor-in-possession financing to Chrysler on an unsecured basis, one of these people said.”

Associated Press : Chrysler to get up to $8B from govt for bankruptcy

New York Times : A Road Map to a Chrysler Bankruptcy

This morning’s GDP numbers were markedly worse than the consensus estimate of a 4.9 percent contraction for the first quarter. But with consumer confidence up a lot and consumer spending up a little, and with the banks apparently poised to receive billions more in emergency liquidity injections from the government, Wall Street found reasons to rally.

The widespread assumption that federal action to save a few insolvent megabanks will lead to a recovery in an economy that is more than 70 percent consumer spending is worse than incorrect, it is counterproductive. And not counterproductive as in unhelpful, but counterproductive as in your economy just contracted for the third consecutive quarter. According to the Associated Press :

“The economy shrank at a worse-than-expected 6.1 percent pace at the start of this year as sharp cutbacks by businesses and the biggest drop in U.S. exports in 40 years overwhelmed a rebound in consumer spending.

The Commerce Department’s report, released Wednesday, dashed hopes that the recession’s grip on the country loosened in the first quarter. Economists surveyed by Thomson Reuters expected a 5 percent annualized decline.

Instead, the economy ended up performing nearly as bad as it had in the final three months of last year when it logged the worst slide in a quarter-century, contracting at a 6.3 percent pace. Nervous consumers played a prominent role in that dismal showing as they ratcheted back spending in the face of rising unemployment, falling home values and shrinking nest eggs.”

Most US news outlets focused almost exclusively on the 2.2 percent rise in consumer spending to achieve the positive spin preferred by American audiences, but the fact remains that the GDP numbers are the worst since Buddy Holly released “That’ll Be The Day”. The Daily Telegraph reports:

“The world’s largest economy has now shrunk by 3.3pc since its peak last year, making this the worst recession since the 1957-58 slump, when GDP fell by 3.8pc. In addition, it is the first time since the 1974-75 downturn that America has recorded third consecutive quarters of negative growth.”

Associated Press : Economy shrinks at 6.1 percent pace in 1Q

Daily Telegraph : US in worst recession for 50 years

Continuing its policy of “gently” releasing the results of the stress tests performed on 19 of the largest banks in the country, the Treasury has leaked reports that it had warned Bank of America and CitiGroup that their capital reserves were insufficient to meet expected loan losses.

The banks have denied that they need to raise new capital, but the rumors pounded their shares in early trading. According to the Independent :

“Banks on both sides of the Atlantic are being warned by regulators that they must hoard additional capital to weather the recession and future economic storms, in another series of steps designed to limit the risk-taking that pumped up the industry’s earnings during the credit boom.

Shares in Citigroup and Bank of America, two of the biggest banking giants in the US, fell sharply amid reports the Treasury has asked them to raise additional money after concluding ‘stress tests’ of their operations.

And the UK’s chief regulator, the Financial Services Authority’s chairman Lord Turner, earmarked higher capital requirements as ‘a possible way forward’ out of the financial crisis.

The US Treasury handed the country’s 19 biggest banks the preliminary results of the stress tests last week, requiring at least BofA and Citigroup to raise additional capital to fill holes in their balance sheet which could open up if the recession lasts longer and is deeper than expected.”

In a related story, Bloomberg is reporting that private investment analyst Paul Miller of Freidman, Billings, and Ramsey has estimated that BofA alone will need another $70 billion, after the firm conducted its own stress tests :

“Bank of America Corp. needs $60 billion to $70 billion of capital, according to Freidman, Billings, Ramsey Group Inc. analyst Paul Miller, who cited stress tests performed by his firm.

Bank of America should consider converting its preferred shares to common stock, including $27 billion in private hands ‘as soon as possible,’ Miller wrote in a note to clients today. Miller said his firm’s versions of the stress tests were ‘somewhat tougher’ than those performed by U.S. regulators.

Bank of America is among 19 lenders evaluating results of the formal U.S. stress tests. The Charlotte, North Carolina-based lender sold $45 billion of preferred stock to the Treasury’s bank rescue fund. Chief Executive Officer Kenneth Lewis and directors face opposition from shareholders to their reelection at tomorrow’s annual meeting after a 78 percent drop in the share price in 12 months.”

Influential finance blogger Barry Ritholz has said that a dozen or more of the 19 banks evaluated will be required to raise new capital. Because they are unlikely to be able to raise money from private sources, it is increasingly probable that the banks will need another round of bailout funds.

But with Congress unlikely to appropriate new dollars, some sort of “emergency” federal intervention may be the preferred plan for the summer months. This might be the subtext to FDIC chief Sheila Bair’s remarks yesterday at the Economic Club of New York. The Associated Press reports :

“Bair also expanded on her calls for a new system of regulation that prevents institutions from taking on excessive risk and becoming so big their failure would endanger the financial system. She said the FDIC would be the ideal agency to become the ‘resolution authority’ empowered to take over and resolve the risky institutions.

‘The FDIC is up to the task, and whether alone or in conjunction with other agencies, the FDIC is central to the solution,’ Bair said in her remarks to the Economic Club of New York. ‘Given our many years of experience resolving banks and closing them, we’re well suited to run a new resolution program.’

