On one hand, the $130 billion he spent on acquisitions – FleetBoston Financial Corp., MBNA Corp., LaSalle Bank Corp., Countrywide Financial Corp., Charles Schwab Corp.’s (Nasdaq: SCHW) U.S. Trust private banking unit and Merrill Lynch – that more than tripled the size of Bank of America, making it the largest U.S. lender both by assets and deposits.

On the other, his open-wallet policy and the example it set forth almost perfectly encapsulates the boom, bust and nascent rebound of the U.S. housing and banking crisis – which later became the financial plague that devastated markets all over the world.

In the second half of 2007, the extent of the U.S. housing crisis began to crystallize when Countrywide’s freewheeling subprime-lending policy irreversibly sank the nation’s largest home lender. Lewis moved in and acquired the troubled lender for $4 billion the following January, and in doing so, he put Bank of America on the hook for Countrywide $1.5 trillion loan portfolio.

In the second half of 2008, the extent of the how much havoc the destruction of investment banks and brokerage firms would wreak upon the world became clear. The vortex of it was Sept. 15, the day the Lehman Brothers Holdings Inc. (OTC: LEHMQ) declared bankruptcy and Bank of America agreed to pay $29 billion for world’s largest brokerage firm, Merrill Lynch, which probably would have failed had it not found a partner.

Lewis’ spending got Bank of America into this mess. The question now is whether continued  spending – using the $45 billion bailout courtesy of the U.S. Treasury’s Troubled Asset Relief Program (TARP) – will get BofA out of it.

And Lewis seems to acknowledge both in the news release announcing his voluntary departure.

“Bank of America is well positioned to meet the continuing challenges of the economy and markets,” Lewis said. “We are in position to begin to repay the federal government’s TARP investments. For these reasons, I decided now is the time to begin to transition to the next generation of leadership at Bank of America.”

Lewis naturally defends his actions just as much as critics chide him for them.

“Their loan portfolio is horrible looking and it’s not going to be easy for them,” Mike Williams, research director at Gradient Analytics in Scottsdale, Arizona, said in a Bloomberg News interview before Lewis announced his departure. “They would have been better off without the Merrill and Countrywide acquisitions over the next few years.”

Money Morning Contributing Editor Martin Hutchinson, a leading banking expert, says that Bank of America has a very difficult journey ahead of it.

“Lewis followed [predecessor CEO Hugh] McColl’s strategy of expanding BofA by acquisition,” he said. “The trouble is that his last 2 deals were both lousy. Countrywide was at the epicenter of all that was bad about housing finance, and that was obvious in January 2008, when he bought it. Just a terrible deal.”

In fact, Hutchinson believes there’s only one viable option for Bank of America.

“BofA will have to be broken up, but may need to be sorted out by a liquidator/ the government,” he said.

Spinning Merrill

The Merrill merger was perhaps the defining moment in Lewis’ tenure, and he Lewis has played the victim and hero of the saga.

Lewis testified that U.S. Federal Reserve Chairman Ben S. Bernanke and former U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. pressured him not only to move ahead with a merger with Merrill Lynch despite reservations, but also to stay quiet about the mounting losses at the crumbling investment bank.

And in a note to employees announcing his departure, he took credit for the fact that Merrill has contributed 24% to the Bank of America’s first-half profit, boosted trading and investment-banking revenue, Bloomberg reported.

“I am gratified that even some of the critics of our acquisition of Merrill Lynch have come to acknowledge how well the deal is working out for our clients,” Lewis wrote. “This journey has been a rocky one and not for the faint of heart, but perseverance is paying off.”

But to the rest of the world, Lewis was most often seen sitting under the hot light of probes by Congress, the U.S. Securities and Exchange Commission (SEC) and New York’s attorney general all trying to determine if Lewis misled investors about Merrill’s losses and bonuses.

And even if shareholders agreed with Lewis’ decisions, they didn’t prefer him to be the company’s face. In April, shareholders voted 50.34% in favor of stripping Lewis of his chairman title.

Changing of the Guard

When Lewis steps down from his post Dec. 31, he joins the ranks of fellow financial firm executives – James Cayne of The Bear Stearns Cos., Charles Prince of Citigroup Inc. (NYSE: C), Stanley O’Neal of Merrill, Kennedy Thompson of Wachovia and Richard Fuld of Lehman Brothers, John Thain of  Merrill Lynch – that resigned, many in disgrace, either during or in the aftermath of the global financial crisis.

Among the survivors, Lloyd Blankfein, CEO of Goldman Sachs Group Inc. (NYSE: GS), and Jamie Dimon, CEO of JPMorgan Chase & Co. (NYSE: JPM).

Bank of America said it will find a replacement by Lewis’ last day, and media outlets have already began making lists of possible successors.

Among the names frequently mentioned:

• Brian Moynihan, head of Bank of America’s consumer and small business banking unit.
• Sallie Krawcheck, former Citigroup Inc. (NYSE: C) CFO and president of Bank of America’s global wealth and investment management unit.
• Tom Montag, former Merrill executive and head of Bank of America’s corporate and investment banking unit.

An outsider might well be the best choice, says Money Morning’s Hutchinson.

Lewis is “leaving a company that no human being could manage, with vast problems, and far too broad a franchise,” Hutchinson said. “North Carolina retail bankers haven’t a clue how to run a top international investment bank like Merrill and vice versa. There’s nobody available to succeed him that can do the job.”

Source: Boom, Bust and Rebuild: Bank of America and the Kenneth Lewis Legacy

For starters, Guaranty Financial of Texas went belly up late Friday and secured a spot in the history books. With $13 billion in “assets,” the bank is the third largest to fail this year and tied for the 11th biggest bank failure in U.S. history.

