Swamp Report would not be the first to say “takes one to know one”. 24/7 Wall St. reports that Friday, May 1, JP Morgan issued a negative bank research call for the major money center and super-regional banks:
“Bank of America Corporation (NYSE: BAC), Citigroup, Inc. (NYSE: C), U.S. Bancorp (NYSE: USB), Wells Fargo & Company (NYSE: WFC), SunTrust Banks, Inc. (NYSE: STI), and others were all hit by the note. Analysts do not actually cover their own companies, but you can’t really get away from the notion that the analyst downgrade also throws JPMorgan under the bus as well.”
Effectively, JP Morgan has labeled several of its fellow money center banks as goats and contrary to 24/7’s opinion, wants us to think that JP Morgan is a sheep. Richard Ramsden of Goldman Sachs boldly called Citigroup a goat, er, sell on April 20, citing Citigroup’s looming credit losses. But of course, Goldman is a sheep, after all “we can sell bonds to suckers, er, public investors without government gaurantees”. An earlier, April 3 Bloomberg quote of Ramsden:
The relaxation of fair-value accounting rules won’t prevent bank shares from falling because growth in bad loans is accelerating, according to Goldman Sachs Group Inc. “Our core view is that banks will not bottom until underperforming asset growth decelerates,” Richard Ramsden, a New York-based analyst at Goldman Sachs, wrote in a report today. “Loans are going bad faster than banks earn money.”
Estimates of Ramsden from a still earlier Bloomberg report on April 1:
A March 24 report from Goldman Sachs Group Inc. analyst Richard Ramsden [ ] estimated that Bank of America Corp., Citigroup Inc. and JPMorgan Chase & Co. are all carrying commercial mortgages at 100 percent of face value. Yet commercial mortgages may be the next shoe to drop for banks. “Commercial credit losses are likely to be quite onerous during 2009,” Friedman Billings Ramsey Group Inc. analyst James Abbott wrote in a report this week. These losses “will be significantly larger than what most are expecting.”
Apparently, a sheep can call a goat a goat, but a goat can’t call itself a sheep, unless a bonifide sheep backs him up. The market didn’t really react on Friday to JP Morgan’s call… So, is JP Morgan a bonifide sheep? What about Goldman?
WSJ reports that “people familiar with the matter” are suggesting Citigroup may need to raise as much as $10 billion in new capital:
“The bank, like many others, is negotiating with the Federal Reserve and may need less if regulators accept the bank’s arguments about its financial health, these people said. In a best-case scenario, Citigroup could wind up having a roughly $500 million cushion above what the government is requiring.”
What -that’s all? This report has been picked up by every major news supplier in the world. Just Google the terms “Citigroup may need $10B more capital” to see all the links… Swamp Report believes this is another intentional leak by the government to prepare the market for the stress test results. “In a best case scenario”… Ha! Citgroup’s wants us to believe they are fighting tooth and nail to keep from having to raise a lousy $10B. “Only please, please, please, Brer Fox, please don’t throw me into that briar patch.” The government’s approach seems to be reverse psychology: seed the idea that if $10B is all Citigroup needs then the CNBC cheerleaders are right – the banking problems are behind us. The government is really into manipulating by signaling. The AP dutifully reports and translates the government’s “signals”:
“Last week, Fed officials said all 19 banks that underwent the stress tests will need to keep extra capital on hand beyond what’s now required in case losses on loans and other assets continue to climb. That was a signal some banks would have to raise more cash. Initial results indicated that both Citigroup and Bank of America Corp. would be among that group, sources told The Associated Press earlier this week.”
Zero Hedge is a little impatient with the whole thing:
“Why should Chrysler creditors be forced to suffer and be scapegoated in front of the entire world, while we don’t know who one single large creditor of a Citi or of BofA is? …. but we can speculate…Hey Obama/Tim – how about some bank creditors suffer a loss here and there too in your witch hunt against “all those self-serving Wall Streeters.” Does it maybe have to do with the fact that these are not really Wall Streets at all but the very same gullible fools who are supposed to lap up the $1 trillion + in USTs you will be shovel feeding over the next year… yes, the same investors who still have their investment in Freddie and Fannie marked at par compliments of Uncle Sam and Joe Taxpayer. All is good though: CNBC just announced that all is priced in, and that no bad news can ever move the market lower as everything negative has been factored in every single stock price in perpetuity and then some.”
$10B is a pittance, agreed. But is it enough to cover Citigroups losses over the next 2 years? – not even a remote chance.
Mike Shedlock comments on the WSJ’s reporting that the Fed Pushes Citi, BofA to Increase Capital:
The most likely ways for the banks to raise capital are via dilution of Treasury owned preferred stock at taxpayer expense and via the Public Private Investment Plan (PPIP). The latter is a scam to heist taxpayers to the tune of hundreds of billions of dollars.
Government officials stated today “that banks directed to raise more capital shouldn’t be viewed as insolvent.”
What else can it possibly mean when taxpayers have to pony up hundreds of billions of dollars every other month just to keep the banks running?
