However, the two largest recipients of TARP money – Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC) – have yet to pay back their loans and the government is still exposed to possible losses from those two heavyweights, as well as from smaller U.S. banks.

The government netted roughly $4 billion – the equivalent of a 15% annual return – from  eight of the biggest banks that have fully repaid their obligations to the government, according to calculations by The New York Times.

Those financial institutions consist of:

• Goldman Sachs Group Inc. (NYSE: GS) – $1.4 billion in profit.
• Morgan Stanley (NYSE: MS) – $1.3 billion in profit.
• American Express Co. (NYSE: AXP) – $414 million in profit.
• Northern Trust Corp. (NYSE: NTRS), The Bank of New York Mellon Corp. (NYSE: BK),    State Street Corp. (NYSE: STT), U.S. Bancorp (NYSE: USB) and BB&T Corp. (NYSE: BBT) – $100 million to $334 million in profit.
• Fourteen smaller banks that have repaid their debt – $35 million in profit.

JPMorgan Chase & Co. (NYSE: JPM) and Capital One Financial Corp. (NYSE: COF) could yield an additional profit of more than $3.1 billion in the coming month, but the final number is dependent on how much they will pay to buy back their warrants, The Times said.

Additionally, the U.S. Federal Reserve earned $16.4 billion through the first six months of the year, thanks to a range of rescue programs – including loans to investment banks and purchases of mortgage-backed securities – while the Federal Deposit Insurance Corp. (FDIC) saw a profit of more than $7 billion on the fees it charged through a program that guaranteed debt issued by banks. Still, the FDIC has agreed to assume most of the risk on $80 billion in loans and other assets, and expects to eventually have to cover $14 billion in future losses on deals cut so far, according to The Wall Street Journal.

“Taxpayers should heave a sigh of relief that the investment in banks protected them from even more catastrophic losses from more bank failures,” said Aswath Damodaran, a finance professor at the New York University’s Stern School of Business.

The government said last year that its decision to purchase preferred shares from hundreds of banks ravaged by mortgage defaults would yield a positive return, including a 5% quarterly dividend and warrants to buy stock in the banks at a set price over 10 years.

As many banks stanched their losses and began to turn a profit, the government authorized them to buy back the preferred stock, make the dividend payments for each quarter since October. Banks also were permitted to buy back the warrants, which had a low fixed price – and which provided therefore provided a windfall for the government as the markets rallied.

The U.S. should consider imposing an automatic ban on dividend payments by lenders when “the bank stock price plummets and the banks aren’t doing well,” New York Federal Reserve Chairman William Dudley told CNBC, expressing concern over how the payouts could end up dissipating the banks’ capital.

Should a bank lose capital because of a falling stock price, it could raise more capital by issuing debt that is convertible, Dudley said.

Had private investors taken matching stakes in the banks in October, they would have tripled their investment to roughly $12 billion, or 44% on an annual basis, according to University of Louisiana at Lafayette finance professor Linus Wilson, who analyzed the data for The Times. But there’s a good reason for that. Under this hypothetical scenario, the private investors would have demanded a higher rate of return, bought in at a lower price, or both – because of the high risk that they would have been incurring.

But the government wasn’t in this to make a profit – it was working to stabilize a financial system that was quickly losing the public’s confidence, experts note.

“Had these banks tried to raise money any other way, they probably would have had to pay quite a bit more than the government received,” Espen Robak, head of Pluris Valuation Advisors, which analyzes the value of large financial institutions, told The Times.

Threat Posed by Loss-Shares

Despite the encouraging news that taxpayers are getting strong returns on their reluctant investments, the loan guarantees invested in the two largest TARP recipients – Citigroup and Bank of America – have not yet been repaid. Citi received $50 billion in TARP funds, while BofA got $45 billion.

In the last month, Citigroup has seen its stock surge roughly 58%, along with a 19% return in the shares of BofA, which leaves the U.S. government sitting on a combined $18 billion of profits from the warrants it purchased last year.

Those banks also hold troubled mortgages and other loans that no one can put a value on – which is why these so-called “toxic assets” have yet to attract buyers.

“No one has a good handle how much is out there,” Elizabeth Warren, the chairman of the Congressional Oversight Panel who acts as the so-called “TARP watchdog,” told Reuters Television in an interview last month. “Here we are 10 months into this crisis…and we can’t tell you what the dollar value is.”