Even more interestingly, the FDIC brokered Guaranty’s assets to Banco Bilbao Vizcaya Argentaria, a bank from northern Spain. We’re surprised on two fronts here: 1) That a bank from Spain — strapped with double-digit unemployment and a wretched housing bust — wants to bring their euros to I.O.U.S.A. 2) That BBVA already has a huge presence in Texas. With this acquisition, they will be the fourth largest banking chain in the Lone Star State. That could be an interesting trend to watch.

Three other banks failed along side Guaranty: CapitalSouth, First Coweta and ebank. That brings the yearly total to 81.

This should put the FDIC’s deposit insurance fund on its last legs. At the beginning of 2008, the FDIC’s bank failure war chest had over $52 billion. At the end of the March 2009, the last time the FDIC has given us a look into the DIF, they had $13 billion left. 60 banks have failed since, including Guaranty and Colonial, which by themselves took out half of that remaining $13 billion. Only the FDIC can say with accuracy if there is any money left, but this chart gives you a pretty good idea of how the trend is shaping up:

The DIF does have a source of income — it taxes member banks a significant “insurance fee.” But we have to think that the DIF is still in bad shape, perhaps even empty… and that the FDIC will soon be hitting up someone (Tim Geithner, Joe Taxpayer and/or U.S. banks) to refill their coffer.

The FDIC will provide their second-quarter report tomorrow, which among other things will include a look into the DIF and their infamous bank “problem list”… could get ugly. We’ll keep you up to speed.

“Recent bank failures remind us of the problem loans festering on small and regional bank balance sheets,” writes Dan Amoss, “and that many of them are marking loans at fantasy levels. The secondary market value for some of the worst loans, like construction loans, is 20 or 30 cents on the dollar.

“There’s a backlog of at least a few hundred insolvent banks that need to be shut down and sold into stronger hands. Bank stock bulls are ignoring the credit losses yet to be recognized, so there are lots of shorting opportunities in the sector. Many banks will not be able to “earn their way out” of their credit losses.

“The problem is, there aren’t many strong buyers with lots of capital out there. Those that are, like private equity groups, are buying only after the FDIC agrees to eat most of the credit losses, and the buyer is gifted with the remaining shell — the profit-making engine of spread lending.

“It’s understandable that the FDIC doesn’t want much publicity about the Deposit Insurance Fund; it wants to maintain the public’s confidence that it can ‘insure’ all deposits with just a few basis points of capital reserves and skimpy premium income. The fund is clearly not adequate to cover the bank failures still in the pipeline, so we’ll see another ‘special assessment’ imposed on all other banks, which will ultimately be passed on to depositors via lower interest rates.”

Critical banking analysis has been one of the hallmarks of Dan’s Strategic Short Report. His brand of scrutiny gave readers 162% gains betting against Allied Capital (NYSE:ALD), 220% on PNC Financial and the whopping 462% winner shorting Lehman Brothers. Today is the last day we are offering his latest financial short play for just $1. Capture this truly rare opportunity by clicking here… midnight tonight, the deal’s off.

Source: The Banking Crisis Cometh

It’s enough to make you succumb to the Two Minutes’ Hate.

But let’s face the truth. As egregious as salary escalation seems – coming as it does on the tail of the worst U.S. banking crisis since the Great Depression – the reality is that this is the U.S. government’s fault. After all, it was the U.S. Federal Reserve and the Obama administration that created all the bailouts and the special-loan-subsidy schemes for banks that would otherwise have been on their last legs.

In a truly free market, ex-Citibankers (NYSE: C) would be on every street corner of Manhattan – selling apples – and that would properly hold down the pay of those bankers still lucky enough to have a job.

The sudden rebound in demand for bankers is a symptom of overall market conditions right now. The U.S. stock market is way up from its lows, there are three Chinese initial public offerings (IPOs) due to come to market this week (one of them for a company with no earnings), the volume of home mortgage refinancing has been running at record levels, the FHA index of home prices has dropped only 0.3% this year and the volume of new corporate debt issuance is also high. Commodity prices are well off their lows, and oil prices are again close to $70 a barrel, which would have been considered an excessively high level only three years ago. That’s not a picture of a financial market – or a global economy – in deep recession.

Far from it.

To some extent, this is good news. A revival of the financial system and its ability to finance businesses and home purchases is exactly what the huge monetary and fiscal stimulus was meant to produce. A modest revival in world trade, as inventories cease being wound down and Chinese production ramps up again, is also a necessary precondition for economic recovery.

As the banking bonus news suggests, however, much of the activity is coming in some pretty funny places, where the excesses of the past decade were concentrated and where you wouldn’t expect to see such a quick revival.

That gives us a clear indication of just what the problem is. Because bankruptcies weren’t allowed to happen back in September and October – as they would have in a free market – there are more institutions in the market than there should be, Citigroup and Merrill Lynch most notable among them.

Moreover, in a true free market, the entire credit-default-swap (CDS) business – a product that caused $180 billion of losses to the financial system through American International Group Inc. (NYSE: AIG) – would be nothing but a smoking ruin. But in the market we are living in, those $180 billion worth of losses have been transferred to the tab of the taxpayers of America.

With Citigroup and Merrill Lynch bankers mooching around on street corners, financial sector salaries would be forced down to a more reasonable level.  As it is, the few unemployed unfortunates who worked at Lehman Brothers are not enough to depress the market. Likewise, credit default swaps have caused huge pain to the unfortunate employees of Abitibi-Bowater Inc. (NYSE: ABH), General Growth Properties (OTC: GGWPQ), and Six Flags Inc. (OTC: SIXFQ), each of which went bust partly because their creditors were playing in the CDS market and had no incentive to find an alternative to bankruptcy. Had CDS caused the pain they should have to financiers, the product would no longer exist, to the considerable benefit of the rest of us.