However as Rolfe Winkler points out, converting preferred to common will not raise the total amount of capital -just increase TCE. The government will, as Mike says, have to put more in… unless they can sucker some private investors.
Two opinions, taken together, can lead to a slightly different conclusion than if only one or the other is taken singularly. Two separate opinions out this morning illustrate this. The first is in FT , where John Dizard opines that Treasury Secretary Tim Geithner will likely be relieved of duty soon:
“For the rest of us, the question is who can be the next to take the lead on the national workout. That is probably Sheila Bair, chairman of the Federal Deposit Insurance Corp. But the FDIC needs serious reinforcement of its talent, and a different capital structure, for this to work.”
Dizard expects Citigroup will be taken over by the government, also soon:
“You can pick out the likely geographical spot where the present bail-out wave will recede: 399 Park Avenue, the Citigroup HQ. Already, the Federal Deposit Insurance Corp’s resolution planners are circling the holding company’s shareholders, bondholders, and – at last! – top management.”
The second piece is in the New Republic, where John B. Judis argues the Obama administration is influenced much more than it should be and perhaps even wants to be, by the bank oligopoly:
“President Obama himself has described his role as mediating between the bankers and angry masses. “Be careful how you make those statements, gentlemen,” Obama said in his statement to bankers who were complaining vociferously about the restrictions on CEO salaries and bonuses. “The public isn’t buying that. My administration is the only thing between you and the pitchforks.”
That’s a great sound bite, but it suggests that Obama sees the administration’s proper role as acceding selectively to pressure from either the people or the banks. That’s not the way the administration should be conducting itself. A president is supposed to represent the people and banks, and to choose policies based on what is best for the nation.”
The chief mechanism by which the president chooses “policies based on what is best for the nation” is through approval of laws made by congress and enforcement of those laws. If laws are broken by banks then it is the duty of the president to seek prosecution. But the symbiotic relation that now exists between the Obama administration and the banks is preventing even an investigation into possible wrongdoing by the banks, even to the point that the government itself is involved in obfuscation and perhaps illegality. There no way to tell until a champion arises to challenge the secrecy. Mr Judis writes of this:
“Obama has also made the case repeatedly for transparency in government. And there is probably no place where it is more needed than in the relations between the administration and the banking community…Yet, in its dealings with the banks, the Obama administration has been anything but transparent.”
Let’s hope that Mr. Dizard is right and the Obama administration is going to move to cut the current “inappropriate” relation between the Treasury and the banks and to face up to insolvent banks. If Mr. Dizard’s predictions come true, then it is more clear that the Obama administration has nothing to hide. Why?, because, if Geithner is fired and Citi is reorganized, it is likely that Mr. Geithner and his pals at Citi will have a few tell all books to write and testimonies before committes to give. Will they have anything sensational to say? Not if the Mr. Dizard’s predictions come true. The Obama administration would never risk it. However, if Geithner remains and Citi continues as a zombie, what shall we conclude?
We all recall the recent boasting by Citi, B of A and JP Morgan that earnings in Jan and Feb were positive and the subsequent backpedaling that occurred regarding March. Euromoney is questioning whether the banks can deliver on these new raised expectations. They document that investment banking fee revenues have supplied some profits, but that the trend is down, globally. The other three main lines of business are also down:
“In other business lines, revenue has collapsed. Banks made just $679 million in net revenues from syndicated loans in the first three months of 2009, down from $1.5 billion in the fourth quarter of 2008 and $2.8 billion in the third quarter and just one-eighth as much as in the high-water-mark second quarter of 2007.Revenue from M&A in the first quarter of 2009 was running at just above half the rate of that in the fourth quarter of 2008, down from $4.5 billion to $2.6 billion in the first quarter to March 27. Quarterly revenues from M&A had run above $5 billion for the first three quarters of 2008, having peaked at above $8 billion in the last quarter of 2007.
ECM revenue has not been as robust as one might have hoped, dropping to $1.8 billion with two days to go until the end of the first quarter from $2.6 billion in the final quarter of 2008 and at barely half the rate of $3.7 billion in the first quarter of 2008. ECM revenues’ most recent peak was in the final quarter of 2007 at $6.9billion.
Put the four business lines together and total revenue for the year to March 27 is $9.2 billion, compared with $10.7 billion for the prior final quarter of 2008, $15.4 billion for the comparable first quarter of 2008 and $26 billion in the record second quarter of 2007.
Oddly, as March drew to a close, at the end of a month in which Vikram Pandit had talked up Citi’s capital strength and earnings capacity, the bank’s own credit analysts delivered a warning: don’t lose sight of the downside. “In our opinion, investors are simply too optimistic about the earnings of the financials and may be disappointed if their expectations are not met. Although the earnings from continuing operations might provide some boost, we are afraid that potential additional write-downs could more than offset this”. “
The next 2 weeks of first quarter earnings reports will truly be interesting for followers of many companies, but for the banks, are we in for a disappointment?