More than 50 deals brokered by the FDIC to absorb losses at small banks affected by the financial crisis still remain in place. These agreements to assume the risk of loans and other assets from the consolidation of failed banks are known as “loss-shares,” and are an important inducement for healthy banks to take over busted institutions.

The FDIC brokered the sale of Alabama’s Colonial BancGroup Inc.’s (OTC: CBCGQ) deposits to BB&T after Colonial failed. It also agreed to help BB&T buy Colonial’s $15 billion portfolio of loans and other assets and absorb over 80% of any future losses. Under the deal, BB&T’s losses are capped at $500 million and – in the unlikely event the entire portfolio becomes worthless – the FDIC is on the hook to cover the rest.

The FDIC sees these deals as a way to keep loans and other assets in the private sector, as well as mitigate the cost of cleaning up the industry.

It would cost the FDIC considerably more to simply liquidate the assets of failed banks, especially with more than 400 banks on its “problem list.” Loss-share deals will cost $11 billion less than if the agency seized assets and sold them, The Journal said, citing the FDIC.

So far this year, 109 banks have failed – quadruple the amount of failures in 2008. The FDIC’s recouping any lost money from the loss-share deals, many of which are in place for up to 10 years, is dependent on the recovery of the economy

Some worry that bankers may tire of the partnerships with the FDIC and not work toward fixing bad loans because the bulk of the losses will fall to the government. But agency officials maintain that because banks still have a “material” exposure, they will be reluctant to do this.

“There is certainly an incentive for the banks to play fair and do right, but there is never a limit on the ability of the private sector to shift cost to the government,” former FDIC general counsel John Douglas told The Journal.

A typical deal has the FDIC agreeing to cover 80% of future losses on a big portion of the assets, and 95% on the rest. However, the FDIC does not expect to see the 95% scenario play out on any of the deals it has made so far.

Source: U.S. Turning Profit on TARP, but Big Loans Remain in Banks’ Hands

The details of the repayments were as follows:

• Morgan Stanley (NYSE:MS) repaid $10 billion

• Goldman Sachs (NYSE:GS) – $10 billion

• BB&T (NYSE:BBT) – $3.1 billion

• US Bancorp (NYSE:USB) – $6.6 billion

• Bank of New York Mellon (NYSE:BK) – $3 billion

• Capital One (NYSE:COF) – $3.57 billion

• American Express (NYSE:AXP) – $3.39 billion.

Lost in the euphoric brouhaha over the TARP repayments was the dispiriting news that Standard & Poor’s had downgraded the credit ratings of 18 large American banks, including one of the seven that repaid its TARP loan!

Incredibly, the US Treasury deemed Capital One sufficiently healthy to repay its $3.57 billion loan while, at the very same moment, Standard & Poor’s downgraded the credit card firm to BBB – just two notches above “junk.” Standard & Poor’s also characterized the credit outlook for Capital One as “negative.”

We would not place much faith in the analyses of either the Treasury Department or Standard & Poor’s. But we are nevertheless fascinated by their conflicting conclusions. Maybe they’re both right. Maybe Capital One is in fine shape today, as the Treasury Department’s stress test implies. But maybe the credit card company will be in miserable shape tomorrow, as Standard & Poor’s downgrade implies.

As investors, we see these conflicting assessments of Capital One as a metaphor for the entire American financial sector. This sector is a hodgepodge of conflicting opinions, data points and risk/reward assessments. Both sides of every trade in the financial sector can point to some sort of fundamental justification. The buyers see a sector on the mend; the sellers see a sector in the mire.

Your California editor is not smart enough to know which assessment is correct; but he is fearful enough to recognize a potential tar pit when he sees one. So he’s got no problem watching others wade into the water while he remains back on the bank…at least for now.

Curiously, bank stocks have gotten worse, ever since the government told us things are getting better. Most finance company stocks have been performing poorly, ever since the upbeat headlines about the “stress test” results first crossed the newswires. The BKX Index of bank stocks has tumbled nearly 19% since the close of trading on May 8, the first trading day after the Federal Reserve announced the “better than expected” results of its stress tests on America’s 19 largest financial institutions.

The TARP repayment announcements did not alter the downward trend of the BKX. Since June 9, when the Treasury Department disclosed which banks may repay their TARP loans, the BKX Index has dropped 5%.