Inevitably, we are going to have to pay the price for all the bailouts. The financial sector will eventually shrink to its proper size, as will its members’ earnings. CDS will eventually be sharply restricted, to prevent their holders from forcing random companies into Chapter 11. Interest rates will have to rise, to accommodate the huge debt-funding needs the government has incurred. Money will have to be kept tight, to pay for the indulgences that Fed Chairman Ben S. Bernanke granted during the bubble, as well as for the even greater-indulgences of the bust.

Which is probably why you don’t want to hold U.S. stocks right now.

[Click here to check out a related Money Morning story on the salary increases some banks are offering in order to retain key employees.]

Source: Who’s Really to Blame for the Crooked Financial System

What makes Patterson’s comments particularly interesting is that he’s a TARP insider. He used TARP matching funds to buy Michegan bank Flagstar Bancorp. Patterson’s firm ended up with 80% of the Flagstar shares. The government managed to secure a mere 10% stake.

Patterson reckons Team Obama is only putting off the necessary day of reckoning by pretending the US banking system is still solvent. Speaking at the Qatar Global Investment Forum he had this to say about the government’s handling of the banking crisis:

It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100 billion of the $700 billion TARP funds. They think they’re doing this for the greater good of society.

When market participants like Patterson speak, we listen. First, these guys are not towing the government line. Second, they have skin in the market. This puts them in a different class than the mainstream commentariat. We call these people underground investors. And we do our best to bring you their money-making advice and market intelligence on a daily basis. Don’t bother looking for them on CNNMoney or on CNBC. You won’t find them there.

Patterson doesn’t believe we’re about to see a V-shaped recovery…

This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance.

Alpha hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well.

He also sees the economic crisis ending in a deliberate inflation…

The US government has thrown 29% of GDP at this crisis compared to 8% in the early 1930s. The Fed’s balance sheet has risen from $900 billion to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road.

But in May of 2008, the answer was not as obvious as it is today. And so we wondered aloud, “How much is one trillion anyway?”

We answered the question from a variety of perspectives. For example: “One trillion seconds equals 31,546 years. One trillion dollar bills placed end to end would reach 96.9 million miles, far enough to reach the Sun. The average new car costs $28,400. $1 trillion would buy more than 35 million cars.”

Why did we bother trying to quantify the sum, one trillion? Because just a few weeks earlier, the International Monetary Fund had estimated that the global banking crisis would produce about $1 trillion of losses. Shortly thereafter, then-President George Bush delivered America’s first $3 trillion budget. Suddenly, the kind of arithmetic that required twelve zeros had become an exercise of national importance.

One year later, this exercise has become vastly more important. The IMF has doubled its estimate of banking sector losses to $2 trillion (while many private economists put the number between $3 and $4 trillion). Furthermore, the U.S. government of 2009 does not merely count its budget in the trillions of dollars, it counts its budget DEFICITS in the trillions of dollars. According to the latest estimates, President Obama’s very first budget will produce a deficit of $1.8 trillion in 2010. And that’s the OPTIMISTIC guess.

So where’s the shock over this shocking development? Where’s the awe? Where’s the national outrage over the mind-numbing cost of bailing out Wall Street’s self-serving speculators?

There isn’t any. No shock. No awe. No outrage…and the reason is very simple: almost no one gets it…literally. The numbers are simply too large.

“The scale of what President Barack Obama proposes to do to the American economy is so enormous, so far-reaching and so potentially disastrous that the [Republican] party is having a hard time describing it,” writes Byron York, chief political correspondent for the Washington Examiner.

“GOP message mavens are struggling with something that academics call ‘insensitivity to scope,’” York continues. “It affects us all; we can understand something on a small scale but have a difficult time comprehending the same thing on a massive scale. Insensitivity to scope is a major obstacle to understanding the Obama administration’s $3.6 trillion 2010 budget. People simply have trouble understanding a number so big. A recent poll asked Americans how many millions are in a trillion. Twenty-one percent of respondents got the answer right — it’s a million million. Most people thought it was a lot less.”

So that means that four out of five respondents got the answer wrong…and most of them guessed too LOW. No wonder a $2 trillion deficit doesn’t seem like a problem.

“[One GOP pollster] tries to explain it,” York goes on, “by asking people to think of a dollar as a second — one dollar, one brief tick of your watch. A million seconds, the pollster explained, equals eleven days. A billion seconds equals 31 years. And a trillion seconds equals 310 centuries…After a review of the Obama budget’s numbers before formal submission to Congress, Budget Director Peter Orszag said this year’s deficit will be $1.841 trillion — $89 billion more than previously estimated. If you’re listening to the ticks of your watch, that’s about 570 centuries.”

And let’s not forget that the Obama budget assumes the economy will be growing at a 3.5% annual rate by the end of this year. That’s a good number in GOOD times. In bad times, such as we are now enduring, a 3.5% growth rate is nothing short of delusional. So we’d guess that the actual budget deficit is likely to be much larger than the already-large numbers the Obama camp is tossing around.

What does all this mean for investors? Hard to say exactly…but not that hard to say inexactly. A $1.8 trillion funding shortfall is a great big hole to fill. Indeed, it is a hole so large that tax receipts could not possibly fill it. Foreign capital and/or domestic savings could theoretically fill it. But in the real world, that’s not likely – not at meager 3% and 4% rates of interest over ten to thirty years. So the most probable “solution” to the funding shortfall is also the most expedient one: the government will buy bonds from itself.