As the Obama administration and Congress work to fashion a new financial rule book to replace the ‘too big to fail’ model used by the government in the financial crisis, various regulators have been staking claims.”

Independent : Banks told to bolster their capital reserves

Bloomberg : Bank of America May Need $70 Billion, FBR Says

Associated Press : Bair: bailout fund can handle stress test results

Just as the efforts of the US government to address the economic crisis have been inappropriately fixated on Wall Street investors to the detriment of the broader populace, so too has the coverage of the problem been overly focused on the plight of relatively comfortable Americans and Europeans, even as the disastrous policies of our financial speculators reverberate tragically throughout the developing world. This evening the Associated Press reports :

“The World Bank on Sunday urged donor nations to speed up delivery of the money they’ve already pledged — and to give even more — to help poor countries weather the steep global recession.

The bank said developing countries face especially serious consequences as the financial and economic crisis turns into what it described as a ‘human and development calamity.’

In a communique, the World Bank’s policy steering committee said the crisis has already driven more than 50 million people into extreme poverty, particularly women and children. ‘We must alleviate its impact on developing countries and facilitate their contribution to global recovery,’ the committee said.”

The AFP is reporting that Chinese officials could not resist another opportunity to poke fun at the US, even in the midst of a humanitarian crisis :

“Meanwhile, China called for reform of the global currency system, dominated by the dollar, which it said is the root cause of the crisis.

Chinese Vice Finance Minister Li Yong said the ‘flawed’ international monetary system is ‘a major defect in the current international economic governance structure.’”

Associated Press : World Bank: Nations should speed aid to poor

Agence France-Presse : World Bank, IMF say crisis becoming ‘human calamity’

With all the attention on the large banks, their astonishing earnings, and their preordained success in the federal stress tests, it was a good week to take a look at the rest of the US banking industry, particularly the so-called “superregionals”, that have billions in deposits but fewer friends in Washington than the big four (C, BAC, JPM, WFC). According to CNN :

“Even in this chilly economic climate, megabanks like Wells Fargo and Citigroup have somehow managed to make money.

A bit lower on the banking food chain however, there have been few signs of relief for big regional banks.

KeyCorp and Fifth Third Bancorp, two major banks headquartered in Ohio, both reported losses this week, hurt, in part, by their exposure to commercial real estate.

Further to the south, First Horizon National, one of Tennessee’s largest lenders, recorded its fourth-straight loss last week. Atlanta-based SunTrust reported an $875.4 million loss on Thursday.

And in other states that have been hit hard during the recession, such as Oregon, regional banks have found themselves unable to catch a break. Portland-based Umpqua Holdings reported a nearly $14 million loss last week.

Many of these regional banks have been stung by rising loan losses as more and more Americans find themselves out of work or simply unable to make ends meet.”

A Wall Street Journal report from Wednesday also focused on the superregional banks, emphasizing that their financial positions offer a truer barometer of the health of the economy than the dodgy balance sheets of the covertly subsidized big four :

“From Minnesota to Alabama, battered regional banks are warning a turnaround from the economic malaise is nowhere in sight.

A series of large regional banks reported Tuesday that rising losses from bad loans plagued first-quarter results. And, that’s forced names like U.S. Bancorp, Regions Financial Corp., and others to put more money aside to fortify against another wave of defaults.

It demonstrates not just massive U.S. institutions like Bank of America Corp. are reeling as the industry pays for extending credit to shaky borrowers. Smaller players scattered across the country are also feeling the pain, telling investors a protracted recession means things will get worse before they get better.

‘No significant turnaround will occur this year,’ Huntington Bancshares Inc. Chief Executive Stephen Steinour said after the Columbus, Ohio-based bank posted a $2.43 billion quarterly loss. He announced a nearly $300 million credit loss provision as the bank faces a stream of potential losses from commercial loans.

Huntington is just one example of a bank struggling as a troubled economy and tight credit environment make it more difficult for consumer and business borrowers to pay their debt. Falling stock markets and rising unemployment also illustrate the breadth and depth of the economic stress, regional bank CEOs said.

Investors have been paying particular attention to regional banks after BofA and Citigroup Inc. reported better-than-expected results through largely one-time gains and accounting changes. Regionals, which typically focus on bread-and-butter operations like lending and deposits, offer a purer snapshot of the industry.

‘We’re now dealing with an extreme recession, and the continued resolution of the over-indebted consumer,’ said Nancy Bush, an independent bank analyst. ‘This is not a 2009 phenomenon, but something we’ll possibly deal with into 2011 to 2012.’”

Bloomberg reports that the entire sector has become unattractive to investors, who believe that writedowns will continue to mount for the superregionals :

“’Across the board, regional banks just continue to fall short of expectations,’ said Terry McEvoy, an analyst with Oppenheimer & Co. ‘Net charge-offs are coming in higher than expected, and really as we move our way through the credit cycle, commercial lending is really driving those losses.’”

CNN Money : Regional banks can’t catch a break

Wall Street Journal : Regional Banks Show No Turnaround In Sight

Bloomberg : PNC, SunTrust, Fifth Third Boost Bad Debt Provisions