Apparently, the finance company sector of the stock market has shifted into the “good news is no longer good news” phase. The BKX’s dazzling 135% rally between March 6 at May 8 may have adequately “priced in” all the good news that is likely to emerge for a while from the financial services industry.

Furthermore, the conspicuous recent weakness of the BKX Index is probably not good news for the overall stock market, since financial shares have been leading the market – both to the upside and the downside – during the last year and a half.

To cite just one example of this phenomenon, between February 1 and May 31 of 2008, the BKX slumped 21% while the S&P 500 actually advanced 1%. But during the ensuing month and a half, the S&P fell 13%. The BKX initiated a similar “bearish divergence” in early December last year, as it tumbled 35% between December 5 at February 6. The S&P 500 barely budged during this timeframe, but fell 20% over the next 30 days.

Obviously, the most recent decline of the BKX does not guarantee a subsequent decline in the S&P 500. But neither does it give us a warm, fuzzy feeling. So let’s call the weakness of the BKX a warning sign. Heed the warning, if you are so inclined.

Source: On the Mend or in the Mire?

Crystal is a single mother with three great kids.  Two years ago her mail box was stuffed with credit card offers.  Credit was so easy to come by then.  All she had to do was sign her name and mail back the application in the little postage-paid envelope.  A week or two later, her shiny new credit card arrived.

Crystal is a great mother, and her children are her pride and joy.  She owned her own home and always paid her bills on time… until she lost her job.

You see, Crystal had already tapped out her home-equity line of credit.  And the only way she could feed her kids was to buy groceries on her credit card.

Crystal’s credit card company was easy to work with… until she missed a payment.  That’s when she got hit with a $39 late-fee and her rate was raised to 29.4%.  Crystal wanted to pay her bills but she did the right thing instead, she fed her kids first.

The credit card company unleashed a vicious collection agency on Crystal that would harass her family and call at all hours of the night.  It got so bad that she had to file for bankruptcy to get the frustrating calls to stop.

In the bankruptcy, Crystal’s credit card debt was “discharged” by the judge, meaning the credit card company took the full hit and Crystal didn’t owe them any money.  At this moment, the good news is that Crystal still owns her home, her kids are great and she just landed a new job…

Stories like this are quite common in America today.  In fact, U.S. credit card defaults rose to a record high in May.  Consumers remain under severe stress and credit card losses across the industry are on pace to surpass 10% this year which would lead to write-offs of over $70 billion for credit card issuers.

Unemployment hit 9.4% in May, which is at the highest level since 1983.  If people don’t have jobs they can’t pay their bills.

Real estate prices have dropped so people can’t borrow against their home anymore–therefore they tend to run up their credit cards.  In fact, American households have been loading up on credit card debt like crazy, with balances rising 75% since 1999.  The average credit card debt per U.S. household is now well over $8,000.

Credit card issuers are attempting to protect themselves against defaults by lowering people’s credit limits and closing accounts.  They have also been hitting consumers with higher interest rates, jacking up fees and canceling reward programs.

But Uncle Sam is putting his foot down.  The U.S. government recently passed a law limiting credit card fees and interest rates.  This will stop credit card companies from socking-it to the American consumer.  But it will be even harder to get a credit card once this law goes into effect–and will increase defaults as consumers find it more difficult to refinance their debts.

Bottom Line:  Credit card issuers are doomed!  How can you play it?

Put options on the goliath credit card issuer Capital One could deliver you some hefty gains as their stock goes down.

You see, Capital One is still losing money hand over fist.  They had a net loss of over $111 million in the first quarter of 2009.  And they lost $46 million in 2008.

I expect Capital One’s revenues to continue to fall, due to slowing consumer spending and a troubled U.S. economy.

The company is in big trouble as a result of a continuing rise in delinquencies and charge-offs in Capital One’s credit card and home equity lines businesses.  Its credit card default rate rose to 9.41% and lower real estate prices have crushed their home equity line portfolio.

Plus, top rating firm Reuters has Capital One rated “Underperform”, and Standard & Poor’s rates the stock a “Sell”.

From a technical perspective, the 200 day moving average is falling which is bearish.  Furthermore, the Up/Down volume pattern indicates that the stock is under distribution, which means investors are offloading the stock.  See the chart:

Buy Put Options on Capital One Financial.