This ancient remedy to fiscal imprudence used to go by the name of currency debasement. But today this process comports itself with an air of sophistication by wearing the title, “quantitative easing.” Different name; same result: inflation.

The financial markets are picking up the scent already. Ever since March 18, when the Federal Reserve announced its intention to purchase $300 billion of Treasury debt, most financial markets began pricing in an inflationary threat. Gold, commodities and bond yields have been moving higher, while the dollar’s value has been moving lower.

“We are experiencing a deleveraging on a scale in the world that is absolutely breath-taking in its scope,” warns John Mauldin, editor of Outside the Box, “And to balance that, governments are going to have to issue massive amounts of sovereign debt to deal with their deficits. But who will buy it, and at what price? And in which currency? Even though we can see the challenge, it is not clear what the final outcome will be, other than stressful volatility as the market reacts.”

We’re guessing the volatility will be much less stressful for those folks who hold a significant amount of their assets in gold and commodities. And the stress might even morph into pleasure for gold-holders if, as we expect, the governments of the world enthusiastically pursue the stealth larceny of currency debasement. You can dress the debasement process in Harvard B-school jargon, surround it with Federal Reserve White Papers and re-christen it, “quantitative easing.” But after all that, you’ve still got the same old process of currency debasement, which produces the same old results: inflation and loss of purchasing power.

Source: The $1.8 Trillion Question

From this, he calculates that $33 trillion is equal to “about a third of total global savings,” which is one hell of a lot of money, which is more than my wife can spend in a whole weekend.

Of course, this brings us to “Why You Should Be Worried About The Bond Market” by Dominic Frisby at Money Week, and instead of going over that old stuff about how bond prices move inversely to interest rates, I will skip right to the crux of the matter, which he notes is that “A collapsing bond market means higher interest rates,” which is weird because I just said I would skip that part!

It must be more important than I thought!

Anyway, one of the Big Freaking Mysteries (BFM) that I ponder when I lock myself in the Big, Beautiful Mogambo Bunker (BBMB) while I am idly looking out of the periscope to survey the perimeter (and keep an eye out for my wife because that last fluorescent light in the bathroom burned out and she is probably wanting me to go to the store and get more bulbs and fix the damned thing and waste my Whole Freaking Day (WFD)) is, “How can bond yields can be so low? What kind of moron would be bidding up the prices of bonds so high that the yield is driven to insignificance?”

Jim Grant of Grant’s Interest Rate Observer says, “The long bond is a better short than a long,” to which he adds “and gold is a better long than a short.”

Sure enough, the long bond fell and saw its yield jump 18 bps to 4.26%, and the 3.3% yield on the 10-year Treasury note is more than a full percent above its low, which corresponds to yields jumping by almost a third since the low!

The ugly side of this is that guys who already owned these kinds of bonds lost money. And with the incredible amounts of leverage that these guys use, where they buy the bonds by putting up only one dollar of their own and borrowing another twenty or a zillion dollars, they not only lost plenty, but are on the hook for twenty times or a zillion times more! Hahaha! What morons!

And it is not just bonds that are going to need a lot of money to be created with which to buy them, but corporations are issuing lots and lots of new shares to get (I assume) enough money to keep going and pay themselves princely sums until inevitable bankruptcy, and, so far, the leader seems to be General Motors, which “announced in a filing with the SEC that it is issuing 60 billion new shares, a move which, if it meets with US Treasury approval, would dilute common shareholders into oblivion.”

Sixty billion shares? Sixty billion shares? That’s ten shares of GM for everybody on the planet! Hahaha! That’s going to take a lot of money!

And if it is money you need, Bill Bonner here at The Daily Reckoning reminds us that “Normally, in a correction, the supply of money – M1 – falls. Asset values are destroyed…borrowers default…money disappears into vaults and mattresses. But this time, so vigorous has been the authorities’ response that M-1 is actually increasing at about a 14% annual rate.”

He then ominously notes that all of this new money sloshing around already has significant portent, as “The money’s got to go somewhere…” with an ellipsis at the end to add that subtle spooky undertone to the whole thing.

With nerves on edge because of that ellipsis thing, I gotta ask, “So what in the hell is going on? And I thought there was going to be a free buffet and an open bar!”

Ignoring my rude outburst, he noted, “Equity losses last year were worse than those of ’29. It stands to reason that the next phase – the economic decline – will also be worse than the ’30s,” mostly because “the U.S. economy carries about $20 trillion of excess debt. Until that debt is eliminated, the idea of a healthy boom is a mirage.”

To my horror, he went on, “Getting rid of that debt either involves a long, hard period of work and sacrifice – as debts are paid down. Or, it involves something much worse.”

Now you suddenly remember his use of an ellipsis! “A long, hard period of work and sacrifice”! Yikes! What in the hell could be worse than “a long, hard period of work and sacrifice” you want to know?

Well, now that you ask, many things instantly come to mind, such as the inflation in consumer prices that all this new money will create, most of them highly reminiscent of the French Revolution, only worse.

And then there is the horror of having teenage children, to name two!

Mr. Bonner says that he figures that I have nothing to worry about because “the feds – who still have no idea what is going on – will choose the second solution…something much worse.”

I gulp in dismay, as he did NOT rule out the possibility of more teenage children screaming at me that I am stupid, that I don’t know anything about anything and I am wrong about everything.

But I am, secretly, not stupid, nor am I wrong about everything, as I can easily prove by just buying gold, silver and oil, waiting a little while until prices soar because of all this money being plowed into the world economy to produce Mr. Bonner’s “something much worse,” and then shaking all that money in their smarmy little faces and yelling into those same smarmy faces, “Who’s stupid now, ya nasty brats?”

Whee! This investing stuff is easy! And sometimes fun, too! “Nasty brats”! Hahaha!

Source: The Long and Short of Bonds and Gold

At least seven of the 10 banks considered by the government to be inadequately capitalized, as well as two others that were found to have sufficient capital cushioning, announced fund raising plans following the release of the stress test results.

PNC Financial Services Group Inc. (NYSE: PNC), U.S. Bancorp (NYSE: USB), KeyCorp (NYSE: KEY), Citigroup Inc. (NYSE: C), Morgan Stanley (NYSE: MS) Wells Fargo & Co. (NYSE: WFC), and Bank of America Corp. (NYSE: BAC) all announced stock offerings or asset sales in the past week.

BB&T Corp. (NYSE: BBT) and Capital One Financial Corp. (NYSE: COF), which were deemed by the government to be sufficiently capitalized, have also announced stock offerings.

Still, S&P says the banks, which have will continue to struggle without a bigger capital cushion than regulators require.

“There’s nothing to say that this banking crisis can’t go on for another three or four years,” S&P Managing Director Tanya Azarchs said.

S&P on May 4 said it might lower its ratings for 23 U.S. banks and thrifts, including 10 that underwent stress tests, citing concern about the industry’s capitalization, Reuters reported. It said the 23 companies had at least a 50% chance of being downgraded within 90 days.

Source: Standard & Poor’s Says Banking Crisis Has Entered New Phase

U.S. banks – under government order to raise capital as a result of the recently completed bank stress tests, and desperate to shed the onerous shackles of the U.S. Treasury Department’s Troubled Assets Relief Program (TARP) – have been announcing billions in secondary stock offerings in recent days, and experts say many more such deals can be expected.

Anadarko Petroleum Corp. (NYSE: APC), Bank of America Corp. (NYSE: BAC) and Ford Motor Co. (NYSE: F) yesterday (Tuesday) became the latest U.S. companies to pursue new sources of capital, announcing deals that involved offerings of stock or debt, or outright asset sales.

Those announcements came just one day after four of the largest U.S. banks – BB&T Corp. (NYSE: BBT), Capital One Financial Corp. (NYSE: COF), U.S. Bancorp (NYSE: USB) and KeyCorp (NYSE: KEY) – announced plans to raise a combined $6.5 billion through stock offerings. At least some of the money raised will be used to repay the TARP money the federal government injected into troubled U.S. banks.

“All the deal activity sends a clear signal – investors are willing to take more risk,” says Louis Basenese, a longtime expert on the IPO market and editor of The Takeover Trader and White Cap Report newsletters. “And it’s already trickling down into the IPO space. In the next two weeks, four deals are slated, doubling the total volume for 2009.”

When asked if all these deals could end up soaking up all the capital that’s still sitting on the sidelines – blunting, as a result, the rally that’s had stocks surging over the past two months – Basenese said there’s no reason for that to be a concern.

“With $8 trillion-plus on the sidelines, we’ve still got a ways to go before the capital is gone,” Basenese said.
In fact, we may well be just getting started, he says.

“During slowdowns, the IPO space is as lonely as a geek on prom night. But right now, our geek might be getting lucky. Along with the market rally and strong appetite for secondary offerings, we’re seeing IPOs hit the market again,” Basenese said. “This week we get Digital Globe. Next week, OpenTable and SolarWinds are slated to debut. And there are over 100 more in the pipeline to fuel a sustained recovery.”

The Latest Deals

Yesterday’s announcements involved a carmaker, an energy company and a top U.S. bank.

Anadarko, an independent oil-and-gas exploration and production company based in Woodlands, Tex., said yesterday that it priced a public offering of 30 million shares at $45.50 each. Underwriters have an option to buy up to 4.5 million additional shares of the company’s common stock through the offering, which is expected to close Friday.

The company’s shares were down about 6% and listed at $45.70 in pre-market trading yesterday morning, FoxBusiness.com reported.

Bank of America, ordered to find $33.9 billion in new capital as a result of the recent bank stress tests, has finally sold about $7.3 billion worth of its shares in China Construction Bank Corp., Reuters and Bloomberg News both reported.

BofA sold 13.5 billion shares, or 6% of CCB, to investors including Hopu Investment Management Co. and Singapore sovereign wealth fund Temasek Holdings Pte. The sale cuts Bank of America’s stake in CCB to 10.6%.

Hopu Investment was founded in 2007 by Fang Fenglei, Goldman Sachs Group Inc.’s (NYSE: GS) China partner. Hopu and Temasek have collaborated before; in late April, the two announced plans to invest $300 million in a Mongolian iron-ore mine. It was Hopu’s first deal since being launched as a private equity firm, Bloomberg News reported.

Bank of America’s sale of part of its CCB stake wasn’t news to Money Morning readers. In a story published in mid-January – “The Global Financial Crisis Will Cost Western Banks a Share of Future China Profits” – Money Morning reported that BofA was going to have to sell some of its stake in that key China bank. Indeed, the report detailed how banks in the United States and Europe would have to divest their interests in China’s promising banking market in order to close capital deficits created by the global financial crisis. The story was part of Money Morning’s ongoing investigation of the U.S. banking bailouts.

On Friday, BofA filed with the U.S. Securities and Exchange Commission (SEC) to sell as much as 1.25 billion shares of common stock, a move that would raise as much as $11 billion (given a proposed maximum offering price of $8.79 per share).

BofA said it will use the net proceeds from the offering for general corporate purposes. Bank of America Securities LLC and Merrill Lynch & Co. (NYSE: SQD) were listed as the underwriters for the stock offering.