Please keep in mind that option trading is speculative.  Of course I can’t guarantee profits and losses are entirely possible. You should only invest funds you can afford to risk.

The high-powered, strictly limited-risk option I suggest trades under the symbol (YFNME).  I say limited risk because you can’t lose more than your initial investment.

One options contract will give you the option to sell 100 shares of the Capital One Financial stock (COF) at $25 per share.

This options contract (YFNME) gives you the right to sell (COF) until January 15th of 2010 at $25 per share.  If Capital One stock drops to $15 per share then you will have a minimum gain of 67%.  If it drops to $10 per share your gain would be 150% at the very least.

Here are the details for the option recommendation:

Option: January 2010 – 25.00 puts (YFNME)
Underlying symbol: COF
Breakeven point at expiration: $25.00 – $6.00= $19.00
Estimated Cost: $1,200 (2 contracts x 100 Shares x $6.00 premium)
Expiration date: January 15, 2010 at 4:00pm EST

After you have done your homework and if you agree with my recommendation, enter the trade online or call your stock broker and say:

“I want to BUY 2 contracts of Capital One Financial Corp. January 2010 Put Options, with a strike price of 25.00, symbol YFNME, at 6.00 points or less, to open.  This order is good ‘til cancelled.”

Close the position if the option trades 50% below your entry price.

Sell the first half of the position if the option trades 100% above your entry price.

Let the second half ride for maximum profits.

If you buy this position and the option is in the money you should exit this position on or before January 15, 2010.

Stock options give you the leverage you need in today’s fast moving markets.  I give 2 to 4 new options picks like this every month in my new options newsletter the Options Power Trader.  Click here if you would like to learn more.

Source: Capital One Is Doomed, Buy Put Options

GM dealers targeted for separation were informed by letter over the weekend, Reuters reported.

The eradication of hundreds of hundreds of American auto dealerships is merely the latest development in the ongoing dismantling of the so-called U.S. “Big Three’’ – a  process that seems likely to leave Ford Motor Co. (NYSE: F) as the last American automaker standing.

“These companies are making up for now for what they have avoided doing for years, if not decades,” industry analyst John A. Casesa, managing partner of consultantcy Casesa Shapiro Group LLC, told The New York Times. “And if the market doesn’t stabilize, this may only be Phase I.”

The moves will clearly change the entire auto-purchasing landscape for U.S. consumers. All told, nearly 800 dealers selling Chrysler brands were given notice that they would be cut off next month. These dealers represent about a quarter of the 3,200 in Chrysler’s dealership network, but account for only 14% of the company’s sales.

Without the dealership cuts, U.S. automakers will likely see their troubles continue. For instance, in its bankruptcy filing, Chrysler says it needs to streamline its distribution-and-sales operation to become more competitive. The current Chrysler dealership sells 303 vehicles per year, compared with 1,219 for a Honda (NYSE ADR: HMC) and 1,292 for Toyota. (NYSE ADR: TM).

GM is looking to close as many as 2,600 of its dealers – about 40% – by 2010. This weekend, it notified the first 1,010 that their franchise deals with General Motors would not be renewed after they expired in October. The other dealerships that will get cut are those that sell such brands as Hummer and Saturn – brands that GM plans to divest.

Both Chrysler and GM have been subsisting on government loans for months.

Just a few years ago, U.S. auto dealers were selling an aggregate 16 million vehicles annually. But after the biggest drop in vehicle sales in a quarter century, dealers are now struggling to even reach the 10-million-vehicle mark.

The letters to GM dealers did not specifically say the company would be filing for bankruptcy, but the move indicates that could well happen next month, which is when the longtime No. 1 U.S. automaker is due to submit a restructuring plan to U.S. President Barack Obama, The Times reported.

In fact, General Motors sales chief Mark LaNeve told reporters on a conference call that carrying out the plan without the benefit of bankruptcy-court protection would be nearly impossible, since state franchise laws make it “onerous and expensive” for manufacturers to force dealers out of business. Wrapped in the cloak of bankruptcy protection, however, the dealership contracts can be nullified, the The Wall Street Journal said.

Chrysler on Thursday asked its bankruptcy judge, U.S. Justice Arthur J. Gonzalez, to hold a hearing on June 3 to allow the company to reject its “contracts and unexpired leases with certain domestic dealers.”

At a time when the falling earnings are continuing to push U.S. companies to make deep job cuts, the dealership closures will add to the national rise in joblessness. The National Automobile Dealers Association (NADA) has estimated that all dealership closings – including those already announced by Chrysler and GM – could cost the U.S. economy 187,000 jobs – or more than the total U.S. employment of the two companies.

Market Matters

When the government was “forced” to help resolve the global financial crisis with bailouts and stimulus packages, analysts hoped for the best (economic and market recoveries) and feared the worst (overreach or even socialism).

To date, some signs have emerged that the recession may be nearing an end, though naysayers also warn about the ramification of “excessive” intervention.

On that note, the Obama administration has begun talks about a complete overhaul of the compensation structure for the entire financial services industry, a move that could even impact employees at institutions that did not accept bailout moneys.  While some believe the current system rewards short-term goals in lieu of longer-term performance, many still feel the government is overstepping its bounds.

President Obama’s administration also announced plans to regulate certain derivative securities, many of which have done considerable damage to the balance sheets of the world’s leading institutions.  While many “experts” agree greater transparency and oversight may have prevented some of the carnage, others worry that over-regulation is never a good things and efforts to improve the system actually may have the exact opposite impact.  Stay tuned.

With the much-ballyhooed stress-tests in the books, banks moved to raise capital with US Bancorp (NYSE: USB), Capital One Financial Corp. (NYSE: COF), and Bank of NY Mellon Corp. (NYSE: BK) among those issuing $1 billion to $2.5 billion in new stock (and diluting current shareholders).

In fact, US Bancorp expects to be the first major institution to repay Troubled Asset Relief Program funds over the next few weeks.  Meanwhile, as banks begin to move off the Treasury’s coffers, insurance companies become the latest recipients as The Hartford now is eligible for a $3 billion-plus government infusion with others to follow.  Automakers continued their cost-cutting moves as both GM and Chrysler started saying goodbye to large percentages of their dealers (and perhaps another 150,000 in related workers), while Ford raised about $1.6 billion through a 300,000-share offering of its own.  GM’s share price fell into penny stock territory for the first-time since 1933 as bankruptcy becomes an even greater likelihood.

On the earnings front, Macy’s Inc. (NYSE: M), JC Penney Co. Inc. (NYSE: JCP), Liz Claiborne Inc. (NYSE: LIZ), and Sony Corp. (NYSE ADR: SNE) all posted disappointing results, a sign that retailers have yet to overcome the ongoing consumer negativity.  While Wal-Mart Co. Inc. (NYSE: WMT) continued to outshine rivals, its earnings were negatively impacted by currency translation.

Both SAP AG (NYSE ADR: SAP) and Intel Corp. (Nasdaq: INTC) expressed optimism about the future for techs as phrases like “bottomed out” and “glimmers of hope” brought renewed investor confidence, though the latter was greeted with a $1.45 billion record fine in Europe over sales and marketing abuses.  Microsoft Corp. (Nasdaq: MSFT) announced its first debt offering in its 36-year existence and some expect the tech giant to explore acquisition opportunities.

Economically Speaking

Yep, the consumer is a fickle sort.  In fact, consumer statistics are quite fickle these days as well.  A few weeks back, same store sales for April showed enhanced retail activity, a strong sign for the consumer-driven economy.  Well, this past week, the U.S. Commerce Department reported that April retail sales actually fell by 0.4%, a worse than expected showing and the eighth decline over the past 10 months.  Before analysts could express renewed doubt about any pending recovery, Redbook Research threw even more confusion into the equation by reporting that chain-store sales climbed 0.1% during the first week in May and bested Wall Street expectations.

Additionally, the University of Michigan Sentiment Index reached its highest confidence level since September 2008.  As long as the labor picture remains bleak, however, consumer activity may vary from one month (week) to the next as many folks remain hesitant to spend and continue saving for that rainy day.

The inflation gauges calmed down those deflation naysayers as the producer price index (PPI) climbed in April on rising food prices and the consumer price index (CPI) was reported as unchanged last month.  Additionally, as oil prices creep a tad higher, the threats of (economy-hurting) price declines lessens; therefore, analysts can focus on other more pressing matters (like labor, manufacturing, housing, retail, etc.) and leave the (soon-to-come) inflation hysteria for another day.  Of note, RealtyTrac reported foreclosures soared by over 30% last month as unemployed homeowners struggle to make their mortgage payments.