Bank of America is also looking at still more asset sales to raise the rest of the required capital. Last Thursday the bank said it’s looking to end a loss-sharing agreement with the federal government on $118 billion of troubled assets, calling the agreement unnecessary – and too expensive.

Ford announced plans to sell 300 million common shares, and said it would use the proceeds from the offering for “general corporate purposes,” and to make a contribution to a fund that pays for healthcare for its retirees.

Total shares outstanding will increase to 3.102 billion – or to 3.148 billion if underwriter’s option for an additional 45 million shares is exercised.

Citigroup Inc. (NYSE: C), Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and Morgan Stanley (NYSE: MS) are acting as joint managers for the stock offering.

Ford’s shares closed yesterday at $5.01, down $1.07, or 17.6%, from Monday.

According to an SEC filing, a settlement with various unions calls for the initial three payments to be made on Dec. 31, 2009, June 30, 2010 and June 30, 2011. At each date, as much as $610 million of the amounts payable could be satisfied by the delivery of Ford common stock, valued at fixed prices of $2.00, $2.10 and $2.20 per share, respectively, the filing stated.

Ford intends to use a portion of the proceeds of this offering to fund all or a portion of the payments to the settlement fund – in lieu of delivering shares on those payment dates, according to a media report by 123Jump.com.

Ford Chief Executive Alan R. Mulally took advantage of the stock-offering announcement to say that Ford’s management and employees are making “strong progress on our transformation plan – gaining retail market share with great new products, improving quality, reducing costs and positioning Ford for a return to profitability.”

Ford also said that it’s unlikely the company will pay any dividend in the foreseeable future. Ford last paid dividends in the third quarter of 2006.

As Ford Sells Shares, So Do GM’s Top Execs

Interestingly, Ford is trying to sell shares to investors just as a group of top General Motors Corp. (NYSE: GM) executives – including GM Vice Chairman Robert A. “Bob” Lutz – have sold what was left of their personal stakes, according to several SEC filings on Monday. The stock sales by GM executives were reported by MarketWatch.com.

“Our shareholders are obviously facing some pretty severe dilution if the bond exchange goes through or we end up in bankruptcy,” GM spokesperson Julie Gibson told MarketWatch. “Either way, no matter the outcome, we’ll essentially be issuing new stock.”

She acknowledged to MarketWatch that the executives took advantage of a trading window to sell their shares while there’s still some value “like most reasonable people would do.”

GM’s executives sold their shares just as the company is trying to rid itself of $27 billion in debt by persuading thousands of creditors to exchange their bonds for 10% in GM stock.

According to the MarketWatch report, the SEC filings say that Lutz was joined by fellow Vice Chairman Thomas G. Stephens, Ralph J. Szygenda, Troy A. Clarke, Gary L. Cowger and Carl-Peter Forster. All together, the six sold nearly 205,000 shares between Friday and Monday, fetching between $1.45 and $1.61 a share.

GM’s shares closed yesterday at $1.15 each, or 20.14%.

It is worth noting that Money Morning Contributing Editor Martin Hutchinson wrote this week that there’s a chasm of difference between the prospects of GM and Chrysler LLC – the two foundering members of Detroit’s “Big Three” – and Ford, which Hutchinson says may actually be worth investing in.

If the market shakes out as Hutchinson expects, Ford could emerge as only real winner among the U.S. automakers.

Under such a scenario, “Ford will pick up market share from GM and Chrysler, even if domestic brands overall continue to see their market share ebb,” Hutchinson wrote. “That will reduce Ford’s losses, and when the automobile market does rebound, the company that created the original automobile assembly line will move to a position of substantial profitability. For the first time since Henry Ford kept the Model T in production too long in the 1920s, Ford may become the dominant U.S.-controlled automobile manufacturer.”

As the secondary-offering market heats up, and the recession, Basenese, the stock-offering expert, says investors need to focus on these investment opportunities – and especially on those that emanate from the expected escalation in IPOs.

“History suggests IPOs are the place to invest coming out of a slump,” he said. “For proof, all we need to do is go back to the last ’severe’ recession on record, from 1973 to 1975. As we exited, IPOs turned in impressive numbers, with first day gains jumping to 40% and three-year returns climbing to more than 150%, easily outpacing the Standard & Poor’s 500.”

Source: Big Surge in Secondary Stock Offerings Will Lead to a Major Uptick in IPO Profit Plays

The Federal Home Loan Bank system, a government sponsored enterprise like Fannie Mae (FNM) and Freddie Mac (FRE), has been called a shadow Fed, and is another part of the”shadow financial system” that’s been a central player in the ongoing financial mess we’re continuing to battle.

With several of the 12 Federal Home Loan Banks now losing money, their impaired ability to lend to their member banks or pay dividends may increase financial-system stress and insolvency. That has the Fed and the FDIC very worried.

And with good reason.

The FHLB system allows member banks to borrow cheaply, to use proceeds for purposes other than originally intended, to mask regulatory capital inadequacy, and ultimately to leverage U.S. taxpayers by adding to the burdens of central bank and the FDIC.

Questions regarding government backing, moral hazard, conflicts of interest and whether the Home Loan Banks inadvertently abetted the banking crisis need to be addressed immediately.

The Blueprint of the Home Loan Banking System

The Federal Home Loan Bank system, established by Congress in 1932, is a wholesale cooperative of 12 regional banks with locations in Atlanta, Boston, Chicago, Cincinnati, Dallas, Des Moines, Indianapolis, New York, Pittsburgh, San Francisco, Seattle and Topeka. It was designed to address several specific problems.