Weekly Economic Calendar

Source:  Chrysler, GM Dealer Cuts Point to More Rough Times Ahead for U.S. Automakers

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

BB&T said it plans to raise $1.5 billion by selling common stock, combine it with “other funds,” and repay all the capital from the U.S. Department of the Treasury’s Troubled Asset Relief Program (TARP).

The Winston-Salem, N.C. bank also said it will cut its divided 68% to 15 cents a share, an action that will save $725 million in capital a year. Chief Executive Officer Kelly King said the dividend reduction is temporary, and making the decision was marked “the worst day in my 37 year career.”

“However, we firmly believe this action is in the long-term best interests of our shareholders and our company because of the risk and uncertainty associated with being a TARP participant… When market conditions improve and our earnings provide for an increase in the dividend, we are committed to increasing it accordingly,” King said in a statement.

Capital One said it plans to raise about $1.75 billion by selling 56 common stock shares at $27.75 a piece. The bank expects net proceeds “to be used for general corporate purposes” and repaying the Treasury.

U.S. Bancorp plans to raise $2.5 billion by selling common stock to the public with the intention of repaying the Treasury with the proceeds. The Minneapolis-based bank also said it may offer medium-term notes in a benchmark amount in a public offering.

KeyCorp filed with regulators a plan to offer up to $750 million in common shares to raise capital.

Disdain for Government’s Eye

On Friday, the government’s stress test revealed that these banks are four of 10 that need to raise more capital if they were to survive a prolonged deterioration of the U.S. economy.

U.S. Bancorp borrowed $6.6 billion from TARP, Capital One took $3.55 and BB&T received $3.1 billion. In taking the billions in emergency loans, the banks also agreed to have tighter government control of their operations – including clamping down on executive pay.

The capital-raising plans – combined with the previously announced plans by Citigroup Inc. (NYSE: C), Morgan Stanley (NYSE: MS) Wells Fargo & Co. (NYSE: WFC) to pay back TARP money – show just how much these banks disdain working on the government’s dime and under the government’s eye. And it shows that they’re willing to further suppress their stock value and possibly upset their shareholders to break the government’s chains.

“Rational, objective lending is one of the most important purposes of the banking system, and when you inject Congress and the administration into it, it effectively politicizes the process, which is not healthy,” BB&T’s King told Reuters.

Source: BB&T, Capital One, U.S. Bancorp and KeyCorp Planning Stock Sales to Raise Capital, Repay TARP

Banks that require funding will have 30 days to present a capital-raising strategy to regulators and then six months to implement it.

It is unlikely that any of the banks will require any additional taxpayer money.

J.P. Morgan Chase & Co. (NYSE: JPM), Goldman Sachs Group Inc. (NYSE: GS), MetLife Inc. (NYSE: MET), American Express Co. (NYSE: AXP), Bank of New York Mellon Corp. (NYSE: BK), BB&T Corp. (NYSE: BBT), Capital One Financial Corp. (NYSE: COF), U.S. Bancorp (NYSE: USB), and State Street Corp. (NYSE: STT) are in the clear in terms of having adequate capital cushioning.

The following banks will be required to raise these assigned amounts of capital:

• Bank of America Corp. (NYSE: BAC): $34 billion.
• Wells Fargo & Co. (NYSE: WFC): $13.7 billion.
• GMAC LLC (NYSE: GMA): $11.5 billion.
• Citigroup Inc. (NYSE: C): $5.5 billion.
• Morgan Stanley (NYSE: MS): $1.8 billion.
• Fifth Third Bancorp (NASDAQ: FITB): $1.1 billion.
• KeyCorp (NYSE: KEY): $1.8 billion.
• PNC Financial Services (NYSE: PNC): $600 million.
• Regions Financial Corp. (NYSE: RF): $2.5 billion.
• SunTrust Banks Inc.( NYSE: STI): $2.2 billion.

The banks will have until June 8 to develop a plan to raise the required capital and until Nov. 9 to implement it. They may choose to raise the money in a variety of ways. They may sell assets, court private investment or convert the government’s existing preferred shares into common stock.

Citigroup has already announced plans to convert a portion of the government’s $45 billion stake into common stock, a move that will give the federal government a 36% stake in the company. Other regional banks – such as Fifth Third Bank or Regions Financial – could be forced to take similar actions, but are loath to do so, as most of the moves would be dilutive to existing shareholders.

Citigroup has agreed to sell Nikko Cordial Securities to Sumitomo Mitsui Financial Group (OTC: SMFJY) for about $5.5 billion. The deal, which is to be completed by Oct. 1, is expected to boost the bank’s Tier-1 capital ratio by approximately 27 basis points.

Morgan Stanley plans to close its capital gap by selling assets or stock to private investors, a person briefed on the plan told The New York Times. And Wells Fargo said late yesterday that it plans to sell $6 billion in new common stock in an effort to raise required capital.

While Bank of America has said it doesn’t agree with the Fed’s conclusions, the bank yesterday outlined its strategy to accommodate the government’s demands. BofA is exploring the sale of such business units as its First Republic private-banking unit and asset manager Columbia Management, The Wall Street Journal reported.

The sale of those businesses could raise a combined $4 billion, David Hendler of CreditSights Inc. told The Journal. BofA could also get about $8 billion for its partial stake in China Construction Bank Corp.

Beyond that BofA would have the options of converting the government’s existing $45 billion investment, or $33 billion in private preferred shares, into common stock.

The Fed wants bank-holding companies to achieve a Tier 1 risk-based ratio of at least 6%, and a Tier 1 Common risk-based ratio of at least 4% by the end of 2010. The goal is to get banks to the point where they are stable enough that they can borrow from private investors without a Federal Deposit Insurance Corp. (FDIC) guarantee, people familiar with the matter told Bloomberg News.

“Going forward, we just need banks to be able to issue debt without the FDIC backing – that’s the next stage for these bank names in terms of evaluating their health,” Mark Bronzo, a money manager at Security Global Investors LLC, which oversees $21 billion in Irvington, N.Y., told Bloomberg.

If the banks fail to meet capital requirements, the government will step in to provide the necessary funds. However, it’s unlikely that any more taxpayer money will be needed, as about $110 billion of the original $700 billion in Troubled Asset Relief Program (TARP) funding remains.

Wall Street’s Reaction

The Dow Jones Industrial Average closed down 102.43 points, or 1.2%, yesterday, with the Dow Jones U.S. Financial Services Index down 3.78%. However, Wall Street’s reaction to the tests won’t be fully realized until the market opens later today (Friday).

“I think this will be a confidence-instilling announcement,” Federal Deposit Insurance Corp. Chairman Sheila Bair told a Senate panel Wednesday. “There will be additional needs for capital buffers for some institutions, but I think there will be mechanisms to do that within the next six months.”

Treasury Secretary Timothy F. Geithner said in an interview with PBS television’s “The Charlie Rose Show” that all of the institutions tested already have “significant cushions” of capital and that Americans have every reason to be confident going forward.

“The results will be, on balance, reassuring,” Geithner said.

But some analysts are skeptical about what the bank stress tests actually achieved, or if their standards of evaluation were even valid in the first place. After all, the tests have occupied resources from both the federal government and the private sector for months, and have increased stock market volatility.

“The banks are healing themselves, and it could have been done a lot faster if government had gotten out of the way instead of parking the emergency equipment in the middle of the road,” Gary B. Townsend, a former banking regulator who now runs his own investment firm, told The New York Times.

Also, many bank employees, and even Elizabeth Warren, who chairs the Congressional Oversight Panel for TARP, have expressed concern that the tests weren’t stringent enough.

Last month, Warren gave rise to speculation that another stress test might be needed by the end of the year, after she called the adverse economic scenario employed by the Fed “disturbingly close” to current economic conditions.

In the Fed’s most pessimistic economic forecast, for example, the government projects the unemployment rate will climb to 10.3% in 2010. But unemployment already hit 8.5% in March and many economists are predicting that it rose to 8.9% in April. If that’s the case, it’s not hard to imagine the national jobless rate reaching double digits by the end of the year.

“The stress tests will make a terrific contribution if they are tough and transparent,” Warren said. “If they are not, they will be useless.”

Still, despite the test’s alleged failings, there is a hope that with more transparency and a greater buffer of equity, investor confidence will be restored.

“This is sending a message that the banks need more capital, but their losses are manageable and the system itself is solvent,” Kevin Fitzsimmons, an analyst at Sandler O’Neill told The Times. “Whether it sticks is something else.”