In 1932, for instance, there was no secondary market for residential mortgages, thrifts originating mortgages had to hold them until maturity. If a thrift was “loaned up,” meaning there was no more depositor funding available for mortgage lending, potential borrowers were turned away. The Home Loan Banks were chartered to make loans, known as “advances,” to member banks, after taking in their existing mortgages as collateral.

Originally, only thrifts, savings-and-loan associations, savings banks and insurance companies were allowed to be members of the Home Loan Bank system. The Financial Institutions Recovery Act of 1989 opened the FHLB system to commercial banks, credit unions and other depository institutions with involvement in the mortgage business. In 1999, the Gramm-Leach-Bliley Act increased membership reach by loosening participation criteria and lifting the cap on the amount of other real estate assets – such as commercial real estate loans – that members could post as collateral.

As of September 2008, according to the latest figures available on the FHLB’s Web site, the system has 8,154 member institutions, $1.429 trillion in assets, and has extended $1.012 trillion in advances – which has resulted in $88 billion in mortgage loans. The fact that the FHLB hasn’t updated its assets and advances to reflect activity through the end of the year may be more a failure to be timely than it is a hint that there are problems afoot. Still, given that we’re in the midst of the worst financial crisis in modern history, updated data on membership, assets, advances and mortgage creation, should have been a priority.

The Hidden Costs of Cheap Money

The problem begins with the FHLB’s easy ability to raise the money it lends to members.

The FHLB funds itself by issuing debt instruments across the world’s capital markets. But because the FHLB is a government-sponsored enterprise (GSE), the debt it raises is not only a joint obligation of the regional Home Loan Banks, it is also considered an obligation of the United States government. The de facto government backing means an investment grade AAA rating from all the major rating agencies. And that means that the FHLB can borrow at a very narrow spread over Treasuries – in other words, cheaply.

Perhaps if FHLB members just used borrowed capital to facilitate mortgage lending in their respective regions, the fallout would’ve been localized. But in a 2007 U.S. Federal Reserve report, “Federal Home Loan Advances and Commercial Bank Portfolio Composition,” authors W. Scott Frame, Diana Hancock and S. Wayne Passmore determined that the banks were, relatively speaking, no longer fulfilling their primary purpose. The authors concluded that:

• Capital advanced by the Home Loan banks is “just as likely to fund other types of bank credit as to fund single-family mortgages.”
• Unexpected changes “in all types of bank lending are accommodated using FHLB advances.”
• Some banks “appear to have used FHLB advances to reduce variability in commercial and industrial lending in response to macroeconomic shocks.”

There are two problems with members borrowing cheaply and easily from the system:

The first issue is one of moral hazard. Not having to rely on core deposit growth or pay higher fees to attract deposit capital through CDs, member banks, able to borrow freely, are less constrained in their efforts to grow. The lack of any “risk premium” imposed by the FHLB on members doesn’t differentiate good borrowing members from suspect borrowers and actually may incentivize some banks to take greater portfolio risks.

The second problem is that many banks may actually be using these loans to mask capital inadequacy. There have already been some egregious examples of FHLB advances propping up sick institutions.

From the end of 2004 to the end of last year, IndyMac Bancorp Inc. (OTC: IDMCQ) increased its borrowings from the San Francisco Home Loan Bank to more than $10 billion, an increase of 500%. At the time IndyMac failed, that money accounted for a third of IndyMac’s liabilities. In November, when asked why the Home Loan Bank helped keep IndyMac afloat, FHLB spokesperson Amy Stewart told MSNBC.com that “it’s not our role to cause a liquidity problem for a member institution.”

Not one to be denied a place at the FHLB trough, Countrywide Financial Corp., as it was reeling from mortgage losses in 2007, borrowed $51 billion from the Atlanta Home Loan Bank branch, which U.S. Sen. Charles E. Schumer, D-N.Y. accused CEO Angelo Mozilo of using like a “personal ATM.” But the winner, so far, has been Washington Mutual Inc., which the FDIC says tripled its FHLB advances to $58.4 billion – or almost 20% of its assets – before it collapsed.

Problems Looming?

At a time when global financial leaders are working hard to end the banking crisis and restore confidence in the still-functioning institutions, insolvent banks that are actually being propped up by FHLB advances pose a devastating possible threat to these objectives. Potentially insolvent banks pose an overwhelming threat to the FDIC, and virtually none to other member banks that may inadvertently be abetting insolvency.

The FHLB has never suffered a loss on any advance. Because advances are “collateralized claims,” they have a senior position under U.S. bankruptcy law. FHLB claims are repaid before other claims, including those of the FDIC.

In its November cover story, “Banks on the Edge,” Bloomberg Markets magazine quotes Tim Yeager, a former Fed economist who is now a finance professor at the University of Arkansas at Fayetteville, as saying: “The Federal Home Loan Banks cannot effectively control or monitor the risks that are in these institutions.”

That’s not a problem for the FHLB, according to John von Seggern, president of the Council of Federal Home Loan Banks, a lobbying group for the FHLB.

“We’re not the regulator, our role is to be the liquidity provider,” he told the magazine.

But liquidity loans are a big problem for the FDIC. According to that same Bloomberg article, FDIC Chairman Sheila C. Blair said “we really get a double whammy. We have a beef with excessive reliance on Federal Home Loan Bank advances.”

It stands to reason that if FHLB advances spell trouble for the FDIC, they spell even more trouble for the Fed and the U.S. Treasury Department, which will inherit the problem and be forced to bail out the FDIC when its dwindling deposit-insurance fund is exhausted.