Source: Bank Stress Tests: The Results Are in; Now What?

But their pleas fell on unsympathetic ears as Obama pressed forward with plans for enhanced consumer protection laws that go beyond credit card restrictions approved by a U.S. House committee Wednesday.

The credit card executives requested the White House meeting as they face outcries of anger from beleaguered cardholders and Congress.  Representatives from a “who’s who” of industry leaders attended, including Citigroup Inc. (C), Wells Fargo & Co (WFC), JPMorgan Chase & Co. (JPM), Capital One Financial Corp. (COF), Visa Inc (V) and MasterCard Inc (MA).

“They’re saying that the economic recovery will take longer if Obama takes punitive action against lenders, but the Obama folks…need more of an explanation,” Linda Sherry, director of national priorities at Consumer Action, a watchdog group that tracks credit-card practices, told Bloomberg News.

As unemployment and credit card delinquencies rise, card issuers are on the hot seat for imposing large late fees and slamming delinquent customers with huge interest rate increases.

Delinquencies are soaring throughout the industry in concert with unemployment, which reached a 25-year high of 8.5% in March. Charge-offs, which are loans that banks have given up on, increased to an average of 8.02% in February from 4.53% a year earlier, Bloomberg reported.

Capital One reported a $111.9 million first-quarter loss on higher reserves for soured loans on Wednesday. Bank of America reported a $1.8 billion first-quarter loss in its credit-card services unit.

Lenders have tried to protect themselves with late fees, tightening credit limits and closing accounts, angering both lawmakers and consumers.

The meeting came a day after a bill to curb credit card fees and limit penalties cleared a key panel in the House of Representatives

The legislation – called the Credit Cardholders’ Bill of Rights – stops credit card issuers from imposing arbitrary interest rate increases and penalties and halts onerous billing practices. A separate version of the bill is under review in the Senate.

Legislators have expressed outrage that many card issuers have received government bailout money under the Treasury’s Troubled Asset Relief Program, essentially paid for by the U.S. taxpayers who use the cards and are saddled with the high fees.

President Obama’s economic adviser, Lawrence Summers, last weekend accused the companies of enticing consumers with aggressive marketing campaigns and deceptive interest-rate terms, encouraging them to become “addicted” to credit.

The White House specifically wants any legislation to limit issuers’ ability to charge fees when customers exceed their credit limits. Obama’s chief of staff, Rahm Emanuel, recently told House Financial Services Chairman Barney Frank that Obama also wants card issuers to offer longer terms for introductory, low teaser rates.
The administration also wants card companies to apply excess payments first to balances with the highest interest rates, and to tell customers how long it will take to pay off their balances if they only make minimum payments.

The banks are saying the proposed regulations will make matters worse by raising costs, restricting credit, and ultimately hurting borrowers more.

“If the government keeps changing rules, it may make it harder for consumers to get credit,” Ken Clayton senior vice president of card policy at the American Bankers Association in Washington, told Bloomberg.

“It means less credit available to vast numbers of Americans at the very wrong time,” he said.

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Source: Obama Pushes Credit Card Issuers on Fees, Rates

]]> http://www.contrarianprofits.com/articles/obama-pushes-credit-card-issuers-on-fees-rates/15926/feed 1 http://www.contrarianprofits.com/articles/as-resurgent-us-banks-shift-into-profit-mode-hitch-a-ride-with-these-two-for-gangbuster-returns/15075 http://www.contrarianprofits.com/articles/as-resurgent-us-banks-shift-into-profit-mode-hitch-a-ride-with-these-two-for-gangbuster-returns/15075#comments Wed, 18 Mar 2009 12:48:07 +0000 Martin Hutchinson http://www.contrarianprofits.com/?p=15075 Although we’re still in the middle of the worst financial crisis in decades, a few select banks are positioned to make a boatload of profits. And if you pick the right ones, gains of 100% or more are easily within reach.

The U.S. Federal Reserve’s actions in cutting short-term interest rates to almost zero – together with a gentle rise in U.S. Treasury bond yields since the start of the year – have given us a steeply sloping yield curve, where long-term rates are about 3% above short-term rates.

What’s more, lending rates to corporate and personal borrowers are way up, far more than Treasury bond rates. That means one thing: In their new lending – particularly to small businesses – banks…