In fact, the government is not only worried about funding the FDIC, it is so worried about the potential solvency of Federal Home Loan Banks that on Sept. 7 – the day after then-U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. announced the bailout of Fannie Mae and Freddie Mac – he quietly extended a secured line of credit to the FHLBs – “if needed.”

The time of “need” may be nearing. At the end of February, the Federal Home Loan banks of San Francisco, Pittsburgh, Boston and Chicago reported write-downs on heavy losses on mortgage securities, and some banks had net losses. The Pittsburgh bank reported a loss of $187.9 million for the fourth quarter; the Boston bank reported a loss of $73.2 million; and the San Francisco bank reported a loss of $103 million for the quarter – a major swing from the net profit of $231 reported in the comparable quarter the year before.

Just last Wednesday, according to The Seattle Times, the Federal Home Loan Bank of Seattle announced it took a fourth-quarter net loss of $241.2 million, and said it took a $304.2 million charge for impaired securities on its balance sheet. In addition to its statement that full-year results will be posted by March 31, the bank said it failed to meet a regulatory capital requirement at the end of last month and that because of its capital deficiency it is disallowed from paying a dividend or repurchasing its capital stock from members. Members rely on dividends and their ability to sell back capital stock to their district banks to additionally bolster their own balance- sheet capital. The F ederal H ome L oan banks of Atlanta, Pittsburgh and Indianapolis have already suspended or delayed dividends, the newspaper reported.

No one really knows what might happen if all of the system’s financial dirty laundry is aired, given how many banks are being propped up by FHLB advances. For the member banks reliant on that capital, the graver concern is what might happen if FHLB funding dries up. If that’s the next shoe to drop in this ongoing financial crisis, the worry is that an entire leg – the banking system – comes with it.

New and stronger regulations – and absolute transparency – are necessary to wean banks off these “easy-money loans” from the Federal Home Loan Banks and “hot money” from brokered deposits, the FHLB’s other evil twin.

Like a flash-fire in an untouched part of the woods, just as fire crews have finally gotten a series of deadly wild fires under control after months of battling, a crisis and scandal in a heretofore untouched portion of the U.S. financial sector could have a demoralizing and devastatingly damaging impact on the long battle to subdue the financial crisis – just as it seems some gains have been made.

With the opportunity to act before this fire really gets started, let’s not waste weeks or months in debate. The time to act is now. We need to “Just Do It.”

Source: “Shadow Fed” Casts a Shadow Over the Solvency of the U.S. Banking System

A drop in the price of oil, the war in Georgia, and a gas-export dispute with the Ukraine have put a huge dent in the Russian economy, which now teeters on the verge of recession.  The devaluations reflect the new reality of low prices and falling demand for oil and other exportable commodities.

In order to contain the damage, the central bank is accelerating the ruble’s slide. Policymakers devalued the ruble every trading day last week except for Tuesday (Jan. 13), letting it fall an average 1.7% a day versus a basket of currencies. By comparison, November and December averaged two devaluations a week, according to Bloomberg News data.

In order to cushion the ruble’s fall, Russia has spent $245 billion since August, as policymakers sold over a quarter of the country’s gold and foreign-currency reserves. That has some economists calling for a free-float or a big devaluation to avoid depleting all of the reserves. Russia’s reserves, the world’s third largest, stood at $426.5 billion on Jan. 9, according to BNP Paribas SA.

Russia is intervening in the currency markets to prevent sharp swings that move people to withdraw their savings. Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves to prevent huge moves and to promote calm in the Russian heartland.

Investors have reacted by pulling back from the currency.

“Fear of another devaluation means nobody wants to buy rubles right now,” Lars Rasmussen, an emerging markets analyst in Copenhagen at Danske Bank A/S told Bloomberg News. “The ruble has begun to look more and more overvalued because of the fall in the oil price.”

Meanwhile, downward spiraling oil prices continue to exert pressure on the overall economy.  Russia’s main oil export, Urals crude, has declined 69% to $44.43 a barrel from record highs in July. Analysts estimate the price needs to reach $70 a barrel for the government to balance the budget this year.

The government wants desperately to avoid another run on the central bank, like the one in 1998, when investors fled the market by selling rubles and Russian assets. That crisis forced Russia to spend its foreign reserves to defend the ruble, further eroding investor confidence and undermining the currency. Eventually, the ruble fell 71% against the dollar before finally stabilizing after the government defaulted on $40 billion of debt.

Despite government efforts, there are signs that remembrances of the 1998 crisis are spurring people to sell rubles.

“Of course I have changed my savings into foreign currency. I don’t want to lose my wealth,” Alexei, a Russian banker, told Reuters outside an exchange point in snowy central Moscow.  Others were busy changing money into dollars in anticipation of increasing prices for food and medicine.

Banks and companies are also hoarding foreign currencies, Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank, told Bloomberg.

“All the attention of the people is focused on the Forex market,” Nadorshin said. “Companies aren’t buying supplies, they’re investing their rubles in dollars instead because the play is too attractive.”

But some analysts believe the devaluations may soon be over.  As the cost of money rises, and supply tightens, policymakers may be forced to halt the ruble devaluation.  Russia’s Moscow Prime rate, the average interest rate banks charge to lend money to each other, rose to a two-month high of 12.5% yesterday, Bloomberg reported.

Mark Mobius, the well-known globetrotting investor and the executive chairman at Templeton Asset Management Ltd., said he expects Russia’s currency will begin to stabilize, meaning the central bank may slow devaluations as the ruble approaches fair value.

“It’s not as overvalued as it was,” said Mobius, who manages more than $24 billion in emerging-market assets. “I know some commentators think further devaluations can be expected, but I’m not too sure about that.”

Source: Ruble Hits 11-year Low As Russia Accelerates Devaluation